"I went to Brussels with one objective: to protect Britain’s national interest. And that is what I did"
The market rallied this past week, albeit in a very volatile manner, to end the week on a positive note as the hopes of a final resolution to the Euro crisis has been reached. In reality, today's announcement of the EU treaty is only the first step and there are many legal challenges that will still have to be resolved. While the reality is that there is still a very long road ahead before anything will actually be accomplished the implication that the with the ECB willing to buy bonds, at least for the moment, and the coordination of two bailout funds the Eurozone can play "kick the can" for a while longer. Those headlines, even without much substance were enough to drive return starved managers into the market for the year end rush.
Eric Sprott Fights PM Manipulation Fire With Fire: Calls Silver Producers To Retain Silver Produced As "Cash"Submitted by Tyler Durden on 12/10/2011 03:14 -0400
In what is likely the most logical follow up to our post of the day, namely the news of the lawsuit between HSBC and MF Global over double-counted gold, or physical - not paper - that was "commingled" via rehypothecating or otherwise, we present readers with the monthly note by Eric Sprott titled "Silver Producers: A Call to Action" in which the Canadian commodities asset manager has had enough of what he perceives as subtle and/or not so subtle manipulation of the precious metal market, and in not so many words calls the silver miners of the world "to spring to action" and effectively establish supply controls to silver extraction to counteract paper market manipulation in the paper realm by treating their product as a currency and retaining it as "cash". To wit: "instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today." And the math: "If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011. If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?" And there you go: Sprott 'reputable' entity to propose to fight manipulation with what is effectively collusion, which in the grand scheme of things is perfectly normal - after all, all is fair in love and war over a dying monetary model. Who could have thought that the jump from "proletariats" to "silver miners" would be so short.
The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical GoldSubmitted by Tyler Durden on 12/09/2011 16:05 -0400
That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.
In a new experiment that began with "The Redline: A Tale Of Collapse" , Alt-Market is trying something a little different; a short fiction series based on fact. Make no mistake; while the characters and events in this story are products of imagination, the issues presented and their probable consequences are anything but fantasy.
Update: And it gets better. Now Dow Jones:
- Euro-Area Countries Ready To Provide IMF With Bilateral Loans, According To Draft Seen By Dow Jones
Yet earlier today, none other than Mario Draghi said that loans to the IMF to purchase European bonds would be legally unworkable. Brilliant
With just 30 minutes until the close we were cutting it close to a rumorless, headlineless session. So here is Reuters to the rescue:
- ESM BAIL-OUT FUND TO BE GIVEN BANKING LICENCE - DRAFT
- EU DETERMINED TO STRENGTHEN BAILOUT MECHANICS - REUTERS
And from earlier:
- ESM BECOMING A BANK "OFF THE TABLE"
Why would Mary and her friends lie?
The reason why some profitable companies pay no taxes. And why others pay too much. It’s so fundamental to business taxation. But not even tax reformers dare to mention it.
Sometimes we just shake our heads. Other times, we just sob anxiously into our handkerchieves. This afternoon's rumor-ramp-denial-no-dump was absurdity at its very best. A 16pt rip in ES on the basis of rumor of another bigger bazooka from the IMF (courtesy of Nikkei not the FT this time as we all know what their rumors are full of) was ignored by pretty much every other asset class. We tweeted almost instantly that the denial would be forthcoming in 10 minutes and sure enough it was. But wondrously, what goes up, does not come down as ES gave back a measly 5pts leaving it very far bereft of broad risk asset's perspective of value. Perhaps the best perspective on the incessant IMF-and-other rumors is from Peter Tchir "This is all circular and that circularity is coming back to haunt those people desperately trying to come up with new ways to extend and pretend."
A week ago, the reputation of legacy carrier American Airlines as being the only one to avoid bankruptcy is not the only thing that went pop. Along with it went the fervent optimism of high yield debt investors that moral hazard spreads not only to insolvent countries and insolvent banks, but to all insolvent corporates. On Wall Street, there is actually a technical name for perspective on insolvency optimism when viewed through the prism of CDS, where it is known as "Jump Risk", or the likelihood of a company to file tomorrow as opposed to a year from now. Until AMR, jump risk was not an issue. Now, it has come back with a vengeance. As Bloomberg LevFin magazine reports, "AMR’s bankruptcy is taking the corporate debt market by surprise, with investors losing 25 percent on bets in junk-bond derivatives that there wouldn’t be a jump in defaults this year. The Chapter 11 filing from the parent of American Airlines is helping to fuel a plunge in the value of credit-default swaps that take outsized losses when companies in a benchmark index fail. The contracts, which back the debt of borrowers including ResCap and Radian, plunged to 64 percent of face value as of yesterday from 85 percent on Nov. 8. The derivatives were three weeks away from expiring with gains on Nov. 29, when AMR filed for protection." Oops. Alas, that's what happens every time unfounded optimism gets away from reality, especially when one is dealing with "junk", literally, which as the name implies is one TBTF if it is 99% unionized.
Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task. The immediate question for most people is What should I do? We break down the intelligent responses into three big buckets: financial, physical, and emotional. In this report, I detail the financial steps that everyone should undertake right now to manage future risks using the framework that I use to assess and understand the financial world and markets. My approach is founded as faithfully as possible on facts and data. But my views on how the markets operate are formed from personal experience, observation, and connecting a few dots that rely on opinions and sometimes beliefs. Therefore, this financial and investing framework is something that you should only accept if it works for you -- and reject if it does not.
Misquoting Shakespeare before the market open may seem like blasphemy but in a follow-up confirmation of a thesis we proposed back in July, Luxor Capital expands on the idea that something rotten is ahead for the state of Denmark. As with many of these crises, the heart of the Danish problems lie in a commercial and residential real estate boom and looming bust and with the capital/equity remaining so low in the Danish banking system (and a pitiful funding profile), it seems increasingly evident that public balance sheet support will become necessary (and perhaps not sufficient). How ironic that we pointed out, back in July, the probability that Germany will need two insolvency funds, a South-facing and now a North-facing one. Having traded in the mid 20s during H1 2011, CDS now stands at 106bps (off its September peak of 158bps) and given the interest we are seeing from hedge funds in this relatively lower cost short, we suspect this week's modest decompression will accelerate.
Yesterday we reported that the freeze in the Europe repo, asset backed paper and money markets is a broad indication that the shadow banking system - the primary conduit to broader disintermediated financial stability or in this case distress - on the continent has now locked up, which means that the three traditional bank transformations of risk, maturity and liquidity now have to be undertaken by the very non-shadow banks whose existence relies day to day on the ECB and the Fed, without any 3rd party market intermediaries (incidentally we are looking forward to tomorrow's quarterly update of the US shadow banking system and will post promptly). Today, the ECB has just confirmed our worst fears, in that the shadow situation is likely worse than expected.
While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it. And the focus on repo while useful misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued. What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.
Because they had had neither the facts nor the law on their side, lawyers for Wall Street trade groups made up stuff in their complaint to overturn new regulations on speculative position limits.