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Guest Post: Caution - Falling Currencies

Eventually, people will discover that they cannot save in terms of dollars (those who don’t figure it out will be rendered economically irrelevant as their wealth is removed from their hands). Savings is a necessary prerequisite for investment. Investment is necessary for companies to grow, to develop new technologies, products, and markets. Growth is necessary to hire new workers. As existing companies achieve higher productivity of labor, and do not need as many workers to perform the same work, they lay off unneeded people. In a free market, the unemployed would quickly be hired by growing companies that expand and develop new businesses. But today’s structurally high unemployment can be traced back to Friedman’s quack prescription (among other government interference). Weakening the currency not only discourages savings, it also weakens businesses who have to keep the currency on their balance sheet and who have to import some of their inputs. When a currency loses value, then all who hold it incur a loss. It is not possible to employ workers and run a business in a country without holding significant amounts of its currency. Currency debasement therefore imposes constant losses on enterprises that try to operate in such an environment.

Dylan Grice Explains When To Sell Gold

Following the latest temporary swoon in gold, the PM naysayers have once again crawled out of the woodwork, like a well tuned Swiss watch (made of 24K gold of course). Of course, they all crawl right back into their hole never to be heard of again until the next temporary drop and so on ad inf. Naturally, the latest incursion of "weak hand" gold longs is screaming bloody murder because the paper representation of the value of their hard, non-dilutable, physical gold is being slammed for one reason or another. Ironically, these same people tend to forget that the primary driver behind the value of gold is not for it to be replaced from paper into paper at some point in the future, but to provide the basis for a solid currency following the reset of a terminally unstable system, unstable precisely due to its reliance on infinitely dilutable currency, and as such any cheaper entry point is to be applauded. Yet it seems it is time for a refresh. Luckily, SocGen's Dylan Grice has coined just that with a brief explanation of "when to sell gold" which while having a modestly different view on the intrinsic value of gold, should provide some comfort to those for whom gold is not a speculative vehicle, but a true buy and hold investment for the future. And in this day and age of exponentially growing central bank balance sheets (chart), this should be everyone but the die hard CNBC fanatics. In brief: "Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK. Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the  time to sell gold."

About Those Foreign-Law Greek Bonds...

With Greece seemingly well-and-truly in the mainstream media's rear-view mirror, we thought it useful to go over a few details that are 'evolving' as we approach the CDS auction and foreign-law bondholder participation deadline. In a nutshell, there are now seven (count them seven) classes of debt in the Greece capital structure ranging from Old GGB holdouts to Troika- and EFSF-subordinated 'loans'. Critically though, just as we have written extensively, it is the size of the holdouts that will become a growing headache for the European Greek government. As BNP notes today, there are at a minimum EUR2.5bn but potentially up to EUR11bn of holdouts that leaves the Hellenic Republic with the chance of achieving 100% participation practically impossible and some very difficult choices between a disorderly failure-to-pay default on these holdouts (with all the ugly ramifications of out-of-control bankruptcy and litigation) or 'unfairly' pay this 'small' group of desperadoes out as normal (i.e. pay interest and principal to Par at maturity - no haircuts). This is exactly the 'blocking-stake-Foreign-Law-bond' strategy we suggested that hedge funds would undertake and it appears successful given the record price differential that now exists between Greek- and Foreign-Law bonds.

Guest Post: "We Have No Other Choice"

Why do families persist in taking on $100,000 student loans for mostly mediocre educations with mostly mediocre "benefits" in the job market? Because they feel they have no other choice. Why do people persist in mortgaging their future and accepting the yoke of debt-serfdom to own a house? Because they feel they have no other choice, and owning a house has become integral to the "American dream." Why do local state, county and city politicos continue playing absurd budget games, shuffling funds, borrowing from their employees' pension plans to make this year's pension plan contribution and similar threadbare tricks? You guessed it: they have no other choice, lest someone somewhere feel some pain. Why do our Federal "leaders" borrow $1.5 trillion each and every year now, fully 10% of the nation's total output, knowing full well that this level of borrowing will bankrupt the nation? (Don't forget to add in the "supplemental" off-budget borrowing.) You know: they have no other choice, lest someone somewhere feel some pain. So instead they keep the accelerating vehicle pointed straight for the cliff. There are only two end-states to this level of borrowing: hyper-inflation or default. Any other "choice" is mere fantasy.

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We must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don’t work and it’s simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.

Frontrunning: March 15

  • Obama, Cameron discussed tapping oil reserves (Reuters)
  • Greek Bonds Signal $2.6 Billion Payout on Credit-Default Swaps (Bloomberg)
  • China leader's ouster roils succession plans (Reuters)
  • China’s Foreign Direct Investment Falls for Fourth Month (Bloomberg)
  • Greek Restructuring Delay Helps Banks as Risks Shift (Bloomberg)
  • Concerns Rise Over Eurozone Fiscal Treaty (FT)
  • Home default notices rise in February: RealtyTrac (Reuters)
  • China PBOC Drains Net CNY57 Bln (WSJ)

Farage On Europe: Determined But Delusional

In one of his most vociferous speeches (which is saying something for the eloquent Englishman), UKIP's Nigel Farage takes his peers in the European Parliament to task on their "determined yet delusional" attempt to keep the Euro propped up (as they desperately avoid using the 'D'-word - default). Citing many of the shocking statistics we have ever-so-quietly posted (such as 50% youth unemployment in Greece, the sovereign bond litigation against the Greek government, and the German FINMIN saying a third bailout for Greece is possible), he conjures images of the stuff-upper-lip English ignoring the carnage around them as they enjoy dinner. Striking at the heart of the problem, Farage notes that what is being done is not to save Greece (in fact it will 'crucify' them - as is already evident in their GGB2 pricing) but to save the "failing Euro project" and he ends with a critical lesson for the outspoken political leaders that surround him and their unequivocal statements

Art Cashin On The Oldest Sovereign Bankruptcy And The UK's Bitter Experience With Perpetual Bonds

Greece just defaulted. Again. No surprise - the country has been in default half the time since 1820. Curiously, Greece is also the first recorded sovereign defaulted as Art Cashin notes in his piece today. He also reminds us that the UK's plans to return the 100 Year bond are nothing new. In fact, the Consol, or the UK perpetual, was around in the 1700's. Things did not work out very well back then...

Daily US Opening News And Market Re-Cap: March 14

Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.

Troika Finds Greece Already Likely To Miss Bailout Budget Targets

The money for Greece has not yet been wired, and already a deeper dive into the previously released Troika report shows  what is glaringly obvious to anyone who follows the actual collapse of the Greek economy: that the country is already on course to miss its budget targets for the immediate future (for insane EU assumptions on what the Greek economy should look like through the lens of a Eurocrat, see our chart of the day). The Telegraph reports: "Athens has probably cut spending enough to bring its primary deficit down to 1.5pc this year as agreed. But "current projections reveal large fiscal gaps in 2013-14" according to a leaked draft report by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF). In its report, the troika said Athens will have to impose further fiscal cuts of as much as 5.5pc of GDP to meet next year's targets." And while Europe may be terminally fixed, translated this means that the aborigines of the southern colony of Bavaria Sachs will see their wages cut even more, and even more people will be unemployed soon just to appears the first lien debt holders. This in a country of 10.8 million where just 36% of the population works. So Greece, which today received a rare bit of highly irrelevant but good news, when Fitch became the first rating agency to upgrade the country's credit rating from Default to B- (even as its new bonds saw their yield surge to 19% on the second day of trading), will in a few short months be forced to once again deal with even more consequences of being the proud recipient of the inverted European bailout, whereby the country's gold is used to fund Eurobank capital shortfalls.