And In The Meantime Back In Reality

As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:

  • China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
  • While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.

This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.

And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:

  • IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets

That's right: government.

Recall what we said last week "in the last 8 weeks foreigners have sold a unprecedented $93 billion across the custodial account bringing it to $3.392 trillion, the lowest since March 2011! So the next time someone asks where European banks are finding emergency liquidity now that commercial paper, money market and Libor Markets are all dead, you will have the answer." Now it has been confirmed. Because when raising capital, you don't sell the bonds which are trading at nickels on the dollar. You sell the liquid ones. It will be very ironic if Europe's collapse drags down America following a wholesale dump of US bonds, as we have been suggesting. Naturally this confirms 100% what we suggested two weeks ago, namely that the only reason the EURUSD is as high as it has been is due to liquidation of US bonds by French banks, and the prompt repatriation of the USDs into EURs. Meaning while the EURUSD correlated market figures all is well, everything behind the facade is falling appart.

In other words, expect to see the downward slope in the chart below to get more and more acute with each passing week as the European fiasco accelerates.