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The added weight on the gross national debt as well as the dis-incentive for people to seek better education would prove to be one of the greatest risk for America as a whole.

CDS is once again (still) in the spotlight. We have moved on from debating whether or not a Credit Event has occurred in the Hellenic Republic, to concerns about whether the CDS market will settle without a problem. There is a lot of talk about “net” and “gross” notionals and counterparty risk.  What I will attempt to do here, is build a CDS world for you. We will look at various counterparties, the trades they do, and the residual risks in the system. It will be loosely based on Greek CDS but some liberties will be taken. None of the institutions are real world institutions (in spite of how much they sound like some people we know). It is a simplification, but to make it useful, it has to be robust enough to give a realistic picture of the CDS market/system.

Back in September we noted a peculiar RFP by the Fed which sought to become a secret 'big brother' to the social media world, and to "monitor billions of conversations and generate text analytics based on predefined criteria." The Fed's desired product should be able to "determine the sentiment of a speaker or writer with respect to some topic or document"... "The solution must be able to gather data from the primary social media platforms – Facebook, Twitter, Blogs, Forums and YouTube. It should also be able to aggregate data from various media outlets such as: CNN, WSJ, Factiva etc." Most importantly, the "Listening Platform" should be able to "Handle crisis situations, Continuously monitor conversations, and Identify and reach out to key bloggers and influencers." While it is unclear just how successful the Fed has been in eavesdropping on various critical blogs, and divining "sentiment", it now appears that the propaganda masters at the Office of Central Planning have decided to go for young American minds while they are still pliable. It appears that as part of its reenactment of Goebbels "economic education" curriculum, the Fed will now directly appeal to K 8-12 student, in which it will elucidate on the premise of "Constitutionality of a Central Bank." You know - just in case said young (and soon to be very unemployed) minds get ideas that heaven forbid, the master bank running the US is not exactly constitutional - you know, that whole thing between Andrew Jackson and the Second Bank of the United States...

Lies, damn lies and charts.  Why no one in charge dares utter the "F" word (fraud).

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.  The German Federal Audit Office has criticised the Bundesbank’s lax auditing and inventory controls regarding Germany’s sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany’s national foreign exchange reserves. There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves. The eurozone's central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget. In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.  The German lawmakers are following in the footsteps of US Presidential candidate Ron Paul who has long called for an audit of the US’ gold reserves. It is believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York.

In what can only be the most ironic of stories today, Reuters is reporting that Citigroup has become the first financial services client for IBM's Jeopardy-playing human-cognitive 'machine' Watson. While IBM expects the financial services segment to provide significant revenues, we worry that Congress will enact some protectionist policy as thousands of highly paid extrapolators analysts are suddenly outsourced to a non-eating, non-bonused, non-champagne-buying, non-tax-paying server farm somewhere. Supposedly Watson offers a 'huge marketing edge' as the government-owned bank is likely to use the uber-computer for "risk management (as opposed to stock picking)" as it offers a 'more global picture' combing through 10-Ks, prospectuses, loan performances, and earnings quality while uncovering sentiment and news not in the usual metrics. We look forward to the next conference call as Vikram is replaced by a Siri-Watson discussion of why TBTF exists.

Swiss money manager and long term bear Marc Faber, aka "Dr Doom", says political risk in the Middle East has increased significantly with war between Iran and Israel “almost inevitable”, and precious metals and equities investments offer some safety. "Political risk was high six months ago and is higher now. I think sooner or later, the U.S. or Israel will strike Iran - it's almost inevitable," Faber, who publishes the widely read Gloom Boom and Doom Report, told Reuters on the sidelines of an investment conference. Brent crude traded near $123 per barrel in volatile trade on Tuesday on fears of a disruption in Iranian supplies. Israeli Prime Minister Benjamin Netanyahu showed no signs of backing away from possible military action against Iran following a Monday meeting with U.S. President Barack Obama. "Say war breaks out in the Middle East or anywhere else, (U.S. Federal Reserve chairman) Mr Bernanke will just print even more money -- they have no option...they haven't got the money to finance a war," said Faber. "You have to be in precious metals and equities ... most wars and most social unrest haven't destroyed corporations - they usually survive," he said. He said that Middle East markets had largely bottomed out, though regime changes from the Arab Spring revolutions were unlikely to be investor-friendly.

All you need to read.

The UK's Daily Mirror newspaper has uncovered the FX trader who dropped over $300k in a Scouse club. It is a 23-year old 'self-taught' barrow-boy named (somewhat ironically in our view) Alex Hope. Self-described as "talented (three years in and a six-figure salary, hhmm), charismatic (its amazing how much 'charisma' a GBP125k bottle of bubbly will buy), and thoroughly likeable (ditto) man. Alex Hope exudes knowledge..." and is willing to share it with you according to his website. How did he become this B.S.D. of the FX markets? "I took two months off my job at Wembley, got really obsessed with reading charts and got the guts to start trading properly." This self-made rosy-cheeked young chap with a penchant for mind-numbingly-arrogant-looking photos on his website may have just become the poster boy for all that is 'great' about the free market - or perhaps a skim through his blog and media exposure will reassure us all that anything is possible as we note he does have some good taste (not just in Champagne) in RTing our posts on Twitter. We can only HOPE that the next time he decides to go down the rub-a-dub-dub for a Leo Sayer, maybe he'll take some of us Septic Tanks with him on the frog-and-toad...as the days of the ship-it-in-large-on-the-left John, done-a-yard by-breakfast spot FX trader are clearly back with us.

In what should come as a surprise to nobody, German banks have announced that they will accept the terms of the Greek PSI whose outcome is due on Thursday. Because as Reuters points out, German banks already have had the time and opportunity to park the bulk of their Greek exposure with the failed German bad bank, which is explicitly funded by the government (thus making the cost to the German government even higher): "While Greek sovereign debt owned by German lenders has a face value of roughly 15 billion euros ($20 billion), in most cases they have already written down that value in their books by about three quarters. FMS Wertmanagement, the biggest creditor with an exposure of nominally more than 8 billion euros, will accept the deal, a person close to the lender said on Monday. FMS, the bad bank set up to hold the toxic assets of bailed-out former bluechip lender Hypo Real Estate, is to formally decide on accepting the debt cut later this week, the person said." German banks... German banks... where else have we seen this today? Oh yes: "Die Welt said that more than half of the 800 lenders that tapped the ECB's 3Y LTRO last week were German, consisting mainly of small savings and cooperative banks." Thank you Jim Reid - so while Bundebank's Jens Weidmann huffs and puffs about the LTRO, it is his own banks are the biggest beneficiaries, in no small part to hedge against Greek exposure. But yes - at least following the absorption of tens of billions in intermediary capital via a variety of channels, German banks can now accept a 70%+ haircut, even if they continue to complain about it in the process: "Commerzbank, which had originally invested almost 3 billion euros in Greek sovereign bonds but has written down its exposure to 800 million, said last month it had little choice but to take part in the bond swap. At the time, chief executive Martin Blessing said: "The voluntariness (of the Greek debt swap) is about as voluntary as a confession at a Spanish inquisition trial."" The Spanish Inquisition appears to have won yet again.

Citigroup have said that they believe that gold will rise to $2,400/oz in 2012 and by $3,400/oz in “the coming years”. However, Citi’s Tom Fitzpatrick warned of price weakness in the short term and said there is a “real danger” that there may be a correction to $1,600/oz which would provide an even better buying opportunity. Citi are also cautious near term on oil and silver. Production of gold in Australia slid again last year, despite gold fetching higher nominal prices than ever before. According to gold experts, Surbiton Associates, 264 tonnes of gold were produced last year, two tonnes less than in 2010. The 264 tonnes equated to about 8.5 million ounces and ensures that Australia remains a major player in gold, with only China producing more last year. The United States was the world's third-biggest producer with 240 tonnes. Australia's gold production was well below the nation's production peak in the late 1990s.  This further suggests the possibility of peak gold production. Of the world’s four biggest gold producers (China, Australia, the U.S. and South Africa), only China has managed to increase gold production in recent years and this Chinese gold is used in China to meet the rapidly growing demand for gold jewellery and coins and bars as stores of value in China.

Wednesday’s sell off is being attributed to one massive sell trade of 31 tonnes on the Chicago Mercantile Exchange during Bernanke’s speech. There are rumours of a large US fund selling and also that the selling may have been by JP Morgan – rumoured to be acting on behalf of an Asian fund. Who sold off and why is less important than the fundamentals of the gold market. Absolutely nothing has changed regarding the fundamentals of gold which remain as sound as ever with broad based demand from store of wealth buyers, institutions and central banks internationally and especially in Asia. Good volumes have been seen on the Shanghai Gold Exchange in recent days. In India, lowest gold prices in a month saw strong physical bullion demand and physical buyers hunting for gold bargains to meet the wedding season demand. India remains the world’s largest buyer of the yellow metal (900 tonnes/year) but China is expected to outpace them this year according the World Gold Council. ETF holdings gained 238,674 ounces to a record high of 70.76 million ounces, showing that institutions and investors remain keen on gold. Also, options data has not changed since Wednesday’s price falls.

• Brazil declares new ‘currency war’ (FT)
• Postal Cuts Are Dead Letter in Congress (WSJ)
• China state banks to boost selected property loans (Reuters)
• ECB Says Overnight Deposits Surge to Record (Bloomberg)
• Van Rompuy confirmed for 2nd term as EU Council president (Reuters) - you mean dictator
• BOJ Shirakawa: Japan consumer prices to gradually rise (Reuters)
• IMF Says Threat of Sharp Global Slowdown Eased (Reuters)
• Eurozone delays half of Greece’s funds (FT)
• BOJ Openings Can Shape Monetary Policy (Bloomberg)

The positive PMI data would ordinarily result in some price weakness as would the testimony from Bernanke which suggested that the Federal Reserve's ultra loose monetary policies may not continue much longer. However, the scale of the selling and size of the price falls was unusual. Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks. Sinclair said it was an “intervention” and was “window dressing” that long term bullion investors should not be concerned about as inflation was coming due to “QE to Infinity.” Embry said that it was a “smash down” and a “paper fiasco.” Jean-Marie Eveillard suggested that central banks may have intervened, as they are doing in fx and bond markets, and sold gold in volume into the market. It is of course very difficult to ascertain what caused the sharp falls in the precious metals yesterday however it would be naive to completely discount what Sinclair, Embry and Eveillard believe may have happened.

Risk off. On one of the highest volume days in months (for equity cash and futures), ES (the S&P e-mini futures contract) fell over 20pts from high to low following Bernanke's lack of expansionary comment. Right at the close we accelerated very fast losing around 6pts almost instantly as the market had a very jittery feel. The major financials were off 2.5-3% from the 10amET Bernanke speech release (and XLF was down 1.4% from that peak) but it was the precious metals that shocked. Gold had it largest percentage drop (over 5%) since early December 2008 (around $100) and Silver plunged over 7% at its worst, managing to come back a little to close down around 6%. Oil did not follow the Central-Plan (to talk down the print-fest) as WTI pushed back up to $107 and Brent over $123 as the USD rallied aggressively - now up over 0.5% on the week. Treasuries early dislike for the removal of the punchbowl was quickly dismissed as equities sold off this afternoon and we drifted back 1-2bps from high yields of the day (though still higher yields close to close). As we noted two days ago on Twitter, the market seems only capable of reacting to addition or removal of central bank liquidity and what was perhaps odd today was the delayed reaction - one of incredulity maybe at the gall of these printers to stop/pause.