Think the ECB is unable to maintain the illusion that central planning works? Think again. Some unlucky sod dares to ask Trichet how the central bank plans to defend its failure as a monetary authority, to which the French president proceeds to have an unprecedented (for a central head banker) on air meltdown with literal foaming in the mouth. "You want the lies?... You can't handle the lies. It is all about ze price stabeeleetee." Hilarity ensues, especially after JCT proceeds to bash his one and only nemesis: Germany. Prepare to watch many more such episodes over the next 2 years as the world voodoo economist PhDs have so carefully constructed for themselves in their ivory towers comes crashing down.
While the BOE's decision came and went exactly as expected (rate unchanged at 0.50%, no new Quantitative Easing), leading to a slight jump in the GBP but nothing too notable, all eyes now turn to the ECB in 20 minutes and whether or not Jean Claude will admit defeat and announce the end of the bank's very ill-timed decision to start tightening from 6 months ago, which as much as it is overdue, will unfortunately not happen, egos and all. Here is a complete preview, but in a nutshell the consensus is for rates to remain unchanged at 1.50%, for an announcement that downside risks have intensified, and that both lower growth and lower inflation will be forecast.
The PIIGS Fleecing Of Europe Continues Even As Italy Promises To Implement Another "Austerity" Package ImminentlySubmitted by Tyler Durden on 09/07/2011 10:31 -0400
The first Italian austerity package has not even properly failed yet (despite labor union protests to the contrary which for some odd reason believe that it has some chance of passing), and already Italy is preparing for a new round of "austerity" to appease those naive fools from the ECB so they buy Italy's otherwise bidless bonds for a few more weeks. From Bloomberg: "Italy may need a new budget- adjustment plan next month because a 54 billion-euro ($76 billion) austerity package to be voted on today won’t convince the European Central Bank to continue buying the nation’s bonds, the chairman of the Senate Finance Committee said. “How long can the ECB continue to buy Italian Treasury bonds?” Mario Baldassarri said in an interview in Rome today. “We may need another adjustment in three, four weeks which will be the real answer to the European Commission and to markets.” Because this time, unlike a month ago, it will be different. Berlusconi promises. As a reminder, Italy will vote on the current massively watered-down plan which is anything but austere later today, in a vote largely expected to pass. Said passage, however will do nothing to please Trichet, who will continue to remind Italy just who calls the shots now (oddly enough the ECB thinks that would be them... which explains the loving relationship between the Central Bank and a electorally challenged Angela Merkel). None of this changes the underlying dynamic which has become all too clear: the PIIGS have called Europe's bluff, and Europe blinked. Going forward expect much barking from the ECB and Luxembourg, warning the periphery to get its house in order... and absolutely no bite. Because everyone by now realizes that the balance of power is entirely on the insolvent countries' side. Europe can threaten to kick out a country, but as UBS demonstrated on Monday, the consequences of such a move, which would end the euro, would be up to and including that Keynesian wet dream: war.
As bizarre as it is to say, but yesterday felt like a short squeeze in the US. In spite of SPX finishing down 9 points, the price action felt like shorts getting squeezed. How can that make sense? Well, anyone who set a short ahead of Jackson Hole or just after the speech, likely set it in the 1130-1160 range. The memory of stocks rallying up to 1228 is too fresh in everyone's mind, so shorts were nervous, and longs may have been set too, as hope remained that Obama, Bernanke, Trichet, and Merkel would say or do things to support the market. I believe yesterday's bounce from the lows, then late day 10 point down and back up swing cleaned up a lot of shorts, so the market is much more balanced at 1175 than it was at 1175 at Jackson Hole time. This gives us a lot more ability to trade lower. Maybe it is too bizarre to believe that we can have a short squeeze on a massively down day, but it felt like that, and it feels like people are positioned less bearish than they feel. With nothing resolved in Europe, and some signs of continued deterioration, the market is more vulnerable to a sell-off. My favorite spin yesterday was that the US will muddle along even if Europe is in trouble. Wasn't it just a few months ago that analysts were saying it is okay if the US does poorly, because over half of S&P 500 profits come from overseas? Weren't profits being enhanced because companies were selling things in Europe and translating those profits back into dollars at favorable exchange rates? Is that story gone and now globalization doesn't matter?
When it comes to European bureaucrats, the easiest way to determine if they are lying is whether or not their mouths are open. Yet there are those rare occasions in which even the most hardened of liars let one slip. The Economic Collapse, always the master of compiling impactful bulletins, has prepared a list of just such "slip" quotes that "are absolutely shocking. In Europe they openly admit that the financial system is dying, that the euro is in danger of not surviving and that the EU does not work in its present form." In other words, ignore the ceaseless headlines of promises that all shall be well. Because it won't. Here is all you need to know about the imminent end of the Eurozone, straight from the horses' mouths.
As of Monday, which may have been a holiday in the US but was anything but in floundering Europe, the ECB held a whopping €166.8 billion in its deposit facility. This is an increase of €15 billion over Friday, and is the highest since August 2010. What this means, simply said, is that European banks are so terrified of holdings cash with each other or frankly in any market conduit not explicitly backstopped by the ECB (we will spare you the LIBOR chart, suffice it to say that 3M USD Libor increased again, this time from 0.333% to 0.336% as perfectly non-shadow interbank funding is becoming rares than hen's teeth). Between the Libor chart and the amount of cash banks have dumped en masses with Trichet (who for some reason is considered a safe locus for capital), one will have a very good perspective of just how ugly the European funding crisis is. Tomorrow we also get an update of how many if any banks borrowed USDs on the special ECB lending facility, which in turn would mean a conduit loan from the New York Fed. If the answer is affirmative, and if one or more banks did indeed borrow dollars, expect SocGen and the usual European suspects to be slammed hard as usual in regular trading tomorrow.
As if we didn't have enough to worry about with sovereign shenanigans in Europe, which bridges to build in the US, and a slowing China, Israel's top-brass now fears a winter of radical Islam, an increase in the chance of a multi-front war, and notes Hamas using a new advanced rocket (perhaps this will be the bazooka that Trichet borrows?).
According to the Handelsblatt, while the majority of the members of the ECB's shadow council - an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institute - supported an unchanged policy the bias is increasingly shifting to one of easing. This comes on the heels of Trichet's idiotic decision, just like in 2008, to start hiking rates in several months ago (ridiculed extensively on these pages and elsewhere) which not only ended up costing Europe its common currency much faster than had it merely kicked the can down the road, but could very well be the last bad decision by the ECB: should Greece be kicked out of the Eurozone as a result of this decision, the ECB is over. It is therefore not surprising that not only is the shadow council scrambling to undo 5 months of bad decision making by the ECB, but the bankers on the council, particularly RBS, PIMCO, RBS (RIP by the way), Barclays and Tudor and HSBC are either expressing an easing bias or outright pushing for a 50 bps cut. Alas, this is too little too late. And the irony is that once the Fed proceeds with QE3, and commodities surge again, the ECB will really be helpless as the continent's core redlines even as the Periphery remains terminally insolvent (ignoring for a minute the inflationary elephant in the room that is China). So will Trichet disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months.
Today, the President of the ECB, Jean- Claude Trichet did not rule out a gold backed euro bond in an interview with ‘Il Sole 24 Ore’ published on the ECB’s website. The comments were a response to former Italian Prime Minister Romano Prodi who proposed - in Italian national daily business newspaper ‘Il Sole 24 Ore’ last week - the creation of a euro bond backed by member states’ gold reserves. Prodi was President of the European Commission from 1999 to 2004. Trichet was asked about “the creation of a fund guaranteed by the gold reserves of countries that would issue bonds to buy back national debt and make new investments.” Trichet did not answer the question directly but said “at this stage, we have the EFSF bonds, which are bonds with a European signature. The main message of the ECB Governing Council to governments is to implement rapidly, fully, comprehensively the decisions taken by the European heads of state and government on 21 July.” Separately the Central Bank of Ireland has said that it will not disclose whether the gold reserves of Ireland (a paltry 6 tonnes) have been swapped or loaned out or had any other receivable status recorded against them (see Commentary below). A senior administrative officer for financial control at the Central Bank of Ireland responded to an inquiry regarding the custody and ownership of Ireland’s gold reserves: “The bank is not, however, in a position to provide further information, nor to outline its investment strategy in relation to the gold holdings.”
That the European ponzi is leaps and bounds ahead of the US is well known: we have frequently succumbed to vertigo trying to chart just how interconnected Europe's financial system is at the current point where €1 in incremental capital is supposed to prop up a multi-trillion pyramid scheme. But the just released news from the Handeslblatt demonstrates that just when we thought we had seen it all, Europe once again manages to surprise us. As is by now well-known, Finland has proven to be quite a stick in the spokes of the joint-European can kicking exercise by, prudently, demanding collateral, or threatening to walk out of the second Greek bailout (that 1 year Greek bonds are trading at 60%+ yields is irrelevant). Well, here's the solution - give them collateral... in the form of insolvent Greek bank shares, which however will be "partially nationalized" as if that will suddenly push their value higher. Supposedly the Finns never clarified that the collateral has to have some liquidation "value." Oh well, better luck next time.
- IASB criticises Greek debt writedowns (FT)
- ECB to reassess inflation risks (FT)
- Pimco's Gross rues US debt 'mistake' (FT)
- Trichet and Rehn defend Europe’s banks (FT)
- Japan Parliament Confirms Noda as Prime Minister (WSJ)
- Sino-Forest is Second Time Chan Loses Company (Bloomberg)
- US authorities assess hurricane’s aftermath (FT)
- Solar Purge Drives Weakest Into Buyouts (Bloomberg)
- Republicans to Unveil Bill to Force Major Changes at the UN (Bloomberg)
Follow that bouncing ball across Europe as it eventually hits home right here on Wall Street. Why haven't we heard about this in the media or the sell side reports?
Earlier today we speculated that the latest ECB monetization tally of insolvent PIIGS debt would be between €10 and €15 billion. Well, the final number was below the bottom end of the range or €6.7 billion (with €1.3 billion maturing). This follows €22 billion and €14.3 billion in the past two weeks, bringing the total under the ECB's debt monetization facility to €120.3 billion, a number that Germany must be simply ecstatic about. Keep in mind this is debt that local banks can not pledge to the ECB in return for 100 cents on the euro, and in essence removes liquidity from the system. What was hilarious, however, is the immediate defensive posture by the ECB's Trichet who said on the subject of whether ECB taking on too much risk, that the increase in ECB's balance sheet not as large as Fed or BoE. He also said that "Everybody understands that particularly in the present situation that the ECB would maintain a solid anchoring of inflation expectations,” Trichet told the European Parliament’s economic committee during a special session called to discuss the debt crisis. "All countries would be hampered” if they became unanchored, Trichet added. Bottom line - the most modern spin on an old maxim: "the ECB is not the Fed" - we are not sure if that is a good or a bad thing: frankly it is all central planning. What we are concerned about is that contrary to what self-aggrandizing economist PhD's, somehow the ECB did not refute the fact that there is central bank risk. Yes, even with all that fiat printing capacity.
When the dust settled on gold’s volatile week, despite much “noise” from uninformed commentators, it showed that gold fell 2.96% on the week. This must be put in context. The previous week alone gold had risen 6.2%. Despite the 3% sell off last week gold remains up 11.6% in dollar terms (and by similar amounts in other currencies) so far in August with just three trading days left in the month. Meanwhile, global stock markets are down by similar amounts in August, with the FTSE down 11.7%, the DAX down 21.6%, the S&P down 8.95% and the MSCI World down 10.95%. Thus, gold has again proven its hedging and safe haven status. The data shows that sentiment in the futures market towards both gold and silver remains muted with very little evidence of participants ‘piling in’ on the long side. Indeed, it shows that the sharp margin increases seen in silver and the margin increase seen in gold last week have had the desired effect of cooling sentiment thereby making the fundamentals in both markets sounder. The COT data in conjunction with very robust physical demand globally and especially in China (see news) means that any correction is likely to be shallow and short prior to the primary trend reasserting itself.