No QE3; ZIRP Extended Thru 2014 As Jeffrey Lacker Objects - Full December-January Statement Comparison

As we have pointed out previously, the primary if not only driver of relative risk returns (because in a world of relative fiat value destruction it is all relative, except for gold which is revalued relative to all equally), will be who of the big two - the Fed and the ECB - can print more. And up until now, at least since the end of December when the market "suddenly" realized that the ECB's balance sheet has soared to unseen records, the consensus was that it was the ECB that would be the primary source of easing. Especially when considering that there is another ~€500 billion LTRO due on February 29. Yet today's rapid reversal in the EURUSD, driven by Bernanke's uber-dovish comments suggest that something has changed and that the Fed is now expected to ease substantially. How much? For that we look to the latest balance sheet cross-correlation, where if we go by simple correlation, the market is now pricing in (based on the EURUSD cross ratio) that the relationship of the two balance sheets will rise from a multi year low of 1.08 as of a few days ago to 1.15, at least based on the rapid move in the EURUSD higher as can be seen in the chart below. Indicatively, the actual value of the two balance sheets is €2.706 trillion for the ECB and $2.92 trillion for the Fed (or a 1.08 ratio). So now that the EURUSD has risen as high as it has, it implies that the pro forma "priced in" ratio is about 1.15. But wait: one should also factor in the fact that the ECB's balance sheet will rise by at least another €500 billion in just over a month, which will bring the ECB's balance sheet to €3.2 trillion. Which means that to retain the 1.15 cross balance sheet relationship, the Fed's own balance sheet will have to rise to $3,687 billion, or a whopping $767 billion increase!

Naturally, that's a simple heuristic based on only what the EURUSD pair is implying. Of course, this is not a scientific way of predicting where Bernanke will go, but that is at least what the market seems to be telling us. If the LTRO is much bigger, such as the €1 trillion suggested by CLSA, then the ratio changes, but €500 billion is probably far more realistic at this point.

So at the end of the day, the balance sheets of the world's two biggest central banks will increase by about €500 billion for the ECB and ~$770 for the Fed and $655 billion for the ECB.

Incidentally, this analysis assumes all else equal, which with Greece on the verge of default and Portugal potentially in its footsteps, it isn't...

Thus our question is: gold is not on its way to $2000 yet why again?

In the wee hours of the morning, Europe was under tremendous stress as the new focal point appears to shift from Greece to Portugal as this nation is now in need of 30 billion Euros. Also remember from my commentary yesterday that bond holders are in much better shape legally than bondholders from Greece.
Portuguese bonds are purchased under UK law where protection of the bondholder is sacrosanct.
Despite the LTRO format of the ECB, strangely the 2 yr Portuguese bond yields rose today. The balance sheet of the ECB is not looking too good today.

(courtesy zero hedge)

end.

European Stress Reemerges As Risk Off Epicenter Following Portugal Admission It Needs €30 Billion Bailout

Submitted by Tyler Durden on 01/25/2012 07:47 -0500

Bond

European Union

Fail

Even as the Euro-Dollar 3 Month basis swap has contracted to a nearly 6 month low at -75 bps, on residual hopes that the LTRO will do anything to fix Europe (it won't - just compare it to the €442 billion 1 year LTRO from June 2009 which worked until it didn't for the simple reason that Europe does does not have a liquidity problem), Europe has once again reemerged as a source of risk off (not least of all because the fulcrum security benefiting from the LTRO - the Italian 2 year BTP is for the first time in weeks wider by 17 bps). Why? The same reason as always: Greece, with a touch of Portugal. As BBG observes the positive sentiment in Asia earlier was retraced in the European session, with commodities, FX, equities lower, especially after ECB demurred from accepting losses on its Greek bond holdings. What that means is that as we patiently explained over the weekend, the imminent Greek default (just listen to Soros over in Davos spewing fire and brimstone on Europe for allowing the situation to get to a place where a Greek default is inevitable) will create so many subordinated junior tranches of Greek debt it will make one's head spin. But while the fate of Greece is all but sealed, and a CDS triggered virtually factored in (note: a Greek CDS trigger, in isolation, won't have much of an impact as repeated here before - in fact it will return some normalcy to the market as CDS will be a hedging vehicle once again over ISDA's corrupt trampled corpse), it is what happens to Portugal and its bonds that has the market gasping for air. Because as Zero Hedge pointed out first, a Greek default will be impossible to be enacted in Portugal in its currently envisioned format, as stupid as it may be. In fact, due to the pervasive and broad negative pledges in most medium-term Portuguese bonds, any priming Troika bailout is impossible without providing matching collateral for everyone else under UK indenture bonds!

This is critical because so far Portuguese PM Pedro Coehlo has been saying that no additional bailout capital will be needed, as the party line demands. Unfortunately, the reason why Portuguese bonds have just blown up once again today is that someone has let the truth slip and the horse is now out of the barn.

As Reuters reports, according to Antonio Saraiva, the head of the country's industry confederation, Portugal needs more bailout funds. €30 billion should do it. Great. However that means that all of the existing bonds have to get the same liens and security protections as any new IMF loan. Translation: Portugal better prepare to see itself stripped of all assets. Yet another translation: prepre to see Portuguese bonds explode as the market slowly realizes that the Greek model does not work here.

Reuters has the smoking gun:

Antonio Saraiva, the leader of the influential lobby group with vast collective bargaining powers, told Reuters the 78-billion-euro bailout that runs through 2013 did not take into account massive debts by inefficient, loss-making public companies, especially in the transport sector.

Due to Portugal's debt crisis, foreign banks have stopped refinancing those debts and Portuguese banks had to step in, depriving the rest of the economy of loans needed for it to pull itself out of the worst recession in decades. The government insists no bailout renegotiation is needed, although it added it could receive more support if external tensions kept it locked out of funding markets.

"I'll dare to say we have a credit crunch... What is lacking is 30 billion euros," said Saraiva, who has been involved in consultations with Portugal's international lenders on the progress of the bailout program.

"I think we will need a mix of more funds and longer terms to be negotiated with the troika" of lenders from the European Commission, European Central Bank and International Monetary Fund.
Saraiva's estimate adds to a warning earlier by a former government official who negotiated the country's bailout, Carlos Pina, that Portugal may need a further 20-25 billion euros in rescue funds to finance public companies.But Saraiva said Portugal would only be able to ask for more money and time after showing more effort in meeting the fiscal goals set out in the bailout to garner more credibility.

"The troika already has a much more detailed vision of Portugal than it had when the pact was signed in May. Through this vision and through the credibility we achieve by adjusting our course, the troika will be more prone to conceding this."

"Maybe before the end of this year we could manage ... to increase the sum of the assistance to at least 100 billion euros, and extend the time terms," he said, explaining that his group told the lenders last year the country needed as much as 106 billion euros in financial assistance.

He said the troika's initial evaluation of Portugal's needs was incorrect.

"When we were first consulted by the troika we defended that the state has to have conditions to reduce the debt burden of the broad public enterprise sector, allowing and obliging banks to provide this sum of 30 billion euros to the economy."

The government says no bailout renegotiation is needed as it remains focused on meeting budget deficit targets and implementing structural reforms.

"I can reaffirm that Portugal will not ask for a renegotiation of its bailout, we will neither ask for more money nor for more time," Prime Minister Pedro Passos Coelho said on Tuesday, vowing that the bailout will not fail due to internal reasons.

But he also said Europe and the IMF were ready to help Portugal if, for external reasons, it would be unable to return to debt markets as planned in the second half of next year. Saraiva said whatever the outcome of Greece's debt crisis, the European Union was unlikely to allow the disintegration of the euro zone, and Portugal would definitely stick to the euro.

Last week, the government, unions, Saraiva's confederation and other employers' associations signed an agreement on labour market reforms, designed to make hiring and firing workers easier to help struggling companies.Saraiva hailed the agreement as an important step in the right direction, but said it only "removes one part of one obstacle" for companies, while many problems such as an excessive tax burden or inefficient justice system remained.

In other words: Portugal does need more money, but under its current capital structure, there just is no place where said new money can come in cleanly and efficiently, while diluting everyone else.

Oops.

end

Timmy is gone after the election :

Easily the best news of the day:

GEITHNER SAYS OBAMA WOULDN'T ASK HIM TO STAY FOR A SECOND TERM - BBG

Oh well, life is tough. Surely that basement office at Goldman Sachs will have some daylight and a TruboTax manual to make post-administrative life bearable for Geithner.

Greek Economy on Track to Implode: Hanke

By Austen Sherman and Sara Eisen - Jan 24, 2012 4:53 PM ET

Whether or not Greece is able to reach an agreement on the restructuring of its debt, the country is set to “implode” as the economy contracts, according to Johns Hopkins University’s Steve Hanke.

“The game is completely over,” Hanke, professor of applied economics, said at the Bloomberg Sovereign Debt Crisis Conference in New York hosted by Bloomberg Link. “All the calculations are nonsense and have been since day one. Since the crisis began the money supply has been shrinking and the economy is going to implode, no matter what they do in the short run.”

Money supply is shrinking at an annual rate of about 16 percent in Greece, meaning there won’t be growth needed to support debt payments, Hanke said. Greece is pursuing talks on a debt swap with private creditors that would lower Greece’s debt to 120 percent of gross domestic product by 2020. European governments have sought to fill a deeper-than-expected gap in Greece’s finances by having investors accept a lower interest rate on exchanged bonds.

The International Monetary Fund cut its forecast for global growth today and warned that the European debt crisis threatens to derail the world economy. The fund, in an update of its World Economic Outlook report, lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent.

Regional Bailouts

To avoid a 1930s-style worldwide depression, IMF Fund Managing Director Christine Lagarde yesterday called on other countries to play their part. The IMF, which co-finances loans to Greece, Ireland and Portugal, identified a potential global financing need of $1 trillion in coming years and is seeking $500 billion in new lending resources from its member countries to address potential loan demand.

“The World Bank said hope for the best, plan for the worst,” Axel Merk, president of Merk Investments LLC in Palo Alto, California, said at the conference. “That is exactly what central banks are doing. Monetary policy is going to be accommodating.”

Now isn’t time to consider whether the 17 nations that participate in the European Monetary Union need to expel weaker members such as Greece, according to Kit Juckes, head of currency strategy at Societe Generale SA in London.

“Europe has to choose. My best guess is they will make a choice that doesn’t have all these countries in it,” Juckes said at the conference. “The dumbest choice is to make that decision under pressure.”

The euro has depreciated 3.5 percent in the past six month against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has gained 6.6 percent and the dollar has risen 7.1 percent.

To contact the reporter on this story: Austen Sherman in New York atasherman18@bloomberg.net

end.

Wolf Richter of www.testosteronepit.com on the Greek economy:

Paying Lip Service To Saving The Eurozone

Submitted by testosteronepit on 01/24/2012 23:12 -0500

default

Gross Domestic Product

Wolf Richter www.testosteronepit.com

"The case of Greece is hopeless," Otmar Issing said today during an interview. He should know. He was a member of the Executive Board of the Bundesbank and of the Governing Council of the ECB. Another substantive voice in an increasingly loud chorus.

But it’s legally impossible to kick Greece out of the Eurozone. So he suggested a procedure: Tell the country that it has to implement reforms as a condition for financial help. When implementation is lacking, the basis for financial help disappears, and “you have to end it,” he said. “Then it's up to the Greeks to think about what they want to do."

That has been happening all along. The bailout troika (EU, ECB, and IMF) has offered money in exchange for a broad range of tough reforms. At first, it was easy for Greece to agree to reforms in return for bailout billions, but adequate implementation turned out to be impossible. Demonstrations, strikes, and riots, an unwilling bureaucracy, a political power struggle, morose economic conditions—all have seen to it that the unpopular German dictate, as it’s called, would fail.

“Greece must implement the agreed measures and reforms,” German Finance Minister Wolfgang Schäuble told reporters in Brussels. “And of course, all Greek parties must agree to the measures."

Another set of German must’s that Greece won’t be able to fulfill. By design. It gives German and Greek politicians an out—no one wants to be tagged with having made the first historic step in breaking up the Eurozone.

So, they’re going through a drawn-out step-by-step procedure of demands for reforms, promises, failed implementations, rebukes, withheld bailout transfers that then might still be made, and so on. The idea is to keep markets from panicking, give governments time to prepare for the inevitable, and render politicians blameless for Greece’s exit from the monetary union.

Return to Otmar Issing. "A monetary union without political union is absurd,” he said. “The keyword today is fiscal union. But a fiscal union cannot function without a political union. Yet decisions in that direction have to be democratically legitimate ... and that takes time. Those that defend the concept of a fiscal union know that."

So, Chancellor Angela Merkel, Schäuble, and the hordes of proponents of a fiscal union know that it cannot function without a political union—and yet they keep paying lip service to it. Beneath the surface, are they loosening the ties of the monetary union? Because the price of saving the impossible is just too high? It seems. And word is getting out.

“The fact that we profit massively from the euro doesn’t mean we have to accept every political horse-trade to save it,” said the president of Germany's Association of Exporters. For how the German industrial elite opened up about exiting the Eurozone, read.... ‘The Old Europe’ Is ‘Not An Option For Germany.’

In Greece, the economic tailspin continues. Squeezed from all sides, and faced with oil prices that have nearly doubled in 2011, Greeks have been heading into public woods to chop down trees; they need logs for their fireplaces to make it through the winter. Authorities filed 1,500 criminal complaints in 2011, twice as many as in the prior year.

But not everything is doom and gloom in Greece. Tourism set a record in 2011: 16.5 million tourists, up by 10% from 2010, and responsible for a 1% increase in GDP, according to the Association of Greek Tourism Companies (SETE). And it expects another record in 2012. While the number of tourists from the EU declined, Russians increased by 88%. And the uptrend is expected to continue. Easier visa requirements, it seems; sometimes, the Greek government does something right.

And Greece’s exit from the Eurozone? According to the SETE, the drachma would turn Greece into a tourist mecca for all budgets, and business would boom. So the only major growth industry in Greece declares that it would be even better off if Greece left the Eurozone. A ringing endorsement.

Indeed. Austerity measures are taking their daily toll. Suicides jumped by 22.5%. Pharmacies are having difficulties obtaining medications. More cuts are coming. If there is no agreement on the debt swap and with the bailout Troika, Greece will default in March. But now, even the Troika is in disarray. Read....Disagreement Everywhere, Rift in the Troika.

end

Today, the UK debt has finally past the ONE Trillion pound mark (equiv 1.56 trillion dollars)
England's Debt to GDP is only 64% compared to the uSA at 100%. However England is rapidly deteriorating due to its high reliance on finance:

(courtesy Jim Sinclair)

UK debt passes £1 trillion for the first time
The UK Treasury has blamed "unsustainable" levels of spending by the last Labour government for public debt rising above £1 trillion for the first time. By Szu Ping Chan
3:20PM GMT 24 Jan 2012

Public sector net debt excluding financial interventions, such as bank bail-outs, rose to £1.004 trillion in December, as the Government borrowed nearly £14bn last month despite its continued austerity drive.

The £1 trillion figure was the highest since records began in 1993, and represents 64pc of GDP. The Treasury has not recorded an annual surplus since 2001/02, when it repaid £243m into the nation’s coffers.

The Government has forecast that servicing Britain’s debt will cost £47.6bn in the current financial year, rising to £65.5bn in 2016/17.

A Treasury spokesman said: "That our national debt has reached more than £1 trillion simply shows the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation’s future that we deal decisively with the deficit."

The Office for National Statistics (ONS) said it expected the figure to ease back in January due to tax inflows, but to rise again in February.

More…

end

I brought this to your attention these past few days. Here is a great article which shows how the use of the dollar is waning:

(courtesy Casey Research)

The Demise of the Petrodollar

Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold. Why does that matter, you ask? Only because it strikes at the heart of both the value of the US dollar and today's high-tension standoff with Iran.

Marin Katusa

Chief Energy Investment Strategist
Casey Research

Tehran Pushes to Ditch the US Dollar

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran's oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.
But that line doesn't make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.
The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.
We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.
If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar's valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.
The Petrodollar System
To explain this situation properly, we have to start in 1973. That's when President Nixon asked King Faisal of Saudi Arabia to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi Arabian oil fields from the Soviet Union and other interested nations, such as Iran and Iraq. It was the start of something great for the US, even if the outcome was as artificial as the US real-estate bubble and yet constitutes the foundation for the valuation of the US dollar.
By 1975 all of the members of OPEC agreed to sell their oil only in US dollars. Every oil-importing nation in the world started saving their surplus in US dollars so as to be able to buy oil; with such high demand for dollars the currency strengthened. On top of that, many oil-exporting nations like Saudi Arabia spent their US dollar surpluses on Treasury securities, providing a new, deep pool of lenders to support US government spending.
The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world's oil for free, since oil's value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.
The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.
There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.
So here's an interesting thought experiment. Everybody says the US goes to war to protect its oil supplies, but doesn't it really go to war to ensure the continuation of the petrodollar system?
The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.
This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.
There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011 Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.
War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant – and very messy – transition in the global oil machine.
The Iranian Dilemma
Iran may be isolated from the United States and Western Europe, but Tehran still has some pretty staunch allies. Iran and Venezuela are advancing $4 billion worth of joint projects, including a bank. India has pledged to continue buying Iranian oil because Tehran has been a great business partner for New Delhi, which struggles to make its payments. Greece opposed the EU sanctions because Iran was one of very few suppliers that had been letting the bankrupt Greeks buy oil on credit. South Korea and Japan are pleading for exemptions from the coming embargoes because they rely on Iranian oil. Economic ties between Russia and Iran are getting stronger every year.
Then there's China. Iran's energy resources are a matter of national security for China, as Iran already supplies no less than 15% of China's oil and natural gas. That makes Iran more important to China than Saudi Arabia is to the United States. Don't expect China to heed the US and EU sanctions much – China will find a way around the sanctions in order to protect two-way trade between the nations, which currently stands at $30 billion and is expected to hit $50 billion in 2015. In fact, China will probably gain from the US and EU sanctions on Iran, as it will be able to buy oil and gas from Iran at depressed prices.
So Iran will continue to have friends, and those friends will continue to buy its oil. More importantly, you can bet they won't be paying for that oil with US dollars. Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold, supported by a few rupees and some yen. Iran is already dumping the dollar in its trade with Russia in favor of rials and rubles. India is already using the yuan with China; China and Russia have been trading in rubles and yuan for more than a year; Japan and China are moving towards transactions in yen and yuan.
And all those energy trades between Iran and China? That will be settled in gold, yuan, and rial. With the Europeans out of the mix, in short order none of Iran's 2.4 million barrels of oil a day will be traded in petrodollars.
With all this knowledge in hand, it starts to seem pretty reasonable that the real reason tensions are mounting in the Persian Gulf is because the United States is desperate to torpedo this movement away from petrodollars. The shift is being spearheaded by Iran and backed by India, China, and Russia. That is undoubtedly enough to make Washington anxious enough to seek out an excuse to topple the regime in Iran.
Speaking of that search for an excuse, this is interesting. A team of International Atomic Energy Agency (IAEA) inspectors just visited Iran. The IAEA is supervising all things nuclear in Iran, and it was an IAEA report in November warning that the country was progressing in its ability to make weapons that sparked this latest round of international condemnation against the supposedly near-nuclear state. But after their latest visit, the IAEA's inspectors reported no signs of bomb making. Oh, and if keeping the world safe from rogue states with nuclear capabilities were the sole motive, why have North Korea and Pakistan been given a pass?
There is another consideration to keep in mind, one that is very important when it comes to making some investment decisions based on this situation: Russia, India, and China – three members of the rising economic powerhouse group known as the BRICs (which also includes Brazil) – are allied with Iran and are major gold producers. If petrodollars go out of vogue and trading in other currencies gets too complicated, they will tap their gold storehouses to keep the crude flowing. Gold always has and always will be the fallback currency and, as mentioned before, when currency relationships start to change and valuations become hard to predict, trading in gold is a tried and true failsafe.
2012 might end up being most famous as the year in which the world defected from the US dollar as the global currency of choice. Imagine the rest of the world doing the math and, little by little, beginning to do business in their own currencies and investing ever less of their surpluses in US Treasuries. It constitutes nothing less than a slow but sure decimation of the dollar.
That may not be a bad thing for the United States. The country's gargantuan debts can never be repaid as long as the dollar maintains anything close to its current valuation. Given the state of the country, all that's really left supporting the value in the dollar is its global reserve currency status. If that goes and the dollar slides, maybe the US will be able to repay its debts and start fresh. That new start would come without the privileges and ingrained subsidies to which Americans are so accustomed, but it's amazing that the petrodollar system has lasted this long. It was only a matter of time before something would break it down.
Finally, the big question: How can one profit from this evolving situation? Playing with currencies is always very risky and, with the global game set to shift to significantly, it would require a lot of analysis and a fair bit of luck. The much more reliable way to play the game is through gold. Gold is the only currency backed by a physical commodity; and it is always where investors hide from a currency storm.
The basic conclusion is that a slow demise of the petrodollar system is bullish for gold and very bearish for the US dollar. As for any more specific suggestions on how to profit, check out our newsletters.
[Smart investors realize oil, like gold, is destined to rise dramatically and that investing in the right energy companies now will be like getting into the yellow metal 10 years ago.]

end

Zero hedge describes why Europe's LTRO is not an automatic risk on stimulation.
What is important here is that good collateral that finances the huge European money markets are becoming scarce and thus will play havoc to our shadowy banking industry;

(courtesy zero hedge)

Why The LTRO Is Not A "Risk On" Catalyst

Submitted by Tyler Durden on 01/25/2012 09:47 -0500

2s10s

Over the past month, much has been said about the recent 3 year LTRO, and its function in stabilizing the European bond market. Certainly it has succeeded in causing an unprecedented steepening in European sovereign 2s10s curves across the periphery (well, except for Greece, and recently, Portugal) as by implication the ECB has made it clear that debt with a sub-3 year maturity is virtually risk free, inasmuch at least as the ECB is a credible central bank (and if it is perceived as no longer being one, there will be far bigger issues), along the lines of what the Fed's promise to keep ZIRP through the end of 2013, and today's likely extension announcement through 2014. Yet does filling a much needed for European stability fixed income "black hole" equate to a catalyst for Risk On? Hardly, because as in a new note today Brockhouse Cooper analysts Pierre Lapointe and Alex Bellefleur explains, the LTRO is "not a catalyst for a risk-on rally as the central bank is substituting itself for funding sources that have “dried up.” Sure enough - all the ECB is doing is preserving existing leverage (especially in light of ongoing bank deleveraging), not providing incremental debt, something which could only be done in the context of unsterilized bond monetization ala QE in the US. So just over a month in, what does the LTRO really mean for Europe (especially as we approach the next 3 Year LTRO issuance on February 29)? Here is Brockhouse's explanation.

Via Bloomberg:

The 3-yr LTRO is not a catalyst for a risk-on rally as the central bank is substituting itself for funding sources that have “dried up"
"This is a key difference that implies that the current collateral shortage will continue"
Collateral shortage negative for velocity of collateral, velocity of money, “not exactly a catalyst for a rally"
Not all LTRO funding is “parked” in short-term peripheral debt as ECB overnight lending touched record EU528b Jan. 17
"The stigma associated with borrowing from the ECB is visibly gone, but the stigma associated with holding peripheral debt remains present"
Post-LTRO, developments in peripheral sovereign bond markets are driven more by solvency factors than liquidity factors
"The desire to de-risk European bank balance sheets will continue to prevail and the need for higher capital requirements will continue to constrain leverage"

And that's the main difference between the European "easing" and that of the Fed: in Europe the ECB's balance sheet is merely filling the leverage void created by the recent mauling of European banks and the fact that nearly €500 billion is still parked with the ECB: hardly an indicator of confidence in the system. In the US, QE1 and QE2, were not only substantial, they provided incremental liquidity into the system, which then spilled over into risk assets.

The question the becomes: what happens to the capital lent out at the next LTRO? Unfortunately, as the bulk of it will go to prop up European bank capital in anticipation of a Greek, and potentially Portuguese - its 10 year just hit a new record, default (controlled or otherwise), it is more than likely that while the market may front run it once again, the final outcome will be even more frozen cash which does nothing to actually benefit from the carry trade, or to pump risk assets.

The bottom line is that with an ECB constrained from unsterilized monetary intervention, any and all generous liquidity injections will have to come from the Fed. Which, however, will likely not be in a position to do much if anything today courtesy of a market which has front run itself precisely expecting this event, as well as believing, falsely as it turns out, that the massive ECB balance sheet expansion was actually beneficial for Risk On, when all it has succeeded in doing is mitigating the Risk Off phase.

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Less Than Two Months Ahead Of The Greek D-Day, Rogoff Says "Europe Is Clearly Not Ready For A Greek Default"

Submitted by Tyler Durden on 01/25/2012 10:15 -0500

Credit Suisse

default

Simon Johnson

It is less than two months until the Greek March 20 D-Day past which there is no more can-kicking? Check. Creditor negotiations which are going "so well" they may collapse at any given moment, have had their deadline extended indefinitely just because, and in which hedge funds now have every option to put the country into bankruptcy? Check. You would think Europe is prepared for this contingency right? Wrong. Per Ken Rogoff (who together with Simon Johnson are two former IMF chief economists who have become some of the biggest bears in the world - what is it about not being shackled to one's salary, that allows one to speak the truth), Europe is "clearly unprepared for a Greek default", less than two months from the day when it very well may finally occur. He adds: "there's going to be an endgame to this and it's not going to be pretty.... If you are just printing money and you are not making fundamental change you either lose money and you will have to recapitalize with the ECB or you will get inflation." And it gets worse: "it's not just Greece. You are going to see other restructurings before this is over." He ends with what we have been saying since mid-2011: "Once you set the precedent then say Portugal are going to say 'hey, look how much you gave Greece. How come we don't get the same?'." Unfortunately, the fact that Portuguese bondholders are far more protected than Greek ones will make an in kind restructuring virtually impossible. Which is something else for Europe to ponder as it prepares for the only key catalyst event between now and March 20 - the February 29 LTRO, which as Credit Suisse already suggested could be up to a ridiculous €10 trillion to firewall not only Greece and Portugal, but all the other PIIGS. Intuitively, this does make a lot of sense.

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Ken Rogoff explains at Davos today that Greece will fail and we must look immediately to the Portugal and other PIIGS nations as they do will look for haircuts to save their nations:

(zero hedge/Ken Rogoff)
if you want to see the video clip go to www.zero hedge.com and scroll down to the heading I have highlighted for you.

Less Than Two Months Ahead Of The Greek D-Day, Rogoff Says "Europe Is Clearly Not Ready For A Greek Default"

Submitted by Tyler Durden on 01/25/2012 10:15 -0500

Credit Suisse

default

Simon Johnson

to see the video clip see www.zero hedge.com

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It didn't take long. Spain is broke and it too is badly in need of bailout money.

(courtesy zero hedge)

Spain Is Now Officially Europe's Broke(n) Gramophone

Submitted by Tyler Durden on 01/25/2012 13:45 -0500

European Central Bank