Citigroup

Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.

"Prolonged economic weakness will persist - especially in the peripheral countries - with further periods of intense financial market stress" is how Citi's Willem Buiter's economics team sees the future in Europe. While they continue to believe that the probability of a Greece exit from the Euro is around 90% in the next 12-18 months; but more critically it is increasingly likely in the next six months - conceivably as soon as September/October depending on the TROIKA  report. There is a crucial series of meetings and events in coming weeks and while they believe that the ECB's conditional bond-buying (and ESM/EFSF) may help avoid a 'Lehman moment' around the GRExit, they believe that there will still be considerably capital flight out of periphery assets should it occur. The reason being simply that even if funding costs were reduced, the current mix of fiscal austerity and supply-side reform will not return any periphery country to a sustainable fiscal path in coming years.

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated 'Jackson Hole' conference in two weeks. Citi's Tom Fitzpatrick believes "it would be irresponsible to do so and that we need a more 'responsible fiscal policy' which will not materialize as long as we have an 'irresponsible monetary policy' bailing policymakers out". However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting 'caught behind the curve' which must be balanced with the 'mistake' of one-monetary-step-too-far with very real inflationary consequences.

While still of the belief that a wholesale disintegration of the European Monetary Union remains a distinct tail-risk event, Citigroup's chief economist Willem Buiter succinctly summarizes his core view as "the euro-area will stumble and bumble towards an eventual resolution." However, that 'final' solution does not look like your grandma's European Union as he expects nothing more than a "continued Monetary Union, probably without Greece, having undergone both major sovereign debt restructurings in the periphery and financial debt restructurings for banks in the periphery and core." Transcribed from a three-minute clip, Buiter eloquently answers three key questions: How is the Euro crisis (and its consequent solution) shaping up? Does Germany have the upper-hand? and What sort of moral hazard issues might we see in the near future? He concludes "we won't have a smooth solution to this crisis."

It's been six weeks since the EU Summit that apparently laid the foundation for all that is good in Europe to evolve. Between the EU Summit's euphoria-to-dysphoria flip-flop and Draghi's believe-to-deceive-to-promise roller-coaster, bond prices/yields and stock prices have had a wild ride - but there is a very clear disconnect now. Since 6/28, Spanish and Italian 10Y spreads are unchanged - yes the very instrument that is supposed to benefit from all this chin-wagging and jawboning has done nothing! Meanwhile - the previously synced at the hip equity markets of these two nations have soared - both now above immediate knee-jerk highs of the EU Summit. This leaves Italy's FTSEMIB almost 7% over-valued relative to its credit risk and Spain's IBEX around 6%; whether this is due to the short-sale ban or simply an irrational willful ignorance of fact over hope - we suggest the convergence offers some better hope (especially as Rajoy sees his party support waning).

It's very simple really. Please point out where on the below list of Top 20 contributors to a randomly selected US politician, in this case New York's Chuck Schumer, can one find Standard Chartered, Barclays, or HSBC?

We've Gone Way Too Far ... It's Time to Decentralize

What a difference a revisionist market rally makes. Remember when everyone was involved in Libor manipulation? No? Curious what a few hundred DJIA points will do especially when the corporate revenues and supporting them simply are not there, and one goes all in on multiple expansion. One entity which, however, has not forgotten about Lieborgate is Pimco parent and Europe's largest insurance firm, Allianz. And they are not happy: "Europe's biggest insurer, Allianz, is worried about the role central banks may have played in an interest rate rigging scandal that has enveloped some leading international lenders, the insurer's chief financial officer said on Friday. "We do not find it funny, what has happened, in particular the arising implication that it is not just the banks but central banks being involved in this," Oliver Baete told a conference call with analysts. "That really gives us cause for concern," Baete added." Of course, neither the ECB nor the FED could care much, considering that Allianz would be immediately insolvent if the same central banks who manipulated Libor stopped manipulating interest rates... which is implicitly what Allianz is unhappy about.

Moments ago AIG stock was halted with many scratching their heads as to the the reason why. Here it is, courtesy of Bloomberg:

• TREASURY TO OFFER $4.5 BILLION OF AIG COMMON SHARES
• AIG TO BUY BACK UP TO $3 BILLION OF SHARES SOLD BY TREASURY

Full release as we get it. Bottom line: another $1.5 billion in AIG shares are about to hit the market. Of course, in this broken market this will be seen as bullish. At least initially. Then the selloff.

When it comes to building wealth, muddying the difference between perception and reality is the key manipulation tool that banksters use to goad people into wrong choices.

Just when you thought the Li(e)bor scandal had jumped the shark, Germany's Spiegel brings it back front-and-center with a detailed and critical insight into the 'organized fraud' and emergence of the cartel of 'bottom of the food chain' money market traders. "The trick is that you can't do it alone" one of the 'chosen' pointed out, but regulators have noiw spoken "mechanisms are now taking effect that I only knew of from mafia films." RICO anyone? "This is a real zinger," says an insider. In the past, bank manager lapses resulted from their stupidity for having bought securities without understanding them. "Now that was bad enough. But manipulating a market rate is criminal." A portion of the industry, adds the insider, apparently doesn't realize that the writing is on the wall.

• Bundesbank’s Weidmann Says ECB Shouldn’t Overstep Mandate (Bloomberg)
• Hollande and Monti Vow to Protect Euro (FT) - be begging Germany to death
• Monti Calls French, Finns to Action as Italy Yields Rises (Bloomberg)
• not working though: Banking license for bailout fund is wrong: German Economy Minister (Reuters)
• Switzerland is ‘New China’ in Currencies (FT)
• Regulator Says no to Obama Mortgage Write-Down Plan (Reuters) - tough: there will be socialism
• Gauging the Triggers to Fed Action (WSJ)
• When domestic monetization is not enough: Azumi Spurns Calls for Bank of Japan to Buy Foreign Bonds to Curb Yen (NYT)
• Indonesia’s July Inflation Accelerates on Higher Food Prices (Bloomberg) - remember: the Deep Fried black swan
• China Manufacturing Teeters Close to Contraction (Bloomberg)
• Spain Introduces Regional Debt Ceilings to Achieve Budget Goals (Bloomberg) - yes, they said "budget goals"

TAG ought to be allowed to expire at the end of 2012, but people like Barney Frank and Tim Johnson will be working to preserve this corporate subsidy for their clients among the large banks regardless of the deleterious effect on the US economy.  

The blunt trauma that JPMorgan was implicated in the missing millions from segregated accounts in Jon Corzine's bankrupt MF Global may have passed but the memory lingers, especially for all those whose cash is still locked up somewhere in vapor space. Yet one event that may tear the scab that patiently was healing, courtesy of a Copperfield market full of distractions such as JPM's CIO fiasco, Lieborgate, oh and, Europe, right off is the recent bankruptcy of Peregrine Financial, aka PFG, whose story we first broke, and which just as we suspected, has promptly become the second coming of MF Global, as at least $200 million has "evaporated." It is thus with little surprise that we find that the first party of interest is none other than JPMorgan, which together with various other banks, will be the target of a subpoena by the PFG trustee. How shocking will it be to find that Dimon's company is once again implicated in this particular episode of monetary vaporization.