Bank Run

At the end of the day, you can announce all the fancy sounding programs you like. But unless someone comes up with actual cash none of it announces to much other than political posturing.

Fear the truth, it shall set fundamental market forces free!

So Spain will suffer a collapse, most likely of its banking system resulting in a sovereign default (barring a bailout). When this happens, some €1 trillion+ worth of collateral (still rated AAA by EU banks) will be sucked out of the system.

Congratulations Mario Draghi, you promised unlimited bond buying and you bought less than one month’s worth of gains for Spain. If you want proof positive that Central Banks are losing their grip on things, the above chart is it. The moment we take out that trendline again, it’s GAME OVER (what more can the ECB promise?)

As the Euro infection commences, is it time to profit?

Yes, even the perennially rose-colored eyeglass wearing IMF is seeing the Eurocalypse, but what's even more interesting is what's not being said.

Spain was already experiencing a banking crisis as well as a sovereign crisis. It’s now on the verge of a constitutional crisis (as well as its ongoing sovereign and banking crises).

There was a time before the Fed announced it would commence sterilizing its Large Scale Asset Purchases when every day in which there was a Permanent Open Market Operation, or POMO (remember those?) was a gift from Bernanke, virtually assuring the market would ramp higher. This phenomenon had been documented extensively in Zero Hedge and elsewhere (a comprehensive analysis can be found in "POMO and Market Intervention: A Primer"). The pronounced market effect of POMO was diminished somewhat once the Fed sterilized the daily flow injection by selling short-term bonds to Primary Dealers, even though the Fed continues to buy $45 billion in long-term bonds to this day, effectively mopping up all 10 Year+ gross Treasury issuance, and keeping the stock of long bonds in the private market flat at ~$650 billion as we observed before. All of this is well known. What was not known is who were the Fed's POMO counterparties. Now we know. Yesterday, the Fed for the first time ever released Transaction level data for all of its Open Market Operations. The new data focuses on discount window transactions (completely irrelevant now that there are $1.7 trillion in excess reserves and the last thing banks need is overnight emergency lending from the Fed when there is already a liquidity tsunami floating, yet this is precisely what the WSJ focused on), on FX operations, and, our favorite, Open Market Operations, chief among them POMOs. What today's release reveals is that once again a conspiracy theory becomes fact, because we now know just which infamous bank was by fat the biggest monopolist of POMO operations in a period in which banks reported quarter after quarter of zero trading day losses. We leave it up to readers to discover just which bank we are referring to.

So who will be buying Spanish bonds? Apparently no one but the ECB. And the ECB will only do this if Spain agrees to austerity measures… which Spain doesn’t want. Talk about a mess.

Lots of headlines but little action. Germany will not be pleased:

• SAENZ SAYS SPAIN PLANS 43 NEW LAWS TO BOLSTER ECONOMY
• SAENZ SAYS REFORM PLAN IS TO MEET PLEDGES TO EU PARTNERS

The kickers:

• SPANISH BUDGET BASED ON UNCHANGED ECONOMIC FORECASTS, SEES GDP DOWN 0.5%

In other words everything will be massively wrong for the country with the epic bank run. And the one the people have been waiting for:

• SPAIN TO TAP €3 BILLION FROM SOCIAL SECURITY RESERVES IN ORDER TO FUND LIQUIDITY NEEDS.
  

Incidentally this is the same fund which has 9 months of pension reserves and is invested in... drumroll... Spanish Bonds! And cue to the riotcam.

Greece is about to default on the investors that funded the bonds that replace the first set of investors that they defaulted on just a few months ago. Get it? Every dollar thrown into Greek bonds at par is akin to flushing money down the toilet.

Some wonder why we have been so convinced that no matter what happens, that the Fed will have no choice but to continue pushing the monetary easing pedal to the metal. It is actually no secret: we explained the logic for the first time back in March of this year with "Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The logic, in a nutshell, is simple: everyone who looks at modern monetary practice (as opposed to theory) through the prism of a 1980s textbook is woefully unprepared for the modern capital markets reality for one simple reason: shadow banking; and when accounting for the ongoing melt of shadow banking credit intermediates, which continues to accelerate, the Fed has a Herculean task ahead of it in restoring consolidated credit growth. Shadow banking, as we have explained many times most recently here, is merely an unregulated, inflationary-buffer (as it has no matched deposits) which provides the conventional banking credit transformations such as maturity, credit and liquidity, in the process generating term liabilities. In yet other words, shadow banking creates credit money which can then flow into monetary conduits such as economic "growth" or capital markets, however without creating the threat of inflation - if anything shadow banks are the biggest systemic deflationary threat, as due to the relatively short-term nature of their duration exposure, they tend to lock up at the first sing of trouble (see Money Markets breaking the buck within hours of the Lehman failure) and lead to utter economic mayhem unless preempted. Well, preempting the collapse in the shadow banking system is precisely what the Fed's primary role has so far been, even more so than pushing the S&P to new all time highs. The problem, however, as we will show today, is that even with the Fed's balance sheet at $2.8 trillion and set to rise to $5 trillion in 2 years, it will not be enough.

Let’s review the tricks the central banks & governments have available to beat back any financial challenges presented by the debt reaper.

• Money tool # 1 = deficit spending. For years, the G7 countries have believed that spending more than you make, will create jobs and prosperity. To measure the success of this strategy, we invite you to hang out in Spain, Greece or Italy.
• Money tool # 2 = cut interest rates to 0%. All the really smart people in the World know that lower interest rates encourage people and companies to borrow more money and spend this money. To measure the success of this strategy, we invite you to hang out at the US Federal Reserve and help them count the $1.5 trillion in excess money held by the big banks.
• Money tool # 3 = when all else fails print money. Everyone knows by now the reason the Great Depression was great was because no one had the idea to print money to kick start the economy. To measure the success of this strategy, we definitely do not invite you to visit Japan. The Japanese have been printing money for over 10 years and that hasn’t shaken their economy from its funk one bit.

As we enter the always dangerous months of September and October, central bankers and governments just can’t get their heads around the fact that their cherished money tools are not shaking the World. Never one to quit, someone somewhere muttered “we must do something” – and something they did.

My latest thoughts on the banks & from Max Keiser and Stacey Herbert, a question I've pondered many times - Why do the oil-rich sheiks takes such abuse from American bankers?

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.