The EU, in its current form, is most certainly in its final chapter as both the political environment and market conditions have rendered all proposed “solutions” to the crisis moot.
2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore. Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.
Even as we are drowned by yet another avalanche of lies and cow feces that the Greek private sector bailout negotiation is going well, despite everyone knowing very well by now that various hedge funds like Saba, York and CapeView are holding the entire process hostage and the culmination will be a CDS trigger, the underlying dynamics of the Greek "bailout" once again resurface, which are and always have been all about Germany and the tensions within its various political parties. And unfortunately at this point things are looking quite bad for Greece. As Bloomberg reports, "Greece will have to exit the euro area as it struggles under a mountain of debt, unable to regain its competitiveness without having its own currency to devalue, a senior lawmaker in Chancellor Angela Merkel’s party said. The comments by Michael Fuchs, the deputy floor leader for Merkel’s Christian Democratic Union, contradict the chancellor’s stance in a sign of the domestic headwinds she faces in leading Europe’s efforts to keep the 17-member euro area intact. With the debt crisis into its third year, Merkel is due to join CDU lawmakers at a two-day policy meeting beginning tomorrow in the northern German city of Kiel." The truth hurts: "For Greece, “the problem is not whether they are capable of paying their loans -- they will not, not at all, never." So, why are we optimistic on Europe again? Oh yes, because European banks issued tons of equity and now have a capital buffer to the imminent hurricane that will be unleashed once the Greek restructuring finally enters freefall mode and the country leaves the Eurozone. No wait, that's not right: only UniCredit tried that and its stock collapsed by 50%. Must be something else then - oh yes, Italy successfully sold debt maturing in one year!
Demand in Asia continues to be strong. China remains the world’s largest producer of mined gold. Premiums for gold bullion bars in Asia are rising again and are at their highest since October in Hong Kong and Singapore. Premiums are at $2.15/oz in Hong Kong and $1.65/oz in Singapore. Bullion’s strength was also attributed to the euro’s 16 month low, with Fitch warning the ECB to purchase assets to try to stabilize the euro. Spot gold was up 0.6 percent at $1,650.34 an ounce at 1009 GMT, having earlier touched a one-month high at $1,652.30. U.S. gold futures for February delivery were up $12.60 an ounce at $1,652.20. A stronger rupee has boosted the purchasing power of gold bullion consumers in India. This is in the run up for the Indian Wedding Season which resumes January 15th and continues until April, leaving a few weeks break for a period that is considered bad luck for nuptials. Chinese demand will weaken next week as many factories and businesses are set to close for the Lunar New Year’s celebrations.
- Hedge Funds Try to Profit From Greece as Banks Face Losses (Bloomberg)
- Spain Doubles Target in Debt Auction, Yields Down (Reuters)
- Italy 1-Year Debt Costs More Than Halve at Auction (Reuters)
- Obama to Propose Tax Breaks to Get Jobs (WSJ)
- GOP Seeks to Pass Keystone Pipeline Without Obama (Reuters)
- Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says (Bloomberg)
- Petroplus wins last-minute reprieve (FT)
- Geithner gets China snub on Iranian oil as Japan plans cut (Bloomberg)
- Fed officials split over easing as they prepare interest rate forecasts (Bloomberg)
- Draft eurozone treaty pleases UK (FT)
- Premier Wen looks at the big picture (China Daily)
- US Foreclosure Filings Hit 4-Year Low in 2011 (Reuters)
While we have long asserted that any attempt to be bullish this market (and economy) by necessity should at least involve the thought experiment of eliminating such pro forma crutches as trillions in excess liquidity from the Fed, not to mention direct and indirect intervention by the central planners in virtually all asset classes, which in turn drives frequent periods of brief decoupling between various geographies and asset classes (which always converge) and thus economic performance (because as Bernanke will tell you gladly, the economy is the market), an exercise which would expose a hollow facade, a broken market and an economy in shambles, in never hurts to ask just what, if anything, do the bulls "see" and how do they spin a convincing case that attempts to sucker in others into the great ponzi either voluntarily, or like in China, at gun point. Alas, our imagination is lacking for an exercise such as this, but luckily David Rosenberg has dedicated his entire letter to clients from this morning precisely to answer this question. So for anyone who is wondering just what it is that those who have supposedly "climbed the wall of worry" see, here is your answer.
The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold. As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge. There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion. China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewellery market according to the World Gold Council. There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”
The economic superstar, with unemployment at a 20-year low and exports at an all-time high, produces 34% of the Eurozone’s GDP—and it smacked into a wall.
Payback sure is a bitch. After being demonized for everything from the tiniest tick down in the EURUSD, to blowing out spreads in CDS, to plunging stocks across the insolvent continent, hedge funds, long falsely prosecuted for everything, even stuff they patently did not do, are about to have their day in the sun, precisely in the manner we predicted back in June of last year when we posted: "Greek Bailout #2 Is Dead On Arrival: A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage." Back then we wrote: "we may suddenly find ourselves in the biggest "activist" investor drama, in which voluntary restructuring "hold out" hedge funds will settle for Cheapest to Delivery or else demand a trillion pounds of flesh from the ECB in order to keep the eurozone afloat. In other words, the drama is about to get very, very real. And, most ironically, a tiny David is about to flip the scales on the mammoth Goliath of the ECB and hold the entire European experiment hostage..." Sure enough, we were right yet again. Ekathimerini writes: "Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece's towering debt burden as time runs out on the talks that could sway the future of Europe's single currency. The funds have built up such a powerful positions in Greek bonds that they could derail Europe's tactic of getting banks and other bondholders to share the burden of reducing the country's debt on a voluntary basis." Oh no, they will let it happen, but first Europe will pay, with real interest, for every single incident of hedge fund bashing and abuse over the past 2 years. We estimate the final tally, to US taxpayer mind you, will be about $20 billion, to remove the "nuisance factor" of hold out hedge funds. Congratulations Europe - you have proven to be a continent full of idiot "leaders" once again.
One of the recurring analogues we have used in the past to describe the centrally planned farce that capital markets have become and the global economy in general has been one of a increasingly chaotic sine wave with ever greater amplitude and ever higher frequency (shorter wavelength). By definition, the greater the central intervention, the bigger the dampening or promoting effect, as central banks attempt to mute or enhance a given wave leg. As a result, each oscillation becomes ever more acute, ever more chaotic, and increasingly more unpredictable. And with "Austrian" analytics becoming increasingly dominant, i.e., how much money on the margin is entering or leaving the closed monetary system at any given moment, the same analysis can be drawn out to the primary driver of virtually everything: the inflation-vs-deflation debate. This in turn is why we are increasingly convinced that as the system gets caught in an ever more rapid round trip scramble peak deflation to peak inflation (and vice versa) so the ever more desperate central planners will have no choice but to ultimately throw the kitchen sink at the massive deflationary problem - because after all it is their prerogative to spur inflation, and will do as at any cost - a process which will culminate with the only possible outcome: terminal currency debasement as the Chaotic monetary swings finally become uncontrollable. Ironically, the reason why bring this up is an essay by Pimco's Neel Kashkari titled simply enough: "Chaos Theory" which looks at unfolding events precisely in the very same light, and whose observations we agree with entirely. Furthermore, since he lays it out more coherently, we present it in its entirety below. His conclusion, especially as pertains to the ubiquitous inflation-deflation debate however, is worth nothing upfront: "I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future." Unfortunately, we are far less optimistic that the very same central bankers who have blundered in virtually everything, will succeed this one time. But, for the sake of the status quo, one can hope...
If there is any one more vivid confirmation of Mayer Rothschild words "Let me issue and control a nation's money and I care not who writes the laws" then we have yet to find it. Today Hungary, which had "valiantly" defied Europe and the IMF in ignoring pressure to make its central bank more "malleable" finally folded, following a recent explosion in its bond yields, a surge in CDS to records, and a collapse in its currency. And to think how easy it is to subjugate a state to slave status in our "globalized" days without shedding one drop of blood. Reuters reports: "Hungary's government is ready to consider modifying disputed legislation if the European Commission deems it necessary, Foreign Minister Janos Martonyi told the bloc's executive and European Union partners. "We fully respect the authority of the European Commission, the guardian of the EU treaties," Martonyi wrote in a letter dated January 6 and published by his ministry on Tuesday. "We stand ready to consider changing legislation, if necessary."" As Rothschild foresaw so effectively over 200 years ago, selling out your sovereignty only takes a few pieces of (paper) silver.
Bob Janjuah, despite never leaving, is once again back, even if he really has nothing new to say: "Western policy makers, at the national and G20/IMF level, still seem to have no response to solvency problems other than printing more money, loading on more debt, and hoping that "time" sorts it all out. In other words, the extension of ponzi schemes which are being used to cover up our lack of competitiveness and real productivity growth through the use of money debasement and leverage....Apologies to all for not telling you anything new or very different. One day, when we collectively abandon the neo-communist experiment in the West that relies on more debt and printing money in order to maintain the status quo, then I will hopefully have a different and far more positive view of the years ahead. I look forward to this time. But for now, expect more of the same as in 2011. And I know it's a few weeks early, but as I am unlikely to write anything for at least a month, Kung Hei Fat Choi. The year of the dragon will soon be upon us."