Bank of England

If the UK was desperately hoping for a "terrible" economic print, it got it this morning after preliminary Q2 GDP printed 0.7% on expectations of a -0.2% decline, following a -0.3% drop in Q1, cementing the country's double dip collapse. Reuters explains: "The Office for National Statistics said Britain's gross domestic product fell 0.7 percent in the second quarter, the sharpest fall since early 2009 and a bigger drop than any of the economists surveyed in a Reuters poll last week had expected. The figures confirmed that Britain is mired in its second recession since the financial crisis, with the economy shrinking for a third consecutive quarter. It will add pressure on Osborne to get the economy growing again after a crisis that has left many Britons poorer as rising prices and higher taxes ate up meager wage increases. Sterling hit its lowest in nearly two weeks against the dollar after the data, and government bond prices rallied on speculation that the Bank of England may have to provide more economic stimulus than expected. Earlier this month the BoE has announced another 50 billion pound program of gilt purchases with newly created money to soften a grim economic outlook, but Wednesday's data is likely to add to market speculation that it may cut interest rates later this year. "This is terrible data. Frankly there's nothing good that comes out of these numbers at all," said Peter Dixon, an economist at Commerzbank. "The economy looks to be badly holed below the water line at this stage. It's a far worse period of activity than we'd expected."" Amusingly, according to Goldman "It is difficult to reconcile the weakness of today’s official GDP data with any other indicator of economic or labour market activity." We knew the peripherals were doing all they can to sabotage their economies and be eligible for more aid and bailouts. But the UK?

There was a time when regulators caught red-handed abusing their privileges, aka, doing nothing in the face of glaring malfeasance, would quietly fade away only to even more quietly reappear, sans press release, as a third general counsel or some other C-grade menial role paying a minimum 6 figure compensation to the individual for years of doing nothing. This is no longer the case: it appears that the best such exposed "regulators" can hope for going forward is to get media positions. Such is the case with John Ewan. Who is John Ewan? None other than the director "responsible for the management of the setting of Libor" at the British Bankers' Association. In other words, the man whom The Sun of all non-captured publications (oddly enough, tabloids sometimes have more journalistic integrity than Reuters and the FT as we will shortly find) has dubbed Mr. Libor. The Sun continues: "In a staggering profile on the internet Mr Ewan reveals he joined the BBA in 2005 to “put Libor on a secure commercial footing”. That year Barclays traders began fiddling the figures they submitted for the Libor calculations. On the LinkedIn networking site Mr Ewan boasts of generating a “tenfold” increase in revenue from licensing out the Libor rate." He adds: “I introduced new products and obtained EU, US and Japanese trademarks for BBA Libor. "I successfully negotiated contracts with derivatives exchanges and all of the major data vendors." Well, in the aftermath of Lieborgate surely Ewan is going to someone receptive to his permissive and highly profitable tactics over the years, such as Barclays. Actually no: instead of a bank, the only place that is willing to accept Ewan is media conglomerate Reuters. And not just as anyone: "Thomson Reuters confirmed that Ewan has joined the company as head of business development for its fixing and benchmark business." We wonder how much revenue Mr. Ewan generated for Reuters?

Too Big Leads To Destruction of the Rule of Law

There is a strange delayed reaction between the initial exposure of weakness in the financial system and the public’s realization of the truth, sort of like Wile E. Coyote dashing off a cliff in the cartoons only to continue running in mid-air above the abyss below.  It is a testament to the fact that beyond the math, there is an undeniable power of psychology in our economy.  The investment world naively believes it can fly, even with the weight of endless debt around its ankles, and for a very short time, that pure delirious oblivious belief sustains the markets.  Eventually, though, gravity always triumphs over fantasy…

• Who Needs the Euro When You Can Pay With Deutsche Marks? (WSJ)
• Now it's personal and ad hominem: Is German Economist Exacerbating Euro Crisis? (Spiegel)
• Bernanke Outlines Range Of Options For Additional Easing (Bloomberg)
• Italy's Monti says serious worry Sicily region may default (Reuters)
• Libor ‘structurally flawed’, says Fed (FT)
• Some Firms Opt to Bring Manufacturing Back to U.S. (WSJ)
• ECB Signals Support for Easing Irish Debt Terms (WSJ)
• China’s Wen Warns Of Severe Job Outlook As Growth Yet To Return (Bloomberg)
• Hollande scraps tax breaks on overtime (WSJ)
• China’s June Home Prices Rebound As Sentiment Improves (Bloomberg)

And so it begins...Last Friday the Spanish government published a proposal to cut government expenditure and raise taxes to reduce the fiscal deficit by 56.4billion euros by 2015.  I have outlined why austerity will not work in Europe, but it looks like this is a lesson Europeans will have to learn for themselves--for a second time.  The writing is on the wall in Ireland, who ailed in the same ways that Spain is currently ailing, but what Lord Merkel wants, Lord Merkel gets.  The immediate malaise from these austerity measures will be large-scale social unrest, which is already being planned by many of the 50% of the country's unemployed young people.  Regardless of one's stance on the economic merit of austerity, what is indisputable is that riots are real and riots do not end well.  With nothing to lose, this round of Spanish austerity protesting has the potential to end in catastrophe.

• Lieborgate fallout: Bank of England Governor Sir Mervyn King faces MPs (Telegraph)
• Yahoo's brand new CEO to seek maternity leave shortly (NYT)
• China’s Foreign Investment Drops 6.9% In June (Bloomberg)
• Falling property investment drives China H1 FDI drop (Reuters)
• German Court Delays Ruling on Fund (WSJ)
• Fed's George Says U.S. Growth May Not Exceed 2% in 2012 (Bloomberg)
• China Echoes 2009 Stimulus Planned Railway Spending Boost (Bloomberg)
• ZEW: Investor Outlook For German Econ At Six-Month Low (MNI)
• Fed Shifts Focus To Jobs As Unemployment Stalls Above 8% (Bloomberg)
• Goldman Builds Private Bank (WSJ) - lock in those deposits asap
• UniCredit, Intesa Among 13 Italian Banks Cut By Moody’s (Bloomberg)

When it comes to insight into what is on Ben Bernanke, nobody is quite as capable as the firm that runs not only the NY Fed, but virtually every other central bank in the world: Goldman Sachs. Below we present Jan Hatzius' thoughts on what to expect when Bernanke takes the stand at 10 am today when he delivers the first day of his semi-annual Humphrey Hawkins presentation to Congress. Many expect him to hint at more QE, and lately a tempest in a teapot (to use the parlance of our times) has erupted over the possibility that the Fed will lower IOER to 0 or even negative. Here is what Goldman has to say about that: "we do not expect an IOER cut at this time." In fact, Goldman is rather skeptical Bernanke will hit at much if anything, especially with bond yields already at record lows: after all, how much more frontrunning of the Fed's bond or MBS purchases is there? Instead look for much more grilling on the Fed's role in Lieborgate: congress is now realizing it is woefully behind its UK political cousins when it comes to reaping points from years of global Libor manipulation. More importantly, Maxine et al have finally finished all those "Libor for absolute corrupt idiots" books they ordered almost a month ago so they are truly prepared.

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive? According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates. The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion. Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

Via Goldman, here are the key economic events to look forward to in the coming relatively quiet week. And out of DB, we get a list of the key PIIGS bond auctions and bailout events in the immediate and near-term future.

Life ain’t fair

The Fed has released the first of its Lieborgate treasure trove: "Attached are materials related to the actions of the Federal Reserve Bank of New York (“New York Fed”) in connection with the Barclays-LIBOR matter.  These include documents requested by Chairman Neugebauer of the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Oversight and Investigations. Chairman Neugebauer requested all transcripts that relate to communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2009. Please note that the transcript of conversations between the New York Fed and Barclays was provided by Barclays pursuant to recent regulatory actions, and the New York Fed cannot attest to the accuracy of these records. The packet also includes additional materials that document our efforts in 2008 to highlight problems with LIBOR and press for reform. We will continue to review our records and actions and will provide updated information as warranted."

Many Other Core Economic Figures Manipulated As Well

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

Who Are the Biggest Manipulators of All?