Creditors

"what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.... Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis."

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population. But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not. Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance). And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

UBS and Nomura have suggested that gold could rise next week as the Federal Reserve may announce further easing at the FOMC meeting – on Tuesday (11/12/12) and Wednesday (12/12/12). Nomura said it is worth considering whether the FOMC will announce further easing to replace so called ‘Operation Twist’. The research house noted that gold remains at the same level as during the October meeting, which suggests gold has not yet priced in any move by the FOMC – creating an opportunity for gold bullion buyers. Regardless of whether the FOMC actually eases at this point – Nomura thinks there is a non-negligible probability – gold is likely to rise. Therefore, Nomura expects gold to rise and prices in this probability as the December meeting approaches, just as gold rose when the September meeting was approaching.

• Bundesbank cuts growth outlook as crisis bites (Reuters)
• Strong quake hits off Japan near Fukushima disaster zone (Reuters)
• Greece to Buy Debt It Already Owns to Reach Target (BBG)
• Draghi’s Go-to ECB Seen Risking Credibility Through Overload (BBG)
• Judge urges Apple and Samsung ‘peace’  (FT) ... Alas only the US government has a Magic Money Tree; others need profit
• Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion (BBG)... make that $5 trillion this time in 2014
• Level Global, SAC Fund Managers Ruled Co-Conspirators (BBG)
• Egypt demonstrators reject Mursi call for dialogue (Reuters)
• Japanese Dealerships in China Retrench in Wake of Dispute (BBG)
• Apparel factory fire reveals big brands' shadowy supply chainsa (Reuters)
• Republican Defectors Weigh Deal on Tax-Rate Increase (BBG)

It would appear that many are lookng at the Greek serial default debacle as a muppet wearing Goldman-tinted gold colored glasses. Here's a more realistic view, complete with the math to back it up!

Yesterday we presented Goldman's first 3 Top Trades for 2013 as they come out, while also noting Goldman's recent disfatuation (sic) with gold. Today, we present Goldman's 4th Top Trade for 2013, which is, drumroll, to go long Spanish Government Bonds, specifically, the 5 year, which should be bought at a current yield of 4.30%. with a target of 3.50% and a stop loss of 5.50%. This reco comes out after the SPGB complex has already enjoyed unprecedented gains - but not driven by economic improvement, far from it - but merely on the vaporware threat of ECB OMT intervention. Of course, once the "threat of intervention" moves to "fact of intervention", everything will promptly unwind as it always does (QE was far more potent as a stock boost when it was merely a daily threat: the market's peak not incidentally occurred the day after Bernanke dropped his entire load: one simply can't move beyond infinity). And with Spain's massive bond buying cliff in Q1 2013, the days its bailout could be postponed are coming to an end.

“Voluntary” and methodical, at taxpayer’s expense

Beggaring thy neighbour has consequences. Neighbours might turn around and bite back. How long until other nations join with Brazil in declaring trade measures against the United States is uncertain, but there may be few other options on the table for creditors wanting to get their pound of flesh, or nations wishing to protect domestic industries. After all, the currency wars won’t just go away; competitive devaluation is like trying to get the last word in an argument. The real question is whether the present argument will lead to a fistfight.

The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. In dampening each successive downturn, authorities accumulated increasingly larger deficits and brought about a debt supercycle that lasted in excess of half a century. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed’s balance sheet beyond anything previously imagined. Some have referred to this as reaching the Keynesian endpoint. Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.

• Union solidarity rubs up against slow economy in LA port strike (Reuters)
• Geithner predicts Republicans will allow higher tax rates (Reuters). And "no risk" of a US downgrade, "no risk"
• Geithner takes hard line on fiscal cliff (FT)
• Narrowing LDP lead points to Japan post-election confusion (Reuters) - not to mention, USDJPY plunges if LDP loses
• Vietnam Says China Must Avoid Trade Weapon in Maritime Spat (Bloomberg)...  and real one, one hopes
• Greece unveils bond buyback plan (FT)
• ECB Can’t Deliver Spain Spread Rajoy Wants, Wellink Says (Bloomberg)
• UK’s euro trade supremacy under attack (FT)
• Merkel Signals Debt Write-Off Possible as Buyback Begins (Bloomberg)
• ECB's Noyer Says Bond-Buying Plan 'Is Bearing Fruit' (WSJ) - as long as just plan, and not execution.

The US dollar's recent losses are being extended at the start of the new week.  The announcement of the details of the Greek bond buy-back scheme has triggered a sharp rally in peripheral bond yields, while the euro area Nov manufacturing PMI is reported at 8-month highs, even if still below the 50 boom./bust level at 46.2.  The euro has completely recouped the knee-jerk losses scored in thin activity just before the weekend when Moody's announced a cut in the ratings for the EFSF, which follows its recent downgrade of France.