Portugal

Name The New Reserve Currency: China Imports More Gold In 2012 Than All ECB Holdings

The last time we looked at monthly Chinese imports of gold from Hong Kong in 2012, the comparable country in question was Portugal (whose citizens, if not central bank, incidentally have run out of gold to sell), because that is whose total gold holdings (at 382.5 tons) Chinese imports had just surpassed. Fast forward a month later, and the update is even more disturbing. In July, Chinese gold imports from HK, after two months of declines, have picked up once more and hit a 3-month high of 75.8 tons. While it is notable that this number is double the 38.1 tons imported a year prior, and that year-to-date imports are now a record 458.6 tons, well over four times greater than the seven month total in 2011 which was 103.9 tons, what is far more important is that in the first seven months of 2012 alone China has imported nearly as much gold as the total holdings of the hedge fund at the heart of the Eurozone, elsewhere known simply as the European Central Bank, and just as importantly considering the import run-rate has hardly slowed down in August, which data we will have in a few weeks, it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings.

When Unlimited Has Limits

In very real terms the ECB is now no longer an independent institution. The ECB has promised not to act unless the EU assents. The ECB is now totally subject to the whims of the politicians in Europe and whether the markets ignore this for the moment or not that is the truth of it. In promising redemption the ECB has also traded away its ability to act on its own and it will be interesting to see how this plays out.

The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe

The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination. As Powell notes: Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that - as economies remain hugely divergent.

Santelli And Grant Explain The ECB Reality

While illiquid short-dated Spanish bond yields plunge and short-sale-banned Spanish stocks (IBEX) surge back above their 200DMA the most in 16 months, one could be forgiven for falling into the age-old CNBC-trap of "well the market is up so it must be good" belief. Rick Santelli and Mark Grant, in a brief few minutes attempt to get below the surface of the actual words and perception of today's Draghi statement and explain just how the conditionality and size/roll constraints make this supposed unlimited "we'll fix it all" scenario rather ridiculous in that "The ECB is never going to be allowed to do anything." Perhaps just as IBEX fell 17% in 3 weeks after rallying 5.6% on EUR Summit-day hope, we will see some sense of reality sink back in to the circularity of this support.

Desperate Maladies Require Desperate Measures

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. To us, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and China and so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit.

The Post Globalized World Part 1: Why The PIGS Are Out Of Luck

There are three key factors to modeling trade flows - or relevance - in a post-globalization world. While competitiveness is important, countries gain from being generally 'Technology-rich', 'Labor-rich', and/or 'Resource-rich'. The following chart, from Deutsche Bank, shows where the world's countries fit into the Venn diagram of give-and-take in a post-globalization market. The red oval highlights where Italy, Greece, Portugal, and Spain (and Argentina sadly enough) do not fit into this picture. Two words - Euro-sustainability?

Did Mario Draghi Leak The Goldman Memo On Next ECB Steps

Just a few hours before someone (cough Draghi cough) leaked the details of the sterilized - though unlimited, peripheral spread-reducing - though not capped or fundamentally-based, SMP 2.0, Goldman Sachs released their 'view' of what Super-Mario will do. Rather unsurprisingly, almost verbatim, the rumors fit that 'guess' rather well as the chaps at Goldman fully expected demanded this 'compromise' solution. They also expect no rate cut - since economic data is not a broadly dismal and falling as it was - but do expect further non-standard measures including collateral-easing (which has been pre-announced to some extent in the 'credit-easing' camp).

For Spain, The Beginning Of The End Arrives As Bank Of Spain Starts Using ELA

As we described in detail yesterday, things are going from worse to worserer as the problems in Spain - more specifically in its banking sector - are deepening as deposit flight accelerates, and "the private sector is leaving the banking system." But the Bank of Spain isn't leaving anything to chance. The WSJ disconcertingly highlights that last month the central bank appears for the first time to have activated an emergency lending program that will enable its banks to borrow from the Bank of Spain directly, bypassing the ECB's relatively tough collateral demands. That would make Spain at least the fourth euro-zone country - following Greece, Ireland and Portugal - to use the ELA, which generally is reserved for situations when banks have exhausted all other financing options. As we pointed out yesterday, this would appear to confirm a "full-blown bailout" is imminent, as the collateral problems mount.

The Battle Begins

If the leaks from the European Parliament are to be believed then the lines are being drawn in the sand for quite a fight. The rumor is that Mr. Draghi is going to propose a plan to buy short sovereign debt (0-3 years) without limit if a nation fills out the requisite form and officially asks for aid with conditionality. This once again proves that the rules and regulations in Europe, the very stipulations that we rely upon, can be changed, modified or distorted with the blink of an eye and the wave of a hand. It seems that nothing is set in concrete, nothing is firm and that everything is moveable upon a moment’s notice. the amount of upfront debt, which would constantly have to be rolled, would present a series of dangers including the inability to finance it as it comes due along with a balance sheet at the ECB that could swell well past the $4 trillion mark where it is now or 45% larger than the current balance sheet at the Fed. The world does not receive funding from alien worlds and there are consequences that append from having a ledger that expands without boundaries.

EU's Poorest Member Country Smacks Down Euro As Bulgaria Refuses To Join Eurozone

If one needs a shining example of why the days of Europe's artificial currency are numbered, look no further than the EU's poorest country which moments ago said "Ne Mersi" to the Eurozone and the European currency. From the WSJ: "Bulgaria, the European Union's poorest member state and a rare fiscal bright spot for the bloc, has indefinitely frozen long-held plans to adopt the single currency, marking the latest fiscally prudent country to cool its enthusiasm for the embattled currency. Speaking in interviews in Sofia, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that the decision to shelve plans to join the currency area, a longtime strategic aim of successive governments in the former communist state, came in response to deteriorating economic conditions and rising uncertainty over the prospects of the bloc, alongside a decisive shift of public opinion in Bulgaria, which is entering its third year of an austerity program. "The momentum has shifted in our thinking and among the public…Right now, I don't see any benefits of entering the euro zone, only costs," Mr. Djankov said. "The public rightly wants to know who would we have to bailout when we join? It's too risky for us and it's also not certain what the rules are and what are they likely to be in one year or two."

Carpe Diem, Quam Minimum Credula Postero

Tomorrow the Battle of Frankfurt begins. Make no mistake in your thinking as America ends its holiday weekend; it will be a battle and there will be bodies littering the field of engagement. Spain and the rest have aims, plans, schemes if not hopes and ambitions in direct opposition to Germany and her side. The outcomes prayed for are a demand for money and a resistance to those demands.  The pleas of Spain are about to be answered; first from the ECB and then from Germany’s acceptance or rejection of the Draghi plan. The “Game of Muddle” will be ended and real answers to real insistences will be given. It all comes down to this; money and how much of it and under what circumstances and whether the nations with capital are willing to hand it to their neighbors and watch their credit ratings, their own cost of funding, their standards of living decline to a mean for all of Europe.

Spain: For Whom The Bell Now Tolls

To use the analogy offered by Senor Cervantes we would say that Rodrigo, as representing Spain, is about to be devoured by the snakes. The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not. We are now at the virtual epicenter of the European Crisis where decisions will have to be made; avoidance is no longer possible. We have reached the end of the road where there is no more path left for can kicking.

September Arrives, As Does The French "Dexia Moment" - France Nationalizes Its Second Largest Mortgage Lender

September has arrived which means for Europe reality can, mercifully, return. First on the agenda: moments ago the French government suddenly announced the nationalization of troubled mortgage lender Credit Immobilier de France, which is also the country's second lagrest mortgage specialist after an attempt to find a buyer for the company failed. "To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee," Finance Minister Pierre Moscovici said according to Reuters. What he really meant was that in order to avoid a bank run following the realization that the housing crisis has finally come home, his boss, socialist Hollande, has decided to renege on his core campaign promise, and bail out an "evil, evil" bank. Sadly, while the nationalization was predicted by us long ago, the reality is that the French government waited too long with the sale, which prompted the Moody's downgrade of CIF by 3 notches earlier this week, which in turn was the catalyst that made any delay in the nationalization inevitable. The alternative: fears that one of the key players in the French mortgage house of cards was effectively insolvent would spread like wildfire, leading to disastrous consequences for the banking system. End result: congratulations France: your Fannie/Freddie-Dexia moment has finally arrived, and the score, naturally: bankers 1 - taxpayers 0.