German Federal auditors handed in a report slamming the Bundesbank for not inspecting their foreign held gold reserves to verify their book value. The report says the gold bars "have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight." Instead, it relies on "written confirmations by the storage sites." The lion’s share of Germany's gold reserves (nearly 3,400 tons estimated at $190 billion) are housed in vaults of the US Federal Reserve, the Bank of England and the Bank of France since the post-war days, when they were worried about a Cold War Soviet invasion. The Bundesbank stated, “There is no doubt about the integrity of the foreign storage sites in this regard". In contrast with best industry practices Germany’s gold reserves do not seem to be independently verified by a third party. Philipp Missfelder, a politician from Merkel’s own party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German’s daily Bild reported. The Bundesbank won't let German parliament members inspect the German gold vaulted abroad because the central bank vaulting facilities supposedly lack "visiting rooms." And yet one of those vaults, the Federal Reserve Bank of New York, offers the public tours that include "an exclusive visit to the gold vault".
While the theater of the presidential election hits peak season, and InTrade odds for this candidate or that are approaching flash crash territory, the one person who truly runs not only the US, but the entire "developed" world, Ben Bernanke, is going nowhere. At least not until January 2014. At which point he may be going somewhere - retirement. Reuters cites the NYT: "U.S. Federal Reserve Chairman Ben Bernanke has told close friends he probably will not stand for a third term at the central bank even if President Barack Obama wins the November 6 election, the New York Times reported." In other words: the republican Fed Chairman who mysteriously became a Democrat president's bestest friend (and has been publicly threatened by every other GOP candidate, including Romney, although that would be merely to replace him with Bill Dudley, not Glenn Hubbard) that $4 trillion that the Fed will have in assets at the time of Ben's departure, and $5 trillion at December 31, 2014, just became someone else's problem. Good luck to that someone else unwinding a Fed balance sheet which as we explained previously, will at one point in the next 2 years hold well over half of the marketable US Treasury debt inventory. How the sale of this inventory will happen in a time of spiking rates (because that's what the Fed wants - inflation) is literally anyone's guess, because in practice it will never happen.
- Moody’s Cuts Ratings on Catalonia, Four Other Spanish Regions (Bloomberg)
- And the market top: Billionaire Ross Interested in Buying Spanish Bank Assets (Bloomberg)
- Japan Jojima denies govt seeks $250 bln BOJ asset buying boost (Reuters)
- China hints at move to strengthen Communist rule (Reuters)... well everyone else is doing it
- Euro-Area Bailout Fund Faces Challenge at EU’s Highest Court (Bloomberg)
- Obama, Romney now tied in presidential race: Reuters/Ipsos poll (Reuters)
- Former China Leader Jiang Resurfaces Before Political Transition (Bloomberg)
- Some in Congress look to $55 billion fiscal cliff 'fallback' (Reuters)
- CLOs stage comeback in US (FT)
- TXU Teeters as Firms Reap $528 Million Fees (Bloomberg)
- China’s Factories Losing Pricing Power in Earnings Threat (Bloomberg)
Easy come, easier go. After yesterday's last hour ramp driven by a MarketWatch article that said absolutely nothing new about the Fed's monetization plans and an AAPL surge which saw the firm add $22 billion in market cap in one day (or more than the market cap of CBS Corp) sent stocks green, the overnight session has taken it all away and then some, with futures now trading roughly 12 ticks lower or at yesterday's lowest levels. The catalyst is, once again, Spain where Moody's downgraded five Spanish regions including Catalonia after the market close (for the reason, see our piece from the weekend "Spanish Regional Bailout Fund Runs Out Of Money"), coupled with news from Confidencial that Spain's budget deficit will overshoot the EU target of 6.3% and hit at least 7.3%, driven by a €10.5 billion deficit in the social security system, trashing the promises from last month's Spain's "reform" package, and as BNP said (confirming what we warned weeks ago), making the conditionality hurdle suddenly that much higher for Spain. And just as the world was getting comfortable that Spain will get away with using the OMP with virtually no conditions. The cherry on top came from France where the business conditions index slid to a 3 year low on expectations a trough had been put in place. The result is a tumble in the EURUSD to below the 1.3000 barrier, dragging stock futures, commodities, and of course Europe with it, sending the Spanish bond curve yield higher, and generally giving a very sour mood to the day as traders walk in.
"Preservation of Capital" must be the watchword in this market; in all markets. Any mistake made is now magnified by our very low interest rates so that any error is compounded by the ability to make back the loss. In America we are facing our national elections. In Europe we are facing a hardening of positions where the divisions between the North and the South, with France lining up with the Socialist South, are edging closer to some nation or another refusing to fund. The scheme of diversion can last only so long as real decisions with real consequences are about to be forced upon the Continent as funding must come or not come.
The International Monetary Fund’s paper, “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof highlighted a means to wipe out debt by legislation by using state created money to replace the private banking system and was commented on in The Telegraph by journalist Ambrose Evans-Prichard. The full paper can be read here. In sum, the paper illuminates on a plan created in 1936 by professors Henry Simons and Irving Fisher during the aftermath of the US Depression. It examines how money created by credit cycles leads to a damaging creation of wealth. Authors, Benes and Kumhof argue that credit-cycle trauma - caused by private money creation – has been around forever and lies at the root of debt catastrophes as far back as ancient Mesopotia and the Middle East. They claim that not only harvest cycles lead to defaults but rather the concentration of wealth in the hands of lenders would have augmented the outcome.
- Dead Heat for Romney, Obama (WSJ)
- The Cheerful Billionaire Who Thinks Obama's a Socialist (Businessweek)
- "Get to work, Mr. Japanese Chairman": Japan Exports Tumble 10% as Maehara Presses BOJ to Ease (Bloomberg)
- Chinese Investors Fear Chill in Canada (WSJ)
- Rosneft Buys BP’s TNK-BP Stake for $26 Billion in Cash, Shares (Bloomberg)
- Hong Kong Defends Its Currency Peg for First Time Since 2009 (Bloomberg)
- Democrats threaten payroll tax cut consensus (FT)
- Spain's Rajoy gets mixed message in regional votes (Reuters)
- Merkel to warn UK on Europe budget veto (FT)
- Netanyahu says doesn't know of any U.S.-Iran talks (Reuters)... neither does Iran, so near certainty
- Der Kurrency Tsar: ECB’s Knot Backs Schaeuble Call for Stronger EU Budget Power (Bloomberg)
- Fannie Mae Limiting Loans Helps JPMorgan Mortgage Profits (Bloomberg)
Once again confusion is rife overnight, following yesterday's main European event, Spain's first "mixed" regional election, which saw Rajoy's PP party in his home state of Galicia eeking a majority by a few seats, offset by wins for nationalist parties in the Basque Country. The immediate read here is that the Galician win is an endorsement of Rajoy's "austerity poilicies" and thus EUR positive (which have yet to be actually implemented as Spanish spending continues to rise, as tax revenues continue to drop), yet it makes the likelihood that Spain requests a bailout before the Spanish regional election on November 25, which is about secession, virtually nil, and thus SPGB negative. Furthermore as Bank of America points out "some euro-area govts may remain reluctant to support Spain’s request as long as yields continue to be low, banks haven’t been recapitalized; probably reinforced by Catalonia elections" but that is a reality tale for another day - the "market" can only handle so much.
In a surprising (if not quite shocking) move, late on Friday Canada blocked Petroliam Nasional Bhd.’s C$5.2 billion takeover of Progress Energy Resources Corp. saying the bid by the Malaysian state-owned company "wasn’t in Canada’s national interests." As BusinessWeek explains, "in what investors say is a test case for the $15.1 billion bid by CNOOC Ltd. of China for Calgary-based Nexen Inc., the Canadian government said it “was not satisfied that the proposed investment is likely to be of net benefit to Canada,” according to an Oct. 19 statement from Industry Minister Christian Paradis." While it is unclear precisely what would be of "net benefit to Canada" what is certain is that the Progress Energy move will crush investor spirits who in recent months have expected a flurry of foreign bids coming for local energy names, only to be left at the altar courtesy of government intervention. And while the outlook for foreign driven M&A in Canada has just been Ice-9'ed to a degree not seen since the BHP Billiton government-denied acquisition of Potash Corp (watch the arbs scurry out of Nexen at first trading opportunity), China is wasting no time, and is rapidly reorineting itself away from increasingly energy-protectionist governments and to "greenfield" national interest expansion opportunities. Such as Afghanistan. As Reuters reports, in a historic development, and in a key staking of regional energy claims, a Chinese oil firm, China National Petroleum Corp, has just started oil production in the country which still has thousands of US troops on the ground. Expect this issue also to suddenly be of paramount importance in next week's final presidential debate.
The last time we checked on the (funding) status of America's real presidential race - the one where America's uber-wealthy try to outspend each other in hopes of purchasing the best president money can buy - the totals were substantially lower. With November 6 rapidly approaching, however, the scramble to lock in those record political lobbying IRRs is in its final lap. And thanks to the unlimited nature of PAC spending, look for the spending to really go into overdrive in the next 2 weeks as the spending frenzy on the world's greatest tragicomedy hits previously unseen heights.
Yesterday we made it very clear why with the Turkey provocation avenue to further Middle East escalation rapidly closing, the one pathway left is Lebanon. Sure enough, today the escalation playbook is firmly in play - from Reuters: "Heavy gunfire erupted in central Beirut on Sunday after protesters tried to storm the offices of Prime Minister Najib Mikati, demanding that he quit over the assasination of a top intelligence official. An official said security forces had fired in the air. Witnesses said at least two protesters had fainted, apparently as a result of tear gas fired by security forces after protesters breached an outer barrier around the prime minister's offices. Hundreds of protesters, waving flags from the anti-Syrian opposition Future Movement - a mainly Sunni Muslim party - and Christian Lebanese Forces as well as black Islamist flags, marched on Mikati's offices after the funeral of Wissam al-Hassan."
From 1987: How much time do I have to liquidate? Answer: We need you to do this by Monday night.
EU leaders committed to establishing a euro-area bank supervisor by year-end, leaving the door open for supplying direct aid to Spanish banks. The EU must now agree on the structure that makes the ECB (European Central Bank) the main supervisor by January 1st. This new system was created to break the link between banks and governments at the root of the zone’s financial crisis and will roll out in the next year and expect to cover all 6,000 eurozone banks by January 2014. “Our goal is banking supervision that’s worthy of the name, because we want to create something that’s better than what we currently have,” Merkel told reporters. Germany and France argued contentiously about the timing. Berlin has insisted the supervisor be effective before the ESM can begin cash injections into Spanish banks, those transactions are not foreseeable to occur until the latter half of the year, around the time of Germany’s national elections. Angela Merkel said it would take more than a few months before the supervisor was fully effective and direct bank recapitalisation could be considered. However, the agreement appeared to upset German finance minister Wolfgang Schaeuble's efforts to delay and limit the scope of European banking supervision. Germany has been averse to see its politically sensitive Savings and Cooperative banks come under outside supervision. It rejects any joint deposit guarantee under which wealthier countries might have to underwrite banks in poorer states.
- Debt Fuels a Dividend Boom - Firms Collect Payouts, and Investors Get Yield; 'Reminiscent of the Bubble Era' (WSJ)
- Black Monday Echoes With Computers Failing to Restore Confidence (BBG)
- Poll: Obama Leads in Wisconsin, Iowa (WSJ)
- Gold Imports by India Seen Climbing First Time in Six Quarters (BBG)
- Europe pushes ahead towards ECB bank supervision (Reuters)
- ... And fails: Summit fails to agree timetable for aid to failing lenders (FT)
- Toyota Prius Dominates California as State’s No. 1 Model (BBG)
- Italy raises €18bn in huge bond sale (FT)
- Diplomacy inbox fills up as U.N. awaits U.S. presidential vote (Reuters)
- Goldman braced for more revelations (FT)
- China power brokers agree preferred leadership team (Reuters)
- EU, Japan Warn Against New US Swaps Rules (WSJ)
- Why VaR is the most meaningless contraption ever: Morgan Stanley shows the ‘flaky’ side of model (FT)
- Made in France Trumps Consumer Choice in Hollande Jobs Quest (BBG)
- North Korea threatens South over propaganda balloons (Reuters)
Yesterday for the first time in years, the irrelevant headlines out of Europe, which continues to pretend to shuffle money out of one pocket (Germany's) into another (everyone else's), was well-deservedly backstage to the Google earnings fiasco one day ahead of the 25th anniversary of Black Monday (which is today). The EU summit was one of the more toothless ones in a long time, with no discussions at all of the one item that matters - Spain's bailout (as well as Greece's) - but with a lot of fluff considerations for a EU banking union and joint deposit guarantees - events which, like in the June summit, Germany has implicitly gone along with for the ride, but explicitly has said only over its dead body and in which it will not participate (note we said "pretends" above). The summit continues today for a second day, and will hardly make any more news than it did yesterday. In real news, GE missed revenue expectations and joins virtually every other company this earnings seasons in confirming deteriorating unfudgable topline conditions. Elsewhere, in Greece a pool by VPRC for Greece Tomorrow showed that the anti-bailout Syriza party would win outright with 30.5% of the vote, with New Democracy getting 27% and the Pasok coalition partners getting 5%. The Neo-Nazis would get 14%. Also notable is that on Sunday Spanish regions Basque country and Galicia hold local elections. As Rabobank warns, Galicia is Rajoy’s home region, and traditional stronghold of his Popular Party. A poor PP showing may highlight political hurdle to making bailout request, thus challenging the recent OMT-inspired support to Spanish bonds. This in turn would confirm what we have said all along, namely that a bailout request means an end to the current ruling regime and political chaos. Finally, the November 25 Catalonian elections may also trigger Spanish euphoria reversal.