Saturday, September 24, 2011

CME raises Margin Requirements on Gold and Silver/ Global Deterioration escalates

Good morning Ladies and Gentlemen:

The CME at 11 o'clock pm est, Friday night raised margin requirements on gold, silver and copper.
This is another of their blatant manipulation moves as they wait until the bankers bomb gold and silver and then when the longs are fragile  they hit with increased margin requirements. I cannot urge you enough to please stay away from the thieves at the comex.  Buy your bullion at bullion banks and be thankful for the low prices as a gift.

Let us head over to the comex and see the damage on Friday.  The gold price fell by a huge $101.70 to $1637.50.  Silver followed gold as it fell by $6.49 to $30.05.  The huge margin increases will probably cause a minor sell off on Monday but the bankers will commence covering their massive shorts within an hour of trading.  Gold and silver should see their bottom and start to rise and behave properly as gold and silver sense global deterioration in all markets.

The total gold comex open interest fell by a tiny 8161 contracts despite the huge raid on Thursday.  The new open interest rests at Friday night at 489,588 from Thursday's level of 497,749.  The front options exercised month of September saw its OI fall from 123 to 73 for a loss of  50 contracts.  We had 40 deliveries on Thursday so we finally had some minor cash settlements.  The next front delivery month in gold is October and strangely the OI did not fall much, settling at 29,569 from Thursday's level of 30,297.  It sure looks like some of the players here are anxious to obtain some physical metal.
The next big delivery month is December and this month took the brunt of the attack on Thursday.  The OI fell from 317,182 to 307,786 for a loss of close to 10,000 contracts.  The estimated volume on Friday was a monstrous 320,725 which followed Thursday's confirmed volume of 298,057.  The banking heroes supplied most of the non backed paper hoping to see many gold leaves fall from the tree.

The total silver comex OI fell by only 768 contracts as these holders seem to be in strong hands.  The new OI is a multi year low.  Strange that bullion dealers and mints are running out of metal and OI which is a measure of demand is at these extreme lows.  The silver comex has been nothing but a physical market for those that wish metal.  The leverage is totally gone and after Monday night it will surely be gone from the silver market.  The new OI rests this weekend at 110,785 falling from Thursday's level of 111,553.  The front delivery month of September saw its OI fall from 228 to 213 for a loss of 15 contracts.  We had 19 deliveries on Thursday so we lost zero contracts to cash settlements.
The front December month saw its OI fall slightly from 73,153 to 72,255.  This is a minor fall in OI considering the massive wallop the price of silver endured on Thursday.  The estimated volume at the silver comex was a monster, coming in at 104,984 with our banking cartel providing the short paper.  The confirmed volume on Thursday was also high at 87,399.

Inventory Movements and Delivery Notices for Gold: Sept 24.2011: 

Withdrawals from Dealers Inventory in oz
3600 (Brinks)
Withdrawals fromCustomer Inventory in oz
482 (HSBC, Manfra)
Deposits to the Dealer Inventory in oz:   nil
Deposits to the Customer Inventory, in oz
507 oz (Brinks)
No of oz served (contracts) today
100 (1)
No of oz to be served (notices)
7200 (72)
Total monthly oz gold served (contracts) so far this month
282,100 (2821)
Total accumulative withdrawal of gold from the Dealers inventory this month
9000 oz
Total accumulative withdrawal of gold from the Customer inventory this month

Again, no gold deposits to the dealer.  However did have another of our strange round exact
withdrawals of  3600 oz and the only vault where this occurs is Brinks.
The customer had a tiny 507 oz of gold deposited and the vault was Brinks.

The customer withdrawals were the following;

1.  450 oz from HSBC
2. 32 oz from Manfra

total withdrawal:  482 oz

we had a tiny adjustment of 507 oz where the customer leased gold to the dealer Brinks
The 507 oz came from the deposit to the customer at Brinks (above)

The total registered gold falls to 1.927 million oz.

The CME notified us that we had only one notice filed for 100 oz.  The total number of notices filed so far this month total 2821 for 282,100 oz of gold. To obtain what is left to be served, I take the OI standing for Sept (73) and subtract out Friday deliveries (1) which leaves me with 72 notices to be filed or 7200 oz to be served upon.

Thus the total number of gold oz standing in this non delivery month is as follows:

282,100 oz (served)  +  7200 (oz to be served)  =   289,300 oz or 8.999 tonnes.

Let us go to silver.

First the chart:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory762,618 (Brinks,Delaware,HSBC,Scotia)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory1,194,855 (HSBC,Scotia)
No of oz served (contracts)  300,000 (60)
No of oz to be served (notices)765,000 (153)
Total monthly oz silver served (contracts)6,255,000 (1251)
Total accumulative withdrawal of silver from the Dealersinventory this month777,918
Total accumulative withdrawal of silver from the Customerinventory this month
we had another of those huge movement days.

The customer had two big deposits:

1.  1,164,855  (HSBC)
2.   30,000 Scotia

total deposit to the customer:  1,194,855 oz

the dealer again had no deposit and no withdrawal.

The customer had the following withdrawals of silver:

1.   45,516 out of Brinks
2.  30,000 oz out of Delaware.
3.  336,103 oz out of HSBC
4.  20,618 oz out of Scotia

total withdrawal by the customer;  762,618 oz

whenever you see these huge movements you know that the comex is in turmoil as it has great difficulty in finding real metal.
The registered silver remains at 31.04 million oz.
The total of all silver rises to 105.76 million oz.

The CME notified us that a total of 60 delivery notices were filed on Friday for a total of  300,000 oz. The total number of notices filed so far this month registers 1251 or 6,255,000 oz of silver.  To obtain what is left to be served, I take the OI standing for Sept  (213) and subtract out Friday deliveries (60) which leaves us with 153 notices or 765,000 oz left to be served upon.

Thus the total silver oz standing in this delivery month is as follows:

6,255,000 (oz served)  +  765,000 (oz to be served)  =  7,020,000 oz.
we gained 20,000 oz of silver standing and lost nothing to cash settlements.


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.

Total Gold in Trust:  sept 24.2011

Total Gold in Trust

Tonnes: 1,252.21
Value US$:

Total Gold in Trust: Sept 22.2011

Tonnes: 1,252.21
Value US$:

sept 21.2011

Tonnes: 1,252.21
Value US$:

Strange: we have gold whacked for 4 days and not one oz leaves the GLD.
Go figure.

Now let us see inventory movements in the SLV: Sept 24.2011:

Ounces of Silver in Trust317,279,386.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,868.49
sept 22.2011:
Ounces of Silver in Trust318,253,096.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,898.78

we lost .974  million oz of paper silver from the SLV

1. Central Fund of Canada: traded to a negative 1.3 percent to NAV in usa funds and a negative 1.0 % to NAV for Cdn funds. ( sept 24.2011).
2. Sprott silver fund (PSLV): Premium to NAV fell to a   positive 20.77%to NAV sept 24.2011
3. Sprott gold fund (PHYS): premium to NAV fell  to a 1.05% to NAV sept 24.2011).
(problems with the Sprott gold site today)

The raid this week has certainly lowered the premiums to NAV on our two physical funds.


Friday night saw the release of the COT report.  This report is from  Sept 13-20th  (Tuesday to Tuesday):

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, September 20, 2011

Please remember that this is of Tuesday last:

Our large specs that have been long in gold covered a huge 22,586 contracts 
as they sensed a raid.
Our large specs that have been short in gold also covered 4,268 of their short positions.

The commercials that have been long in gold added 3,805 to their long side.
And our bankers who have been perennially short gold from the beginning of time, covered a rather large 9,035 contracts from their short fall.

The small specs who have been long in gold got it wrong again by adding4564 contracts to their long side and got burnt in the process.
The small specs who have been short in gold covered a tiny 914 contracts of their shortfall.

And now for silver:

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, September 20, 2011

In silver, our large specs that have been long in silver covered  2641 contracts.
Our large specs that have been short in silver added 1108 short positions to their totals.  

Our commercials who have been long in silver, added 522 positions to their long side.

Our our famous short bankers like JPM and cohorts, they covered 4,157 contracts of their rather large shorts. 
Forgot about the small specs in silver. The high margin requirements liquidated them in May and they have not come back in force as of yet.


Let us see some of the big stories which will effect the price of gold and silver:

After seeing gold and silver getting belted I was wondering whether the criminal CME would raise gold margin levels.  They not only raised the margins for gold but also silver and copper.
The comex is now a pure criminal operation and if anyone of you play with these crooks, you are taking a mighty gamble.  The physical prices are rising above the paper prices as dealers are running out of metal and they are commanding a higher price for that physical.

Here was the announcement late Friday night at 11 pm hoping we would not see this:

CME raises gold, silver, copper margin requirements

By Matt Day
The Wall Street Journal
Friday, September 23, 2011
Exchange operator CME Group Inc. will raise the collateral requirements for trading in gold, copper, and silver futures after a volatile week.
Gold margins will be raised by 21%, silver margins by 16%, and copper margins by 18%, effective at the close of trading Monday, CME said in an email after trading closed Friday.
Following the change, speculative investors in the benchmark 100-troy ounce gold contract must put up $11,475 to open a position and maintain $8,500 of that to keep it overnight. Producers and consumers of the precious metal must put up $8,500 to open a position, and the same figure to hold it overnight.
In silver, speculative traders must put up $24,875 to trade a 5,000-ounce contract. The cost to hold a contract overnight was lifted to $18,500.
Copper speculators must post $6,750 to open a contract and $5,000 to hold it overnight.
Exchanges require market participants to post margins to cover potential losses in trading sessions. CME executives have said margin increases typically take place when markets become more volatile.
The gold market swung wildly this month, rising to record intraday highs above $1,900 an ounce Sept. 6, only to dip below the $1,800 mark the following day.
This week, futures collapsed in a rout felt across metals markets as traders liquidated their holdings to raise cash. The most actively traded gold contract fell more than $100 Friday, ending down 5.9% at $1,639.90 a troy ounce.
CME raised gold margins twice in August. Including the increases that take effect Monday, the margin increases since Aug. 11 total 55%.
Silver and copper weren't spared by this week's selloff, with both metals falling sharply. Those losses came as some investors worried that demand for industrial metals would crumble because of flagging global economic growth.


Conditions in Europe continue to deteriorate as now 8 Greek banks have been downgraded by Moody's to basically junk.  So not only is the sovereign nation of Greece have junk bonds yielding over 70% per annum but also their individual banks.  The problem of course is very simple, the ECB must cover all citizens bank deposits to prevent a complete collapse in Greece.  Greece has over 10 million citizens:

01:45 Moody's downgrades 8 rated Greek banks by two notches
* Moody's investors service downgraded the long-term deposit and senior debt ratings of eight rated greek banks by two notches. National bank of greece sa (NBG), EFG Eurobank ergasias sa (EUROB.GA), Alpha Bank ae (ALPHA.GA), Piraeus bank sa (TPEIR.GA), Agricultural bank of greece (ATE) and Attica bank sa downgraded to CAA2 from B3. Emporiki bank of greece (TEMP.GA) and general bank of greece (GENIKI) downgraded to b3 from b1. All of the banks' long-term deposit and debt ratings carry a negative outlook.
* The rating actions conclude the review for possible downgrade moody's initiated on 25 july 2011.
* The main factors driving the rating actions on domestically owned greek banks are as follows:
The impact of recent impairments of greek government bonds (ggbs), and the increasing risk of significant additional impairments of ggbs, on banks' capital levels.
The expected impact of the deteriorating domestic economic environment on non-performing loans (npls) and potential additional provisioning costs from the upcoming diagnostic asset quality study, initiated by bog and to be conducted by external consultants (blackrock).
Declines in deposit bases and still fragile liquidity positions, as illustrated by limited remaining eligible collateral for funding from the european central bank (ecb) and the recent activation of emergency liquidity assistance (ela) by the bank of greece (bog).


The ECB's financial director, Knot, issued this last night:

ECB's Knot: Bigger EFSF needed if crisis worsensFRANKFURT, Sept 23 | Fri Sep 23, 2011 8:24am EDT
FRANKFURT, Sept 23 (Reuters) - The European bailout fund should be expanded to more than 1 trillion euros to cope with a deepening of the Greek debt crisis, European Central Bank Governing Council member Klaas Knot was quoted as saying on Friday.
"It is evident that if things go wrong in Greece you need a higher dam than the current fund can offer," Knot told Dutch daily NRC Handelsblad in an interview.
He added that the total size of the European Financial Stability Facility (EFSF) may need to be increased to 1 trillion euros or even more.
Knot's predecessor Nout Wellink had suggested to double the fund in size to 1.5 trillion euros.
Knot added that Dutch banks are well prepared for a possible deterioration of the European sovereign debt.

Ambrose Evans Pritchard discusses the increase in fear gauge as yield on corporate debt skyrocket and bank shares plummet:
(courtesy Ambrose Evans Pritchard, the UKTelegraph)

Fear gauge enters the red zone

Europe's debt crisis risks escalating out of control as the world economy slides towards a double-dip slump with few shock absorbers left to limit the damage.

Key indicators of credit stress have reached the danger levels seen before the Lehman Brothers failure three years ago, with Markit's iTraxx Crossover index – or "fear gauge" – of corporate bonds surging 56 basis points to 857 on Thursday.
Societe Generale led a further rout of bank shares, crashing 9pc in Paris on concern that it might need recapitalisation to cope with losses on Italian and Spanish debt.
The yield spread between Italian 10-year bonds and Bunds reached a fresh record of 408 basis points before the European Central Bank (ECB) intervened in late trading. It is near the level at which LCH.Clearnet raises margin requirements, the trigger that forced Greece, Portugal and Ireland to request bail-outs.
Global investors appear shaken by the refusal of the US Federal Reserve to come to the rescue yet again with quantitative easing (QE3) even though it was never likely the bank would launch fresh stimulus with core inflation running near 2pc or in the face of protests from Capitol Hill.
The global flight from risk has hit Europe hardest. Peter Possing Andersen from Danske Bank said Europe’s authorities are running out of time. “The financial markets have lost faith in the current policies and the economy is on the verge of a recession. Radical action is needed to short-circuit the negative spiral,” he said.
“Segments of the financial markets are dysfunctional and access to credit is being shut down. European policymakers must take imminent and bold measures. Until this happens, the market will grind slowly but surely towards disaster. The current policy of austerity risks killing the already-fragile recovery and is making a bad situation worse in terms of debt dynamics,” he said.
Mr Andersen said Greece needs greater debt relief to break the “vicious circle”, while the ECB should step in with “unlimited” bond purchases from countries such as Italy that are essentially solvent.
Andrew Roberts, credit chief at RBS, said recent weeks’ grim economic data have rendered Europe’s “muddle through” policy unworkable, pushing weaker states towards the brink. The latest PMI data show that export orders for manufacturing tumbled to 44.8 in September, the lowest since mid-2009.
Ominously, the PMI data for China is flashing contraction warnings for the third month, dropping further than it did during the depths of the Great Contraction, suggesting the loan curbs are starting to bite.
“We are in a fresh cyclical downturn within a structural slump/depression. We need global co-ordinated monetary action and the ECB must cut rates by 50 points. It made a terrible mistake by raising rates in July,” Mr Roberts said.
The IMF has slashed its growth forecast for Italy to a stall speed of just 0.3pc in 2012, a level that risks havoc with debt dynamics. The country must raise €260bn by late next year. Each 100-point rise in borrowing costs increases the budget deficit by €2.5bn.
The IMF warned that emerging markets are nearing the buffers of credit growth and are losing their fiscal room for manoeuvre. It said China’s domestic loans have risen to 173pc of GDP, “well above” the safety level.
The IMF fears “significant” losses on $1.7 trillion of local government debt, raising the risk Beijing may need to rescue the system. “The consequences could be a substantial worsening of China’s public debt metrics and a narrower scope for future fiscal stimulus,” it said. China cannot safely respond to a second global shock by opening the floodgates of cheap credit again.
Professor Giuseppe Ragusa from Luiss Guido University in Rome said the ECB has the power to halt the eurozone’s escalating crisis by pledging to buy up €2 trillion of bonds. “They would not have to buy the debt. The promise would be enough,” he said.
Such bold action appears unlikely. The ECB has intervened hesitantly over the past six weeks, without the overwhelming force needed to convince markets that it will back-stop Italy’s €1.8 trillion debt – the world’s third largest.
The bank is constrained since the policy is vehemently opposed by the Bundesbank and by German president Christian Wulff, who has accused the ECB of breaching the EU treaty law.
David Owen from Jefferies Fixed Income said the Bundesbank increased its balance sheet by €50bn in August alone to help shore up the Eurosystem. It has lifted its liquidity provision eightfold to €421bn since the crisis began, almost as much as the ECB itself.
On Thursday IMF managing director Christine Lagarde said the ECB must continue to provide “solid, reliable” funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis.
The ECB “plays and can play and I hope will continue to play a critical role,” she said.
There are clearly limits to how far this policy can be pushed without a treaty change. Otherwise it amounts to fiscal union by the back door. The task of purchasing bonds and recapitalising banks must fall to the EU’s bail-out fund, but it will not be ready until ratified by all national parliaments later this year. Europe faces a tense Autumn.


Here is another indicator that shows the economy in a complete death spiral:

(courtesy Gonzalo Lira and zero hedge)

Submitted by Gonzalo Lira
Forget Gold—What Matters Is Copper
People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—
—but copper is what has me worried.
Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.
From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.
But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means.
What it means for monetary policy.
We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect.
The ongoing price collapse of copper signals that the markets have collectively decided that there is going to be no resurgence of the global economies—at least not for the next 9 to 18 months. Up until now, the economic data that has been coming out over the last couple of weeks seemed to indicate that there’s going to be a double-dip—but in my mind, this fall in the price of copper confirms this notion that the general economy is going down.
And remember: Market sentiment can not only be a predictor of future economic performance, but its determinant. If today the markets feel that the economy is going to suck tomorrow, often that very sentiment is what makes the economy suck canal water.
So if copper is falling like a mo-fo—which both signals and convinces the market that the economy is gonna suck—what does this mean for monetary policy?
Prima facie, the fall in the price of copper is deflationary: Less demand means that the prices fall—meaning the dollar acquires purchasing power.
What does it mean for monetary policy that copper has fallen so low?
It means that Bernanke will carry out more “non-traditional” Federal Reserve stimulus.
Ben Bernanke is famous for being terrified of deflation—and to his particular mindset, this is a reasonable fear. More to the point, Bernanke’s deflation-phobia actually matters—because after all, he is the Chairman of the Federal Reserve. He controls U.S. monetary policy.
Deflation is supposed to be bad because it shrinks an economy. (Personally, I am more afraid of inflation than deflation: The latter is self-correcting, while the former spirals out of control and into social chaos. But that’s for some other post.)
According to the deflationary world view, falling prices oblige producers to cut back on production—which means firing workers. These fired workers—husbanding their resources during their unemployment—spend less, further contracting demand, thus putting more downward pressure on prices, forcing more producers to cut back and fire even more workers, who thus spend less—
—you get the picture: A “deflationary death spiral”, in the Deflationistas’ parlance.
This is Bernanke’s fear—and he will do anything to alleviate it. Notice: It’s not that Bernanke will do anything to alleviate deflation—he will do anything to alleviate his fear of deflation.
As copper prices continue to tumble, signaling further economic contraction, there is no question in my mind that Ben Bernanke and his Fools of the Fed will view this as evidence of looming dollar deflation.
They will do everything to stop this looming deflation. But since the “traditional” Federal Reserve tools have been used up—that is, the Fed has its rate at zero, and for all intents and purposes all of its liquidity windows open—Bernanke will have no choice but to announce some new “non-traditional” liquidity injection scheme shortly.
Thus I expect some Banana Republic money-printing scheme to be announced by the Bernankster before the end of the year—perhaps as early as this coming October. The fall in the price of copper—more than anything else—is what Benny and his Fools will be looking at, to justify this new scheme.
And my bet is, this scheme they announce will be as big—and as controversial—as QE-II.
I am giving my people at The Strategic Planning Group a detailed analysis of what has happened over the past week, and what we can expect to happen in the markets over the coming weeks. You’ll have to pay to play for that.
But insofar as my overall view of the situation is concerned, this is what I think:
Bernanke will drive a schoolbus over small children, in order to prevent his notion of deflation from coming true. This fall in the price of copper is much more relevant to his course of action as Fed Chairman than the fall in the price of gold (which was just a combination of options expiration coming up, and gold positions being sold to cover losses in other asset classes).
This dramatic fall in the price of copper signals that the markets do not believe reactivation is anywhere near eminent—not for at least 9 to 18 months.
To the traditional twin Federal Reserve mandates of price stability and full employment, Bernanke has added a third mission: That of “growing the economy”—whatever it takes, however unorthodox or reckless the measures.
Therefore, it is my estimation that very soon now—end of this year at the latest—we will have QE-infinity—and beyond!
 To confirm the death spiral, take a look at the Baltic Dry Index.  Basically it ground to a halt;
(this index is a measure of moving dry goods across the world.  The lower the index, the lower the activity in commodities).  China has slowed down the past 3 months:

Baltic Exchange Dry Index (BDI),
exponential average in red.
200 day exp. avr. green


The debate this weekend is whether Greece should default.  I felt this paper by P. Tchir was
bang on:

There Will Never Be A “Good” Time For Greece To Default

Tyler Durden's picture

By Peter Tchir of TF Market Advisors
There Will Never Be a “Good” Time For Greece To Default
I have been a proponent that Greece should default sooner rather than later for a long time.  At first most people argued that Greece would never have to default.  Now many people argue that Greece should default, but now isn’t a good time.  The argument goes that Europe needs time to prepare for the default or the risk of contagion is too high.
My view is that Europe needs to let Greece default.  Europe needs to abandon the existing perimeter and fall back to a more defensible position.  Europe doesn’t need to collapse, but it does need to retreat to a core, stronger position, where it can dig in its heels and defend itself.  Battles are not lost because every soldier is killed, battles are lost when morale gets so low that the soldiers give up and flee for their lives.  Wars are won when isolated, broken units, are captured or killed.  I think Europe has to take the pain now, or risk further pain.
My argument against “waiting for a better time” is that it may never come.  Europe has squandered the last year.  Europe was in much better shape to deal with a Greek default last year than they are now.  Contagion was a concern back then in regards to Ireland and Portugal, now it is a reality.  Only the darkest of the doom and gloom crowd believed that contagion could really spread to Spain and Italy, yet now that risk is palpable.   Banks were more worried about fighting Dodd-Frank, and raising dividends, and creating almost record bonus pools, not trying to convince employees that the firm’s are solvent.
Contagion in many ways has already hit.  The EU stocks are down over 20% in the past 12 months in most cases.  Germany has performed better than the rest, but that is a very large drop and the market in Europe as a whole are in a Bear Market.  The U.K. with its proximity to Europe, and Japan with the earthquake are also lower, but the U.S. stock market has remained relatively unscathed (despite what you might be reading this weekend about how our sell-off is overdone).  China and Brazil are experiencing some troubles in their own stock markets.  In spite of the hype of the BRIC’s coming to the rescue, they may be too busy taking care of themselves.  It is worth noting that the EUR/USD exchange rate was 1.36 on September 30th last year, and is 1.35 now, so it is not all about exchange rates.
The credit story is more bleak and stark.  Credit has clearly picked the safe havens, the next Greece, and those in between.  Italy and Spain are now trading almost where Portugal was a year ago.  How much easier would it have been for Italy to withstand a Greek default when it’s 5 year bonds were trading at Bunds + 134 instead of Bunds + 407.  CDS has blown out across the board, including the allegedly cash rich China, but there is a “basis” swap element as the CDS trades in a currency different than what the country uses (ie, all Eurozone CDS trades in dollars).
It is hard to look at the data and note with that the bold steps of letting Greece default, had been taken last year when countries were in better shape.  It is also clear, that the contagion has occurred without a default.  Portugal has clearly moved to the plagued group and Italy and Spain are trying to fight it off.
Last September, the Eurozone and the U.S. had just posted 2nd quarter GDP growth of about 0.9%.  This year, both the Eurozone and U.S. only had 0.2% growth in the 2nd quarter.  At the risk of being ridiculed by proper economists, you cannot guarantee that GDP growth will be even worse or in contraction if we wait any longer for Greece to default.
It also worth pointing out that at the time, the ECB was only an amateur at overpaying for bonds.  It has since purchased even more bonds well above the current market price.  All that purchasing power would be nice to have now, but it has been spent.  They can always spend more, but the ECB would be much stronger if it wasn’t sitting on such a big inventory of losing positions, that clearly did little to stem the crisis.
What about the banks?  Don’t we need to wait so the banks can be stronger?
It doesn’t take a rocket scientist to see that the banks squandered a year to improve their capital base.  BAC wasn’t selling cheap options to Warren Buffett when their stock was at 13.  The SocGen CEO wasn’t on TV trying to convince investors that they had no funding or capital problems when his stock was at 42.  The banks are even worse off than most of the countries, but why should anyone assume that waiting will make it easier for them to digest a Greek default.
To me, it seems that a lot has already been priced in and that the contagion is occurring whether we want it to or not, so we may as well let Greece default now and figure out how much has already been priced in and how to really stop the contagion from spreading to Italy and Spain and to banks that deserve to be saved.  Let’s just admit it is gangrene and that it has already spread farther than is safe, but it is still better to cut off an arm to save the body.  If we keep waiting it may not be possible to save the patient.  The patient is getting weaker by the day, and being blind to that is just as big and just as dangerous as letting Greece default now.

This is what Germany demands in order for increase funding of the EFSF.  If this happens I strongly believe that we will have another of those Lehman moments due to the high credit default swaps written on Greece:  (courtesy zero hedge)

Germany Demands "Managed" Greek Default And 50% Bond Haircuts In Exchange For Expanding EFSF, Peripheral "Firewall"

Tyler Durden's picture

Back on July 21, the same day as the Greek bailout redux hit the tape, we speculated that the biggest weakness in the Second Greek Bailout is that the EFSF would have to be expanded to well over the current E440 billion (which even at its current size has not been fully ratified in Europe, and based on recent events may not be implemented until 2012 thanks to Slovenia and Finland), or about E1.5 trillion (and possibly as much as E3.5 trillion). The reason this is a "problem" is that it would have to come exclusively at the expense of Germany which would have to pledge anywhere between 50% and 133% of its GDP (as France would have long since been downgraded and hence unable to participate in the EFSF at a AAA rating). We also assumed that the debt rollover with a 21% haircut would not be an issue as it should have been a formality: on this we were fatally wrong - the debt rollover plan has imploded and means that the entire Greek bailout has collapsed as some had expected. And now that it is clear that contagion is threatening to sweep through the core, it is back to Germany to prevent the gangrene, no longer contagion, from advancing beyond the PIIGS. However, in order to prevent a full out revolution,Germany's economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a "controlled" default by Greece and 50% haircuts for private bondholders (as German banks have long since offloaded their Greek bonds).
This means that "Lehman" is indeed here: just like back in 2008 Paulson et al thought they could contain the adverse effects of a Lehman bankruptcy, while the financial system ground to a halt 4 days later when money market funds broke the buck, so now Greece is somehow expected to remain in the eurozone even as it files bankruptcy. How or why they think the market will buy any of this is beyond stupefying, but we are sure all those armies of lawyers who never have a practical sense of what actually ends up happening in the real world, and who are poring over tomes of EU and EUR charter to see if they can file Greece without expelling it from the Eurozone, certainly has something to do with it.
So as part of this new strategy, here are the three key components of the plan to "firewall" contagion, via the Telegraph.
Sources said the plan would have to be released as a whole, as the elements would not work in isolation.

First, Europe’s banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders.

Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) – the eurozone’s €440bn bail-out scheme.

The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.

The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”. If the EFSF bore the first 20pc of any loss, the fund’s warchest would effectively be bolstered to Eu2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion.

Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.

The arrangement is similar to the proposal made by US Treasury Secretary Tim Geithner to the eurozone at the September 16 EcoFin meeting in Poland. Gathering turmoil in financial markets has convinced Germany to begin work of some kind of variant of the US plan, despite having initially rejected the notion as unworkable as threatening to compromise ECB independence.
In other words, Germany will be humiliated to appear weak after conceding to Geithner's proposals even after everyone in Europe already took turns at mocking the tax cheat. Which is why Germany has decided in turn to humiliate Greece, and in the process initiate a chain of events that will bring the end of the Eurozone, albeit, mercifully, much faster.
The proposal would be hugely sensitive in Germany as its parliament has yet to ratify the July 21 agreement to allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring programme. The vote is due on September 29.

As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece.
And with incompetent hubris bringing us here, we are happy to see said hubris is still front and center. Because if Europe really thinks there is such a thing, quadrillion sin USD FX swap lines notwithstanding, as a "managed" bankruptcy, then it fully deserves to ride into the sunset, battling the windmills of evil shorters and vile bloggers, on the much suffering back of Don Quixote's Rossinante.


From Sky News this afternoon.  By the way, the capitalization of all European banks will probably cost somewhere around 2.5 to 3 trillion dollars.  (and European citizens will not flock into gold and silver?)
More from Sky News correspondent Ed Conway (via Twitter):

  • G20 now preparing itself for Greek default after October - Sky sources. Will be on Sky News imminently with more
  • G20 sources: all efforts behind the scenes (by G20 members) are now going into recapitalising banks, preparing economies for default.
  • G20 sources: default not expected until after Cannes G20 early November. Emergency funding should still keep Greece afloat thru October
  • G20 sources: No suggestion Greek default need imply country leaving the euro
  • G20 sources: @ Washington summit marked difference in attitude. Confident euro members edging closer to recapitalising banks, expanding EFSF
Looks like the inevitable is coming in about a month.

For those of you who do not believe me in the huge number of derivatives underwritten by USA banks, this just came out last night:  (yes you are reading correctly  usa exposure 250 TRILLION dollars in notional amount in contracts)

courtesy zero hedge

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Tyler Durden's picture

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.
At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?
...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.
The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 
Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...


Here is an interview with Eric Sprott who details how silver bullion dealers have been wiped out of supply due to the low prices.  And the comex is a price discovery mechanism?/????

Smashing of silver futures spikes demand for real metal at SprottMoney

10:44p ET Friday, September 23, 2011
Dear Friend of GATA and Gold (and Silver):
Sprott Money President Larisa Sprott today tells King World News today that the coin and bullion dealer's silver supply was temporarily wiped out by huge demand prompted by this week's huge decline in silver future's prices. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Alas our poor CEO from UBS just got canned:

UBS' CEO Booted

Capital Markets Merrill Merrill Lynch Middle East Reuters Rogue TraderSwitzerland
Things for UBS are just getting from bad to worse. The UBS "Rogue Trader" incident which was anything but rogue and certainly involved far more than just a trader, has struck at the very top and just claimed the scalp of the top man at the organization, forcing many to ask: just what is really going on behind the scenes at the embattled Swiss bank? Alas, this latest development means that life for the bank's other employees is about to become a (bonus free) living hell, as a complete overhaul of the employee base is imminent. From Reuters: "The board of UBS accepted on Saturday the resignation of Chief Executive Oswald Gruebel after the Swiss bank lost $2.3 billion in alleged rogue trading and said it had appointed Sergio Ermotti to replace him for now. Ermotti, a 51 year-old from Switzerland's Italian-speaking region of Ticino, joined UBS in April from UniCredit as head of Europe, Middle East and Africa. Before joining UniCredit in 2005, he worked at Merrill Lynch for 18 years. The board said in a statement it had asked management to accelerate an overhaul of the investment bank already under way "concentrating on advisory, capital markets, and client flow and solutions businesses". UBS's board meeting, one of four regular meetings per year, had originally been due to end on Friday ahead of the UBS-sponsored Singapore Formula One motor racing Grand Prix on Sunday, when executives will be trying to reassure big clients. But deliberations continued on Saturday by conference call after the board left Singapore on Friday with some members headed back to Switzerland, sources told Reuters. "

Finally, the COT report on the USA dollar vs Euro shows everyone betting on the dollar and the Euro to collapse.  Maybe the Euro is oversold and time for the uSA dollar to be attacked:

zero hedge:

Bullish Dollar Sentiment Surges By Most In Years, As CFTC-Based Rumors Of Euro Demise Are Not Exaggerated

Tyler Durden's picture

For once the speculators got it right. In the week ended September 20, net USD futures and options exposure surged by the most in years, with net non-commercial contracts soaring by a whopping 22,577 contracts to the highest since April of 2010. The flip trade is a collapse in EUR sentiment, which saw net exposure plunge by 25,001 from -54,459 to -79,460, the most bearish sentiment in the European currency has been since June 2010. Net net: the euro is now massively oversold explaining why even the smallest of rumors initiates a furious short covering squeeze. And yes, the next bubble is now not in silver, not in gold, but in the dollar. The first sign of moderation of European stress, or a Hilsenrath piece on the next round of QE by the Chairsatan, and watch the DXY and the various USD pair collapse (and gold surge).
Source: CFTC COT

It is great to be back from my long culinary holiday in Napa Valley and also to be back to my regular computer.  We had such a great time, meeting wonderful people who are truly wonderful chefs.
Be prepared for another roller coaster week in trading on all fronts.
I will see you on Monday.


see you on Monday.

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