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.
For awhile now, the market has loved to talk about risk-on or risk-off. Occasionally a few outliers exist, but by and large that pattern of everything risky up or down together has been holding. It felt like that is potentially starting to fall apart this week. The first thing that caught my eye, was the difference in performance between credit and stocks. The CDX IG16 index was actually wider on the week. It closed at 123 the prior week and finished this week at 126.25. That is not a major move, but is in sharp contrast to the SPX which was up 4.7% on the week.
That relative out performance of stocks left many investors scratching their heads. For all the talk about "credit" leading stocks, or warning signs in the credit markets, they were all ignored this week, at least in U.S. Stocks. Good luck, and hopefully the simplicity of risk-on or risk-off will return, otherwise I suspect this will get very messy as so many trading strategies have depended on it.
Word Cloud Of Trichet's Disappointing Jackson Hole Speech: "Inflation" Mentions: 10; "Deflation" And "Gold": ZeroSubmitted by Tyler Durden on 08/27/2011 14:07 -0500
I think if we had the global leader app functioning, we would find that most are on vacation somewhere, making it highly unlikely we get any big intervention over the weekend. Merkel and Sarkozy just finished a summit. Obama is definitely on vacation. I just don't think they feel the level of urgency the market wants them to have. Trichet has done a lot already, more than any other entity in the past couple of weeks. What more can he do? When does he get replaced? I don't see the ECB announcing anything new. And what about Ben? He seems to like Jackson Hole, and he has been far less keen on making weekend announcements anyways.