European Union

• Greek Parliament Backs Austerity as Rioters Burn Buildings (Bloomberg)
• China CIC Wary of EU Government Bond Investments (Reuters)
• Spain Unions Decry New Labor Rules (WSJ)
• China Tells Banks to Roll Over Loans (FT)
• We're Not Greece: Italian Prime Minister Monti (CNBC)
• Bernanke’s Labor Pessimism at Odds With U.S. Growth (Bloomberg)
• Obama Budget Seeks Funding for Trade Unit (Bloomberg)
• Obama's Election-Year Budget to Target Rich (Reuters)
• China May Need to Fine-Tune Policy This Quarter, Wen Says (Bloomberg)
• China’s Xi Seeks Second Front for U.S. Ties in Return to Iowa (Bloomberg)
• Why Greece and Portugal Ought to go Bankrupt (FT)

"The European Union suffers under Germany” ruffled some feathers, but Greek reform rebellion gives Angela Merkel and others what they’ve been looking for: plausible deniability.

As the headlines from Europe become more and more realistic (and ironically more and more Onion-worthy), Reuters notes one of the more interesting examples of just how the Greek people are feeling. The Federation of Greek Police have accused EU/IMF officials, in a formal letter, of "...blackmail, covertly abolishing or eroding democracy and national sovereignty". While violence erupts among the largely unemployed youth, the supposedly 'grown-up and responsible' segment of the Greek society, which for now at least appears not to be on strike, is recognizing the wholesale destruction of their society (as 22% cuts in minimum wage for instance are thrust upon them). The Greek police, who have stood against the protesters and done their jobs facing threats and anger, are seemingly expressing solidarity with the antagonists as they call out ECB, European Commission, and IMF leaders for their destructive policies. At what point do the police throw down their riot shields and follow the Greek people into their 'Bastille'?

The Greek daily http://www.dimokratianews.gr/ (price 1 Euro, not 2000 Drachma) may have summarized best what at least a prominent subsegment of Greece feels toward Die Frau, who quite adeptly managed to dodge the Greek "pledge"  gambit, so thoroughly discussed earlier, and put the ball back in the Lucas Papademos' court, who now must be tearing his hair out: not only did Europe put him in his current position, but now it is the same Europe who no longer wants him in... What's a former ECB apparatchik and Trilateral Commission member to do...

Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits. Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.

UPDATE: Ironic timing (via Bloomberg)...*VENIZELOS SAYS GREECE FACES CHOICE OF STAYING IN EURO OR NOT,  *GREEK DEBT SUSTAINABILITY NO WAY NEAR 120%, DE JAGER SAYS, and *ECB SHOULD CONTRIBUTE TO REDUCTION OF GREEK DEBT, JUNCKER SAYS

In an incredibly candid 'informal' discussion caught on video by Portugal's TVi24 television crew, German finance minister Wolfgang Schaeuble gives Portuguese finance minister Vitor Gaspar 'the nod' that after the Greek deal is done, Germany will relax the conditions of the financial assistance program for Portugal. While the soundtrack is a little flaky, it is clear that the German finmin notes they must remain resolute in their conditions against Greece in order to maintain the appearance of 'seriousness' with the fellow members of the Greek parliament and more importantly the people of Germany. It would appear that once they have flexed their muscles against the Greeks (think Lehman?) then (and only then) can (and will) they 'help' the Portuguese. Perhaps the hard default is the way they expect this to play out with the assumption they can post-hoc avoid contagion in some manner but nevertheless, Samaras' comments this afternoon on growth and a focus away from austerity do not sit in any way complementary to Schaeuble's comments in this candid-camera moment.

Portuguese TV is having a field day with the clip as they note: Vítor Gaspar was "looking like a student trying to impress the teacher," was how the commentator saw the episode. Adding, the minister "did everything but say that not only is doing everything right as even very fond of the austerity policy."

Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system. Perhaps regular readers will recall that back in July, we wrote an article titled "China And Iran To Bypass Dollar, Plan Oil Barter System." Specifically, we wrote that "according to the FT, China has decided to commence a barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant." Seen in this light the fact that Iran is actually proceeding with a barter system, something that had been in the works for quite a while, actually puts the Reuters story in a totally different light: instead of one predicting the imminent demise of the Iranian economy, the conclusion is inverted, and underscores the culmination of what may have been an extended barter preparation period, has finally gone from beta to (pardon the pun) gold, and Iran is now successfully engaging in global trade without the use of the historical reserve currency.

Even as the ECB's very own Mario Draghi is now peddling Greek deal rumors, which are essentially a reaffirmation that the country will "pledge" to return to GDP growth in 2013, we are already seeing real, not pledged, or promised, consequences of this deal, whether real or not (ignoring that Venizelos just said that it would actually take up to 15 days to finalize it, something which means the Greek exchange offer is DOA) namely that the crippling economic collapse discussed extensively on these pages is about to get far worse. AP reports: "Angry union leaders announced a 48-hour general strike for Friday and Saturday." “We are moving to a social uprising," said ADEDY Secretary Genera Iliopoulos." Surely this is the fastest shortcut for Greece to meet or beat expectations of halting the 10% drop in its GDP and convert that number to positive. One can only hope that makers of bulletproof vests can compensate the economic collapse as every other part of the economy shuts down.

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.  New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.  The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.

Back in July of 2011, when we first predicted the demise of the second Greek bailout package, even before the details were fully known in "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" we asked, "what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly." Alas, it has not been all that very "shortly", as once again we underestimated people's stupidity and willingness to pay the piper of a crumbling economic and monetary system. But our prediction is finally starting to come true. Spiegel has just released an article, which encapsulates what well over 50% of Germans think, who say that the time to let Greece loose, has come.

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A few days after Germany proposed the stripping of Greek fiscal authority from the insolvent country, in exchange for providing funding for what German FinMin Schauble called today a "bottomless pit" (and Brüderle chimed in saying that "a default of the Greek government would be bitter but manageable), Sarkozy decided to demonstrate his "muscle" if not so much stature, and openly denied Germany, saying "There can be no question of putting any country under tutelage." Sure enough, it was now Germany's turn to reciprocate the favor. According to Bloomberg, "Finance ministers from the four euro- area countries with AAA ratings -- Germany, Finland, Luxembourg and the Netherlands -- will meet in Berlin tomorrow afternoon, a German Finance Ministry spokesman said." And as is well known, FrAAnce no longer a member of this, however meaningless, club. "The gathering is part of a a series of meetings convened by officials from the highest-rated euro states, the spokesman said, speaking on the customary condition of anonymity. Ministers will discuss current issues without briefing reporters after the meeting." And so the gauntlet of public humiliation is now once again back in Sarkozy's court. The good news: if the de minimis Frenchman does not get his act in order, and overturn the massive lead that his challenger in the April presidential elections has garnered, he will need to endure the humiliation for at most 3 more months. In other news, it appears that when it comes to saving political face, the rating agencies are actually quite useful.

All you need to read.

All you need to read.