What is actually going on in the Financial World?
The Fed has reopened FX swap lines to Switzerland. The Fed ONLY does this when things are on RED ALERT. It’s now only a matter of time before a big bank goes down and takes the European banking system with it. Forget al the headlines, the ECB and regulators over there have lost control.
- European equities remained under pressure during the session weighed upon by growing signs of a faltering global economic growth together with August options expiry in the European indices
- CHF and JPY remained the major beneficiaries of risk-aversion, whereas commodity-linked currencies generally traded lower
- After breaching the key USD 1,800 per ounce level yesterday, spot Gold continued its ascent towards the USD 1,900 technical level amid risk-aversion
- EU's Rehn said the EU may draft legislation for joint Eurobonds, however gave no timetable for the draft legislation
- EU Commission said collateral agreement between Finland and Greece is being examined by the Eurozone, adding that Finland is the only country to request Greece collateral. Meanwhile, Austrian finance minister said the Finnish deal to get a 20% cash collateral on Greek loans is unacceptable
As those who have studied some history know all too well, any mention of the Maginot Line usually does not have a Hollywood ending. Alas, the same can be said for the highly unique analysis by JPM's Michael Cembalest who looks at Europe's latest "Maginot Line", this time however for the insolvent, 21st century, generation. "Rather than focus on what EU politicians said at yet another summit this week, let’s look at the lines of defense they may eventually have to rely on to defend the European Monetary Union. For illustration’s sake, we have superimposed these defenses on a map of the Maginot Line constructed by France in the early 1930’s to defend against an attack from the East." The 8 steps outlined present, from start to finish, the flow chart of what will happen in the next few months as Europe scrambles to avert one crisis after another, which as we pointed out months ago, ends with the "last resort" federalization of Europe, via the Eurobond paradigm. Alas, the response to that is (or isn't) revolution, in which the people finally tell their treasonous (there, we also used that word) governments they have had enough of funding other people's greed, gluttony, and overall mistakes. Just as the idiotic Maginot line, praised back in its day as a work of genius, was circumvented in one simple move when the German army simply invaded France through the Ardennes forest and took over in hours, so this latest Maginot line will do absolutely nothing to prevent the final outcome which even Europe's deranged bureaucrats know is coming: the end of the most flawed generational experiment in globalization history.
One of the biggest stories this morning is that European cohesion and solidarity is about to crumble after it was disclosed that Greece was pursuing a private deal with Finland in which Greece promised to collateralize Finnish contributions, in essence eliminating Finland's contribution to the Greek Bailout round 2. As Kathimerini reported, "Greece and Finland agreed on Tuesday to virtually cancel the latter’s participation in the former’s second bailout package, following three days of negotiations between Finance Minister Evangelos Venizelos and his Finnish counterpart Jutta Urpilainen. Finland’s share in the 109-billion-euro package amounts to about 1 billion, which Helsinki will pay to Greece but Athens will repay it through a new loan contract to be signed for this purpose and which will be valid for the next 25 years (likely to be the maturing period of the new loans, too). This means in practice that Finland’s contribution to the new package will be returned in full and deposited in a special account to be created by the Finnish government." End result is that everyone else has immediately come demanding the same treatment: first the Austrians, next the Dutch, and last the Slovenians. And what happens if Finland backtracks on its collateral demand: will it back out of the Greek bailout as well? Or, if Finland digs in, and all the non-German countries follow suit, will Germany say Enough and tell Europe (and China) to fix its own problems?
Feels like people are waiting for Europe to go home so that we can rally? That has worked in the past, but I don't think it will this time. This was not just European selling. It is not just the problems in Europe. In fact, the news seems to be getting worse out of there. Merkel and Sarkozy announce they have a candidate for the new head of something or other and that is somehow useful and positive? Finland, and potentially others demanding collateral from Greece to provide more funding is far more important in my opinion. At the same time, our data was awful. Brutal, yet most people seem to want to trade in anticipation of the next rally. That conviction that we will bounce doesn't seem to have disappeared. The Europe gone home rally is just another example of that. Yet how many times have rallies failed to materialize because everyone is anticipating them?
Speaking of gold, have a quick read of the article about Hugo Chavez nationalizing Venezuela’s gold industry and more importantly, repatriating his physical gold from storage sites abroad back to Caracas. The worry here is two-fold: 1) that his demands for physical delivery could stress the market given the estimates of somewhere between 30 and 45 paper ounces of gold issued for every 1 ounce of physical. 2) that this action starts a trend amongst countries that aren’t particularly US-friendly to repatriate and even potentially price sensitive commodities in gold. How much longer will Chavez continue to sell his extremely useful, much needed petroleum products and in exchange accept increasingly worthless pieces of paper, ie USD? Some might respond that if he did that, the US would instantly label him a terrorist and take him out. Perhaps. But what if Russia did it? What if Iran did it? If the commodity rich enemies of the US want to cause problems in this country they don’t need to fire a single shot, all they have to do is start selling their products priced in gold. The end of the reign of the USD as reserve currency will follow quickly.
Sorry to interrupt the panic, but this may be important:
- FURTHER DISCUSSION ON COLLATERAL WOULD CANCEL SECOND GREEK BAILOUT- GOVT SOURCE - RTRS
This follows on the heels of news overnight that Finland, Holland and now Slovenia are all pushing to get collateral (aka a DIP out of Greece). And naturally, no Greek bailout means game over for a united Europe, and its disjointed banks.
- Fed Dissenters Say Pledge Gives Appearance of Targeting Stocks (Bloomberg)
- U.S. Inquiry Eyes S.&P. Ratings of Mortgages (NYT)
- 6 dead in string of attacks in southern Israel (CNN)
- ECB’s Nowotny Says Italy Not Greece, Too Early for Euro Bonds (Bloomberg)
- France, Germany Push for Sanctions (WSJ)
- Breaking Europe’s cycle of enfeeblement (FT)
- Biden tells China's Xi that cooperation key for global stability (Reuters)
- Hong Kong Exchange in Venture Talks With Shanghai, Shenzhen (Bloomberg)
Did you know that the word ‘idiot’ is actually derived from the origins of democracy in ancient Greece? Thousands of years ago, a Greek citizen who demonstrated disinterest in politics was labeled ‘idiotes’; it literally meant ‘private person,’ which curiously enough was a term of derision at the time. Fast forward to the pitiful excuse we have for a democratic process in the world today, and the opposite is now true: you have to be a complete idiot to invest yourself in these politics.
The next round of German elections comes in September (the 4th, 11th, and 18th). Is Merkel (and her party) really going to commit political suicide to support the Euro? After all, she would literally have to change the German constitution to participate in the creation of Eurobonds (the latest deranged ECB idea). You think the German people will go for that?
A Trader's View On US Equities & Why The Inevitable Pan-European CRE Collapse Has A Cousin In the US!Submitted by Reggie Middleton on 08/17/2011 09:54 -0400
What are the chances rate volatility, excess supply from a burst bubble and insolvent banks causes a CRE crash on both sides of the Atlantic? Yeah, if only all test questios were that easy...
QE3 ON: Goldman Lowers Global Government Bond Forecasts Following 2012 US GDP Cut To 2.1%, Repeats "QE3 Is Part Of Baseline Estimates"Submitted by Tyler Durden on 08/16/2011 10:34 -0400
For those wondering why gold just surged by about $20 dollars, and why Gartman's cab driver once again proves to be far more astute than his passenger, we bring to your attention a report just released by Goldman's Francesco Garzarelli which is appropriately titled "The Price of Slower Growth" - appropriately, because in it Goldman slashes the firm's outlook on global policy rates across the board, slashes to cut its 10 Year bond yield outlook from 3.75% to 2.75% in 2011 and from 4.25% to 3.50%, slashes 2012 US GDP from 3.0% to 2.10%, and once again makes it all too clear that QE3 is coming, and not only coming but is already priced in (to the tune of about $300-400 billion): "In previous work, we have estimated that every US$1trn in purchases, if maintained, decreases 10-yr Treasury yields by 25bp-50bp. If our subjective assessment that market participants now assign a greater-than-even chance of ‘QE3’ is correct, and considering that the expected ‘unsterilized’ size of these purchases is in the region of US$600-800bn, this would equate to as much as 20bp being already ‘in the price’. Clearly, these magnitudes are unobservable, and thus subject to great uncertainty. Nevertheless, our calculations would suggest that the bond market is already discounting a mild recession and the chance of a Fed reaction to it." Translation (and this is nothing new to ZH readers): Bill Dudley has his marching orders from Jan Hatzius: GS now sees deflation as the broader risk, and anything and everything must be done to make sure Wall Street has another record bonus season round, pardon, deflation must be halted.