Saturday, October 8, 2011

Dexia to be buried by tomorrow/silver and gold OI lowest in many years

Good evening Ladies and Gentlemen:

Tonight's commentary will be on the short side.
Before commencing I would like to report that we had two banks that entered the morgue Friday night:

1.  Sun Security Bank of Ellington Mo.
2. Riverbank, Wyoming, MN

Gold finished the comex session at $1634.50 down $17.40 on the day.  Silver fell $1.06 to $30.96
Most of the fall in the metals occurred after 12 o'clock when London and the physical markets were put to bed.
I felt on Thursday that a raid of this type was imminent  (due to light volume) and the bankers decided to attack only after 12 pm to conserve badly needed physical.

Let us head over to the comex and assess the damage:

The total gold comex OI fell slightly by 140 contracts to rest at 432,946.  The OI for the front delivery month of Oct saw it OI fall from 866 to 841 for a loss of 25 contracts.  We had 25 deliveries so we lost zero ounces to cash settlements.  The front December month saw its OI fall a little over 1000 contracts to 269,201.
The estimated volume at the gold comex was a rather low 117,768.  The confirmed volume on Thursday was also on the lighter side at 130,525.

The silver comex again has its OI retreat as this market begins a strictly physical one.  The OI finished the session down around 400 contracts to 100,165.  The front options expiry month of October saw its OI fall from 143 to 122 for a loss of 21 contracts.  We had 25 deliveries on Thursday so we lost zero ounces to cash settlements and gained 20,000 oz of physical standing.

Inventory Movements and Delivery Notices for Gold: Oct 6.2011:
 Chart for Oct. 

Withdrawals from Dealers Inventory in oz
Withdrawals fromCustomer Inventory in oz
Deposits to the Dealer Inventory in oz:   nil
Deposits to the Customer Inventory, in oz
32,030 (Scotia)
No of oz served (contracts) today
1700 (17)
No of oz to be served (notices)
824,000  (824)
Total monthly oz gold served (contracts) so far this month
564,600 (5646)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

Again we had no gold deposited into the dealer and no dealer withdrawal.

The only transaction was a big deposit by the customer at Scotia:

1.  Into Scotia  32,030 oz.

we had an adjustment of 1,221 oz added into the customer at Brinks.
The registered gold remains at 2.284 million oz.

The CME announced that we had 17 deliveries for 1700 oz
To obtain what is left to be served upon, I take the OI standing for Oct  (841) and subtract out Friday deliveries (17) which leaves us with 824 notices or 82,400 oz left to be served upon.

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

564,600 oz (served)  +  82,400 oz (to be served)  =   647,000 or or 20.12 tonnes.
the same as Thursday.

Let us go to silver.

First the chart:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory597,617 (Brinks,Delaware)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventorynil
No of oz served (contracts)  20,000 (4)
No of oz to be served (notices)595,000  (118)
Total monthly oz silver served (contracts)2,455,000 (491)
Total accumulative withdrawal of silver from the Dealersinventory this monthnil
Total accumulative withdrawal of silver from the Customerinventory this month

no silver was deposited to the dealer and no silver was withdrawn from a dealer.
We had witnessed many oz leaving the comex silver vaults this past week and on Friday this occurred again.

Withdrawals by the customer:

1.  From the Brinks vault, 596,593 oz
2. From delaware:   1024 oz.

total withdrawal:  597,617 oz

we had no adjustment.
The registered dealer silver remains at 31.09 million oz
The total of all silver lowers to 105.934 million.

The CME notified us that we had only 4 deliveries for 20,000 oz of silver.
The total number of silver notices filed so far this month total 495 for 2,475,000 oz.
To obtain what is left to be served upon, I take the Oi standing for Oct  (122) and subtract out Friday deliveries (4) which leaves us with 118 notices or 590,000 oz left to be served upon.

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

2,475,000 oz (served)  +  590,000 oz (to be served)  =  3,065,000 oz
we did not lose any silver to cash settlements and we gained 20,000 oz standing.


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.

Oct 8.2011:




Value US$:64,600,424,094.18

Oct 6.2011




Value US$:64,600,424,094.18

we neither gained nor lost any gold from the GLD.

and now SLV: :

Oct 8.2011
Ounces of Silver in Trust321,692,030.200
Tonnes of Silver in Trust Tonnes of Silver in Trust10,005.74

Oct 6.2011:

Ounces of Silver in Trust321,205,320.200
Tonnes of Silver in Trust Tonnes of Silver in Trust9,990.60

we gained 487,000 oz of silver into the SLV

1. Central Fund of Canada: traded to a positive .6 percent to NAV in usa funds and a positive .9% to NAV for Cdn funds. ( Oct 8.2011).
2. Sprott silver fund (PSLV): Premium to NAV fell to a   positive 21.39%to NAV Oct 8.2011
3. Sprott gold fund (PHYS): premium to NAV fell  to a 3.42% to NAV Oct 8.2011).

 The Sprott funds still command a great premium to NAV in silver and a positive to NAV in gold.
The shorts are certainly having their effect on the central fund of canada.


Let us head over to the COT report released Friday night.

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, October 04, 2011

The net commercial short position in gold is declining rapidly as the shorts are covering as quickly as they can.  This is a very bullish COT report:

Those large specs that have been long in gold pitched 1,088 contracts from their long side.

Those large specs that have been short in gold covered a huge 6,443 contracts from their massive shorts held.

And now for our commercials:

Those commercials that have been long in gold covered a whopping 12,168 contracts from their long side.   (these may also be the short bankers who buy a long contract in a different month which is the same as covering their shorts)

Those commercials that have been short in gold covered a whopping 14,100 contracts from their short side.

Even the small specs got into the action:

the small specs that have been long covered a monstrous 9354 contracts.
the small specs that have been short in gold   added another 2,067 contracts to their short side.

The net commercial short has never been this low in quite some time.
This COT is extremely bullish.

And now for the Silver COT:

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, October 04, 2011

In the silver COT report,

those large specs that have been long in silver pitched 1294 from their long side.
those large specs that have been short in silver added  2231 contracts to their short side.

and now for our commercials:

Those commercials that have been long in silver added 1559 contracts to their long side.
Those commercials that have been short in silver covered a large 3780 contracts from their short side.

Even the small specs got into the action:

the small specs that have been long in silver pitched 1446 contracts from their long side.
The small specs that have been short in silver added 368 contracts to their short side.

as I mentioned above, the commercial net short has never been this low.  However we are dealing with crooks so be careful.  The silver comex is becoming strictly a physical exchange as leverage is now around 6: 1.


Let us see some of the big stories which shape the price of gold and silver.

Yesterday they released the jobs number and it "was a little better" but still way below what is needed.
The plug number certainly helped:

Employment rises in September, jobless rate steadyWASHINGTON | Fri Oct 7, 2011 8:40am EDT
WASHINGTON (Reuters) - Employment grew more than expected in September and job gains for the prior months were revised higher, according to a government report on Friday that could ease fears the economy was heading into recession.
Nonfarm payrolls rose 103,000 the Labor Department said on Friday, while the unemployment rate held steady at 9.1 percent as an increase in household employment offset a rise in the participation rate.
Part of September's relative strength reflected the return of 45,000 Verizon Communications workers who had dropped off payrolls in August due to a strike. Excluding those workers, payrolls increased by 58,000.
The tenor of the report was strengthened by revisions that showed 99,000 more jobs added in July and August than initially reported. In addition, hourly earnings rebounded and the average work week rose.
Economists had expected nonfarm employment to increase 60,000 last month and the jobless rate to hold steady at 9.1 percent.
The government's closely followed employment report was another sign that the world's largest economy was likely to skirt a recession despite weakness over the summer.
Private employment increased 137,000 last month, an acceleration from August's meager 42,000 count. But government payrolls fell 34,000 as employment at the local government level fell 35,000 and the Postal Service shed 5,000 positions.
The nation's weak labor market has posed a critical challenge for President Barack Obama, who is gearing up for a tough reelection battle in November 2012. Obama on Thursday used a news conference to press for measures to spur jobs growth that face uncertain prospects in Congress.
Recent reports on manufacturing, business spending and auto sales suggest the economy fared better in the third quarter after growing at an anemic 1.3 percent annual pace in the April-June period.
But some economists are warning Europe's debt crisis threatens to all but derail the U.S. recovery.
And while third-quarter growth is expected to top a 2 percent annualized pace, that is still too slow to make a dent in the high unemployment rate.
The economy needs to grow by at least a 2.5 percent rate, with payrolls expanding by 150,000 positions a month, to keep the jobless rate from rising.
The U.S. central bank last month announced new steps to stimulate the economy by pushing long-term borrowing costs even lower by shifting assets on its balance sheet.
Uncertainty over the economic outlook, which continues to be muddied by acrimony in Washington over budget policy and by Europe's inability to get to grips with its debt crisis, is making businesses reluctant to hire.
There were a few bright spots in the payrolls report. Hourly earnings rose four cents after falling four cents in August.
An improvement in income is crucial for consumer spending, which accounts for about 70 percent of U.S. economic activity.
Incomes dropped in August for the first time since October 2009, curbing spending and pushing savings to the lowest level in more than 1-1/2 years.
Manufacturing shed 13,000 jobs last month, extending August's decline of 4,000. Health care added 40,800 jobs. The sector has consistently added jobs as the baby boomers demand more health care services.
Temporary help increased 19.400, slightly less than the previous month's gain.

John Williams on the release of the non farm payrolls:

(courtesy Jim Sinclair)

Jim Sinclair’s Commentary
The latest from John Williams’
- September Payroll Gain Was Statistically Meaningless
- Broadest Government Unemployment Rate Jumped by 0.3% to 16.5%
- September Unemployment: 9.1% (U.3), 16.5% (U.6), 23.1% (SGS)
- Annual Money Supply M3 Growth Inched Higher in September
- Economic and Systemic-Solvency Crises Intensify

The markets initially liked the number but the Dow eventually swooned on news that Europe was again in trouble.

Here are the news which shaped Friday:

From the governor of the Bank of England:  (I do not need to add any more words as it is self explanatory):

World facing worst financial crisis in history, Bank of England Governor saysThe world is facing the worst financial crisis since at least the 1930s "if not ever", the Governor of the Bank of England said last night.Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.
Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Early Friday morning we were greeted with this:

Moody's Puts Belgium Aa1 Rating Under Downgrade Review, CDS To Surge

Tyler Durden's picture

To all those who bought Belgium CDS as per our compression trade suggested earlier today, congratulations. Oh and the part in the Moody's announcement where it says that a main driver of the review is "The uncertainty around the impact on the already pressured balance sheet of the government of additional bank support measures which are likely to be needed" means that anyone harboring even the smallest hope that France will be within 100 parsecs of Dexia when the broke bank is nationalized, may be slightly disappointed.
From Moodys'
Moody's places Belgium's Aa1 ratings on review for possible downgrade

Frankfurt am Main, October 07, 2011 -- Moody's Investors Service has today placed Belgium's Aa1 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1.

The main drivers that prompted the rating review are:

(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Belgium, as a result of the sustained fragility in the wholesale finance environment for euro sovereigns and banks stemming from the sovereign debt crisis.

(2) Risks of a deterioration of the public debt trajectory in light of increasing downside risks to economic growth.

(3) The uncertainty around the impact on the already pressured balance sheet of the government of additional bank support measures which are likely to be needed.

Moody's review will evaluate the weight of these growing risks in light of the country's high rating but also relative to the country's strong credit features such as the economy's net creditor status, high savings rate and the absence of substantial structural imbalances.


First, the fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for sovereigns and banks. Although future policy actions within the euro area could reduce investors' concerns and stabilize funding markets, the opposite cannot be excluded.
Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility is likely to remain and presents elements of vulnerability for euro area sovereigns with high public debt.

Second, the challenges facing the euro area banking system, the need for simultaneous fiscal tightening of euro area sovereigns, together with the weakening global economic growth outlook, pose risks to the growth outlook for the small and very open Belgian economy which, in turn, adds uncertainty regarding the stabilization and reversal of the public debt trajectory.

Third, given the fragility of the funding markets for sovereigns and banks, the likelihood for the need of additional government measures to support individual banks or the system has increased, as illustrated by the significant challenges now facing the Dexia Group. It is unclear how far additional support measures would be likely to weigh on the balance sheet of the government.


Moody's review of Belgium's sovereign ratings will focus on the vulnerabilities of the Belgian public debt in the current euro area sovereign and bank funding environment. This will include a review of potential additional need for government measures to support the banking system, or individual banks. In this regard, Moody's intends to assess the potential costs and additional contingent liabilities that the government may incur in supporting the Dexia Group. During the review period Moody's will also assess how the risks for the growth outlook of the Belgian economy and the government's medium term fiscal and economic plans may impact the country's debt trajectory. Finally, we will also look into the prospects for political stability in Belgium and how the recent agreement on the evolution of the political framework will address the institutional weaknesses which would otherwise have weighed on the rating and allow the incoming government the scope needed to address the country's economic and budgetary challenges.

Your rating: None Average: 4.8 (4 votes)

Saturday morning, this zero hedge commentary which probably send all bourses into the deep red on Monday as Europe is preparing to bury Dexia.  We will probably have another of those "Lehman moments" as credit default swaps will be triggered:

"Dexia's Funeral Will Be Announced On Sunday" As "Weakest Link" Slovakia Prepares To Bury The Euro

Tyler Durden's picture

A few days ago we mocked the market's naive belief that a loose union of 17 different countries and hundreds of separate political organizations, each torn by thousands of unique interests and lobby groups, can all agree unanimously in the pursuit of the common monetary (read: banker) good, over that of their own people. Yet that did not stop stocks from enacting the second weekly massive short covering squeeze, in 3 weeks, purely on hype, rumors, innuendo and lies. And just like the last time the market soared by nearly double digits in a few short days, only to plunge when hopes of a quick resolution were mercilessly dashed, Monday has all the makings of another epic risk off day. Because while all it takes is a rumor (of a plan for a plan) to start a squeeze, we are about to get some very nasty actual eventswhich will demand immediate and forceful intervention by the powers that be, something which Europe (and the US) has proven is virtually impossible. The events in question are, as Reuters reports, that i) "Dexia's Funeral Will Be Announced On Sunday" and, asBloomberg reports, that ii) Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said. Said otherwise, bonds are currently thanking their lucky stars the bond market is closed because not only will Europe have to deal with the headline risk that the weakest link in Europe, the tiny country of Slovakia, can scuttle the entire second Greek rescue operation, and thus, lead to the expulsion of Greece from the eurozone following its bankruptcy, but this will have to take place as Europe fights the stem the contagion resulting from the collapse and nationalization of the first Greek bank, which nobody, nobodycould have foreseen.
First, on Dexia via Reuters:
France and Belgium are expected to finalise plans this weekend to break up Dexia, which helps finance hundreds of towns in both countries and became the first European bank to fall victim to the euro zone crisis.

Dexia, whose board is likely to meet on Sunday, was forced to seek government help earlier this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.

The bank's implosion has added to investors' worries about the solidity of European banks and has coincided with increased European Union talk about coordinated action to recapitalise banks across the continent.

The burden of bailing out Dexia also prompted Moody's to warn Belgium late on Friday that its credit rating could fall.

The ratings agency also cited the prospect of higher funding costs and weak economic growth as reasons for putting Belgium's Aa1 government bond ratings on review for possible downgrade.

France and Belgium have guaranteed Dexia's financing, paving the way for a new rescue for the bank, which is struggling to wind down billions of euros in toxic assets accumulated during an overambitious expansion plan.

But there were signs that the details of the rescue were proving troublesome, as a Dexia board meeting originally scheduled for Saturday slipped back to Sunday.

Still, a source close to the talks was confident the bank's future would be determined before the opening of markets on Monday morning.

"The need to rescue Dexia is symbolic of the uncertainty that characterises the banking sector," said Eric Galiegue, president of Valquant, an independent research firm. "Who would have imagined that a bank so linked with European construction would end up being dismantled?"
"Dexia's funeral will be announced on Sunday," the source said.
Summarizing the above: nobody has any clue what the proper response here is nor how the market will react.
And as for the second key event just unveiled...
Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said.

The party, known as SaS, insists its three coalition partners agree to two conditions before it will back the enhancement of the euro region’s bailout fund, the European Financial Stability Facility, in a parliamentary vote Oct. 11, said Jozef Kollar, head of SaS’s parliamentary caucus. “If the solutions we have put forward aren’t accepted then we will not vote for the EFSF,” Kollar said in a debate on state Slovak Radio today.

Slovakia and Malta are the only countries that haven’t yet ratified the key element in the European Union’s plan to prevent the region’s debt crisis from spreading. The Slovak row risks sinking the EU plan, which needs the unanimous consent of all 17 euro members to come into force.

SaS is calling for the creation of an inter-party committee that would have a right to veto individual EFSF disbursements. It is also demanding that Slovakia doesn’t participate in the European Stability Mechanism, a permanent rescue vehicle set to come into force in 2013. SaS will negotiate “until the last minute” with its coalition partners, according to a statement posted on the party’s web site today.

Smer, the largest opposition party, has said it won’t support the EFSF overhaul unless the government steps down.
For those who are still confused, here is what is going on:
The bailout plan that was proposed in July, and was supposed to be operational by the start of September,has still not been ratified, and now the smallest European country is holding the entire continent, its currency, and frankly the Fed, which will have to step in and bailout Europe, hostage.
In the meantime, the first actual core bank casuality is about to go 6 feet under, and unleash a falling house of cards of unpredictable consequences, which will likely make the "fear and loathing" chart presented previously double in a very short time.
And in this environment, where the decisionmakers in Europe are objectively about 2 years behind the curve, are paralyzed into inactivity and torn asunder by warring political parties, the market actually believes that some actual "solid" policy intervention can about to take place?
Oh yes, "Dexia is fine"... The stress test (the second one)said so.

Your rating: None Average: 4.9 (21 votes)

On Friday, Moody's lowered the boom on 12 United Kingdom banks 
02:58 Moody's downgrades 12 UK financial institutions finishing review of systemic support

and then:  knocked down 9 Portuguese banks:

04:16 Moody's takes rating actions on Portuguese banks; outlook negative

Rating actions involve downgrades by one or two notches of the senior debt and deposit ratings of 9 banks and downgrades by one or two notches of the standalone ratings of 6 of these banks. All of the banks' ratings carry a negative outlook with the exception of Banco Portugues de Negocios, which has a developing outlook on all of its ratings. This conclude the review initiated following the downgrade of the Republic of Portugal


I found this John Mauldin commentary extremely good as it describes in great detail in easy to understand English, the problems facing Ireland and how Ireland is different from Greece:


An Irish Haircut

By: John Mauldin, Millennium Wave Advisors

-- Posted Sunday, 9 October 2011 | Share this article | Source:

Two Insights from Ireland
The Irish Chamber of Commerce
An Irish Haircut
New York, South Africa, Back to Ireland ... and Pushups
Just as only four short years ago it was All Subprime, All the Time, and then it was the Credit Crisis, now it is Europe. (When) will Greece default and which banks will implode as a result? Is there another banking crisis in our future? I just came back from a whirlwind four-country visit to Europe, and I will try to offer a few insights. This week we start with Ireland, move to the problem of Europe at large and, if we're not out of space (and your patience!), we'll visit some last-minute data points. There is a lot to cover, so let's jump right in.
This was my first visit to Ireland, but it won't be my last. In an odd way, I felt more at home than I do in some US cities. And the views! I was charmed enough to agree to go back next month to speak at one of the most unusual economic "festivals" I have ever been to, when the last thing I want to do is get on another plane. More on that at the end.
First off, even though we think of Ireland as a country, it is in reality a nice-sized city. Ireland is a little under 4.5 million in population (with another 1.8 million in Northern Ireland). I was lucky, in that I have a number of readers in Ireland who offered to introduce me to people. Remember the old game of six degrees of separation (from Kevin Bacon, the actor)? In Ireland it is more like two degrees. It turns out they all had cousins or mates who knew someone I should see. No one was less than a few introductions away.
I spent a great deal of time going from one meeting to the next, gathering impressions and data. Literally dozens of meetings. I met with officials of government pension funds, the new chairman of the Anglo Irish Bank, former prime ministers, politicians of all types (both front and back benchers), established economists and rogue economists, businessmen at all levels, regular people in pubs, investors, and the fabled Irish ne'er-do-wells. And only got to a fraction of the potential meetings. With such a potpourri of people, you might think it would be hard to draw any conclusions, but I came away with two main impressions (and lots of smaller ones), which I think offer us insight into the world and European situations at large.
But before we get to those, let's review a little history. Ireland is noted throughout the world for its troubles and the Diaspora. Famines, rebellions, and tales of woes. The Irish have emigrated almost everywhere. The Irish pub was created as a way for people to gather when it was against the laws to assemble in public. And they exported their pubs around the world. What city can you go to and not find an Irish pub? (Well, some in Asia, perhaps, though my editor tells me there's a great one in Kyoto.) And in all of them they'll sing about some kid that was killed in the war, which was of course in 1618, or whenever.
I have always loved Celtic music, so I was delighted when I went to some local pubs and, sure enough, heard the music I was so familiar with, complete with the lilting Irish voices. The Irish are nothing if not a social people, wherever they gather. And the local pub is still the center of local communication (more on that later).
The first night I was there, I had the fortune to be invited by David McWilliams to attend the opening night of a classic and much-loved Irish play by Sean O'Casey, at the Abbey Theatre, first staged at the same theatre for its premier in 1924. The play is set in the working-class tenements of Dublin during the Irish Civil War of the early 1920s. It is a comic tragedy on so many levels, and was an interesting introduction to Ireland.
It is those centuries of woes that set the stage for the recent economic crisis in Ireland. For a number of reasons, Ireland began a "miracle" growth period in the 1980s and soon became "the Celtic Tiger." The mood of the country changed from downtrodden to optimistic. And that translated into a construction boom. They ended up believing that "this time is different" and went crazy buying and building homes. Which are now down some 65%.
Ireland is an interesting contrast to Greece. Greece used its access to low rates that came along with the euro to borrow and increase the wages of government workers, until the Greek train system, for instance, had €100 million in revenue and €400 million in salaries, with another €300 million in expenses. A government-sponsored retirement plan for some 600 different "hazardous" jobs (like hairdressing and radio work) was available at 50 years of age.
Greek banks are going to go bankrupt not because they lent money to finance too many homes but because they lent money to the Greek government. That is the opposite of Irish banks, which, while they bought modest amounts of Irish government debt, facilitated a construction boom of epic proportions – a bubble that imploded.
I have written about Irish housing woes. They built 300,000 too many homes, which would correspond to about 15 million too many homes in the US (we "merely" overbuilt by 2.5 million). The resulting crash in building has been a monstrous drag on the Irish economy. And the same happened in commercial construction – a taxi driver took some delight, once he knew I was a financial writer, in pointing out buildings that were empty. "But they are probably a good buy now!"
And the construction boom helped finance a huge boost in government revenues. In 2004, the Irish Home Builders Association calculated that 40% of the price of a house went straight to the government in taxes. You can find details on their calculations in this newspaper article. The government of that time protested that the figure was only 28%!
And the Irish willingly took on the debt of banks that went bankrupt. If Anglo Irish Bank were a US institution, the equivalent debt would have been about $3.5-4 trillion (depending on the exchange rate). Can you imagine trying to get a bailout for ONE bank for that much? And in Ireland there were three of them (!), though the other two were somewhat smaller. The Irish government guaranteed the bank debt for ECB loans, which money then went to European banks that had loaned the Irish banks the money in the first place.
Michael Lewis, in his just published book Boomerang! (I saw several people reading it on the plane coming back – soon to be downloaded to my iPad), noted that he thought it was interesting that the Irish people did not seem all that aware of the rather crushing nature of the debt they had assumed. He also commented on that in an interview with Charlie Rose. More on that bank debt below.
Before we get to my two impressions from Ireland, a few things we should keep in mind. First, I heard time and time again that Ireland is different from Greece and other Mediterranean countries. The Irish willingly undertook an austerity program, without major public protests, and have actually begun reforms. They cut public salaries (around 15%), pensions, and other "untouchables." (Try that in the US! Wisconsin went berserk over cuts that were a fraction of what the Irish did.) Other government budgets were slashed. And they acknowledge the need for even more cuts. That being said, a clear backlash is beginning to brew over cuts to government social programs. (I should note that even though this is about the Irish, I hear this complaint everywhere in Europe and the US.)
This is from the Irish paper The Independent:
"A LABOUR senator has questioned the need for massive social welfare payments to many families after revealing yesterday that some are receiving €90,000 a year. Senator Jimmy
Harte highlighted the case of one family who are being paid €1,763 per week. The unemployed married couple, who have four children and live in Dublin, claim a range of social welfare benefits.
"Mr. Harte, who received the information from Department of Social Protection officials, said €50,000 is more than enough for a family to survive on. The Donegal-based senator told the Irish Independent yesterday that he believed the figure was far too much to be handed to a family in support payments.
"The family are doing nothing illegal but the system is wrong when a couple are able to receive €90,000 per year for doing nothing. I don't think this sort of payment is acceptable in the good times, never mind the bad times we find ourselves in now…. There are married couples in this country with two good jobs, working very hard and are not receiving anything like this. As well as receiving €90,000, they will not have to pay property tax or water charges. That is just wrong. You would need to be earning close to €140,000 to take that sort of money home after tax.
"This is a Dublin-based family but I know there are families in other counties receiving up to €85,000. They won't take in as much in rent allowance but they are still entitled to all the other payments [said the Senator].
"According to figures obtained by Mr Harte, the following is the weekly breakdown of the social welfare payments received by the family: father on disability allowance, €322; guardian's pension for child taken in, €286; rent supplement, €276; mother – carer's allowance, €380; child benefit, €288; daughter (17) with special needs, €211. Mr. Harte said he has forwarded all this information on to the Minister for Social Protection Joan Burton and wants a cap put on welfare payments."
And from my understanding, this is on top of health care. Which is another thing that I was told needs reformed. Which of course you hear in the US and all over the developed world, so the Irish have no corner on politicians who like to hand out a lot of benefits when times are good. But now the bills are coming due.
Sidebar: The one thing the Irish have plenty of is politicians. The Dail (pronounced "doil") is their parliament. It has 150 members. And their upper house has 60 members. That's about one member of parliament for every 30,000 voters. Peter Mathews, a new member of parliament, was kind enough to show me through the parliament building, opening up the chambers in the evening. Now that is something you don't see US Congressmen do.
So, Ireland is not without its issues that must be dealt with. But I did come away with some positive views.
As I noted, I met with people of all different stripes and political bents, from avowed socialists to libertarians. When they would ask me who else I was going to see (or had seen), they would almost invariably wince and say, "Don't let them put you off Ireland" or "They don't understand the real problems," or some variation.
They are not shy about voicing opinions. David McWilliams is seen as something of a rogue in polite political circles. When McWilliams began to suggest that the Irish housing market was a bubble that would wreak havoc when it broke, the prime minister said that people like him should just commit suicide. (Seriously!)
I have been involved in political circles for many years, although lately I have more or less "retired" from my political activities. In my experience, nothing is more sharp or divided than local politics. There is far more direct involvement at the local level, and that means more opinions and personalities get involved.
Remember when I said Ireland was a nice-sized city? That is what their politics reminded me of. When everyone knows everyone, and when there are enough politicians that everyone can get to them with their views, it is indeed a small world.
But after they had shared their opinions with me, a strange thing happened in almost every meeting. I pointed it out to a friend, Phil Harkin, who set up so many of the meetings and helped me get where I was going. He began to pick up on it as well, and it became our running bit of humor.
It seemed everyone I met was a member of the Chamber of Commerce. They would tell you why Ireland needed to adopt one policy or other, what their views were, and then at the end they would pull out a figurative brochure and tell me why I needed to "buy Ireland." Bring your business here. Set up shop. Hire the locals, who are flexible and educated and willing to work, etc. They speak English. They are skilled workers.
The Irish seemingly get it. While they all (left, right, and center) want the government to adopt the particular set of policies they prefer, they all recognize that the way to growth and jobs is for businesses to prosper. And they wanted more of that! The virtues of Ireland are manifest to all, if you only look. And they were more than happy to show me where to look.
The Irish may bicker and moan amongst themselves, but when they face the world they lock arms and join the chorus. "Buy Ireland," they sing. It really is rather amazing to listen to all at once.
Ireland has more direct investment from the US than all the BRICs combined. Think about that. More than China, Brazil, Russia, and India. That rather stunned me. There are over 600 US companies in Ireland, employing 100,000 people. Google has 2,700 employees from over 40 countries and is growing, adding office space and people as fast as it can. Technology is everywhere. Biotech, medical devices, all sorts of computer services. The Irish seem to have a knack for research and development. Entrepreneurs are taking over as fast as they can. I heard one amazing story after another of businesses that had blossomed in the Irish soil.
It is not just one-way. Irish companies have a lot of US employees. There are some 82,000 people employed in the US by 227 Irish firms, almost as many as are employed by US firms in Ireland. That is a far cry from the US employees of Chinese firms.
As a result, Ireland is in the enviable position of having a positive trade balance, which is necessary if you want to balance your budget in a country where the banking system is imploding and people are deleveraging. It is why Greece will become a basket case and Ireland has a way to get through its crisis. When Greece defaults, whether or not they leave the euro and go back to the drachma, they are in for a massive deflationary depression. At the end of the day, you either have to have "hard currency" to buy oil and medicine and other essentials, or find someone willing to loan you the money. Greece and Portugal and Spain do not export enough to make it through without some kind of devaluation. Ireland does. That is a critical difference.
And that brings us to my next take-away, which has serious ramifications for Europe.
Michael Lewis noted from his time in Ireland that the Irish seemingly went along with the Irish government taking on the bank debt. The large majority were not aware of the nature of the impending crisis. In the last few years, that has changed.
I have written extensively in the past about how the Irish have figured out they are taking on debt for banks that no government should have touched. It was just too much. It's simple arithmetic: the Irish cannot repay that debt under the current terms (even after the ECB and Europe gave them lower interest rates in July) and ever hope to get out of debt in the next 30 years. They have consigned themselves and their children to decades of toil to pay back English and German and French banks (among others).
And that fact dawned upon them. They voted out the government that allowed the debt to be assumed. It was a clear message, but the government has not yet done anything to rid itself of the debt.
There are those like McWilliams who simply want to repudiate the debt. "It should never have been done, so we will not pay it." He is not alone; that view is becoming increasingly mainstream now.
When you press politicians and establishment types (and I did) who are against unilaterally disavowing the debt, a strange thing happens. I kept asking, "But the voters seem to want to forego the debt. And the math suggests that Ireland can't pay back these foreign bankers without great sacrifices." At first, they would point out that Ireland is doing what needs to be done: cutting spending and payrolls. We are not Greece, they say; there is a need for "respectability." But when pressed, they would come around to admitting that, "Yes, Ireland will get a haircut." Everyone I met expected it to happen. The difference was the path to the haircut. But while the politics matter, the destination is the same.
Some favor doing it outright. Others truly believe they will be offered a haircut when Greece and Portugal get theirs. They fully expect it. In a meeting with an establishment-insider economist (off the record), who was at the table when the first deal was done, he said there was an implicit understanding with the IMF (and ECB) that whatever was offered to Greece, et al. would be available to Ireland. So Ireland went along with the bailout to keep from imploding the euro and averting a crisis that would have been biblical in proportions. The future of the euro is now not in their hands, because by taking on the debt they did not blow the euro up. Which could have happened, because European politicians were not ready for such a crisis.
So rather than having to kick the door open for a haircut, they expect the door to be opened for them by the IMF and the ECB. A far more respectable path for those who are very pro-Eurozone. But Irish leaders clearly get that voters expect that something will be done. They have time, as it will be another three-plus years before elections. By then, the crisis will have fully evolved and resolved itself, as far as the political public is concerned. And politicians will take the credit, as they always and everywhere do.
But here is the issue for Europe. The amount of money needed for Ireland is going to be a lot more than they now think, or at least are willing to admit. When Eurozone politicians worry about "contagion," or one country wanting the debt relief that another country gets, it is a very real worry. And rightfully so, as voters in Portugal or Spain or (gasp) Italy who are burdened by debt that is seemingly intractable will also want relief. It is not just an Irish condition, it is a human trait.
And the money that Europe needs will overwhelm the €440 billion ESFS fund. Stratfor and others think it will take at least €2 trillion. The Boston Consulting Group put out a report that suggest the total number, at the end of the day, will need to be (drum roll, wait for it) over €6 trillion. I don't like their proffered solutions, but their analysis of the debt and the need for relief is sobering.
Whatever the figure, it is staggering. And one the Eurozone is not willing to pay, at this moment. When the crisis hits, who knows? But now, that much is not on the table. There is talk of leveraging the ESFS up to €2 trillion, but that seems odd, as normally you have to have equity to leverage more debt. The ESFS is debt created by promises to pay by the member governments. Are we now at the point where we need to leverage our leverage? It seems to me that is what got us into the problems to begin with.
France is at risk of losing its AAA rating. From my far-removed seat, I think it is almost a certainty they will, as the amount they will have to raise for French banks is enormous. Add another few hundred billion euros for bailout funds for Spain and Italy, and the idea of AAA euro debt goes right out of window. To keep the current AAA, a majority of guarantees needs to be from AAA countries. That is a very touchy issue right now.
Read the following quote from Angela Merkel, Chancellor of Germany and someone who is a believer in a strong, united Europe. This is from a supporter of Europe, mind you.
"While stepping up her rejection of a Greek default, she [Merkel] said that issuance of shared debt by euro countries isn't the solution to the problem spilling from Greece, even though some may long for the ‘big bang' to end the debt crisis. ‘Whoever believes that has no clue about the economy,' she said. ‘No one can say with certainty' what would happen if Greece defaults, she said. ‘Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?'
"Merkel said that her ‘entire council' of economic advisers says Greek debt should be restructured, advice that she is not prepared to take.
" ‘If we tell a country "We cancel half of your debt," that's a great deal,' she said. ‘Then the next guy will immediately show up and say he wants the same.'
" ‘You can open any newspaper and see there's a broad international debate,' she said. ‘I'm not an economist or a theorist. I and the German government have to consider the consequences of what we do.'
"Merkel, speaking to the last of six regional conferences of her Christian Democrats before the party holds a national convention next month, said that she was ‘deeply convinced' thatEurope's problems can only be solved jointly.
" ‘Solidarity is always cheaper than if we were to go it alone and wind up with the problemSwitzerland has – that the currency level is so high that you can't export any products anymore. Today, going it alone is no path to a better future.' " (Bloomberg)
It is getting late and this is already long enough, so a few more quick notes and then I'll save the rest for next week.
Greece will only get more promises and more funds until Merkel gets a call from her accountants, who tell her they have figured out which banks need government funds. The next day she will call Papandreou and tell him to hold a conference announcing the haircut that Greece will get. It will all be orchestrated to the color of their socks.
From what I heard, Europeans banks are worse than even the dire reports you read in the papers. Spreads are widening and liquidity is drying up. Drexia is the tip of the iceberg. I really have to wonder how much France can do in regards to its bank debt. Will the ECB lend them enough money? The answer is yes. But we are talking a great deal of debt for a country with serious fiscal deficits and where government spending is already 55% of GDP, with rising health-care and pension costs. Think French politicians will try and get their unions and public workers to take a 15% pay cut? The French will not be civilized and stoical, like the Irish. They will take to the streets.
We are now in the final innings of the Endgame. Greece is likely to default no later than the end of this year, if not by the end of this month. Which for all intents and purposes they have already done. If you can't get the market to finance you, that means you can't pay your bills without the kindness of strangers. If Greece were an individual or a company, it would be in bankruptcy proceedings. It is now just a matter of time.
Can the euro survive? The short answer is yes, but not without a lot of pain on the part of a lot of people. The drive for a united Europe is strong and may indeed overcome the drive that would tear the union apart. I actually hope so. But it will not be done without a lot of sacrifice. I think the valuation of the euro is at serious risk. And while European markets look cheap on a relative and historical-valuation basis, one needs to ask, compared to what? Long European stocks, short the euro? Maybe, especially if the Germans turn the ECB loose as a way to keep (and pay the price for) the European Union.
I heard no consensus. There are dozens of different plans, enough to make any politician's head swim. Stay tuned.
I will be in Houston on Friday and leave from the Streettalk conference ( to go to New York for the Singularity Summit over the weekend (, then meetings Monday and Tuesday in New York, and I'm off to Cape Town, South Africa for two days, one night to speak at the Momentum Wealth Investment Summit Conference. Then home, where I will do a series of conferences for wealth advisors, in conjunction with my partners Altegris Investments. More on those later.
As noted above, I was with David McWilliams while in Ireland (his website is, and we really hit it off. I like the guy. Besides his economics gig, he writes a column read by almost everyone in Ireland. He did a one-man show which sold out for thirty days at the Abbey Theatre, and is coming to NYC. Go figure.
He talked me into going back to Ireland for the second annual economics festival he does in Kilkenny. From their website: "If you're like us you're finding all economics complicated and frightening in equal measure right now. What if we were to put some world class economic thinkers together with some of the best comic analytical minds available and see if they can't make all this easier to understand in a way that is entertaining, informative and funny?"
I made the note talking with Barry Ritholtz and Bill Bonner this summer that all good economic speakers are frustrated stand-up comedians. And since I can't actually be all that funny, maybe I can learn something from the professionals. It is quite the deal and sounds like a lot of fun. See me there!
It is time to hit the send button. This weekend all the kids will be in to celebrate my birthday (which was last Tuesday), and I see some quality family time. Maybe even some pancakes for lunch. Time to indulge. I actually did 65 pushups on my birthday, and in working up to it once did 73. Getting old just means getting better. At least that is what I tell myself! Have a great week!
Your feeling his Irish blood analyst,
John Mauldin


This may be the reason for the paper selling in gold where one HedgeFund is in trouble in Canada.
The other hedge fund are the John Paulsen funds:

(courtesy zero hedge)

Fund Blamed For Gold Sell Off, Salida Capital, Tumbles 37% In September, 49% YTD

Tyler Durden's picture

Last week, a fund rumored to be on deathwatch, was Toronto-based, gold and energy-focused hedge fund Salida Capital (whose gold exposure, in addition to Paulson's, were both factors in the rapid drop in the price of gold last week, following concerns that it was being liquidated in the open market - for more on Salida's gold exposure, read the attached letter). The fund promptly came out and refuted said rumors, however upon review of its monthly P&L, we are somewhat skeptical about its survival chances, even if, in principle, we agree with the fund's investment philosophy. The reason for our skepticism is that Salida was down a whopping 37.2% in September, and 49.4% YTD, a collapse which only compares to that of Paulson's Advantage Plus, and demonstrates vividly just how much of a misnomer the name "hedge" can be when applied to members of the asset management industry. What is worse, however, is that the reason attributed for this epic collapse is amateur hour 101, and any LPs should be far more concerned by the explanation provided for this underperformance than the actual underperformance itself.
Salida says: "September was an extremely difficult month for the Salida Strategic Growth Fund, which fell 37.17% in the month and 49.44% year-to-date. On the back of August's market selloff, we felt that our core gold, energy, and other resource names were trading at very attractive levels, particularly in light of prevailing commodity prices. We further felt that the Fed was moving ever closer to a QE3 announcement, and even more importantly, U.S. money supply had been growing extremely strongly through the summer months even without a QE program. U.S. money supply growth in recent years has proven to be very reliable leading indicator of risk asset markets. So far, however, it appears that this newly printed money has this time flooded into U.S. treasuries offering record low yields." In other words, it's all M2's fault. The problem with this simplistic observation is that as we pointed out two months ago, the move in M2 has nothing to do with the Fed, and everything to do with asset reallocation, when investors scrambled out of equities and into the "safety" of their bank accounts. Furthermore, theunwind of Regulation Q was also a main driver for this surge in the broad monetary aggregate. Alas, Salida made the most fundamental rookie mistake in finance and assumed correlation to be causation (as did Art Cashin, Dennis Gartman and Andy Lees) of Fed stimulus. The irony is, as we said, that we agree with Salida's underlying premise: "With an election year looming, a sputtering economy, and a Fed Chairman who has in the past touted the ability of unconventional monetary policy to cure such economic woes, we believe the [QE3 Large Scale Asset Purchases] announcement will come." Alas, the question is when. And as Salida just found out the very hard way, in finance you may be 100% right eventually, but if your timing is off, well, as Salida itself says, "True money–printing QE3 will come — timing is the question." In that, at least, they are 100% correct.
As for the reason why gold sold off so precipitously two weeks ago, a lot of it has to do with feedback loop concerns that Salida (as well as Paulson and other long-heavy funds) may be liquidating. From the fund's letter:
On the back of this surge in money supply, we made two mid–August investment calls:

1. We continued boosting our exposure to gold, believing it to be a relative safe haven, and that it would continue to attract inflows as QE3 speculation grew in the face of a renewed U.S. recession. While bullion performed well in 2011 through August, it was hit hard in September, falling a dramatic US$200/oz in only a 3–day span. Margin hikes by the CME and the Shanghai Gold Exchange, disappointment from the Fed, and rumours of redemption/margin call–driven fund liquidations and European central bank selling took their toll. These factors tend to be temporary in nature. In fact, with much of the developed world now in or close to recession, European sovereign debt concerns intensifying, and Chinese growth appearing to slow, the fundamental backdrop for gold has rarely been more compelling. A bet on bullion is a bet that central banks are about to ramp up money printing — a logical bet in our view. In fact, we feel safer in gold than anywhere else in today’s market.

2. We felt that a money growth–fuelled market rally would provide a good bounce to beaten–up energy stocks given the relative resilience of the oil price. Not only did the bounce not occur, but the sector has continued to sell off. Sell off is an understatement — it’s been decimated, with the WCAT ETF (a basket of mid–cap energy stocks) falling almost 40% over August and September alone. Our impression is that the sell–off is at least partially driven by forced fund liquidations (i.e. selling to meet margin calls or redemptions). While these factors tend to be temporary in nature and unsupported by fundamentals, we admittedly have less confidence in the short term outlook for the price of oil than we do in gold. It’s not $80 WTI (or $100 Brent) that has investors spooked — it’s the potential for oil to head lower in the near term. And with recessionary conditions spreading, we can’t totally dismiss such a scenario. Accordingly, we’ve now raised our level of hedging in both the energy sector and the broad market.

These two calls have been costly, as the market has moved against us. We still believe that the reasoning was logical, but arguably ill–timed. In hindsight, we underestimated the short term impact of forced selling.
Considering that the letter was written October 3, it is probably safe to assume that Salida was not the source of gold liquidation. At least not yet.
Salida's Monthly Performance Letter (pdf)


It is late in the night so I think it best to send this down to you so you can prepare for Monday.

I hope you will have a grand weekend.

I will amend my commentary on any news on Dexia.

all the best

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