European Central Bank
Gold has surged 7.2% already in January, outperforming gold in dollars which is up 4.8%, and building on the 12% gains seen in 2014. Market participants are increasing allocations to gold in order to hedge a ‘Grexit’ and risks posed by euro money printing.
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Germany could end up in a position where it would be constitutionally bound to leave the euro area, warns the IFO economic institute's Hans-Werner Sinn, which would force "somebody to give in and that would be the ECB." Sinn blasts the looming decision of ECB QE as an excuse to help weaker nations, exclaiming, as Bloomberg reports, "the risk of deflation is just a pretext for quantitative easing, for hammering out a bailout program for southern Europe."
In what appears to be a desperate attempt to boost confidence in a failing financial system taken right out of the 2011/2012 playbook, over the weekend the National Bank of Greece had its latest "subprime is contained" moment and loudly announced that "the situation with deposit outflows from the country was under control" as it tried to reassure markets ahead of a Jan. 25 snap election, reports Kathimerini. And while Greek deposits may or may not be "running" one thing is certain: with an increasing probability they may not have a "continuity-promoting" government in less than two weeks, Greeks tax remittances to the government, which were almost non-existent to begin with, have ground to a halt!
Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario. So far this time around, we had everything but step "5". We do now.
The entire theory of monetarism is coming undone in spectacular and empirical fashion, which leaves the entire status quo exposed. All that is left in defense is the same old refrain of “it wasn’t big enough.” That’s great for those in the ivory towers blinding themselves to the reality of a lost generation of Italians, Spaniards, French and now even Germans; a listing to which even the FOMC is worried may yet add Americans. Why anyone ever expected a different outcome is due solely to unrepentant ideology, since these central banks are following almost exactly the Japanese “model.”
Despite stressing time and again that the ECB cannot dictate policy within individual nation states in Europe, Reuters reports Draghi's henchmen are playing 'bad cop' to Germany's 'good cop' for now as they threaten the withdrawal of Greek financial system funding if reforms are not carried out post election. Greek stocks are falling once again (led by the banks) and default risk has soared, with 5Y CDS +250bps at 1555bps.
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Just 2 short months ago we warned of the rising voice among the cognoscenti tilting their windmills towards the concept of "helicopter money," as Deutsche bank noted, "perhaps there's an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock." Committing what Commerzbank calls "the ultimate sin" is now reaching the mainstream as Germany's Der Spiegel notes it is becoming increasingly clear that Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation; and many economists are demanding that the European Central Bank hand out money to consumers to stimulate the economy.
Who owns Greece's public debt? That's the 322 billion-euro question, according to the Finance Ministry's figures from the third quarter of last year. Most of the debt has changed hands since a bailout in 2010, a second in 2012 and a restructuring involving private creditors that same year. Private owners now hold only 17 percent. The secondary market has become very thin — bear that in mind when looking at 10-year bond yields. A default would have to be absorbed instead by official creditors, holding the remaining 83 percent of outstanding loans and bonds. These include euro-area governments (62 percent), the International Monetary Fund (10 percent) through its participation in the two bailouts, and the European Central Bank (8 percent), which purchased bonds in 2010 through its Securities Market Program. The remaining 3 percent are repurchase agreements and assets held by the Central Bank of Greece. It is unclear where losses on that portion would fall.
The Greek 3Y-10Y yield curve is back over 400bps inverted this morning as bond (and stock) prices re-tumble following a new reports. As The FT reports, forecasting group Oxford Economics says it has carried out an "in-depth" analysis of opinion polls ahead of Greece's snap general election on January 25, which shows that the radical Syriza party is on course to win a "clear mandate" to push through anti-austerity policies. Will German worry now?
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While the predictions of Blackstone's Byron Wien (born in 1933) have been all over the place in the last few years, they nevertheless provide some color on just what the mainstream does not believe... This is the 30th year Byron has given his views on a number of economic, financial market and political surprises for the coming year. From "our luck running out on cyberterrorism" to "shock and awe no longer working in Japan", Wien's non-predictions range from The Fed to China and from Oil to Hillary Clinton...
As bonds rally and EUR slumps near 1.20 (the figure) following moar Draghi jawboning and suggestions of sovereign QE from the ECB, Germany has come out swinging to remind the world that it won't stand idly by as the nation's taxpayers are thrown under the bailout-the-EU-or-else bus. Michael Fuchs, deputy parliamentary floor leader of Angela Merkel's Christian Democrats, told Deutschlandfunk radio on Friday: "We shouldn't pump extra money into these states, but rather make sure they continue along the reform path." As Reuters reports, Fuchs further added, "I'd be grateful if (ECB President Mario) Mr Draghi would make statements along these lines."
To complete monetary union we will ultimately have to deepen our political union further: to lay down its rights and obligations in a renewed institutional order.