Saturday, July 9, 2011

Horrific Jobs report/gold rises/silver steady

Good morning Ladies and Gentlemen:

Gold closed yesterday at $1541.20 rising by 11 dollars.  Silver rose by one cent to $36.54.
The bankers knowing the jobs number would be week, sent gold and silver down in early European trading.
However once the numbers were released gold never looked back.  Gold and silver continued their advance in the access market. The final numbers for these metals are as follows:

Gold; 1544.20
Silver:  36.71

Before heading into comex trading, the big story of the day without question was the jobs report.

Here is the official release of the jobs report from Reuters which showed that the official job gains were only
up by 18,000 and that the previous month of May saw a reduction of 44,000 jobs.  The unemployment rate went up by .1% to 9.2% as many dropped out of the job scene.  The plug B/D reported a jump in 131,000
workers.  (B/D =  Birth/Death ie. when you lose your job it is "death" and the BLS figures that many of these death workers become entrepreneurs and open businesses and hire people  (birth).  It is total fictitious)

(courtesy Reuters)



Jobs barely rise, dashing hopes of economic revival
WASHINGTON (Reuters) - U.S. employment growth ground to a halt in June, with employers hiring the fewest number of workers in nine months, dampening hopes the economy was on the cusp of regaining momentum after stumbling in recent months.
Nonfarm payrolls rose only 18,000, the weakest reading since September, the Labor Department said on Friday, well below economists' expectations for a 90,000 rise.
Many economists raised their forecasts on Thursday after a stronger-than-expected reading on U.S. private hiring from payrolls processor ADP, and they expected gains of anywhere between 125,000 and 175,000.
The unemployment rate climbed to 9.2 percent, the highest since December, from 9.1 percent in May.
The government revised April and May payrolls to show 44,000 fewer jobs created than previously reported. The report shattered expectations that the economy was starting to accelerate after a soft patch in the first half of the year.
The private sector added 57,000, accounting for all the jobs created, with government employment shrinking 39,000 because of fiscal problems at local and state governments.
Economic activity in the first six months of the year was dampened by rising commodity prices and supply chain disruptions following Japan's devastating earthquake in March.
WHITE HOUSE HEADACHES
Signs the labor market is struggling is a major blow for the Obama administration, which has struggled to get the economy to create enough jobs to absorb the 14.1 million unemployed Americans.
The economy is the top concern among voters and will feature prominently in President Barack Obama's bid for re-election next year. So far, the economy has regained only a fraction of the more than 8 million jobs lost during the recession.
At the same time, the Federal Reserve -- which wrapped up a $600 billion bond-buying program last week designed to spur lending and stimulate growth -- appears unlikely to take any further steps to boost the economy.
The economy needs to create between 125,000 and 150,000 new jobs a month just to absorb new labor force entrants.
Details of the report showed widespread weakness, though factory payrolls rebounded 6,000 after contracting in May for the first time in seven months, with the recovery reflecting a step-up in motor vehicle production.
Construction employment fell 9,000 last month after declining 4,000 in May. Government employment declined for an eighth straight month as municipalities and state governments continued to wield the axe to balance their budgets.
The report also showed the average workweek fell to 34.3 hours from 34.4 hours. Employers have been reluctant to extend hours because of the uncertainty surrounding the recovery.
Average hourly earnings slipped a penny, more evidence that wage-driven inflation is not a risk.
-END-



Closer to the truth is the shadowstats number of John Williams:


Jim Sinclair’s Commentary
Here is the latest from John Williams’ www.ShadowStats.com.
June Employment, Unemployment and M3
- Payroll Survey Employment Down by 26,000, Before Revisions
- Household Survey Employment Plunged by 445,000
- June Unemployment Rates: 9.2% (U.3), 16.2% (U.6), 22.7% (SGS)
- Broad Money Supply Flattened in June
"No. 377: June Employment, Unemployment and M3"
Web-page: http://www.shadowstats.com


Here John uses 3 numbers for unemployment:

U3 which is the official government unemployment  9.2%
U6 which is the underemployment figure where short term part timers cannot find full employment and take a part time job.  That figure rose to16.22%
SGS: this is John's real underemployment if you include all long term discouraged workers who fell out of the work place + part timers who want full time work.  This number increased to 22.7%.  This is the real number which shows that job growth in the USA is non existent.



By far, the best report on the jobs number came from this blog and special thanks to Goldy Malhotra
for providing this for us.  I urge you to read the report carefully as it studies the numbers in depth
and gives the true picture of the USA jobs scene including the B/D plug number. The pathetic jobs report means low tax revenue for the country coupled with higher unemployment expenses.  Also remember that the first baby boomers have reached 65 as this group increases daily.  Pension costs rise precipitously.

(courtesy:  Goldy Malhotra)

U.S. Payroll Stunner, Full "Pathetic"Jobs Report Analys

From : Goldy Malhotra at 12:15 PM - Jul 09, 2011 (5 hours ago)

Total Views: 46

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Last month I commented things are awful at first glance and simply bad beneath the surface. This month things took a huge turn for the worse.

Three months ago I commented "It is very questionable if this pace of jobs keeps up." Clearly it didn't, for the second straight disastrous month. Certainly this cannot all be blamed on the Tsunami in Japan. The entire global economy is slowing rapidly as I have commented numerous times.
Economists projected a drop in the unemployment rate, I called for a rise to 9.2%.

Few were prepared for today's grim numbers.
  • US Payrolls +18,000
  • Last Month Quietly Revised Lower to +25,000 from +54,000
  • US Unemployment Unexpectedly Rises +.1 to 9.2% Despite Drop in Participation Rate
  • Since March, Number of Unemployed Rises by 545,000
  • Household Survey Number Unemployed Up 173,000
  • Household Survey Number of Employed Down 445,000
  • 272,000 people dropped out of the labor force, reversing the labor force gain of 272,000 last month.
  • Average Weekly Workweek Drops by .1 Hours
  • Average Manufacturing Hours Drops by .3 Hours
  • Average Private Hourly Earnings Decrease 1 Cent
  • There has been virtually no improvement in part-time employment in a full year. 8.5+ million workers want a full time job and cannot find one.

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Digging deeper into the Household Survey, we see some more interesting data. In the last year, the civilian population rose by 1,799,000. Yet the labor force dropped by 263,000. Those not in the labor force rose by 2,063,000.

Last month the labor force rose by 272,000. This month the labor force fell by 272,000. How's that for symmetry?

The 6-month labor force total for 2011 is +4,000.

Many of those millions who dropped out of the workforce would start looking if they thought jobs were available. Indeed, in a 2-year old recovery, the labor force should be rising sharply as those who stopped looking for jobs, once again started looking. Instead, the labor force is not expanding at all.

Were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%.

June 2011 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) June 2011 Employment Report.

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment
continued to trend down.

Unemployment Rate - Seasonally Adjusted 


Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Notice that employment is lower than it was 10 years ago.
Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Ignoring the effects of the census, in the last 9 months of a recovery 2 years old, the economy is averaging 130,000 jobs a month. That is very poor as recoveries go.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat.

Nonfarm Employment - Payroll Survey Details - Seasonally Adjusted


Average Weekly Hours

Index of Aggregate Weekly Hours

Average Hourly Earnings vs. CPI

"Success" of QE2
  • Average hourly earnings of all private-sector employees declined by 1 cent in
    June to $22.99; over the year, the series has increased 1.9 percent.
  • The consumer price index for all urban consumers (CPI-U) was up 3.4 percent
    over the year ending in May.
Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The BLS has moved to quarterly rather than annual adjustments to smooth out the numbers.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



BLS Back in Outer-Space
Do NOT subtract 131,000 from the headline number. That is statistically invalid. However, in my estimation the BLS is back in outer-space.

It is clear the economy is slowing and the BLS model has not picked it up. The model is horrendously wrong at economic turns.

Household Data
In the last year, the civilian population rose by 1,799,000. Yet the labor force dropped by 263,000. Those not in the labor force rose by 2,063,000.

Last month the labor force rose by 272,000.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status


There has been virtually no improvement in part-time employment in a full year. 8.5+ million workers want a full time job and cannot find one.

Table A-15
Table A-15 is where one can find a better approximation of what the unemployment rate really is.


Distorted Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 9.2%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.2%, U-6 is much higher at 16.2%.

Things are much worse than the reported numbers would have you believe, and for the second consecutive month the beneath the surface numbers were bad-to-awful.

Note that U3 rose from 9.1% to 9.2% while U6 rose from 15.8% to 16.2%. Thus, the official measure rose .1, while the alternative measure rose .4.

This is an "artifact" of 272,000 people dropping out of the labor force this past month.

Also note that the unemployment rate is barely better than it was a year ago. It would actually be worse than a year ago were it not for people dropping out of the labor force.

This was a pathetic jobs report

end



The FDIC closed 3 banks last night:( special thanks to RTT news)


Regulators Close Three Banks; Failure Toll Rises To 51 In 2011



(RTTNews) - The Federal Deposit Insurance Corp. or FDIC on Friday announced the failure of three banks, bringing the bank failure toll to 51 in 2011. Regulators shut a bank in Illinois and two in Colorado on Friday and the FDIC estimates that the cost to the Deposit Insurance Fund or DIF, by the three bank closures will be a total of $590.4 million.
First Chicago Bank & Trust of Chicago, Illinois, had about $959.3 million in total assets and $887.5 million in total deposits, was closed, the FDIC stated. Northbrook Bank & Trust Company of Northbrook, Illinois, will assume all of the deposits of First Chicago's seven branches. The FDIC estimates that the cost to DIF will be $284.3 million. The FDIC and Northbrook Bank & Trust Co entered into a loss-share transaction on $699.8 million of First Chicago Bank & Trust's assets. Northbrook Bank & Trust is a subsidiary of Wintrust Financial (WTFC: News ).
Colorado Capital Bank of Castle Rock, Colorado, was closed and First-Citizens Bank & Trust Company of Raleigh, North Carolina, would assume its deposits. Colorado Capital Bank of Castle Rock had seven branches and $717.5 million in total assets. The FDIC estimates that the cost to the DIF will be $283.8 million The FDIC and First-Citizens Bank & Trust entered into a loss-share transaction on $580.0 million of Colorado Capital Bank's assets. First Citizens Bank, a subsidiary of Raleigh-headquartered First Citizens BancShares (FCNCA: News ).
Another Colorado bank, Signature Bank of Windsor was closed and the Points West Community Bank of Julesburg, Colorado, will assume the failed bank's deposits. The three branches of Signature Bank had about $66.7 million in total assets and $64.5 million in total deposits. The FDIC estimates that the cost to DIF will be $22.3 million.

An average of 13 banks have failed per month in 2010, with bank closures for 2010 totaling 157, which was up from 140 in 2009, and more than six times the number that were closed in 2008 of 25 bank failures. Only three banks failed in 2007. The highest and all time record for bank closures was in 1989 when 534 banks closed, followed by 181 bank failures in 1992.

end.

Now without further ado let us assess the data at the comex.  First gold.
The total gold comex OI continues to shrink despite record gold prices in USA dollars, in Euros
and in British pounds. The Friday resting level with respect to open interest fell to 493,496 from 495,327 for a drop of 1831 contracts.  This is basis Thursday.  We must have lost a few bankers from the short side as they did not like the look of things. The front option expiry month of July saw its OI remain the same at 74.  We had zero deliveries on Thursday so basically the entire gold deliveries and total amounts of gold standing remained constant.  Strangely again for the 5th straight day, no gold deliveries were sent down on Friday.  The next big delivery month is August and here we saw a big drop in OI from 297,695 to 288,376.  The bankers must have been scared of the layout as they refused to supply the paper.  The estimated volume at the gold comex yesterday was fair at 150,280.  The confirmed volume on Thursday was 142,446 also on the light side.

The silver comex OI fell again by a rather large 601 contracts to 110,539  (Thursday level: 111,140).  Silver had a huge day on Thursday so some of the banker shorts got mortally wounded.
The front delivery month of July saw its OI fall from 965 to 762 for a drop of 203 contracts. On
Thursday we had 210 deliveries so the entire contraction was due to those deliveries and thus we gained some silver ounces standing.  The next big delivery month is September and here the OI remained tight bound: Friday ( 56,308) and Thursday  (57,053).  The estimated volume at the silver comex was quite tame at 42,192.  The volume on Thursday was better at 62,340.

Here is the chart for 7/09/2011 regarding deliveries and inventory changes at the comex. 




Gold
Ounces
Withdrawals from Dealers Inventory
nil
Withdrawals fromCustomer Inventory
902(Scotia)
Deposits to the Dealer Inventory
nil
Deposits to the Customer Inventory
1,608 (Manfra)
No of oz served (contracts)  today
zero (0)
No of oz to be served  (notices)
 7400 oz (74)
Total monthly oz gold served (contracts) so far this month
 10,000 (100)
Total accumulative withdrawal of gold from the Dealers inventory this month
8400
Total accumulative withdrawal of gold from the Customer inventory this month
336,802.



 In gold, there are hardly any activity on Friday.  We again witnessed no gold
enter the dealer and no gold left the dealer.
There were two transactions to report for the customer:
On the deposit side:
1608 oz were added to the Manfra vault.
On the withdrawal side:
902 oz left Scotia's vault.
Also on the adjustment side of things, 988 oz leaves the HSBC vault as an accounting error.

As I pointed out above, there were no delivery notices sent down on Friday for gold
and thus the total number of notices remain at 100 contracts so far. The number of notices that needs to be serviced remain at 74 or 7400 oz.
Thus the total number of gold ounces standing in this non delivery month of July is as follows:
10,000 oz (served) + 7400 oz (to be served)  =   17,400 oz identical to Thursday.

Now silver:



First the chart:



Silver
Ounces
Withdrawals from Dealers Inventory
nil
Withdrawals from Customer Inventory
18,808 ( Scotia, HSBC,Delaware) 
Deposits to the Dealer Inventory
nil
Deposits to the Customer Inventory
 1,196,648(Brinks, Scotia)
No of oz served (contracts)  today
120,000 (24)
No of oz to be served  (notices)
3,690,000 (738)
Total monthly oz silver served (contracts) so far this month
1,885,000  (377)
Total accumulative withdrawal of silver from the Dealers inventory this month
  nil oz
Total accumulative withdrawal of silver from the Customer Inventory this month.



2,287,244



We witnessed more activity in the silver vaults today.  However no activity with the dealer.
We had the following deposits to the customer:
1. 600,974 oz added to the Brinks warehouse
2. 595,674 oz added to the Scotia warehouse
total deposit:  1,196,648 oz

We had the following withdrawals:

1. 13,692 oz leave Scotia
2. 1075 oz leave HSBC
3. 4041 oz leave Delaware
total withdrawal:  18,808 oz
If you are keeping score the net addition to the silver vaults :  1,177,840 oz.

We also had an adjustment of 109,263 oz as a customer lent silver to the dealer.
The total registered or dealer inventory of silver:  28.19 million oz
The total of all silver:  99.85 million oz.

The comex folk notified us that only 24 notices were sent down for servicing for a total of
120,000 oz.  The total number of notices filed so far this month total only 377 or 1,885,000 oz
To obtain what is left to be served, I take the OI standing for July (762) and subtract out Friday's deliveries (24) which leaves me with 738 notices or 3,690,000 ounces left to be served upon.

Thus the total number of silver oz standing in this delivery month:
1,885,000 oz (served) +  3,690,000 (to be served)  =  5,575,000 oz. ( we gained 35,000 oz standing from Thursday.

To give you guys a little head start for Monday, the following was released by the CME last Friday night:
Gold notices:  4 only
and get a load of this for a delivery month in silver:  2 only.
As I mentioned to you on previous occasions, the silver comex is rapidly becoming a physical market and the dealers are having a rough time finding supplies.  The game ends when London England exhausts its supply which in turn should cause the comex to fail.

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:
Sprott and Central Fund of Canada.

 The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.



First GLD inventory changes:  July 9.2011 :


Total Gold in Trust

Tonnes: 1,205.41
Ounces:38,755,260.40
Value US$:
59,733,438,304.25






Total Gold in Trust

Tonnes: 1,205.81
Ounces:38,767,955.66
Value US$:
59,191,341,545.22



we lost a small 0.4 tonnes of gold or 12,860 oz..







Now let us see inventory movements in the SLV:  July 9:2011



Ounces of Silver in Trust306,473,840.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,532.40
July 7.2011


Ounces of Silver in Trust306,473,840.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,532.40

July 6.2011:

Ounces of Silver in Trust306,473,840.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,532.40
July 5.2011:


Ounces of Silver in Trust306,473,840.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,532.40


We have had 4 big days of silver advancing in price and strangely not an ounce has been added
to the SLV inventory. 




1. Central Fund of Canada: it is trading at zero  percent to NAV in usa funds and negative 0.3% in NAV for Cdn funds.  ( July 9.2011)

2. Sprott silver fund  (PSLV):  Premium to NAV fell to   17.77 positive NAV (July 9.2011
3. Sprott gold fund (PHYS): premium to NAV rose to a positive 3.04% to NAV  (July 9.2011).



The Sprott silver fund still is maintaining a huge positive to NAV. The central fund of Canada is still in banking cartel prison.

end

Friday afternoon saw the release of the COT report which is always from Tuesday to Tuesday last.(July5)
Here is the official report:


Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
219,889
62,114
27,693
177,118
379,120
424,700
468,927
Change from Prior Reporting Period
-6,093
2,034
2,982
-706
-7,459
-3,817
-2,443
Traders
188
63
77
50
50
268
164


Small Speculators




Long
Short
Open Interest



65,082
20,855
489,782



-2,162
-3,536
-5,979



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, July 05, 2011

In the gold COT,
those speculators that have been long in gold covered a rather large 6,093 contracts this past week and are very sorry campers.
Those large speculators that have been short gold added another 2093 contracts to their short positions are again are not happy this weekend.

In our commercial category:
those commercials that are close to the physical scene and are long in gold, lightened up a bit to the tune of 776 contracts.
And now for our famous commercials that are short gold: they covered a huge 7459 contracts.

In our small spec category:
those small specs that are long in gold covered a rather large: 2162 contracts.
those small specs that are short in gold covered a rather large:   3536 contracts

In a nutshell: an extremely bullish gold COT report as we are witnessing the bankers bail out of their shorts in a rising gold environment.

Now for silver:


Silver COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
28,131
9,296
22,565
33,548
66,999
84,244
98,860
692
-2,145
-1,168
-3,346
939
-3,822
-2,374
Traders
67
37
46
33
40
128
99

Small Speculators




Long
Short
Open Interest



27,007
12,391
111,251



743
-705
-3,079



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, July 05, 2011

In silver, those large specs that have been long in silver continued to add to their positions to the tune of 692 contracts.
Those large specs that are short in silver saw the light and covered a huge:  2145 contracts.

And now for our commercials:

Those commercials that are close to the physical scene and are long in silver covered 3346 contracts.
And now for our famous short commercials like JPM and friends who are always short silver:
added 939 contracts to their short positions.

Forgot about the small specs in silver.  They have been blown out since May 1.

The report is also very bullish for silver.


end.

Early this morning Lee Adler over at zero hedge has shown that the tax receipts for June are 4% behind last year.   He comments on the lousy jobs report:  (courtesy zero hedge and Lee Adler)


Behind the Dismal Employment Numbers

ilene's picture






Behind the Dismal Employment Numbers

Lee Adler looks behind the terrible employment numbers and sees trouble on the horizon - a shattering house of mirrors, a rogue wave crashing down on our ship, and a black hole ready to suck us into oblivion. - Ilene 
In the Treasury Update that I posted yesterday in the Wall Street Examiner Professional Edition.  I warned that regardless of what the government numbers would show, the jobs situation was deteriorating badly. Based on real time Federal withholding tax data, there have been no job gains since last year.
Here’s an excerpt from the July 7 Professional Edition Treasury update:
Month to date withholding taxes as of the end of June were down 4.6% from last year. Some of that was due to a calendar anomaly of a payment date for a biweekly and semimonthly pay period last year coming on June 1. That resulted in June receipts last year being inflated, making this June look worse than it was. A 4.6% drop would imply an economic collapse. In actuality it’s more of a stall, although I expect it to spiral down from here.
As shown on the chart below, tax receipts over 2 week rolling periods have again opened a lead versus last year, although the monthly averages are about even. In view of the fact that tax receipts were consistently running well ahead of the same point last year from February through May, the sharp drop in June suggested that the US economy may already be in recession. That becomes a little clearer when looking at the comparison in real terms, adjusted for wage increases (though small) as shown on the next page. Given the ending of POMO and government spending cuts ahead, I expect this comparison to soon go negative.
Federal Withholding Tax Chart - Click to enlarge
Real % Change in Withholding Chart- Click to enlarge
Chart data through July 5
(6/24/11) Normal seasonality shows a flat period through Q3, with a final low in September/October. If this graph drops below last year’s level from here, then the economy probably is in free fall. That would be very bad news for the levels of debt the Treasury must float in the months ahead.
I have not been able to isolate a strong correlation between this data and the government’s headline employment numbers. Regardless of what the Labor Department releases say on Friday, a zero gain in withholding over the past month is clear evidence that there are no more people working today than there were a year ago, at least in terms of paying jobs. If the numbers come in positive I would only guess that there are plenty of “self employed” people out there, not subject to withholding, who aren’t earning any money at all, let alone a decent living.
I was a little surprised that the propaganda machine at the BLS (Bureau of Liar Statistics) was willing to admit this fact today, but I must have had brain-lock, because it should have been obvious that it would want to trumpet bad news. The gummit has $66 billion in new long term paper to sell next week, and the name of the game is to get those yields down by whatever means necessary. I have observed repeatedly through the years that the government would sacrifice the stock market on the altar of the Treasury market whenever necessary, and it proved that again on Friday.
By now, you have heard all the gory details of Friday’s employment report.
  • Nonfarm payrolls up by just 18,000 (seasonally manipulated) against a consensus of 125,000
  • Job gains in May revised down
  • Unemployment up to 9.2% (again seasonally manipulated)
  • Average hourly earnings flat.
  • Average workweek down, with factory workweek down sharply
  • Household survey showed employment down 443,000 (seasonally manipulated)
All of those numbers were truly terrible. But they don’t begin to tell the whole story.
Other horrendous numbers include the U6 unemployment rate (which includes discouraged workers and others not counted in the headline number) which rose to 16.4% (actual not seasonally manipulated) from 15.4% in June. Admittedly, this number always goes up in June, BUT the 1% jump was the biggest since 2001. Total employment, not seasonally manipulated, rose by 101,000 in June according to the household survey. Of course this number  includes self employed real estate sales people,  eBayers, and “professional” bloggers, none of whom actually earn a living even though they are employed full time. Even with these people included as employed, this was by far the worst reading for any June since 2001. The average gain in June for the previous 10 years was 784,000. The worst year before this one was 2010 when the gain was 385,000.
Not seasonally manipulated actual nonfarm payrolls rose by 376,000, which is somewhat above the 10 year average. But this figure is manipulated by the business birth-death adjustment and is almost certainly wrong, or at least misleading, because it includes both part time and full time employment in addition to the birth-death adjustment.
Here’s what I feel is the most important government number released today, one that I haven’t seen reported anywhere else. The total number of persons employed full time, according to the household survey, had its worst June performance in 43 years. And it’s that good because the government only started collecting this data 43 years ago. Total full time employment has increased in every single June since then. This year’s increase was reported to be 637,000. That sounds impressive until you consider that the worst prior year was at the bottom of the first leg of this depression in 2009 when full time employment rose by 931,000 in June. The average gain in June for the 42 years prior to this was 2.3 MILLION. The AVERAGE!
Total full time workers in June was 113.3 million, the lowest number of full time workers since June of 1999.
Total Full Time Employed Chart - Click to enlarge
Do you want to get even more depressed? How’s this? The employment to population ratio was unchanged from May at 58.2%, its lowest June level since 1984!
Employment/Population Ratio Chart- Click to enlarge
Since 2001, this measure has always increased in June by two to four tenths of a percent. Not this year. The government has been keeping this statistic since 1948. This is the first year, EVER, in the past 63 years, when the employment/population ratio did not increase in June. The employment to population ratio is now as low as it was during the 1940s, 50s, and 60s, when far fewer women were in the labor force. And don’t give me that “baby boomers are retiring” crap. The vast majority of baby boomers are still employed. Most boomers haven’t hit retirement age, and of those who have, relatively few have willingly retired. That’s not a significant factor contributing  to these numbers.
Long Term Chart Employment-Population Ratio- Click to enlarge
How could all of those phd egonomists and Wall Street paid government shills have been so wrong, when all they needed to do was follow the government’s own daily budget data to see what was going on? Even without that data, it was apparent from the long term charts of the not seasonally manipulated data that there had been no material improvement in these trends, and therefore no reason to expect real improvement in the current numbers. Yet somehow these brilliant strategists continue to misunderstand and misrepresent the facts.  Unfortunately, that includes the members of the FOMC and Dr. Bernankenstein  himself, among the worst offenders.
Other numbers have also been screaming of trouble. I have reported in the Professional Edition Treasury updates since February that government stimulus spending has been collapsing versus last year. The entire illusion of recovery was based on that spending and Fed propping. Without those cash flows, the house of mirrors shatters. On Thursday I reported that the combined drop in tax refunds and government outlays in June had reached $30 billion on a monthly basis versus June 2010.  I have also reported that since February that the banks were socking away virtually all of the QE2 cash from the Fed back in the Fed’s vault rather than redeploying it in the economy. That was another factor behind the economic stall. This trend will only get worse now that the Fed has ended its propping of the financial markets. Additional budget cuts will exacerbate the downtrend. The economy will spiral down into a black hole.
We’ll need to watch the Treasury market technical indicators closely for any sign that the fear trade driving cash from stocks to Treasuries is reviving. Or will both sink with the ship? We’ve seen this rogue wave coming for a long time. Brace yourself, because it’s about to hit us.
_______________________________________________
Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Get the research you need to understand these critical forces. Click here to try WSE’s Professional Edition risk free for 30 days! 

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Here is the latest on the Greek situation, where the IMF has just approved the 5th
tranche of its 12 billion euro advance.  The sum advanced totalled 3.2 billion euros and the usa share is 780 million dollars.

Here is zero hedge on the latest developments:


US Taxpayers Just Paid $780 Million To Fund The Latest Greece Bailout Tranche

Tyler Durden's picture






The IMF is delighted to announce that it just approved a €3.2 billion disbursement of cash for Greece, its fifth, as part of the €12 billion in money that Greece needs in order to continue operating in the months f July and August. And just for what purpose will this money be used, one may ask? Well, as explained a few weeks ago, in Greek Math: €12 Billion In, €18.2 Billion Out the entire amount will be promptly recycled by global financial institutions in the form of debt maturities and interest payments, which amount to €18.2 billion in the months of July and August. Simply said ECB, EU and IMF money in, money owed to bankers out. The kicker: 17.09% of the money coming from the IMF, comes from, that's right dear US taxpayer, you (and since 21% of the quota contributions allocated to the IMF are deemed "non-usable", the actual number funded by the US is likely much higher). But this plot has a bonus kickeras we reported on Wednesday, the actual Greek debt is no longer owed by European banks to the extent it had been previously expected: a development that threatens to scuttle the entire second Greek bailout plan as currently proposed. So as the banks have been selling Greek debt, who has been buying? Mostly hedge funds, such as everyone's favorite John Paulson. So to recap: US taxpayers have just paid out about $780 million of the $4.6 billion in order to fund interest owed to... hedge funds.
The WSJ provides a pretty chart explaining who is responsible for what:
[IMFGREECE]
Counting all IMF funding sources, the 15 euro-zone nations would be responsible for a substantially larger stake in the institution's Greek bailout than the U.S. European contributions to the IMF loan, of course, will in turn be dwarfed by euro-zone countries' far larger exposure through the European bailout.

To make its loan, the IMF will borrow from the U.S. Federal Reserve and the other central banks it taps and pay them interest of about 0.25% on the money; the IMF will then charge Greece about 3% on the loan.

Will the money be wasted? That depends on whether the Greek electorate swallows the cuts in salary and pensions required by the IMF and the country's European partners and whether a new economic strategy boosts Greece's competitive position.

The IMF is always at the top of any list to be repaid because its blessing is crucial for any country to be able to borrow internationally. If there were to be any losses on Greek loans, IMF policy is to absorb them rather than passing them on to members.
So that's the truth. And here is the party line, from Reuters:
In announcing the payment, part of a 110 billion euro IMF-European Union bailout package crafted for Greece last year, IMF Managing Director Christine Lagarde pointed to progress being made by debt-laden Greece, though noting that more work remains.

"The program is delivering important results: the fiscal deficit is being reduced, the economy is rebalancing, and competitiveness is gradually improving," Lagarde said in a statement.

"However, with many important structural reforms still to be implemented, significant policy challenges remain. A durable fiscal adjustment is needed, lest the deficit get entrenched at an unsustainably high level, and productivity-enhancing reforms should be accelerated, lest growth fail to recover," she said.

The IMF has warned that the crisis in Greece could reach countries like the United States through money market funds, especially if the contagion spreads to European banks heavily exposed to Greek debt.

The global lender scheduled its meeting to consider the fifth loan disbursement for Greece after euro zone leaders agreed on Saturday to release their portion of the 12 billion euros due to be paid to Athens from the initial bailout.

Lagarde said Greek authorities had made progress in the fiscal area by identifying measures required to reduce the general government deficit to less than 3 percent of gross domestic product by 2014.

She also lauded the government's privatization strategy and noted that while the plan to sell 50 billion euros of state assets by 2015 is "very ambitious, the establishment of an independent privatization agency should help realize transparent and timely implementation."

Still, more work needs to be done, Lagarde said.

"To strengthen Greece's competitiveness, structural reform implementation needs to be accelerated. This will help achieve synergies, such as between privatization and reducing administrative barriers to investment. The reform agenda should be expanded to address Greece's high labor tax wedge and inefficient judicial system," Lagarde added.
Incidentally, while not a minute was spared to sequester and prosecute DSK, today, for the second time, the French Republican Court of "Justice" decided to once again delay its probe into her alleged money laundering affair with Bernard Tapie.
Hedge funds around the world salute the decision, which will simply allow more taxpayer money to be reallocated into their various Cayman Island petty cash accounts.
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Credit default swaps are a measure of risk of default. In this zero hedge report Tyler Durden
believes it is Italy that can bring the whole house of cards down. Italy has the largest number of CDS contracts outstanding.

Here's Why Italy's CDS Are The Biggest Risk For The Eurozone

Tyler Durden's picture






Much hollow rhetoric has been uttered about the vast existential threat presented by Greek CDS. As we have reported, Greek CDS is the least of Europe's problems. When it comes to the stability of the European dominoes, it is and has always been about Italy, which is not only the second worst country in Europe after Greece on a debt/GDP basis, and also the country with the largest amount of nominal debt, but more importantly has the largest amount of net CDS outstanding. All this is summarized on the Bloomberg chart below.
What the market is most confused by is that Spain, which everyone thought would be the next to fall after Portugal, yet which in the Cajas has the same GSE-type structure that provides a natural buffer to a housing system that is getting destroyed by its own Option ARM implosion (unlike the US' Liebor, Euribor is at 1.593% and making adjustable mortgages quite painful), the bond vigilantes decided to go straight to the gateway to Europe's core. Italy. So ignore whatever the PBoC is doing with the EURUSD, and Brian Sack is telegraphing with his ES ramp into the close: the truth is Italy is on the verge, and with all communicating vessels, the pain is only just beginning as Europe will find out very soon: as the chart below shows, there is a doozy of Treasury issuance about to be unleashed by the Italian Treasury.
Bottom line: the Italian CDS is not so much an aggregator of risk, as a beacon of where investors think risk will emanate from next. Although, to be fully objective, the biggest surge in recent months in net notional has not been at Italy, nor Spain, nor any of the other PIIGS, but.. France.
There is, however, one country that is missing from the Y/Y surge comparison. The United States of America.
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Graham summers weighs on the following development:

(courtesy Phoenix capital)


If Central Banks Believe in Paper 


Money Why Are They Loading Up On Gold?

Phoenix Capital Research's picture




I’ve been warning for years that an inflationary storm was coming. I’ve recently tailored my forecast to allow for a resurgence in deflation based on QE 2 ending and the economy diving, but my long-term forecast remains the same: inflation WILL be exploding in the years to come.

Indeed, even the biggest proponents of paper money (central banks) have begun to realize that their grand experiment is coming to an end. Central banks officially became net buyers of Gold last year. And we now find that they have acquired the most Gold in over a decade.

The Financial Times reports:

Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past yearthe largest withdrawal in more than a decade.

The move, disclosed in the BIS's annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.

Let’s consider this. If you’re a central bank and youactually believe in the value of paper money and your ability to create wealth by printing it…why would you be loading up on Gold?

The answer is simple: you see the writing on the wall.

The central banks of the world are in a competition to devalue their respective currencies against each other. They will work together to suppress a particular currency if a carry-trade gets too out of control (see Japan earlier this year), but in general the ECB wants a cheap Euro, the Fed wants a cheap Dollar and so on and so forth.

These guys know that the financial system is broken. They’ve known it for over a decade (Greenspan even admitted that derivatives could “implode” the market in 1999). But they’re going to kick the paper money can down the road as long as they can… primarily because the entire financial system is banking on their ability to “fix” things.

The 2008 Crisis was the first taste of systemic risk. The central banks threw everything including the kitchen sink at the problem in an attempt to hold things up. And it’s worked temporarily in the sense that the financial world still believes central banks can handle the situation.

However, the fact remains that the central banks actually didn’t fix anything. After all, you can only fix a debt problem by paying the debt off or defaulting. Moving it around and issuing more debt to meet current payments does nothing.

In this sense, the world’s central banks literally “bet the farm” on themselves and the view that sovereign balance sheets can stomach this toxic waste. As we’re now discovering in Europe, the laws of the markets (oversaturation of debt, default and the like) apply to countries as well as private banks.

The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 Crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They KNOW (not think) that systemic risk is still on the table in a big way and that they will be POWERLESS to address the next Crisis when it explodes.

You can already see this in their public statements. Bernanke himself even admitted the Fed has no idea why the economy isn’t recovering. If you extend the implications of this statement it becomes clear Bernanke and pals are realizing that printing money is not going to patch up the financial system.

Hence the Gold purchases.

In plain terms, the REAL Crisis, the Crisis that was put off temporarily during the last two years, is coming. It will not be a Crisis of stocks or bonds. It will be a Crisis of the financial system itself. A Crisis in which entire countries default. And it will make 2008 look like a picnic.

Remember, every asset class is defined relative to sovereign bonds. So if sovereign bonds begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over $11 trillion in household wealth. Round Two will wipe out…?

On that note, if you’ve not taken steps to prepare for the coming Crisis, you can download my FREE report devoted to showing in painstaking detail how to protect yourself and your portfolio from the coming ROUND TWO of the Financial Crisis.

I call it The Financial Crisis “Round Two” Survival KitAnd its 17 pages contain a wealth of information about portfolio protection, which investments to own, which to avoid, and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com and click on FREE REPORTS.

Good Investing!

Graham Summers


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Jack Farchy of the the London Financial times also weighs in on the big central banks
move to retrieve gold from the BIS:  (special thanks to GATA and Jack Farchy Financial times)

Central banks pull most gold in a decade from BIS
Submitted by cpowell on 05:36PM ET Thursday, July 7, 2011. Section: Daily Dispatches
Do they want to get it back in their own vaults before the fiat currencies hit the fan?* * *
By Jack Farchy
Financial Times, London
Thursday, July 7, 2011
Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.
The move, disclosed in the BIS's annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.
Central banks and other official institutions collectively hold about 30,000 tonnes of bullion in their reserves, and many seek to earn an income on their gold by lending it out, just as any other currency.
However, demand to borrow gold has fallen sharply in the past decade, driving interest rates on gold lending to record lows.
Hedging by gold miners, which is typically structured to involve borrowing gold, was traditionally the largest source of demand. But since miners have cut back their hedging programmes to almost zero, the gold lending market, which is mediated by large bullion-dealing banks, has dwindled.
Lending gold for six months earned a rate of 0.1 per cent on Thursday, according to benchmark market assessments published by the London Bullion Market Association.
In response to e-mailed questions, the BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented "a shift in customer gold holdings away from the BIS."
"The Bank's gold deposit liabilities declined by around 635 tonnes between 31 March 2010 and 31 March 2011," it added. Comparison with previous annual reports showed the withdrawal was the largest in at least 10 years.
Traders said the move of gold holdings away from the BIS probably reflected a combination of factors.
Some central banks, unimpressed with the paltry interest rates on offer, may have taken the decision not to lend their gold at all.
"My perception is there's less and less gold being put out by the central banks into the gold market," said one banker.
However, some central banks may have rediscovered an appetite for lending gold to the private sector, which can earn higher rates depending on the credit rating of the counterparty and structure of the transaction.
"As commercial banks' balance sheets have started to look better, there may have been a switch back to lending to the private sector," said Philip Klapwijk, executive chairman of GFMS, a consultancy.
"Yield enhancement can be a powerful inducement to a central banker," an industry executive added.


end.


It looks like the Swiss has found religion with respect to gold:

(courtesy Market watch)

July 8, 2011, 4:12 a.m. EDT

Swiss Parliament to discuss gold franc

Right-wing party seeks way back to gold standard



By Agnese Smith

Reuters
ZURICH (MarketWatch) — The Swiss Parliament is expected later this year to discuss the creation of a gold franc — a parallel currency to the official Swiss franc, with the fringe initiative likely triggering a broader debate about the role of the precious metal in the Alpine nation.
The initiative is part of “Healthy Currency,” a campaign sponsored by politicians from the right-wing Swiss People’s Party (SVP) — the country’s biggest — that is seeking to capitalize on popular fears about global financial turmoil and inflation to reverse the government’s current policy on gold.
“I can imagine that this will spark some sort of debate about gold and there may be some pressure to accept the parallel currency,” said Dr. Gebhard Kirchgaessner, an economics professor at St. Gallen University. “But it won’t have any real effect on the economy. It seems incredible to imagine that there are people out there willing to buy millions of these things.”
Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana.
“I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. ”Today’s monetary system is all backed by debt — all backed by nothing — and I want people to realize this.”
A good part of the enthusiasm for gold, which provokes strong emotion among many who invest in it, has to do with its price: the yellow metal has more than quadrupled during the last decade and now stands at more than $1,500 per ounce.

Goldman's Hatzius on slow growth

In a WSJ interview, Goldman Sachs' chief U.S. economist Jan Hatzius says he sees a 15% to 20% chance of renewed recession next year.
In the U.S., legislation to allow a gold currency is largely symbolic — a protest against what many consider irresponsible spending by central governments to recharge economies. But according to Jacob, the gold franc has a more practical goal: giving small investors the opportunity to safeguard their investments against global uncertainty.
Modest investors face several hurdles to investing in the precious metal, said the 50 year-old Jacob, a former pilot and currently a sales coach at Zurich Financial Services Group. Collecting coins, bullion and gold certificates typically requires professional advice and even the smallest coin costs around 100 francs. One of the new gold francs, on the other hand, with a gold content of 0.1 grams, could be purchased for just 5 francs (at current prices).
While there is evidence that investing in gold is increasingly popular in Switzerland and other countries, the idea of establishing a gold franc is not foremost on the minds most ordinary Swiss, some of whom still find the subject of gold uncomfortable given the country’s association with precious metals looted in World War II.
“I got rid of my coins a while ago,” said Esther Heusser, a social worker in Jona, Switzerland. “I just didn’t want to think about where they came from.”

The real problem

Very few have even heard of the initiative. The rising Swiss franc, which has jumped 16 percent in two years against the euro and the dollar thanks to its safe haven status, is a much wider concern.
This “is the real problem and it is clear that neither the [Swiss National Bank] nor the government have anything really meaningful against it,” St. Gallen’s Kirchgaessner said. “We might have a real crisis in a couple of years.”
Indeed, the strong franc has clipped corporate earnings of many exporters and has lead to some painful restructuring. Because of the ongoing global financial crisis, investors here and abroad are seeking a safe haven from economic uncertainty and inflation, which Switzerland’s low debt and firm economic footing provides. High gold reserves have also helped.
acob doesn’t think the adoption of the gold franc would increase the value of the official currency. “In fact, it would take pressure off,” he speculates.
Like the Swiss franc, gold has jumped for many of the same reasons, even though the Swiss National Bank and other central banks decided to dump the metal after two decades of underperformance against other financial instruments.
Strong demand from China has also helped push gold prices to records. Gold enthusiasts — so-called gold bugs — many of whom see stock markets as no better than gambling casinos and central banks as money printing machines — are rejoicing.
“Buying gold has been the best method for shorting the government,” wrote Shayne McGuire late last year. McGuire, who has predicted that gold could soar to $10,000 an ounce, manages the $500 million GBO Gold Fund for Teacher Retirement System of Texas.
“I strongly believe that present financial conditions are about to transform the investment strategies of the world’s largest investment funds in a way that will cause gold to surge substantially higher,” McGuire wrote in an essay on the metal.

Large reserves

Switzerland still holds a large amount of the precious metal. The alpine country of 7.7 million residents holds 1,040 tons worth about $46 billion, almost as much as China, according to World Gold Council figures. It ranks seventh in its league table, with the US at the top.
In terms of gold reserves per person, it stands at just over $6,000, number one by nearly twice the amount of the next largest hoarder, Lebanon (over $3,000) and nearly six times as much as the US ($1,000), according to The Economist newspaper.
But this is not enough according to the “Healthy Currency” movement.
The SVP, which also wants to limit the autonomy of the Swiss National Bank after it posted big losses trying to tamp down the franc, plans to start collecting signatures for a ballot initiative in mid August, according to Jacob. The party is demanding that the central bank stop any further bank sales, repatriate Swiss gold reserves held abroad, and not allow the proportion of its gold to fall below 20% of its total assets. The campaign is also calling for the country’s withdrawal from the IMF.
Jacob, who claims to have no affiliation with the SVP other than the currency initiative, admits that the success of his gold franc campaign is linked to the amount of publicity the Healthy Currency initiative manages to muster at the end of the summer. “It would definitely put the parallel currency on the agenda,” he said.
And it will be no easy feat. The passage of the legislation will require an amendment to the Swiss constitution and the country is not particularly well known for a reckless pace of change. If rejected, a popular vote — where ordinary Swiss people have their say — is planned, probably in mid 2012, according to Jacob.
If approved, licensed financial institutions can then issue the coins, using their official logo on one side with the other, an easily recognizable Swiss gold franc emblem, Jacob said. The initiative foresees strict regulation by the government to ensure gold content and authenticity.
Even if popularized, the gold coins are unlikely to be in use for commercial reasons as the volatility of gold prices make this unpractical. 
end




Finally, I will leave you with this piece written by Ambrose Pritchard Evans.
He is back writing after a lengthy hiatus and he is angry:  (courtesy Ambrose Pritchard Evans UK Telegraph)



Europe, Free Speech, and the sinister repression of the Rating Agencies


My gripe against the agencies is not that they are downgrading all these semi-bankrupt states today, but that they totally failed to signal the inherent dangers of EMU a long time ago when the crucial investment decisions were being made.
Before we all join the chorus of abuse against the robber agencies, let us not lose sight of what is happening in the eurozone. The EU authorities are attempting to muzzle free opinion, first by threatening Fitch, Moody’s, and S&P with vague retribution, and then by drafting restrictive laws to prevent them from publishing unwelcome messages.
It is financial repression, pure and simple. The same will be done to the press in due course. Then to you, dear reader.
“We must break the oligopoly of the rating agencies,” says German finance minister, Wolfgang Schäuble. By “we”, of course, he means the EU apparatus of coercion.
The European Commission has already created a pan-EU oversight body with binding powers to breathe down the necks of these agencies. It will draft restrictive legislation by the end of the year. The Portuguese downgrade ensures that it will be even nastier.” Developments since the sovereign-debt crisis show we need to take a further look at reinforcing our rules,” said Commission chief Jose Manuel Barroso.
Mr Barroso came close to accusing the agencies of cartel activities and a malicious agenda.
“It’s quite strang that the market is almost dominated by only three players. It seems strange that there is not a single rating agency coming from Europe. It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe.”
Leaving aside the not-small matter that Fitch is owned by the French group Fimalac (quoted on the Paris bourse), or that it is largely run by Britons who belong to the EU and contribute to Mr Barroso’s salary, this talk of anti-European bias cannot pass unchallenged.
Currency unions switch exchange risk into default risk. The rating on countries in currency unions ought to be lower therefore (ceteris paribus). States with their own sovereign currency and debt in their own currency can let the exchange rate take the strain when they get into trouble, as the US and the UK have done. Foreign investors lose money on the exchange rate. There may be all kinds of risks and dangers in the US and the UK, but default is not high on the list (discounting the US soap opera over the debt ceiling).
This not the case at all for EMU laggards. They cannot devalue or inflate away debt. The stress shows up in the bond markets instead. The more relevant comparison in this respect is between the Euroland’s Club Med states and California. The Anglo-Saxon agencies do not rate many US states at AAA. California is A- and may lose that soon enough.
To compare the ratios of national debt to GDP levels in the Anglosphere with those in Europe, as the EU elites tirelessly do, is to the miss the point.
My gripe against the agencies is not that they are downgrading all these semi-bankrupt states today, but that they totally failed to signal the inherent dangers of EMU a long time ago when the crucial investment decisions were being made. They too were swept up by euro euphoria. They too failed to understand the inherent structure of monetary union, or to spot obvious warning signs as the drama unfolded and the North-South divide became ever-more apparent. They handed out AAAs like confetti.
That is the great indictment of Fitch, S&P, and Moody’s in this sovereign saga, especially Moody’s (which has since replaced much of its French-led sovereign team). Moody’s still had a A3 rating on Greece in May 2010. Unbelievable.
I have great sympathy for the Portuguese. They did not have a demented credit and property boom during the roaring noughties (yes, they did earlier). They did not cheat on the deficit figures. They do indeed have bloated a public sector but basically the cause of their disaster is having locked into EMU in the mid-1990s before they were ready. They lost control of monetary policy and have been the victims of a dysfunctional currency union ever since.
Parts of their light manufacturing industry have been wiped out by Chinese imports, flooding Portugal at an exchange rate of 9 or 10 yuan to the euro. Portugal needs a 50pc devaluation against China.
The Portuguese have shown impressive stoicism since the crisis erupted. They have knuckled down under the new free-market government of Pedro Passos Coelho, complying diligently with the demands of the EU/IMF inspectors. (Pointlessly, in my view. They should simply leave the euro and put an end to the misery. But that is another matter.)
Yet, out of the blue, Moody’s cuts them four notches to junk status, and precipitates an explosive rise in yields across the maturity curve. A “punch in the stomach” said Mr Passos Coelho. Indeed.
But let us be clear. The EU itself brought this about by declaring war on the very investors needed to finance the vast borrowing needs of the European project. By baying for the blood of bankers and “speculators” (ie pension funds and the like who bought Greek, Portuguese, and Irish debt in good faith), Chancellor Merkel has set off capital flight and raised the spectre of defaults. Her specific demands for “burden-sharing” by Greece’s private creditors (and therefore Portugal and Ireland next) have changed the landscape. The agencies have no choice at this stage. Their job is signal default risk.
The ECB has warned tirelessly that attempts to punish investors in this fashion would back-fire horribly, set off a fresh contagion, and potentially spiral out of control. This is where we are today as Club Med bond yields go haywire again. Governments need to love and caress bond-holders, not spit at them.
By the way, holders of Greek and Portuguese long-term debt have already lost half their money based on current resale values.
What should have been done is obvious. The EU’s bail-out fund should have been given powers mop up the bonds of countries in distress on the open market at a hefty discount (as the ECB suggested). Investors would have suffered condign losses, and the EU could have given Greece debt relief by retiring bonds with no net loss to European taxpayers.
This elegant solution was blocked by Germany because it was seen as a slippery slope towards a Transfer Union, and might have violated the Grundgesetz. (In a sense the Germans are right, but you shouldn’t join a currency union in the first place if don’t realize that it implies fiscal union.)
Now, if the EU institutions wish to avoid being held hostage by the robber agencies they should stop using the ratings as a basis for lending collateral at the ECB. They should create their own more rigorous method of assessing credit-worthiness, ignore the agencies altogether, and make their case directly to global investors.
What the EU should not do is try to muzzle free opinion, or free speech. We are on a slippery slope.
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