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Goldman: "As The Endgame Approaches, The Rally In AAA-Euro Area Sovereign Bonds No Longer Seems Sustainable"

Goldman Sachs has for the time being been very quiet in joining all of its colleagues from around the street in screaming for an immediate intervention by the ECB or else. The reasons are glaringly obvious: with a Goldman alum in charge of the ECB, and a 23 year Goldman veteran acting as ambassador to Germany, whatever Goldman wants, Goldman will get, without the need for convincing pitchbooks and dramatic expostulations that the world is ending unless... Intuitively it makes sense for Goldman to wait: after all why not take advantage of the situation a la Bear and Lehman, and wait for 3-4 major European banks to collapse, which will be the green light for Goldman to do what it does best: step in and fill the financial and power vacuum. Needless to say, when UniCredit, Commerzbank or Raiffeisen are down, the ECB will have no choice but to intervene with or without the Fed's help. Which is why anyone looking for clues as to what will happen in Europe has to focus on Goldman alone as we already know too well how everyone else is axed. Luckily GS' Francesco Garzarelli and Huw Pill have just released a much overdue note presenting just how the firm feel ont he topic of Europe's continuation as a going concern, or, alternatively, collapse. While we present the full note below in its entirety which naturally seeks to avoid broad panic, here are some notable extracts from a nuanced read: "considering how much damage to confidence has now been inflicted, one must also entertain the possibility that the intensification of market tensions and/or deterioration of economic activity reinforce each other feeding domestic political and social pressures precluding a final agreement among EMU member states from being reached. In this case, rather than being the ‘forcing mechanism’ that drives agreement, the economic and financial environment could feedback into the political process in a negative way, leading to a vicious downward spiral and, ultimately, to the failure of the Euro project." Simply said "an alternative scenario of a ‘break-up’ of the Euro area certainly cannot be ruled out", which leads to Goldman's conclusion: "For the same set of reasons, as the ‘end game’ approaches the rally in AAA-rated Euro area sovereign bonds (Germany’s especially) no longer seems sustainable and could reverse in coming weeks. In our base case of more intrusive control on future deficit financing, the core countries will, in exchange, have to shoulder a greater part of the legacy credit risk of their peers if they want to keep EMU alive. In a ‘break-up’ scenario, the creditor ‘core’ countries will be confronted with a wave of insolvencies, which would also worsen their fiscal position. And in the middle ground between these two outcomes, where we currently stand, the ECB will be intermediating growing intra-Eurosystem imbalances. Through this monetary channel at the heart of EMU, the ‘shadow’ credit risk of the core countries is already rising, and at an increasingly rapid pace." As expected, it appears that Goldman sure will like occupying those European bank HQs for about $1 in equity.

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Flair For The Drachma-tic: ICAP Preparing For Return Of Greek Currency

As if we needed another reason to send the ES higher by a few more percent in the premarket session on 10 or so ES contracts, the news that ICAP is already preparing for the end of the Euro should do it:

  • ICAP Testing Trades In Greek Drachma Against Dollar, Euro
  • ICAP has reloaded old drachma templates for spot foreign exchange and derivatives (NDFs)
  • ICAP Drachma Tests Are Only Precautionary
  • Drachma Currency Pairs Not Yet Launched For Trading, May Never Be Used - Execs
  • ICAP Testing Trades In Greek Drachma Against Dollar, Euro - Executives

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Futures Indicated Up More Than 1% Pre-Open

And so the market is once again shooting first, and doing the math later. While the EURUSD has since dropped substantially from its afternoon premarket highs and was trading just over 1.33 last check, the ES is now about 15 points higher per the bid/ask stack or at 1173, well over 1% more than Friday's close, even though CONTEXT fair value demonstrates a roughly 15 point arbitrage. Looks like the futures are all alone in this latest attempt to ramp everyone on the wrong side and sell to the greater fool. Fade the massive arbitrage to risk fair value.

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Former IMF Employee And Greek Statistics Head Faces Life In Prison If Found Guilty Of Making Greece Look Uglier

A few months ago we reported that unlike in any other Banana Republic, where the natural bias is to fudge one's numbers higher to make the economy look better and get the stock market to rise, in Greece even the traditional banana metrics are upside down. To wit: "Greek newspaper Eleftherotypia reports that according to a just terminated member of the Greek Statistical Authority, Greece artificially misrepresented its 2009 15.4% deficit number to Eurostat in order to obtain aid from the EU and IMF." Sure enough, two months later even this absolutely bizarre story has been confirmed. The FT reports that "The head of Elstat, Greece’s new independent statistics agency, faces an official criminal investigation for allegedly inflating the scale of the country’s fiscal crisis and acting against the Greek national interest." Not surprisingly, the man who allegedly cooked the books is none other than a 20 year former IMF employee: precisely the kind of guy who knows just what buttons to push to get the US-funded organization to dole out capital. "Andreas Georgiou, who worked at the International Monetary Fund for 20 years, was appointed in 2010 by agreement with the fund and the European Commission to clean up Greek statistics after years of official fudging by the finance ministry." And just because someone needs to be made a scapegoat, if convicted Georgiou may face the same sentence as Madoff: "Mr Georgiou is due to appear before Greece’s prosecutor for financial crime on December 12 to answer the charges. If convicted of “betraying the country’s interests”, he could face life imprisonment." Well, that's fine: the man should rot in hell for not learning that "minus" is not really "plus" - surely no greater ex-capital punishment crime exists. Yet we wonder - will the same life sentence follow all those others who are found to have betrayed their countries interest and inflated numbers higher thus not getting US taxpayer-funded bailouts? Because when it comes to Europe, it is now every many for himself (as the soon to be faded rumor du jour of a €600 billion IMF-funded bailout of Italy confirms)... all the way to Joe Sixpack's wallet.

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Black Friday Shopping Like There Is No Tomorrow?

By now the broader population has been inundated with reports of what a stunning retail experience Black Friday was. And for those who haven't just head over to CNBC: "Sales rose an estimated 6.6 percent to a record $11.4 billion on Black Friday, typically the busiest shopping day of the year for Americans, while the traffic at stores rose 5.1 percent, according to ShopperTrak. The day's sales growth was the strongest percentage gain since 2007, when sales rose 8.3 percent on the day after Thanksgiving, said Ed Marcheselli, chief marketing officer at ShopperTrak, which monitors retail traffic." This is happening despite the savings rate recently dropping to pre-Depressionary level, and despite revolving consumer credit (as in not cars and colleges), continuing to contract. That there is more than enough fine print will be largely irrelevant for the mainstream media which will naturally trumpet this as the next best thing to the S&P actually rising for once: "More than 120 stores at the Mall of America opened at midnight. The crowd at that point was about 15,000 people. Mall operators estimated that it was the largest crowd ever at the mall, which is big enough to hold seven Yankee Stadiums. While eager shoppers emerged from stores around the country lugging big-screen TVs and bags full of video games and toys, it was far from certain that people will pull out their wallets for much more than the best deals this year. Shoppers with limited budgets started using layaway at chains such as Walmart as early as October. Retail shares fell more than the overall market on Friday. "Americans are still worried about jobs, still worried about the economy," said Mike Thielmann, group executive vice president at J.C. Penney, who noted that shoppers were buying gifts and for themselves, and said jewelry was selling well." Yet what really caught our attention was the Retail Group comparison of this "record" black Friday Weekend. From Bloomberg: 'RETAIL GROUP SAYS SECOND-BEST BLACK FRIDAY WEEKEND WAS IN 2008." As a reminder, Thanksgiving 2008 happened just after a nearly 400 point plunge in the S&P in two months as can be seen in the chart below. Which begs the question: with the world on the verge every single day once again, is it a coincidence that people spent more than they did only compared to 2008 when the world was once again ending. In other words, did Americans really spend "like there is no tomorrow" (more so than ever that is)... and what happens when the bill (because there is no doubt the purchasing was entirely on credit) is in the mailbox?

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EURUSD Up Modest +30 Pips Despite Latest Weekend Rumormill

Our guess is they were hoping for a little more than a 30pip lift out of the gate...Have no fear though...




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Bill Buckler Presents The Four Horsemen Of The (Financial) Apocalypse

"There are four indicators today which show as clearly as anything can be shown the state of our global debt-based monetary and financial system. Any one of them alone should be all the evidence one needs that the system is unsustainable. Put them together and much more than the canary is singing."

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Steve Keen On Parasitic Bankers, Deluded Economists, and Why “We Are Already In The Second Great Depression”

Everything that 'deluded' orthodox economists have done so far has been designed to aid the creditors (who remain the problem) while Steve Keen, the most familiar face of the non-orthodox economists, sees the only solution to this crisis as aiding the debtors. His interview with BBC’s HardTalk this week covers a great deal of ground from modern debt jubilees (and how they should be structured), the Tea-Party and Occupy movements (and his growing fear of historically repeating the endgames of previous economic and social disenfranchisements), and the parasitic nature of our existing financial sector.

He is unequivocal on the outcome of the status quo, as he has been for many years, citing politicians as reactors not leaders with the view that the youth movements we are seeing will force change of leadership to enable non-orthodox solutions to our simple problem – too much private debt. “Write off the private debts, nationalize the banking system, and start all over again” is his starting point but his ideas on implementation warrant some attention as he attempts to promote creative instability and reduce the destructive instabilities of capitalism – recognizing that our world is not in equilibrium as every Keynesian economist would believe but inherently cyclical and unstable.

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EFSF Cash For Irish Bailout Running Out

Just when Europe thought it would only have to worry about an Italian bailout, we get news that not only is Greece about to renegotiatie its entire debt haircut, but that Ireland suddenly finds itseld out of bailout cash. From the Independent: "As EU leaders dither, the European Financial Stability Facility (EFSF) -- the limp pan-euro bailout fund -- may struggle to raise enough money to fund the payments to Ireland agreed under the €67bn IMF/EU bailout package. There is "genuine fear" that the fund may not be able to access the markets as investors shun the euro region, according to UBS." As noted earlier, the EFSF's rates are soaring at an alarming pace: "every 1 per cent rise in funding costs for the EFSF costs Ireland about €200m, according to calculations by Goodbody Stockbrokers' economist Dermot O'Leary." All is good though according to UBS because should the EFSF fail in even its existing duties which do not involve being levered at an X multuiple to rescue Italy, others will step in: "But UBS indicated that there was no "immediate funding threat to Ireland" as money may also be available from the IMF and through bilateral loans from the UK, Denmark or Sweden." We wonder if the UK, Denmark or Sweden are aware that suddenly they are on the hook to rescue Ireland, which up until recently was considered the A+ student of the European bailout. If not, we are confident the bond market will shortly remind them.

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Arab League Adopts Economic Blockade Sanctions Syria "Effective Immediately"

In the off case that this weekend's Italian bailout rumor roundup does nothing to quell the ongoing European collapse, the status quo is already working in diversion Plan B. Enter the Arab Leage and the announcement that it has approved sanctions against Syria, including an asset freeze and an embargo on investments, effective immediately. And while the screenplay is for now a carbon copy replica of what happened in Libya, with the imposition of a "No Fly Zone" over Syria as reported previously as the most likely next step, what is unique is the response that will follow from not only Syria, but Iran (which followed in Russian footsteps and announced it would attack NATO member Turkey missiles if provoked) as well as Russia and China, all of which have made it clear that any unilateral, US/Europe-backed agression against Syria will not stand. BBC reports: "League foreign ministers adopted the unprecedented sanctions at a meeting in Cairo by a vote of 19 to three. The move came after Syria refused to allow 4,000 Arab League monitors into the country to assess the situation on the ground. Syria, one of the founder members of the Arab League, condemned the sanctions as a betrayal of Arab solidarity. Syrian Foreign Minister Walid al-Muallem accused the league of seeking to "internationalise" the conflict." We expect developments to move quickly at this point as the chaos in the developed world is hitting a fever pitch and the only logical outcome is some "localized" regional warfare here and there.

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Of European Insurance Funds and Short-Dated EFSF Issuance

We have discussed the obvious lack of demand for EFSF paper in the last few weeks and note that Friday saw the longer-dated issue break above 4% yield - clearly indicating the market's unwillingness to 'believe' in the AAA rating (and therefore any explicit wrapper that may evolve from this entity). Peter Tchir, of TF Market Advisors, notes the headlines and rumours are already coming in fast and furious.  The EFSF is starting to put out some data and is discussing tradable insurance certificates as well as very short-dated issuance (further evidence of a dearth of demand). We worry that rolling short-dated EFSF paper will lead from a liquidit crisis to a solvency crisis much faster. European leaders clearly saw how weak the market closed every day last week (futures accelerated to the downside after 4 pm) and are trying to talk up the market. We remain highly skeptical and will continue to use overly optimistic rallies to get shorter.

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Guest Post: Comfortably Numb

As I observe the zombie like reactions of Americans to our catastrophic economic highway to collapse, the continued plundering and pillaging of the national treasury by criminal Wall Street bankers, non-enforcement of existing laws against those who committed the largest crime in history, and reaction to young people across the country getting beaten, bludgeoned, shot with tear gas and pepper sprayed by police, I can’t help but wonder whether there is anyone home. Why are most Americans so passively accepting of these calamitous conditions? How did we become so comfortably numb? I’ve concluded Americans have chosen willful ignorance over thoughtful critical thinking due to their own intellectual laziness and overpowering mind manipulation by the elite through their propaganda emitting media machines. Some people are awaking from their trance, but the vast majority is still slumbering or fuming at erroneous perpetrators... The American people are paying the price for allowing a few evil men to gain control of our government... We now unquestioningly accept being molested in airports. We shrug as our intelligence agencies eavesdrop on our telephone conversations and emails without the need for a court order. It is now taken for granted that we imprison people without charging them with a crime and assassinate suspected terrorists in foreign countries with predator drones. Invading countries and going to war no longer requires a declaration of war by Congress as required by the Constitution. The State grows ever more powerful.

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Uncle Sam To The Rescue After All: Latest Rumor Sees €600 Billion Bailout Of Italy From US, Pardon IMF

The European desperation is palpable ahead of the EURUSD open in a few hours, which has to deal with the aftermath of the Friday afternoon downgrade of Belgium, the junking of Portugal and Hungary, and the prospect of an imminent downgrade of AAA-stalwarts Austria and France. So what does Europe do instead of actually proposing the inevitable debt repudiation that is the only and final outcome? Why more rumors of course. To wit: last night saw the preannouncement of Welt am Sonntag indicating that in order to bypass the lengthy process of treaty changes, Europe would instead proceed with bilateral agreements that would somehow enforce fiscal stability and convince the market that European states would follow the German leader. Well since that is sure to have absolutely no impact, overnight Italian La Stampa is out with a fresh new rumor which cites "IMF sources" according to which the US-headquartered and funded organization would provide a €600 billion loan to Italy at 4-5%. In other words, Uncle Sam, in his role as primary funding agent of the IMF would lose massive amount of money on the "market to fair value" arbitrage, only to bail out the latest European domino. As a reminder, the whole "under market rates" loan from the IMF was implemented in Greece and worked out just swell: at last check the 1 Year Greek bond was trading with a yield of over 300%. Oh, and La Stampa forgot to mention one thing: any changes to the IMF, which currently is massively underfunded and is why the organization was forced to create two new liquidity facilities: a Precautionary and Liquidity Credit line, since it is unable to fund its New Arrangements to Borrow, have to go through US Congress when it comes to expanding funding capacity. Yup, the most dysfunctional, corrupt and criminal thing in the world - the US House of Representatives, where unless everyone is short Italian CDS, this will never pass. In other words: this rumor is dead in the water.

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$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

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Guest Post: A Glimpse Into The Future Of The Stock Market And Dollar

A lot of technical analysts and financial pundits are expecting a standard-issue Santa Claus Rally once a "solution" to Europe's debt crisis magically appears. There will be no such magical solution for the simple reason the problems are intrinsic to the euro, the Eurozone's immense debts and the structure of the E.U. itself. The accident has finally happened, and it's called the euro/European debt crisis. I see a lot of analysts trying to torture a Bullish interpretation out of the charts, so let's take a "nothing fancy" chart of the broad-based S&P 500 with five basic TA tools: Bollinger Bands to measure volatility, relative strength (RSI), MACD (moving average convergence-divergence), stochastics and volume. If we use Technical Analysis 101 (basic version), a number of things quickly pop out of this chart--and none of them are remotely bullish.

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