As we get closer to that point where economic reality and financial fact override/overpower politics & concerted central financial planning that attempts to outlaw insitutional failure, we need to employ fact based strategies backed by research based in realism to not only capitalize, but even last through the coming storm.
Gold is trading at USD 1,620.40, EUR 1,120.50 and GBP 989.08 and CHF 1,298.50 per ounce. Both the dollar and the euro are under pressure again today and gold has reached another new record nominal high of $1,625.70/oz in early European trading. Economists in the U.S. believe that the U.S. will lose its vanguard AAA credit rating according to a recent poll conducted by Reuters. A survey of 53 economists showed 30 believed that one of the three leading credit rating agencies will downgrade US debt. The economists do not believe that the U.S. will default. A downgrading of the U.S. is inevitable given its very poor fiscal position – the question is by how much the U.S. is downgraded and AA looks possible in the coming months. The widening in U.S. CDS has so far been modest but the bond vigilantes may be awakening from their slumber as net notional CDS on US debt has risen above that of Greece and Italy. They either believe that the U.S. government will default on its debt or are taking out insurance against of this happening. Investors internationally -- including everyone from individual consumers in their pension funds, to hedge funds, to the Chinese government -- currently hold $9.3 trillion (with a T!) in Treasury bonds, and they're counting on Uncle Sam paying up when those contracts mature. The U.S. government will have a three-business-day grace period to make good on any default before credit default swaps are triggered, the International Swaps and Derivatives Association said Tuesday.
When we first summarized our take on the second European bailout package we completely ignored the specifics of the rollover mechanism and the private investor participation scheme because they were entirely irrelevant. We said: "This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub... The bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium." We further said that "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV." We concluded with the rhetorical: "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?" Well, German Finance Minister just gave us an answer, and it is the reason why various European banks are once locked limit down, and the entire banking industry in Europe is bleeding: "German Finance Minister Wolfgang Schaeuble said the euro zone's rescue fund should only purchase bonds on the secondary market in exceptional circumstances, according to a letter obtained by Reuters on Wednesday. "The government rejects a 'carte blanche' for widespread purchases on the secondary market." Translation: Germany finally realized the horrors of the fine print and just said no. This means that the entire second bailout package has now been unilaterally unwound courtesy of German which has realized it was the patsy, and will not agree to the clause giving the EFSF unlimited PPT powers. Time to start planning bailout #3.
Earlier today, while discussing the implications of a US debt downgrade on a SIFMA call, JPM head of fixed-income Terry Belton told listeners that a US downgrade could cost the US an additional 60-70 bps in incremental interest. That's per year. He also added that US asset managers are unlikely to sell Treasurys on a downgrade, but that's irrelevant. Nobody can predict what all the knock off events from a US downgrade would be, as the Citi presentation from yesterday indicated. Should there be a downgrade, investors may not sell Treasurys, but they sure will be forced to sell other lower rated instruments to keep the overall rating distribution of their portfolio in line with mandated rating requirements. Which in turn, following margin calls, will result in, you guessed it, selling of Treasurys. Yet this debate is the topic of another post. What is more important is that on the same call, Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.
ISDA, Which Refuses To Declare Greece In Default, Has Given The US A 3 Day Grace Period Before A CDS TriggerSubmitted by Tyler Durden on 07/26/2011 10:06 -0500
ISDA is rapidly deteriorating to rating agency status when it comes to credibility. After it made it all too clear in the past few weeks that no matter what happens it would never "determine" Greece (or any other European insolvent country) to have breached a CDS trigger (as that would apparently destroy the world), the same trade association (logically enough comprised of the same firms that make up the heart of the status quo) has joined the rating agencies, and as of last night the CME, in making it all too clear that a debt ceiling plan (preferably Reid's because it achieves absolutely nothing) has to pass, or else, after it earlier announced that the US has precisely 3 days to cure any missed debt payment before US CDS are triggered. Obviously this can not be allowed to happen, so expect this latest development to be used by the president in his nighlty scaremongering session.
We have previously presented this data in tabular format but because we realize that some readers visual learners, here is a compilation of total US Federal obligations (read cash outlays) between August 3 and August 15, this time from Reuters, at which point all the money runs out no questions asked. The total: $246 billion.
- Frenemies: Two Greek Rivals Hold Nation's Fate in Balance (WSJ)
- Obama Attacks Republicans over Debt Talks (FT)
- Swift U.S. Action on Debt Needed in Global Interest: IMF (Reuters)
- FHA May Be Next in Line for Bailout: Delisle and Papagianis (Bloomberg)
- And the requisite NYT editorial piece: The Republican Wreckage (NYT)
- Bank Lobbyists Push European Members to Support Greek Debt Rollover Plan (Bloomberg)
- A Global Economy Held Hostage by Lehman (RCM)
- Banks 'Safe from Debt Defaults' But the Days of Double-Digit Growth May Be Over (Australian)
- Is Obama Wall Street’s Best Friend or Mortal Foe? (Bloomberg)
Market participants remained reluctant to invest in USD-based assets as the US lawmakers failed to reach a deal on raising the US debt ceiling, ahead of an August 2nd deadline, which resulted in the USD-Index to trade lower. European equities opened higher, led by financials, however as the session progressed prices moved back in negative territory, weighed upon by lacklustre European corporate earnings from the likes of BP (-2.36%), UBS (-2.37%), and Deutsche Bank (-0.68%). However, the FTSE 100 Index received support after GlaxoSmithKline said that its operating margin will begin to improve in 2012. Elsewhere, GBP received strength across the board following the release of second quarter advanced GDP data from the UK, which came in-line with expectations; however UK's ONS said that the quarterly GDP would have been 0.7% without taking into account special factors. Also, JPY weakness was observed following comments from sources that Japan's policy-makers are considering solo FX intervention as an increasingly viable near term option.
A picture paints a thousand words and a video hundreds of thousands of words and this is a very informative video about our modern monetary system, fiat currencies and gold. It shows how fiat money has led to wars, massive debt, social inequality, economic bubbles, rampant consumerism, and environmental destruction. It shows that a return to a gold standard would help ameliorate today’s monetary, financial and economic ills. “A gold standard will not cure every social ill in the world, nor will it stop all senseless wars. Nothing will. However, by now it should be clear to everyone that the current fiat system is good only for bankers, brokers, politicians, war mongers, and the already wealthy. Everyone else loses as inflation eventually eats away at what's left of the rapidly shrinking 'middle class'. All fiat currencies including the US dollar are doomed. The only debate is the path it takes to get there.”
While pundits are still contemplating yesterday's CME move to hike collateral haircuts on US Treasurys (absolutely nothing more then merely more posturing) today's European auction results indicate that the time to expand the EFSF to the €1.5 trillion threshold may be approaching faster than anyone expected. In Spain, the Treasury sold 750 million euros of 3-month bills at an average yield of 1.899 percent compared to 1.568 percent at the previous auction and at a bid-to-cover ratio of 6.3 after 9.5 in June. Spain also sold 2.14 billion euros of 6-month bills, with the average yield rising to 2.519 percent, the highest since Dec. 2010, from 1.776 percent in June, while the offer was 2.2 times subscribed after 3.8 times at the last auction. In other words: far higher interest and far lower demand than the last such sale in June. As Reuters cites, "The most important point again is the fact that relative to the last auction yields are much, much higher ... It's not a good situation to be in," strategist at Monument Securities Marc Ostwald said. "It shows we may have had some relief last week but that relief has proven to be rather short-lived." We wonder just how much of these auctions were allocated to the EFSF monetization mechanism and/or Asian proxies that know they can promptly use it for precisely such purposes. Elsewhere Italy sold €10 billion in 6 month Bills and 2 year notes, and just like in Spain, both saw their respective yields rising and investor demand falling: 6-mo auc avg yld 2.269% vs 1.988%, bid/cover 1.56 vs 1.72, 2-yr auc avg yld 4.038% vs 3.219%, bid/cover 1.66 vs 1.87. End result of today's auctions: both Spanish and Italian Bund spreads jump to day wides as the IBEX is now underperforming on concerns Europe's second bailout bought less than a week of calm.
Relevant News by www.thetrader.se
Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted Well Over A Year Ago - Yet EU States Are Still UnpreparedSubmitted by Reggie Middleton on 07/25/2011 11:18 -0500
You know, it's downright frightening how clearly this was able to be anticipated well over a year ago, yet it appears as if the EU politicking behind the bailout bonanza STILL leads down the road to perdition.
"Do Not Question" - Full Directive From China's Ministry Of Truth On High Speed Train Wreck CensorshipSubmitted by Tyler Durden on 07/25/2011 11:01 -0500
You read about it previously on Reuters, now here, as per your 1st amendment protected right, is the full text of the statement issued by the Chinese Propaganda Department seeking to prevent broad dissemination and distribution of the news of the two high speed trains from Saturday. To wit: "The latest directives on reporting the Wenzhou high-speed train crash: 1. Release death toll only according to figures from authorities. 2. Do not report on a frequent basis. 3. More touching stories are to reported instead, i.e. blood donation, free taxi services, etc. 4. Do not investigate the causes of the accident; use information released from authorities as standard. 5. Do not reflect or comment." Obviously, that failed spectacularly, and as was reported earlier, has generated a broad wave of discontent among the population for this glaring attempt to put bureaucratic incompetence and corruption over human life. One thing is certain: at least America's own version of the DOT(ruth) is modestly more subtle... For now.
Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’)....Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…
- Spain Will Require Regions to Curb Deficits, Its Finance Minister Says (WSJ)
- Obama cancels fundraising appearances amid stalled debt talks (CNN)
- Toying With Default: The President isn't serious about real spending cuts (WSJ Editorial)
- QE2 is coming to the UK: Cable Appeals for New Dose of Easing (FT)
- Lawmakers Still Divided as Debt Deadline Looms (Reuters)
- Rail Stocks Tumble in China, Hong Kong (Bloomberg)
- Clinton Assures China on U.S. Debt-Ceiling (Bloomberg)
- Messing With Medicare (Paul Krugman)