Deutsche Bank

"It’s all about Politicians, Central Bankers and Growth for 2013" is how Deutsche Bank's Jim Reid perfectly sums up the year ahead. While he notes that Central bankers have increasingly eliminated the immediate tail-risk across the globe, he adds that they have not yet found the solution to weak/negative growth and how to successfully de-lever over indebted economies. This argues for a risk-off (periodic growth disappointments), risk-on world (liquidity injections) to continue as far as the eye can see. We tend to agree that the biggest risk to this comes from politicians. The fiscal cliff is the near-term risk but the Italian elections also loom and execution risk in Spain must be closely watched. It could be a decent year for markets but with huge risk off moments. If politicians drop the ball and renege on promises or get forced by the electorate to embark on a different path against the wishes of the EU/ECB then huge risk aversion could still easily occur.

The news Deutsche Bank apparently sat on potential super-senior losses of $12 bln through the banking crisis is bound to anger the many bankers who saw their careers crumble or subsumed into bureaucracy. Other banks up the ying-yang with unhedgable risk went bust or were forced into the ignominy of public bailouts. From a proper accounting or risk-management perspective DB should have been bust - but to the unknowing world it wasn't. And that sums up the complexity of the bank world - if management can hide or not recognise risks (and even sack whistleblowers who disagree with them), what's the answer? It's the No-See-Ums that kill institutions. On the basis if you can't see it, then it can't see you... should DB have survived? If Lehman had kept schtumm about its leverage and unquantifiable risk, would it still be with us? Not getting caught is an objective all management have quietly inscribed into their heads. And as far as the UK's fiscal projections... on the basis QE has historically proved to be little less effective than pushing uphill on a length of wet wool, then we might just be staring down the Japanese abyss - no growth as CAPEX will stay subdued on the weak outlook. Lastly, we've been told (forceably) our concerns the Greek buyback could be difficult are completely overstated. We are idiots for even thinking it... apparently.

• MSM discovers window dressing: Fund Managers Lift Results With Timely Trading Sprees (WSJ)
• White House Unyielding on Debt Limit (WSJ)
• Obama, Boehner talk; Geithner prepared to go off "cliff" (Reuters)
• Republicans urged to resist tax rises (FT)
• China looms large over Japanese poll (FT)
• As predicted here two months ago, Greek Bond Buyback Leads S&P to Cut to Selective Default (BBG)
• Japan opposition LDP set to win solid election majority – polls (BBG), but...
• Japan Opposition LDP’s Main Ally Cautions Abe on BOJ Pressure (BBG)
• U.S. and Europe Tackle Russia Trade (WSJ)
• King Seen Maintaining QE as Osborne Extends Fiscal Squeeze (BBG)
• Syria pound fall suggests currency crisis (FT)
• Irish budget seeks extra €3.5bn (FT)
• U.K. Extends Cuts Due to Poor Outlook (WSJ)
• ECB Seen Refraining From Rate Cuts as Yields Sink on Bond Plan (BBG)

Insider traders and penny stock hucksters beware...

Forget the perfectly anticipated Greek (selective) default. This is the real deal. The FT just released a blockbuster that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time!

Confused by the recent surge of capital into Europe (which somehow is supposed to indicate that all is well because local stock and bond markets are faring better)? Don't be: it is merely the latest and greatest manifestation of that most prevalent of New Normal investment strategies: hope. Hope that this time it is different, and that the latest injection of capital from the Fed via QE3 coupled with the OMT perpetual backstop of liquidity via the ECB (still merely at the beta stage: expansion to actual gold/production phase TBD) will kick start the European economies. Alas, it won't, at least not until Europe actually undergoes the inevitable internal devaluation which we described over the weekend (since an external one is impossible) and crushes local wages of the PIIGS, which in turn would lead to revolution, and thus will never happen. That, or somehow discharges about 40% of consolidated Eurozone debt/GDP, which it also won't as it would wipe out the global banking system. So what does this mean? Well, as Deutsche Bank explains looking simply at manufacturing output in the developed world, global markets are now overvalued anywhere between 15% and 35%. This is the hope premium now embedded in stock prices.

In our first installment of this series we explored the concept of stock to flow in the gold markets being the key driver of supply/demand dynamics, and ultimately its price. Today we are going to explore the paper markets and, importantly, to what degree they distort upwardly the “flow” of the physical gold market. We believe the very existence of paper gold creates the illusion of physical gold flow that does not and physically cannot exist. After all, if flow determines price – and if paper flow simulates physical metal movement to a degree much larger than is possible – doesn’t it then suggest that paper flow creates an artificially low price?
Leveraged systems are based on confidence – confidence in efficient exchanges, confidence in reputable counterparties, and confidence in the rule of law. As we have learned (or should have learned) with the failures of Long Term Capital Management, Lehman Brothers, AIG, Fannie & Freddie, and MF Global – the unwind from a highly leveraged system can be sudden and chaotic. These systems function…until they don’t. CDOs were AAA... until they weren’t. Paper Gold is just like allocated, unambiguously owned physical bullion... until it’s not.

With a vote of 473 in favor, 100 against, and 11 abstentions in the German Bundestag, Europe's AAA-club gets the formal green light to pay off hedge fund holders of Greek bonds, and to preserve the solvency of Deutsche Bank, also incorrectly known elsewhere as "the third Greek bailout." As for Greece, we expect a 4th "bailout" within 3-6 months. In fact after today's spectacular collapse in Greek retail sales which plunged 12.1% in October, make that 2-5 months.

As ever, it is very difficult to pinpoint exactly why gold and all precious metals fell in price. Interestingly, oil fell by even more - NYMEX crude was down by 1% and was down by more than 1.7% at one stage. The CME Group, which operates the U.S. COMEX gold futures market, said Wednesday's plunge in gold was not the consequence of a "fat finger" or a human error. The trading wasn’t even fast enough to trigger a pause on Globex, said CME.  One thing that we can say for certain was that there was massive, concentrated selling as the New York stock markets opened with some 35,000 lots sold which is equivalent to 3.5 million ounces and saw the price fall from $1,735/oz to $1,711/oz between 0825 and 0830 EST. One sell order alone was believed to be 24 tonnes or 770,000 troy ounces.  Incredibly there was 35% daily volume in just 60 seconds. The selling, like all peculiar, counter intuitive, sharp sell offs in recent months, was COMEX driven with COMEX contracts slammed leading to further stop loss selling. The selling may have been by speculative players on the COMEX. It may have been algo or computer trading driven or tech selling – although this is less likely. Informed commentators questioned the nature of the selling as a large institutional COMEX trading entity would normally gradually sell a position of this size in order to maximise profit.

If you want further evidence that the financial elites are already preparing for a default from Spain and a collateral crunch, you should consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) have ALL begun accepting Gold as collateral.

China needs to add to its gold reserves to ensure national economic and financial safety, promote yuan globalization and as a hedge against foreign- reserve risks, Gao Wei, an official from the Department of International Economic Affairs of Ministry of Foreign Affairs, writes in a commentary in the China Securities Journal today which was reported on by Bloomberg. China’s gold reserve is “too small”, Gao said and while gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility, Gao wrote. The People’s Bank of China is accumulating significant volumes of gold under the radar of many less informed market participants which is bullish. The Chinese government is secretive about its gold diversification and buying and does not disclose gold purchases to the IMF. Therefore, there has been no official update to their holdings since the barely reported upon announcement four years ago that Chinese gold reserves had risen from just over 500 tonnes to over 1,000 tonnes.

Earmuffs time for Europe's carefully sculpted theater of goodwill, solidarity and cohesion. Because this has to be some sort of record. Hours after Greece got its much desired two year bailout extension of Deutsche Bank from Germany Europe, Greece is already in breach of the terms it, and Europe, all "fought so hard" for. From Kathimerini: "A planned 25 percent increase in the price of public transport tickets next March is to be postponed until October, the general secretary of the Development Ministry, Nikos Stathopoulos, said on Tuesday. The increase originally demanded by the troika would have pushed the price of a ticket for all modes of public transport to 1.75 euros from 1.40." Instead the Troika's demand is overruled, and in its place is a promise that some efficiency has been extracted elsewhere, until of course, said promise is probed and uncovered to have also been a lie.

Over the past several days there had been concerns that even if Greece managed to roll its maturing €5 billion in Bills with a new Bill issuance (which it did earlier today), it would be unable to actually obtain cash for this worthless paper, through a repo with the European Central Bank. The reason being that last week the ECB allowed a temporary extension in Greek ELA collateral eligibility to expire, enacted on August 2, which in turn reduced the amount of repoable T-Bills from €7 billion to just €3.5 billion, in the process reducing the amount of cash Greece can obtain in half from the Bill roll. And while there had been lots of speculation and rumors that the ECB would, as in the case of Spain, either make a "mistake" or extend the collateral pool exemption once more, this did not occur. Instead, as we have just learned, the ECB has allowed Greek banks to use "asset-backed" securities to plug the collateral gap. Needless to say, one can only conceive just what unencumbered assets still can be found on Greek bank balance sheets (here is one artist's impression) but it was largely expected that in the race to debase its currency, the ECB would once again admit that when it comes to perpetuating the Ponzi, especially at a marginal cost of a token €3.5 billion, anything goes (just don't tell Germany). And so, Greece kicks the can once again.

In a shining example of the law of unintended consequences, when 2012 started Wall Street bankers had expected that all it would take for bonuses to surge and offset 2011's deplorable comp, is another round of QE. Well, QE came and went, not only in the US, but virtually everywhere else, and sure enough the market traded up to new 5 year highs (and just why of all time highs as well), yet something was not going according to plan: bank revenues. Another side-effect of the Fed buying the long end is everyone piling in and frontrunning Bernanke in the 10-30 Year segment, flattening the curve, and making Net Interest Margin profitability a thing of the past. The result has been a year in which despite stocks rising, banker pay is set to tumble even more (for those lucky enough to still even have a job that is, which for UBS and Nomura means about 80% of the employees a year ago) with traders of cash equities and derivatives set to see another 20% drop in comp from 2011 according to Options Group. The end result: 2012 all in comp will be half of what it was in 2007. Say goodbye to the Master of the Universe - they will now have to settle for a galaxy or two at most.

The overnight session has so far been marked with one after another economic debacle out of Asia. First Japan announced that its Q3 GDP fell an annualized 3.5% in Q3, more than the 3.4% expected, the worst decline since last year's earthquake. The drivers were sliding exports and a collapse in consumer spending. The announcement brought on a barrage of platitudes by various Japanese officials who are shocked, shocked, that 32 years of Keynesian miracles have resulted in this horrifying outcome. Of course, everyone knows 33 years is the charm for Keynesian miracles. So much for the boosts from Japan's QE 8 aad QE 9: bring on QE 10. The pundits appear surprised now that Japan is back in a solid recession, which to us is quite surprising as well - does this mean that Japan ever exited the depression? Then China came out with an announcement that its credit growth plunged in October with Chinese banks extended CNY 505bn new yuan loans in October, down from CNY 623bn in September and less than the CNY 590 expected. The trifecta of bad news was rounded off by India, whose Industrial Production joined the rest of the world in global recession, when it dropped 0.4% in September on expectations of a 2.8% rise, even as Consumer prices rose 9.75% Y/Y - the global stagflation wave has arrived... For all those wondering why futures have managed to eek out a modest overnight ramp.