Less than an hour ago Zero Hedge was happy to point out the glaringly obvious.
Bernanke speech will have nothing in it
— zerohedge (@zerohedge) June 7, 2012
Shortly thereafter, Bernanke confirmed it. Now it is Wall Street's turn to join in.
With Bernanke's speech dominated by the word 'Fiscal', is it any wonder that Fitch comes over-the-top with a warning, via Reuters and Bloomberg:
- *FITCH SAYS WOULD CUT US AAA RATING IF THERE IS NO CREDIBLE FISCAL CONSOLIDATION PLAN IN 2013
- *UK, FRANCE ,GERMANY, OTHER AAA NATIONS HAVE CREDIBLE PLANS:FITCH
Are the world's central bankers now checking back to the governments? Well we know how that will end. With the Fed's implicit tightening (as the balance sheet rolls down) and the fiscal cliff, it seems headwinds are mounting.
Central bank gold demand remains robust as central banks continue to diversify out of the euro and the dollar. Further central bank demand is confirmed in the news this morning that Kazakhstan plans to raise the share of gold in its international reserves from 12% to 15%. So announced central bank Deputy Chairman Bisengaly Tadzhiyakov to reporters today in the capital, Astana. “We’ve already signed contracts for 22 tons,” Tadzhiyakov said. Bloomberg report that immediate-delivery gold was little changed at $1.620.41 an ounce at 10:50 a.m. in Moscow, valuing 22 metric tons of gold at about $1.2 billion. “The bank is ready to buy when suppliers are ready to sell,” Tadzhiyakov said. Kazakhstan said yesterday it will cut its holdings in the euro by a sixth. It was reported in the Reuters Global Gold Forum that the central bank buys all the gold produced in Kazakhstan and owned 98.19T at the end of April, according to the IMF's most recent international finance statistics report. Meanwhile, supply issues remain and South African gold production continues to plummet. South African gold production fell 12.8% in April from a year earlier, Juan -Pierre Terblanche, a spokesman for Statistics South Africa, told Bloomberg.
- China Cuts Interest Rates for First Time Since 2008 (Bloomberg)
- New Risk to Europe's Growth: Banks Cut Lending to Cities (WSJ)
- Labor Faces New Challenge - Losses in Wisconsin, California Come as Ranks of Government Unions Decline (WSJ)
- Yellen argues for more Fed easing amid Europe risk (Reuters)
- Americans Cling to Jobs as U.S. Workforce Dynamism Fades (Bloomberg)
- Japan’s LDP Agrees to Talks With Noda’s DPJ on Sales Tax (Bloomberg)
- Korean Buying Spree Boosts Brent Price (FT)
- China Delays Bank Capital Rule Tightening as Economy Slows (Bloomberg)
- China CIC Chief Sees Rising Risk of Euro Breakup (WSJ)
On the surface, the overnight Spanish bond auction, in which the country sold a tiny €2.1 billion of 2, 4 and 10 year bonds was a success, simply because it wasn't a failure. Anywhere below the surface and things get fishy. The Treasury sold €638 million of a 2-year bond, €825 million of a four-year bond and €611 million of a benchmark 10-year bond. And while the bid-to-cover ratios were higher than at recent auctions, with the 2012, 2014 and 2022 bonds covered 4.3, 2.6 and 3.3 times respectively, so were the yields: the 2014 bond was issued at a yield of 4.335 percent, the 2016 bond at 5.353 percent and the 2022 bond at 6.044 percent, a lower price than the 6.14 percent the same maturity bond trades at in the secondary market. In other words, Spain is back to using the same tricks it did back in the fall when bonds would magically price well over 10 bps inside of fair value. Just don't ask why. More notably, as Bloomberg reminds us, this was the lowest amount allotted to a 10 year note since 2004. In other words Spain sold the bare minimum of the longer-bond just to keep up with appearances: an amount likely recycled by its broke banks, which scrambled to get the last remaining LTRO cash and to show just how strong the demand for the country's debt is. In fact as Nicholas Spiro of Spiro Sovereign said, "If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt. Right now confidence in Spain is at an all-time low." Either way, the good news is that according to Spain it has now covered 58% of its borrowing needs for 2012. the bad news: 42% remains uncovered. Especially in the aftermath of an EU announcement that not only has it not received an aid request from Spain, but that there is no EU rescue plan for Spanish banks. Europe has now completely lost the script and is making up day by day.
Despite the failure of the generous offer of Spiderman towels from the recently 'stress-test'-proof-but-now-busted Bankia, today's market suggests there is still hope. The public estimate of loan losses for Spanish banks stands around EUR225 billion (EUR 125bn known and an additional EUR100bn estimated) which, as Charles Biderman of TrimTabs notes "is so big as to be practically unsolvable" as he details the total and utter lack of trust of Spain and Spanish banks that is spreading not just across Europe but around the world. The installation of six of the largest global consulting firms (and the IMF) to begin audits of the Spanish banks, as Reuters reports today, should tell everyone (especially those who bid them up 7-10% today) just how terrible the situation is. Biderman begins to go ultrasonic as he expects real losses for Spain to be in excess of EUR300 billion and this is just Spain! Who knows how big the losses are for the rest of Europe? He does not believe Germany, or anyone else, will put up the EUR300 billion for Spain (or a trillion for the rest of Europe) and sees at best a 50% chance that the entire Euro banking system will go down leaving a much smaller Euro-zone behind (and a 25% chance of a non-panic mode restructuring).
While the Reuters story, which we noted earlier, and which speculated that a no-strings attached bailout of Spanish banks may be coming courtesy of a German stealth funding of the nearly empty Spanish bank bailout fund, has been making the rounds over and over, the latest incarnation of the underlying narrative, brought to us courtesy of the FT, has a novel twist: "EU officials are also debating the size of the loans needed. Senior Spanish banking executives have put the figure at about €40bn, but EU officials have been looking at plans that are at least double that, according to people briefed on the discussions." In other words, just as we speculated, Goldman's big picture estimate of Spanish bank funding needs was woefully inadequate, and once the dirty truth is uncovered, it will become apparent that losses, which at this point are nothing more than capital shortfalls from deposit runs, are far, far greater than anyone speculated. It also means that the disconnect between the European reality, and what the media and politicians are spoonfeeding the gullible public, has hit unprecedented levels. Finally, once Germans once again realize they have been lied to, what happens then: will they simply fork over the cash as rumored, or will they finally say enough? According to this lead article in German Welt, the answer is not looking too good for the broken European monetary experiment.
With all proposed Spanish bank bailout plans so far either shot down, or found to be inadequate, the question always has boiled down to whether Germany, which as we have noted in the past is the true lender of last resort in Europe, not the ECB, will agree to the trade off of preserving the Eurozone, i.e. temporarily ending the latest Spanish risk flare out, in exchange for the risk of political disgrace domestically, where more and more people are against sweeping European bail outs, due to soaring "contingent liabilities" which increasingly more people on the street are realizing are all too real (see: TARGET2). On the other hand, a direct bank bailout request for Spain using traditional European channels, which would fund the government, would result in a deterioration in the Spanish sovereign leverage, and make the country even riskier, thereby putting more pressure on the banks, and so in a toxic loop. It now seems that this dilemma may have been resolved, at least on paper. As Reuters reports, "A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say. While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland."
- Wisconsin's Walker makes history surviving recall election (Reuters)
- China Labor Shortages in Guangdong Show Stimulus Limits (Bloomberg)
- Oil rises toward $100 ahead of ECB (Reuters)
- China's Property Controls to Stay (China Daily)
- Spain Makes Explicit Plea for Bank Aid (FT)
- Fed Considers More Action Amid New Recovery Doubts (WSJ)
- Noda Sales-Tax Push Confronts Rising Japan Majority Opposition (Bloomberg)
- National Interests Threaten EU Bank Reforms (FT)
When in doubt: crush your "common" currency by keeping your "partners" on the verge of bankruptcy, and export, export, export. After contracting by 0.3% in Q4 for both the Euroarea (of 17 countries) and the EU27, just released data from Eurostat indicated that in Q1, GDP for both "areas", but notably the Eurozone, was flat quarter over quarter courtesy of... strong exports. Which in turns shows just why various countries in the Eurozone (coughgermanycough), namely those who actually are relevant in the GDP calculation, seek to benefit greatly from the perception that Europe is on the brink, and the EUR is sliding as a result, further promoting exports, and thus, growth. As a result, because technically it avoided two consecutive quarters of contraction, the Eurozone has avoided the dreaded recession. For now. Expect further speculation that Europe is imploding, continuing to benefit solely the one export powerhouse of Europe: Germany.
Global gold demand continues to surprise to the upside – especially sizeable demand from the Middle East and China. Confirmation of continuing huge demand in China came yesterday with data showing that Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62% on the month - marking the second-highest monthly exports ever. While demand from India continues it has fallen from the record levels recently but demand from other Asian countries is robust with reports of demand in Thailand, Vietnam, Malaysia and Indonesia. A new and potentially significant source of demand is that of demand from Iran. Iran imported a massive $1.2 billion worth of precious metals from Turkey in April alone. Turkish exports of gold, precious metals, pearls and coins to Iran rose to $1.2 billion in April from a tiny $7,500 a year earlier, according to figures released by the state statistics institute in Ankara yesterday. This is a massive increase in demand and suggests that there may be official involvement in the imports from the Central Bank of Iran.
- Spain says markets are closing to it as G7 confers (Reuters)
- Germany Pushes EU Bank Oversight (WSJ)
- Falling Oil Prices Are No Mystery (Bloomberg)
- Aussie Rises After RBA Cuts Rate Less Than Swaps Suggest (Bloomberg)
- Euro falls on Spain worries as market awaits G7 (Reuters)
- Bad News Piles Up for China's Economy (Bloomberg)
- Japan Lawmakers Push to Curb Central Bank (WSJ)
- Lawyer Kluger Gets 12 Years, Bauer 9 for Insider Trades (Bloomberg)
- All eyes on Wisconsin governor's recall election (Reuters)
- The Global Obesity Bomb (BusinessWeek)
And so those lining up at the bailout trough are now 4: remember all those lies Spain spoon-fed the gullible press that it didn't need a European bailout as recently as yesterday? You can now forget them. From Reuters: "Spain said on Tuesday that credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc's worsening debt crisis. Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain. Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and and prompting the Madrid stock market to rise. But his comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on expectations that a conference call of G7 finance ministers and central bankers may hasten bold action." Well, Germany got its wish: it got Spain to admit it is broke. Just as it wanted - because remember: all Germany is, is a true lender of last resort unlike the ECB: after all they are the decision makers. And Germany knows very well that it needs Europe desperate when it is forced to accept any conditions to the German DIP loan that Schrodinger Schauble proposes. Which means forget anything positive will come out of the G7, and certainly forget anything actionable will come out of the ECB's June 7 meeting. If anything, things will first get much worse, before things get better. And finally, don't forget just who benefits the most from EURUSD at parity or lower... That's right: Germany.