Tuesday, January 17, 2012

Greek Default Imminent probably March 20,2012/LTRO next auction 1 trillion euros

Good evening Ladies and Gentlemen:

Gold and silver had stellar days with gold rising by $24.80 to $1655.20 and silver finishing the day up by 36 cents to $30.11. There is still no doubt that the bankers are controlling the paper silver/gold market.
Let's proceed over to the comex and assess trading there today with respect to open interest, inventory movements and amounts of precious metals standing for delivery.

The total comex open interest rose by a huge 6572 open interest contracts today with a closing reading of 425,244.  Remember that this is actually the official closing open interest for Friday as we are always 24 hours back with respect to OI readings. The front options expiry month of January rose from 35 to 71 contracts despite 13 delivery notices on Friday.  We thus gained 49 contracts of additional gold standing and lost nothing to cash settlements.  We are now two weeks away from first day notice which will be on Tuesday, Jan 31.2012.  The front delivery month of February saw its OI fall from 174,222 to 168,260 as many are rolling over to other future months namely April.  The total volume at the gold comex was quite tame at 223,113 when you consider the rollovers.  The confirmed volume on Friday registered 230,480 and we also had some rollovers then.

The total silver comex OI fell by 1052 contracts in total contrast to gold.  It seems that the bankers are rather reluctant to supply paper silver.  They must be aware that in the real world we have a physical shortage.
The front options expiry month of January saw its OI fall 45 contracts from 122 to 77.   We had 92 delivery notices on Friday so again we lost no silver oz to cash settlements and we gained an additional 47 contracts or  235,000 additional oz of silver standing.  The next delivery month for silver is March and here the OI fell from 55,029 to 53,786 as some paper players are just exiting the playing field.  The estimated volume at the silver comex was again light at 42,254.  The confirmed volume on Friday was very tame at 38,782.

Inventory Movements and Delivery Notices for Gold: Jan 17 2012:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
27,010 (HSBC,Manfra, JPM)
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
38 (3800)
No of oz to be served (notices)
33  (3300)
Total monthly oz gold served (contracts) so far this month
1074  (107,400)
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 to the dealer.  We also had no gold withdrawn by the dealer as well.

The only set of transactions occurred with the customer and one is highly suspicious:

1.  Out of HSBC:  97 oz.

2,  Out of Manfra:  129 oz

3.  the biggy:  26,784 oz leaving J.P.Morgan

total gold withdrawal:  27,010 oz.

we had a tiny adjustment of 105 oz leaving the dealer to repay a customer.
Thus the total registered gold inventory rests tonight at 2.499 million oz or 77.73 tonnes of gold.

The CME notified us that we had 38 notices filed for a total of 3800 oz of gold.  The total number of notices filed so far this month total 1074 for 107400 oz.  To obtain what is left to be served upon, we take the OI standing for January (71) and subtract out today's deliveries (38) which leaves us with 33 notices or 3300 oz left to be served upon our longs.

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

107,400 oz (served)  +  3300 (oz to be served) =   110,700 oz  or 3.443 tonnes.

If we add the delivery month of December to the two non delivery months (Jan and Nov) we have a total
of  74.123 tonnes of gold delivery notices against an inventory of 77.72 or 95.37% of available dealer inventory.

 And now for silver 

 the chart: January 17 2012:

Month of January now commences:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory366,285(Brinks,)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory25,725(Brinks)
No of oz served (contracts)23 (115,000)
No of oz to be served (notices)54  (270,000)
Total monthly oz silver served (contracts)789  (3,945,000)
Total accumulative withdrawal of silver from the Dealersinventory this month268,115
Total accumulative withdrawal of silver from the Customer inventory this month 2,562,743

The silver vaults were quiet today.  We had no activity whatsoever with the dealer.

The customer over at Brinks received a smallish 25,725 oz.

We had the following customer withdrawal of silver today:

366,285 oz from Brinks as well.

We had another adjustment of exactly 5,000 oz whereby the dealer received leased silver from a customer.
The registered total of silver rises to 36.703 million oz.  The total of all silver lowers to 125.63 million oz.

The CME notified us that we had a total of 23 notices filed for today or 115,000 oz of silver.
The total number of notices filed so far this month total 789 for 3,945,000 oz.  To obtain what is left to be served upon, I take the OI standing for January (77) and subtract out today's deliveries (23) which leaves us with 54 notices or 270,000 oz left to be served upon.

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

3,945,000 oz (served)  +  270,000 oz (to be served) =  4,215,000.

Please note that the silver oz standing for January is coming close to the 5 million oz standing in the big delivery month of December.  A delivery month generally exceeds the non delivery months in amounts of physical standing by quite a margin.


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.

Jan 17. 2012:

Total Gold in Trust



Value US$:66,839,003,007.06

Jan 14.2012;




Value US$:65,934,796,423.39

JAN 12.2012:




Value US$:66,963,739,550.16

JAN 11.2012




Value US$:65,895,926,430.52

today we gained 1.51 tonnes of gold into the GLD.  The custodians must have found religion as to the increase in inventory.

And now for silver Jan 17 2012: 

Ounces of Silver in Trust305,970,641.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,516.75

 Jan 14.2012:

Ounces of Silver in Trust305,970,641.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,516.75

Jan 12: 2011:

Ounces of Silver in Trust305,970,641.100

we neither gained nor lost any silver today in the SLV.


And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 3.6 percent to NAV in usa funds and a positive 3.6% to NAV for Cdn funds. ( Jan 17 2012.).
2. Sprott silver fund (PSLV): Premium to NAV rose  to  24.53% to NAV  Jan 17 2012:
3. Sprott gold fund (PHYS): premium to NAV rose  to a 5.13% positive to NAV Jan 17. 2014). 


Before we see the big stories on the paper side of things, there are a few developments in the physical side to discuss with you.

Today King World News interviewed the "London trader" who states that gold demand is creating massive shortages as Eastern block countries buy metal and move it onto their shores.
He also discusses the shear madness of the 25 million oz shortfall of the SLV.

(courtesy Kingworld News/ Jim Sinclair/GATA)

London Trader – Staggering Gold Demand Creating Shortages

Dear CIGAs,
With many global investors still concerned about the price of gold and silver, today King World News interviewed the “London Trader” to get his take on these markets. The source stated, “We’ve still got a very, very compressed spring because the shorts are still trying to defend their positions, their naked short positions in both the gold and silver markets.  As an example, in the silver market, you saw that type of activity in the silver ETF (SLV).  Shorts borrowed another 3 million ounces to cover immediate delivery concerns.  There are 25 million ounces now borrowed from SLV.  It is getting worse and worse for them.”
The London Trader continues:
“They are naked short on the COMEX and to meet immediate delivery demand they are having to borrow it from the SLV.  It is still unwinding and it’s still got a long way to go.  Yes, you will still see games being played and yes you can create paper gold out of thin air.  But there comes a point where each time you do that the physical buyers are taking it and it has a lagging effect that will catch up, and eventually it gets reflected in the price.
The demand for euro gold here in London is so intense it’s shocking to some of the players.  This is what has left some market participants in the US wondering why the price of gold has risen along with the dollar.  It’s because demand in the eurozone is unimaginably strong.  The euro physical gold demand is off the charts and it is creating shortages for metal, in size, here in London.
The physical gold market is actually being drained by euro gold buyers.  People are converting their euros to gold and there is only a finite amount of physical gold available.  Again, that’s why you are seeing the dollar and gold rallying together.
We are also seeing very strong markets in Asia with solid premiums.  Silver is in backwardation.  There are huge premiums for size (large tonnage orders) in silver and you are going to wait 3, 4 or 5 weeks for delivery.  There is constant backwardation into the March futures contract.  For the most part, the bid on silver spot has been higher than the ask on March futures.
These paper markets are a joke.  Nobody who is seriously in the business of taking physical delivery is trading on the COMEX anymore.  That is big news.  The COMEX is no longer a credible marketplace….


GoldFieldsMineral Services reports that central banks have been loading up on gold.  This has been reported to you on many occasions throughout the year.  This should be no surprise to you:

(Courtesy GFMS/Jim Sinclair/ Dow Jones newswires)

GFMS reports substantial offtake of Gold by Central Banks

Dow Jones news is carrying a report this morning from GFMS (formerly Gold Fields Mineral Services) detailing the amount of gold purchased last year by the world's Central Banks. It was indeed a formidable number.

The net purchases of the yellow metal came in near 430 tons, a more than 5-fold increase on the previous year. It was also the highest level recorded since 1964.

To give you a sense of the significance of these purchases - the amount of NET purchases by Central Banks in 2010 was a mere 77 tons!

Surprising to me was the fact that Mexico was the largest buyer as far as the official monetary sector goes. GFMS reports that they added almost 100 tons of gold to their reserves. I would have thought it would have been China to lead the pack.

The other surprising fact was that signatories to the Central Bank Gold Agreement ( this was set up to limit the amount of gold sold by European Central Banks ) sold less than 10 tons for 2011.

The summary - Central Banks are now absorbing a significant amount of world gold production. This should continue to provide very good downside support for the metal on price retracements lower as these banks do NOT CHASE PRICES HIGHER but are there to buy at levels they consider gold to have "value".

To end the day on a positive note...
HOT OFF THE PRESS: Sprott Asset Management doing an overnight issue of the PSLV, which will be a minimum of $300 million, and hopefully will get even larger.

Please note:  the announcement is only 1/5 of what Eric wants.  No doubt he made this deal with a " major-miner":

Sprott Physical Silver Trust Announces Follow-on Offering of Trust Units
TORONTO, ONTARIO--(Marketwire - Jan. 17, 2012) - Sprott Physical Silver Trust (the "Trust") (TSX:PHS.U)(NYSE:PSLV), a trust created to invest and hold substantially all of its assets in physical silver bullion and managed by Sprott Asset Management LP, announced today that it has launched a follow-on offering (the "Offering") of transferable, redeemable units of the Trust ("Units").
The Trust will use the net proceeds of the Offering to acquire physical silver bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per Unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering.
The Units are listed on the NYSE Arca and the Toronto Stock Exchange under the symbols "PSLV" and "PHS.U", respectively. The Offering will be made simultaneously in the United States and Canada by underwriters led by Morgan Stanley and RBC Capital Markets in the United States and RBC Capital Markets and Morgan Stanley in Canada.
Copies of the U.S. prospectus related to the Offering may be obtained by contacting Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com, or RBC Capital Markets Corporation, Attention: Prospectus Department, Three World Financial Center, 200 Vesey Street, 8th floor, New York, New York 10281-8098 (telephone: 212-428-6670, fax: 212-428-6260). Copies of the Canadian prospectus related to this Offering may be obtained by contacting RBC Capital Markets, Attention: Distribution Centre, 277 Front St. W., 5th Floor, Toronto, Ontario M5V 2X4 (fax: 416-313-6066) or Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com. The Offering in Canada is only being made by the Canadian prospectus, which includes important detailed information about the Units being offered.
This news release does not constitute an offer to sell or a solicitation of an offer to buy the Units, nor shall there be any sale of the Units in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

Let us head over to the paper business and see if any defaults are about to appear.
The first big story is out of S and P and this rating agency declared that a Greek default was rapidly
approaching our shores:

(S and P /Zero Hedge/Bloomberg/Reuters)

S and P Says Greek Default Imminent

Tyler Durden's picture

Time for the dominos to fall where they may: head of sovereign ratings at S&P Kraemer spoke on Bloomberg TV, and said the following:
And the punchline:
The only thing he did not add is that the default will be Coercive. What happens next is anyone's guess, but whatever it is it is certainly priced in. Also, let's not forget that the inability of the market to react to any news ever again is most certainly priced in.


Please circle this date in your calender. This is the real date that Greece will fail as they will not get the 14.8 billion euros needed to rollover their debt:

(Fitch/zero hedge)

Fitch Says Greece Will Default By March 20 Bond Payment

Tyler Durden's picture

It's all over but the crying at least as far as Greece is concerned. First, it was S&P's Kraemer telling Bloomberg yesterday the country is finished, now today for dramatic impact, we get Fitch's repeating the doom and gloom, stating that the country will likely default before its March 20 payment. From Bloomberg: "Greece is insolvent and will default on its debts, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said in an interview in Stockholm today. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default at Fitch, he said.  “The so called private sector involvement, for us, would count as a default, it clearly is a default in our book,” Parker said. “So it won’t be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon." Europe’s debt crisis is likely to be “long and drawn out,” Parker said." And here we go again, with official attempts to make what appeared apocalyptic as recently as a month ago, seem trite, boring and perfectly anticipated. In other words, the fact that this like every other piece of bad news that should be priced in, is priced in, is priced in. And so on, at least according to the kleptocrats, until we finally learn that nothing is priced in but endless market stupidity.


This is a big story. Chris Wood of CLSA has explained why the next LTRO maybe 1 trillion euros.
Gold advanced the moment this was released:

(courtesy zero hedge)

A Shocking €1 Trillion LTRO On Deck? CLSA Explains Why Massive Quanto-Easing By The ECB May Be Coming Next Month

Tyler Durden's picture

It is a pure coincidence that following the previous report of stern condemnation of traditional ECB QE in the form of Large Scale Asset Purchases (LSAP) by the Bundesbank, we should follow it up with the latest analysis by Chris Wood of CLSA's famous Greed and Loathing newsletter, in which the noted skeptic does an about face on his existing short European financial trade and covers such exposure, while observing the much-discussed major shift in ECB liquidity provisioning as the catalyst. As he says, "the main reason to do [cover the Euro short fin trade] is the potential for a benign interlude provided by the ECB’s increasingly aggressive liquidity support for the European banking system." And while his trade reco may or may not be right (if we were betting people we would put our money on the latter), what is interesting is the basis for the material change in exposure which to Wood is explained simply by the dramatic shift in the ECB approach toward monetary generosity, courtesy of the arrival of ex-Goldmanite Mario Draghi. The basis is the first noted here massive surge in the European balance sheet (Figure 2) which while not engaging in prima faciemonetization, has done so via indirect channels, in the form of an LTRO, which is basically a 1%, 3-year loan, but more importantly, a balance sheet expansion which while having failed to increase the velocity of money in any way (with all of the LTRO and then some now having been redeposited back at the ECB as reporter earlier), has at least fooled the market for the time being that any sub 3 Year debt is "safe" as seen by Figure 1.
And since it has worked once, in the eyes of central planners it should work again, until it fails. Which it naturally will, just like the first LTRO iteration from 2008. But first, it will be expanded to a very ludicrous level, which will lead to the one outcome that Germany wants more than any other - send the euro plunging (remember - the primary correlation of 2012 is the ratio of ECB to FED assets), at least until the Fed steps right back into the currency devaluation fray, which it likely will as soon as March. So just how large will the next LTRO be? "Market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!" That's right - it is possible that in its quantomonetary diarrhea (but at least it's not printing, so the Bundesbank will be delighted), the ECB is about to increase its balance sheet from €2.7 trillion to € €3.7 trillion, or a €1.7 trillion ($2.2 trillion) expansion in 8 months! And gold is where again?
Chris Wood explains:
By creating a massive incentive for European banks to buy their government’s debt issuance up to three years maturity, the new ECB leader Mario Draghi is clearly seeking to get control over the direction of Eurozone government bond yields. The dramatic decline in Eurozone bond yields up to three years suggests he is getting some traction (see Figure 1).It is also the case that absolute-return investors may be tempted to “front run” coming bond auctions if they think the ECB policy is working. On this point, market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!
The result is an exploding balance sheet controlled, of course, by an ex-Goldmanite, which can only be halted by Germany, but why when the EUR is crashing, keeping the German export economy vibrant.
True, the above upbeat mood can be undermined in a second by a word from Berlin indicating that Germany does not approve of Draghi’s only too evident easing intentions. It is also the case that criticism is already coming from Germany about the latest draft of the fiscal compact which contains a derisory lack of “teeth” in terms of actual measures to enforce good fiscal behaviour. Still Draghi’s responsibility is monetary policy not fiscal policy. And based on GREED & fear’s observations thus far, it is clear that former investment banker Draghi is a smooth if not slick operator who is adept at saying one thing and doing another. He will also understand that the goal of monetary easing will be undermined if it arouses German opposition. For that reason investors should assume for now that he will have the political skills to keep the Germans onside. Meanwhile, for the moment it is politically correct in Berlin to keep the banking system liquid via ECB extension of credit courtesy of dramatically relaxed collateral standards, even if it is not yet “PC” to monetise Eurozone government debt outright.

The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011 (see Figure 2).

There are two investment conclusions to draw from this. First, investors should assume a continuing weakening in the euro. On this point, one of the key developments so far this year is a decoupling of the euro from risk currencies such as the Aussie dollar (see Figure 3). Second, the likelihood of a significant weakening in the euro creates the clear potential for European stock markets to outperform the S&P500 this year, given the benefits to European exporters of a weaker currency. Meanwhile, one reason GREED & fear is convinced the euro will head lower is based on the view that Draghi will be quite ready to cut rates to zero if inflation data in Europe can justify such easing. Right now the money markets are discounting only a 25bp cut this year.
Clearly, all of the above does not mean that Eurozone crisis is over. There are plenty of potential landmines, for example the continuing negotiation on the Greek debt restructuring. GREED & fear also still believes that market pressure will ultimately force a more concrete fiscal union as a quid pro quo for more outright monetisation. Still with the highly flexible Draghi at the helm, and with the usual want-to-be-bullish New Year sentiment, it is too risky to keep on the recommended hedge since the risk at this juncture is all of the gains made are wiped out by a violent bear market rally.
More importantly to fans of sound currency, the bottom line is that between the ECB (assuming it does proceed with a €1 trillion LTRO), and the Fed (assuming it does go ahead and launch a $600 billion minimum (and as much as $1 trillion) QE3 as every bank expects by June), the global balance sheet will have increased by nearly $3 trillion since Julyeven as gold has actually declined in price. And if anyone needs the final clue as to what is going on, an increase in the US debt ceiling to $16.4 trillion which is expected to pass imminently, would mean that by simple correlation a fair value for the yellow metal would be just under $2000 per ounce.

So going back to the first paragraph: "And gold is where again?"

If Greece defaults, then a Credit Suisse official believes that LTRO will enter the 10 trillion euro

(courtesy zero hedge/Credit Suisse)

$10 TRILLION Liquidity Injection Coming? Credit Suisse Hunkers Down Ahead Of The European Endgame

Tyler Durden's picture

When yesterday we presented the view from CLSA's Chris Wood that the February 29 LTRO could be €1 Trillion (compared to under €500 billion for the December 21 iteration), we snickered, although we knew quite well that the market response, in stocks and gold, today would be precisely as has transpired. However, after reading the report by Credit Suisse's William Porter, we no longer assign a trivial probability to some ridiculous amount hitting the headlines early in the morning on February 29. Why? Because from this moment on, the market will no longer be preoccupied with a €1 trillion LTRO number as the potential headline, one which in itself would be sufficient to send the Euro tumbling, the USD surging, and provoking an immediate in kind response from the Fed. Instead, the new 'possible' number is just a "little" higher, which intuitively would make sense. After all both S&P and now Fitch expect Greece to default on March 20 (just to have the event somewhat "priced in"). Which means that in an attempt to front-run the unprecedented liquidity scramble that will certainly result as nobody has any idea what would happen should Greece default in an orderly fashion, let alone disorderly, the only buffer is having cash. Lots of it. A shock and awe liquidity firewall that will leave everyone stunned. How much. According to Credit Suisse the new LTRO number could be up to a gargantuan, and unprecedented, €10 TRILLION!
Here is how the strawman is now put in place for what may the biggest liquidity injection in modern history in just under two months.
February’s second 3-year LTRO looks set to be extremely large. Really extravagant claims (we have heard reports of €10 tn) are probably wide of the mark because this will not be a complete collateral free-for-all (unless NCBs choose to make it so, which for some of them is admittedly an open question; again, see rational player section below). But the idea of path-finder lightning springs to mind (High-speed cameras reveal that lightning evolves “bang BANG”, essentially); the last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best. This is, on the face of it, very cheap protection indeed against any possibility of a liquidity crisis for three years.
Naturally, if indeed there is anything even remotely resembling a€10 trillion expansion in the ECB's sub €3 trillion balance sheet, all bets will be off as the ratio of the ECB to the Fed assets, a correlation which would imply a sub parity level on the EURUSD would gut corporate earnings in the US, all merely to prevent the disintegration of the Eurozone. And while this event will be welcomed by the Fed initially as it will send stocks exploding to potentially all time highs (and gold to well over $2000/ounce), it will cripple the US manufacturing model unless the Fed immediately responds in kind, and prints outright, and unsterilized, a non-trivial comparable amount. In other words, the world could very well enter the final round of global coordinated currency devaluation, aka FX war, together. Yes, that means coordinated printing by the SNB, BOE, PBoC, BOJ, etc, etc. Simply in a last ditch attempt to preserve the status quo. Which, unfortunately, after the knee jerk reaction, will fail. CS explains why:
But there are many problems, particularly at the systemic level. So, although an eye-catching number may trigger a rally (to be clear: 29 February is an eternity away in the current environment), Greece is a salutary reminder that treating a solvency problem as a liquidity problem, including buying time for solvency to be addressed and other dubious concepts, is a disaster for existing creditors, who are subordinated throughout by the senior rescue funds. It also shows that three years is an eternity and that timescales (such as the possible introduction of resolution regimes) are flexible. It remains unclear to us where the new capital for the European banking system is going to come from if not from existing bondholders and that, in some cases, that must involve senior, in our view. So the LTRO is another example of reducing idiosyncratic risk at the expense of systematizing risk, in our view.

The participating bank needs a plan for refinancing the LTRO; the lack of a plan means that financing will not be forthcoming, in a death spiral. So the massive provision of official liquidity will act as a long-term triage and increases the pressure (albeit over a longer period) to raise capital. It is a free lunch only for stronger banks, in some sense, and at the systemic level is anything but. Rather, it is paid for by those with senior exposure to weaker banks.
In fact, Credit Suisse is openly hunkering down as it now see the "endgame taking shape" - "We do not expect the downgrade of France to have an immediate impact, but it highlights very clearly to us the ultimate issue that has to be tested in the euro area. Will Germany hold together the euro as, when and if France becomes part of the periphery?"
Here is how the European endgame will look, through the prism of game theory.
The Nashing of teeth

We continue to analyse the euro area sovereigns ingame theoretic terms, with the game looking from outside like a CDO where value allocation is a function of expected losses and of correlation (distribution of those losses in a tranche structure).

In simplistic terms, we have stated that Portugal cannot rescue Greece (i.e., Greece's creditors), Spain cannot rescue Portugal, Italy cannot rescue Spain, France cannot rescue Italy, but Germany can rescue France.

In equally simplistic terms, we have stated many times that “crises are baked into the cake”.

With the CDO and game theory analysis, we have formally modelled both statements. In the game theory, we concluded that the most likely outcome is a series of ever-deeper crises and relief rallies culminating in a definitive moment. Before that definitive moment, our analysis suggests that both core and periphery parties playing hard-ball leads to an escalation of the crisis, but not calamity. Only at the decisive moment does a “collision” in our game of chicken model lead to catastrophe. We remain convinced that the decisive crisis has not been seen yet.
What we have not done before is put the two statements together. To do so, it strikes us that each “wave” of the series of crises represents the transition of a country or countries to the periphery. We started with the “Greek crisis”, still under way with, at the time of writing, both parties threatening hardball. Then we had the rest of the outer periphery, with Ireland “swerving” rather spectacularly and Portugal not so clear. This led to a set of rescue plans that made the implicit assumption that the periphery would broaden no further.

But the outer periphery was followed by Italy and Spain as the crisis emerged in the summer as truly systemic. The resulting crises have been forestalled, for now, by ECB action (SMP and 3-year LTRO). Now, the (well-flagged) action by S&P hints at the final crisis.

Current news on Greece raises the question of whether the (existing) core wants to “rescue Greece”, amid the usual nonsensical debate about laziness and doctors’ swimming pools. But our analysis suggests a steady narrowing of the core and broadening of the periphery as we head to the ultimate question. Would Germany want to rescue France? And – see the below section on the rationality assumption – would France want to be rescued? We are not gong to futurize French politics, but we note that we are already in a situation where it is not impossible that Le Pen eliminates Sarkozy in the first round, according to the polls. By definition, France finding itself on the periphery would damage France’s leadership position in Europe and risk a change in politics. Of course, we think the ultimate answers are “yes” and “yes”, but that frisson of doubt, in light of the consequences of the implications, will keep the market well on its toes.
Putting it all together: the rational national player assumption.
News agencies try to reconstruct the internal national debates of the euro area, which are often carried out fairly openly, it has to be said. But a country often has a simple choice to express to the world, and we model this in our game theory as “hard” or “soft”. We make, thereby, a key assumption, that a country acts in a way that appears rational when viewed externally as a single entity in that single action.

We have complained for years that countries cannot be seen as monoliths. We need to consider the possibility that the outcome of the internal game, since it is not fully transparent to the outside, can superficially seem irrational. Circumstances could be envisioned where a player chooses to play hard in a situation where he knows that it will damage national interests, i.e., playing hard will be worse for it than playing soft. For example, it might be rational for a player within France, lets say le Pen or Sarkozy, to play uncooperatively in the European context, if that is beneficial from a French or individual perspective. Even within the European context, a country playing "irrationally" aggressively can be part of a rational strategy of brinkmanship behaviour. For example, by trying to make a threat look more credible. We could be seeing this in German attitudes to Greece, as we explore below. The corollary is that this can only work up to the penultimate stage of the crisis, as only that way one can try to force the other player to do the right thing in the final stage. Overall, we see the risk to be vigilant with the rational monolithic player assumption in the euro area. And, of course, flexing it does not invalidate our conclusions, it merely points out that getting it wrong is a key risk in the analysis. This is framed by the historical context, where Europe has achieved disastrous outcomes under the incentives of the time.

The risk of the simplification can be highlighted by a simple example. The rational action of the College of Cardinals under the post-13th century papal conclave is collectively to fill the vacant Papacy immediately. Individually, as well, the cardinals have the same incentive; no matter how beautiful the ceiling of the Sistine Chapel, they can see it anytime. So any sensible rational expectation of the smoke colour, based on treating the conclave as a single rational entity, is white at all times, including on the first day. That assumption would have led our observer astray by 82 rounds over 50 days between 1830 and 1831. Similarly, as we head into elections in France, already referred to above, and to Germany, the assumption is likely to come under some stress. We think that understanding of the internal “game” is most central in these two countries, particularly Germany. This is because, in our view, the periphery playing “soft”, rationally or irrationally, cannot make the crisis resolve on its own. Or, austerity is not sufficient. The central question, now hoving into view, is whether France and Germany, when the time comes, can co-operate. By then France may be in an embarrassingly inferior position, possibly forcing a Nationalist response that is apparently irrational when viewed externally but rational when viewed in consideration of internal incentives.

Between Greece, French elections and the downgrades, the situation remains as deeply uncertain as ever. The effect of the LTRO may last a while longer, buoyed by a negative market, but we are on the alert for a turn.
Finally, CS' appendix on why what started with Greece, will likely end with it:
We no longer publish views on Greece because the situation is too fluid to permit it, but we would observe that a key is whether sufficient voluntary participation can be induced to enable a CAC to be credibly introduced. In this case, “free-loading” on anything other than the 20 March bond becomes dangerous if a further restructuring is thought necessary, which we regard as the market’s expectation. In a game-theoretic sense, which is still the only way we can look at it, the dominant strategy, if a restructuring on more burdensome terms is expected with probability 1, is to volunteer now. The exception is the basis holders but, as we have pointed out many times, CDS are a tiny fraction of bond outstandings so basis holders are unlikely to tip the balance. Free-loading on March is a much more subtle game given that there is not time for a second round and the authorities would still like to avoid a hard event. What would they be willing to pay for this? How much 20 March is held outside the ECB and banks which are under official influence? etc. As we write, both parties seem to be playing “hard”, suggesting a suboptimal outcome of a hard default. As examined above, at this relatively early stage of the game we should expect a “swerve”, most probably by the core. But continued playing hard might be the outcome of rational behaviour by either party, given the multi-stage nature of the game. What message would paying the 20 March in full on Greece’s behalf give to the rest of the periphery?
The last bolded sentence is precisely what we warned about last week when we said that should Greece devolve into a full out coercive restructuring, the one real question would be: "who is next?"
Needless to say, if Credit Suisse is even 20% correct in its estimates, and the more we think about it, the more plausible it is that 20 days ahead of the Greek default the ECB will bend over to provide every last penny European banks may need, and then some, to firewall exposure fall out (since none except for UniCredit actually did a capital raise and we all saw what happened then), then all bets are truly off. Should the ECB indeed escalate events to this degree, then we are about to leave the paradigm started with the late 2008 bailout of Lehman, and enter one in which every incremental swing in the global socio-economic sinewave could well be the last.
As such, attempting to predict what happens after becomes futile.
Incidentally, those curious what a €10 trillion expansion to the ECB's balance sheet without a proportionate response by the Fed, would do to balance sheet correlation, and implicitly, to the EURUSD pair (the correlation was explained previously here), this presents it vividly.


This was inevitable, the downgrading of the EFSF due to the massive downgrades on Friday:

(courtesy zero hedge)

S and P Downgrades EFSF From AAA To AA+, May Cut More If Sovereign Downgrades Continue

Tyler Durden's picture

And so the latest inevitable outcome of the French downgrade from AAA has arrived, after the S&P just downgraded the EFSF, that pillar of European stability, from AAA to AA+. S&P adds: "if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF's 'AAA' or 'AA+' rated members to below 'AA+'." In other words, as everyone but Europe apparently knew, the EFSF is only as strong as the rating of its weakest member. And now the rhetoric on how AAA is not really necessary for the EFSF, begins, to be followed by AA, next A, then BBB and finally how as long as the EFSF is not D-rated all is well.
From S&P:
European Financial Stability Facility Long-Term Ratings Cut To 'AA+'; Short-Term Ratings Affirmed; Outlook Developing
  • On Jan. 13, 2012, we lowered to 'AA+' the long-term sovereign credit ratings on two of the European Financial Stability Facility's (EFSF's) previously 'AAA' rated guarantor member states, France and Austria.
  • The EFSF's obligations are no longer fully supported either by guarantees from EFSF members rated 'AAA' by Standard & Poor's, or by 'AAA' rated securities. We consider that credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.
  • We are therefore lowering our long-term issuer credit rating on the EFSF to 'AA+' from 'AAA'. We are also affirming the 'A-1+' short-term rating on EFSF.
  • The outlook is developing, which reflects that we could raise the EFSF's long-term rating to 'AAA' if we see that additional credit enhancements are put in place, but also the likelihood that we could lower the rating further if we conclude that the creditworthiness of the EFSF's members will likely be further reduced over the next two years.
Rating Action
On Jan. 16, 2012, Standard & Poor's Ratings Services lowered the 'AAA' long-term issuer credit rating on the European Financial Stability Facility (EFSF) to 'AA+' from 'AAA' and affirmed the short-term issuer credit rating at 'A-1+'. We removed the ratings from CreditWatch, where they had been placed with negative implications on Dec. 6, 2011. The outlook is developing.
When we announced the placement of the ratings on the EFSF on CreditWatch on Dec. 6, 2011, we said that, depending on the outcome of our review of the ratings of the EFSF's guarantor member sovereigns, we would likely align the issue and issuer credit ratings on the EFSF with those of the lowest issuer rating we assigned to the EFSF members we rated 'AAA' (as of Dec. 6, 2011), unless we saw that sufficient credit enhancements were in place to maintain the EFSF rating at 'AAA' (see "European Financial Stability Facility Long-Term 'AAA' Rating Placed On CreditWatch Negative," published Dec. 6, 2011).
On Jan. 13, 2012, we announced rating actions on 16 members of the European Economic and Monetary Union (EMU or eurozone; see "Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments," Jan. 13, 2012). We lowered to 'AA+' the long-term ratings on two of the EFSF's previously 'AAA' rated guarantor members, France and Austria. The outlook on the long-term ratings on France and Austria is negative, indicating that we believe that there is at least a one-in-three chance that we will lower the ratings again in 2012 or 2013. We affirmed the ratings on the other 'AAA' rated EFSF members: Finland, Germany, Luxembourg, and The Netherlands.
Following the lowering of the ratings on France and Austria, the rated long-term debt instruments already issued by the EFSF are no longer fully
supported by guarantees from the EFSF guarantor members rated 'AAA' by Standard & Poor's, or 'AAA' rated liquid securities. Instead, they are now covered by guarantees from guarantor members or securities rated 'AAA' or 'AA+'.
We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF's guarantors and securities backing the EFSF's issues are currently not in place. We have therefore lowered to 'AA+' the issuer credit rating of the EFSF, as well as the issue ratings on its long-term debt securities.
The developing outlook on the long-term rating reflects the likelihood we currently see that we may either raise or lower the ratings over the next two years.
We understand that EFSF member states may currently be exploring credit-enhancement options. If the EFSF adopts credit enhancements that in our view are sufficient to offset its now-reduced creditworthiness, in particular if we see that once again the EFSF's long-term obligations are fully supported by guarantees from EFSF member-guarantors rated 'AAA' or by securities rated 'AAA', we would likely raise the EFSF's long-term ratings to 'AAA'.
Conversely, if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF's 'AAA' or 'AA+' rated members to below 'AA+'.


Early this morning euphoria reigned supreme as these basket case sovereigns issued treasuries successful.
All of this junk will be passed on the Europe's morgue:  the ECB:

EFSF, Spain, Belgium, Greece And Hungary Issue Bills; Deposits With ECB Pass Half A Trillion

Tyler Durden's picture

The good news out of Europe is that despite the long-overdue downgrade 4 countries plus the EFSF issued debt successfully, namely the EFSF as well as Spain, Belgium, Greece And Hungary. The bad news is that all of the debt issued was Bills, which at least for now is not an issue when it comes to market access as the market believes that LTRO cash will cover anything with a sub-3 year maturity courtesy of the LTRO, even if in reality nobody is using the LTRO for debt roll purposes and all auctions are net cash withdrawing from the system. In brief: the EFSF sold €1.5 billion in 6 month bills at a 0.2664% yield and 3.10 BTC; Spain issued €4.9 billion out of a €5 targeted in 12 and 18 month bills, which priced better than the last such auction from December 13, at mixed Bids to Cover; Belgium raised €1.76 billion in 3 month bills at a higher yield or 0.429% compared to 0.264% before and in line BTC as well as €1.2 billion in 12 month Bills at a 1.162% yield compared to 2.167% and a lower BTC; Greece bill yields fell at a 3 month bill auction to 4.64% vs 4.68% before, selling €1.625 bn with €1.25b in competitive auction, meeting maximum competitive auction target of EU1.25b and so on. The picture is simple: when it comes to funding itself, Europe is great at ultra-short term debt, and not so good at anything longer. Regardless, Europe will spin this as a great success considering the S&P downgrade over the weekend. We'll wait to see how bond auctions longer than 5 years will fare, if of course any non-Bill auctions are conducted in Europe in the future. Some other good news came from the German Jan. ZEW confidence index which came at 28.4 vs est. 24.0. The result is that the expected EURUSD short covering has kicked in, and the pair is flirting with 1.28, as we get recoupling between asset classes. Bottom line: ultra short term debt and a rise in confidence is sufficient to push futures up by about 11 ES points. In the meantime, as the chart below shows, we get another record high parking of cash by European banks with the ECB at €502 billion, as the European superstorm - the failure of Greek restructuring talks - is about to hit, and banks have to prepare for the unknowable. Also, today we will likely see S&P begin downgrading hundreds of European banks and insurance companies. But that to is surely largely priced in.


From Ambrose Evans Pritchard on the fate of Hungary.
(For those of you who have not been to Hungary, it is truly a beautiful city, on both sides of the Danube River)

(Ambrose Evans Pritchard and special thank you to Robert H for sending)

Hungary faces ruin as EU loses patience

The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible.

The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible.
A general view of the Hungarian parliament. Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Photo: EPA

By Ambrose Evans-Pritchard, International business editor
7:41PM GMT 17 Jan 2012
London Telegraph

Hungary's defiant premier Viktor Orbán has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him a stark choice of either bowing to EU demands or letting his country slide into bankruptcy.

Yields on Hungary's two-year debt jumped to 9.17pc on Tuesday, an unsustainable level for an economy in recession with public debt of near 80pc of GDP. Hungary's debt was cut to junk status by rating agencies last week.

Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Two-thirds of household debt is in Swiss francs, leading to a lethal currency mismatch as capital flight weakens the forint.

"Hungary is playing with fire," said Lars Christensen from Danske Bank. "The EU is not bluffing. It will let Hungary go over the edge to make the point that EU countries must play by the rules. Our worry is that Hungary's government has not yet got the message."

The EU said it had sent three letters of "Formal Notice" over Hungary's assault on the independence of the judiciary, the central bank, and the data protection ombudsman – the first step in "infringement proceedings". The dispute could ultimately lead to loss of Hungary's voting rights under Article 7 of EU treaty law.

"We'll use all our powers to make sure that Hungary complies with the rules of the EU," said European Commission president Jose Manuel Barroso.

Mr Orbán said his country was the victim of "international leftists" in Brussels. A zealous anti-Communist, he insists that Hungary's Stalinist past must be ripped out at the roots.

The immediate dispute centres on three laws in Hungary's new constitution pushed through despite EU warnings. Commission officials say these are just the "tip of the iceberg". Over 300 laws have been passed since Fidesz took power in 2010, giving the party sweeping control over the country's institutional system. Amnesty International said last week that Hungary's media clamp-down breaches human rights.

The Commission is taking aim at a law forcing retirement of judges at age 62 instead of 70, widely viewed as a ploy to stack the courts with political loyalists. The new head of the judicial office has overweening powers to manage the courts, appoint judges, and allocate cases.

The central bank law allows ministers to vet the agenda of Monetary Council and take part in meetings. The governor has to swear an oath of loyalty and lacks secure tenure.

"Governments must refrain from seeking to influence their central bank," said EU economics commissioner Olli Rehn. "Certain provisions in the new constitution are in breach of these principles. This needs to be addressed before we can start formal negotiations on the requested EU/IMF financial system."

The warning is clear. Hungary will be left at the mercy of hostile markets until it bows to EU pressure.

Deputy premier Tibor Navracsics played down concerns yesterday, saying a solution could be found to concerns about the central bank and data protection. He yielded no ground on treatment on the judiciary.


According to Graham Summers of Phoenix Capital Research, Germany is fed up and ready to walk
leaving the rest of the Euro boys in a quandary:

(courtesy Graham Summers/phoenix capital research)

Germany’s Fed Up and Getting Ready to Walk

Phoenix Capital Research's picture

For months I’ve been warning that when push come to shove Germany will bail on the Euro.

The reasons for this are simple:

1)   The German public and court system won’t stand for QE from the European Central Bank
2)   Issuing Euro bonds goes against the German constitution
3)   Germany has its own share of domestic problems with a REAL Debt to GDP ratio north of 200% and its banks needing tens of billions of Euros in new capital

All of these factors lead me to believe that Germany would refuse to be the ultimate backstop for the EU. You could also see Germany preparing the legislation to allow it to walk if it wanted to:

German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.

The resolution reads:

"Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily--according to the rules of the Lisbon Treaty for leaving the European Union--leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro."

I believe Germany implemented this legislation for itself… not some other country. And by the look of things, Germany’s getting a lot closer to walking.

BBK Thiele: Current ECB Government Bond Buys Violate Treaty

The European Central Bank's government bond buys are a violation of the Maastricht Treaty, Bundesbank board member Carl-Ludwig Thiele said Monday.

Thiele's comments depart form the official Bundesbank line. While the German central bank has warned that larger purchases may be illegal, it has said that current purchases do not violate the prohibition of monetary financing.

Thiele recalled that the decision to buy Greek government bonds had found no support from German ECB Governing Council members. "Germany was over-ruled on the Council," Thiele said.

"These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state," Thiele said in a speech text provided by the Bundesbank.

Bundesbanker says euro zone must forget idea of QE

Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis, Bundesbank board member Carl-Ludwig Thiele said on Monday.

Thiele called for euro zone countries to exercise fiscal discipline and said that boosting the resources of Europe's rescue funds would buy time to address the bloc's debt woes.

"But lasting confidence cannot be bought with money alone," he added in the text of a speech for delivery in Hamburg.

"One idea should be brushed aside once and for all - namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank."

These are extremely strong statements coming from the Bundesbank. Remember, Merkel is the German political leader, but she doesn’t control the purse strings to Germany: the German courts and Bundesbank do. And if they don’t support more bailouts, there’s nothing Merkel can do.

We see similar warnings coming out of German CEOs:
Linde CEO says Germany should mull euro exit-paper
Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.

"I fear the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in," Linde's chief executive Wolfgang Reitzle was quoted as saying.

"If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.

I firmly believe Germany is already makings moves to prepare for precisely this outcome. No EU member state is going to submit to German authority regarding fiscal policies. Indeed, virtually every EU legislation passed in the post-WWII era was aimed at limiting Germany’s power.

And Germany isn’t going to simply prop up the EU out of the goodness of its heart. As I mentioned before, Germany has its own domestic issues to deal with. And when push comes to shove, Germany will look after its own interests rather than Greece’s or Italy’s.

With that in mind I believe it’s only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults.

When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.

Many people see their portfolios go up in smoke with this. But you don’t have to be one of them. In fact, I’ve laid out a series of steps every investor can take to prepare for the coming European Collapse.  

These steps are laid out in five Special Reports that can all be downloaded for FREE at http://www.gainspainscapital.comunder the Our Free Special Reports tab.

To pick up your copies, swing byhttp://www.gainspainscapital.com today!

Good Investing!

Graham Summers


It has been my contention that QEIII is ongoing through swaps.  Thus bonds are purchased with USA dollars freshly printed and shipped overseas to Europe.  Likewise, the swapped Euros that land in Washington are also purchasing European bonds.    The difference between the two is simple:  the USA can purchase any quantity of any duration it wants.  IN Europe because the LTRO only allows 0 to 3 years, I guess we will not see too much bonds issued in Europe of length greater than 3 years.  And this is the reason that Germany is mighty angry:

(courtesy Jim Sinclair)

QE To Infinity Only Seen In Retrospect

Dear Friends,
The action of the Euro and the news out of Euroland is suspiciously counter intuitive. Don’t buy the party line that it is buying on the bad news.
The Euro minus at least Greece looks better, not worse. The Chinese have to help in order to protect their markets.
I think the deal with the Fed is that the Chinese will watch out moderately for the level of Euro while the Fed will provide all the euro QE money via swaps to the ECB, and why not to other central banks that will then redo the swaps with the ECB?
Follow the money even though it will only be seen in retrospect.
The decrease in French interest rates on the last auction is pure QE and nothing else. It is the use of Fed swaps to the ECB and ECB loans to euro banks to buy the bonds which then add, not detract, from the bank liquidity calculations.
Who are they trying to kid? All this says that 80 to 82 on the USDX is a place where fundamental selling of the US dollar will be huge. That further supports my statement that the gold accordion price reaction is over and the downside is now quite limited in the euro.
Basically what no one a week ago would listen to is starting to take meaningful form. Aren’t you glad you gave me 2 days before joining the herd of Gold? That is those of you that took time to listen to my interview.


The ECB chief, Draghi states that the European situation is in grave danger and he explains why he introduced LTRO to the European banks.  The problem of course is not liquidity but insolvency!!

(courtesy, Jim Sinclair and Wall Street week)

ECB’s Chief Warns Situation Is ‘Very Grave’ JANUARY 17, 2012
FRANKFURT—European Central Bank President Mario Draghi delivered his sternest warning to date on Europe’s debt crisis, saying it could cripple financial markets and the economy unless effective actions are taken by governments.
"We are in a very grave state of affairs and we must not shy away from this fact," Mr. Draghi said in testimony to the European Parliament.
Three months ago, Mr. Draghi’s predecessor, Jean-Claude Trichet, told the same group of lawmakers the crisis had reached "systemic dimensions." Mr. Draghi on Monday said "the situation has worsened further" since then.
Steps must be taken to restore economic growth and boost employment even as vulnerable governments reduce their budget deficits, Mr. Draghi said. Concerns over government-bond markets in some European countries, in addition to a worsening of economic growth prospects, "led to severe disturbances in the normal functioning of financial markets and, ultimately, the real economy," Mr. Draghi said.
The ECB has responded "decisively," Mr. Draghi said, citing the bank’s decision last month to make three-year loans available to commercial banks and relax its collateral rules to expand access to the loans. Early results are "encouraging" that the measures helped to avert a major credit crunch, he said, reiterating comments made last week after the ECB’s monthly meeting.
The ECB president delivered a more upbeat message when policy makers met Thursday, pointing to "tentative" evidence that the euro-zone economy was stabilizing. Since then, the euro bloc has been hit by a series of setbacks, including a mass downgrade of euro-zone credit ratings on Friday and a breakdown in Greek debt-restructuring talks.


Many of you know that one of the indices that I use is the Baltic Dry Index as it gives me a flavour of how the global economy is shaping.  It is simply a measure of costs to move 'dry' commodities like cotton, wood,
corn etc but not oil.  If the ships are empty the economy is dreadful and the index is down badly.
If the ships are moving stuff, then the economy is improving.  Here is the latest Baltic Dry Index and the result is self explanatory:

(zero hedge)

Baltic Dry Index:

Baltic Dry Index Slumps To Lowest Since January 2009

Tyler Durden's picture

The apparently critical-when-its-going-up-but-ignore-it-when-it-is-falling index of the cost of dry bulk goods transportation has 'crashed' in the last few weeks to its lowest level since January 2009 (back below 1000 according to today's levels). Whether this is seasonal output differences or weather impacts, it seems clear that lower steel output in China and a decline in European imports is having its impact on global trade. The index has fallen for 19 days in a row, down almost 50%, its largest drop since the harrowing period of Q4 2008.
The change over the past 19 days (of freefall) is almost 50%, its largest drop since Q4 2008...
and only the third largest ever monthly percentage drop in dry bulk rates...
Charts: Bloomberg


And now this news from my country, Canada, who brought to the world, hockey, basketball, and "eh":

It seems that we have a "Houston we have a problem"

Second MF Global Unveiled As Canadian Regulator Accuses Barret Capital Of Commingling Client Funds

Tyler Durden's picture

When we learned of the MF Global client theft scandal, in the aftermath of its sudden bankruptcy filing, the one thing we predicted would happen (in addition to Jon Corzine never going to prison) was that many more brokers, banks and broadly financial intermediaries would be discovered having dipped in client accounts, or otherwise "commingled" capital in direct violation of the first rule of banking. Sure enough, a little over two months since, the second notable company to have been alleged to have abused client capital for own purposes has emerged. And it comes to us courtesy of sleep Canada whose "banks are all fine." As the Winnipeg Free Press reports, "One of Canada's investment regulators has accused Barret Capital Management, a firm specialized in futures and options on metals and other exchange-traded commodities, of using client money for its own purposes. The Investment Industry Regulatory Organization of Canada warned Monday that Barret clients are at risk due to the firm's "ongoing misappropriation of their money to fund losing trades and ongoing misinformation about the value and holdings in their accounts." IIROC has set a hearing for Tuesday morning to suspend Barret's membership in the organization and stop Barret from dealing with the public. In requesting the expedited hearing, the regulator alleged Barret made "significant misrepresentations to clients including through manipulating account values, misrepresenting account values and holdings by way of false account statements or otherwise providing false information to clients and by manipulating on and off book payments to clients." Where the story gets even more interesting is when one takes a look at just what it is that the company engages in, and how it fits into the scenario analysis conducted in the MF Global aftermath.
From the company's blog, which has all about 5 entries:
Barret Capital is an Investment Dealer that specializes in futures and options on metals, energies and all other Exchange-traded commodities, located in Toronto Ontario.
And the website's About Us section:
Dedicated to guiding commodity investors in Canada to safer, more focused investments in hard assets like gold and silver

Buying hard assets like gold and silver will protect you from the instability of today's market place. As a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investors Protection Fund, we are a full service boutique firm dedicated to guiding novice and experienced commodity investors in Canada towards smart investments, including buying and selling gold, silver and other hard assets.

Our expert brokers, staff and management will guide you from beginning to end, ensuring that you become an educated commodities trader who makes more profitable trades in the exploding gold, silver and commodities market.

We offer our commodity investors in Canada the following services:

    Buying and selling gold, silver, and other commodities
    Buying in derivatives or hard assets
    Providing on-demand market quotes
    Offering delivery and storage options
    Placing stop-loss orders
    Offering online account views
    Providing regular research reports
    Consulting from bullion specialists
    Liquidating holdings

If you are a commodities investor in Canada, contact us today to learn more on how buying and selling gold and silver can help you profit from a booming commodities marketplace.
And finally, per the President's message, the fallout may next impact carrying broker Laurentian Bank:
At Barret Capital Management Inc., we pride ourselves in being a full service, commodities futures Investment Dealer located in the heart of Toronto, Ontario. The decision to choose Laurentian Bank Securities as our carrying broker was an integral one, as Barret Capital Management Inc. is able to provide its clients with the best of two worlds: personal attention to your financial objectives that you'd expect from a boutique commodities futures firm, along with the breadth of knowledge, information and integrity that a large carrying full service brokerage bank can provide.

Our Toronto commodities futures brokerage is special because we believe in building real relationships with our clients. At the end of the day, taking care of your individual interest is at the core of everything we do.
What all this means is that as expected MF Global may have been the first, but certainly will not be the last, to use client capital to prop up its books. And while Barret is not Goldman, it is merely the next company which could no longer perpetuate the lie. Of course, the bigger one is, the harder it is to be caught. Once caught, however, the ripple effects spread fast and furious. 
In Barret's case, this latest incursion in fiduciary duty will simply make paper investors even more skeptical of keeping precious metal "investments" in a paper intermediary, something we warned about when we discussed the fallout from MF Global on HSBC gold claims. Because those too are just the beginning.
Finally, while still unclear what the premise behind the regulatory allegation is, readers will recall our final warning that as in MF Global's case, the fundamental weakest link in the system, was the rehypothecation of assets to make funding appear sufficient and credible, when in reality it is nothing but hot air.  Specifically, we said: "Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant, yet which have all the same if not far greater risk factors as MF Global."
This was merely the first. We expect many more, Canadian, and otherwise banks, to follow suit, in a world in which broker funding is virtually nonexistent at this moment.

Citigroup Misses Big On Top And Bottom Line: Earnings Negative Absent Loan Loss Release

Tyler Durden's picture

Following last week's Easter egg by JPMorgan, the misses by financials continue, with Citi crapping the bed following a big miss in both top and bottom line after reporting $17.2 billion and $0.38 EPS on expectations of $18.5 billion and $0.52 per share. The biggest hit to the top line was the DVA adjustment courtesy of tightening CDS spreads, which while adding to top and bottom line in Q3, took out $1.9 billion in Q4 - of course like everything else it was also priced in. And while we are confident the full earnings presentation will be a labyrinth of loss covering, the first thing to realize is that absent a $1.5 billion in loan loss reserve releases, the bank would have reported negative net income, which was $1.364 billion pretax. Yet there is no way to explain the absolute bloodbath in the Securities and Banking group, which saw revenues implode by 53% from $6.7 billion to $3.2 billion Y/Y, and down 10% Q/Q. Notably, Lending revenues down 84% from $1 billion to $164 million. RIP Carry Trade.
Some highlights from the earnings report, pre-spun for public consumption:
  • Fourth Quarter Revenues of $17.2 Billion Down 7% from the Prior Year Period
  • Fourth Quarter Net Credit Losses Declined 40% from the Prior Year Period to $4.1 Billion
  • Full Year 2011 Net Income of $11.3 Billion up 6% from $10.6 Billion in 2010
  • Full Year 2011 Revenues of $78.4 Billion Compared to $86.6 Billion in 2010 Driven by $6.4 Billion Decline in Citi Holdings Revenues
  • Citicorp Loans of $465.4 Billion Grew 14% versus Prior Year
  • Citi Holdings Loans of $181.8 Billion Declined 25% versus Prior Year
  • Full Year 2011 Net Credit Losses of $20.0 Billion Compared to $30.9 Billion in 2010
  • Loan Loss Reserve Release of $1.5 Billion in Fourth Quarter, Down 35% from the Prior Year Period
  • Tier 1 Common of $115.1 Billion, Tier 1 Common Ratio Increased to 11.8%
  • Year-over-Year, Book Value Per Share up 8% to $60.78, Tangible Book Value Per Share(2) up 12% to $49.81
Full earnings supplement presentation:


Wells Fargo Earnings?

U.S. debt and deficits are running over $1 trillion per annum and amount to over 700% of Federal revenue.  And just last week, we learned that the monthly budget deficit climbed to $85.97 billion in December, from $78.13 billion in the same month a year earlier.  The only relief from such debt will be a default on the part of the United States.  A sovereign U.S. default would be pernicious for the dollar and massively bullish for gold.  - Michael Pento, on King World News
I see Wells Fargo's earnings report was greeted by much fanfare by Bubblevision and the mass media slavishly followed by the hoi polloi.  I was curious to see if I could figure out where Warren Buffet was fudging the truth about WFC's earnings, so I took a quick peek at the 8-K filed with the SEC this morning.

Let me qualify this by saying that I only looked in the obvious spots - of course ignoring the fancy marketing charts and spin data attached to the 8-K - to see where I could deflate WFC's inflated earnings report.  I don't have time to go through WFC's numbers with a fine tooth comb, but just looking at the hot spots of GAAP manipulation will show you why WFC stock makes a better short than long.

First, versus 2010, WFC reduced its allowance for credit losses from $23.6 billion in 2010 to $19.6 billion in 2011.  If they had just kept that number the same, WFC would have reported break-even results for 2011 - i.e. no net income.

Here's why I believe that a scrutinizing analyst should look at WFC's earnings report but use the same allowance for loan losses as in 2010:  WFC actually increased the number of loans 90 days or more past due to $22 billion, from $18.5 billion in 2010.  That's a 19% increase in non-paying loans (mostly mortgages).  We also know that these banks are letting a significant portion of their delinquent mortgages "slide," without classifying them as delinquent or in default.  So assume that WFC's number is actually larger than $22 billion.  On that basis alone WFC's allowance for losses should have been closer to the $23 billion reported in 2010 than the $19 billion they reported this year

Furthermore, WFC has $37 billion in underwater "pick a pay" mortgages.  These are the notorious "pay option ARM's" that allow the borrow to skip payments and that payment is then added on to the outstanding loan balance.  These mortgages get bigger while the underlying housing collateral continues to shrink.  Most of Well's pick a pays are in California and Florida.  I think you can see that these mortgages will eventually be a big source of losses for WFC and WFC should therefore be reserving for losses associated with these mortgages at a faster rate, not a slower rate.

Even uglier, WFC as $106 billion in home equity loans.  35% of these are in Californian and Florida.  When a 1st mortgage is, best case, just barely covered by the value of the underlying home, it means the home equity debt attached to that home is worth ZERO.  If Warren and WFC were to be honest with the market and investors, the value of that home equity portfolio would be written down by at least 50%.  That's $56 billion in losses.  But since "new" GAAP and the "new FASB" allows these banks to hope and pray for a housing market miracle, lenders like WFC get to kick the can down the road and pretend that their home equity portfolio is really worth $106 billion.  Anyone want to take Wells' side of that bet?

My point here is that Wells should be much more aggressive in recognizing allowances for credit losses.  But since our ponzi system allows them to report b.s., it's b.s. we get when these banks reports earnings.  Needless to say eventually Warren will call up his good buddy Barack Obama and see to it that the taxpayer gets the tab for the eventual mortgage bloodbath on WFC's balance sheet.  But in the meantime, please understand that the earnings reported by Wells Fargo today were total bullshit.

Here's a link the 8-K if you would like to do your own research:  LINK

And bear in mind, I only had time to look at obvious areas of GAAP manipulation.  I'm sure if you combine today's filing with the 10-K and look at the off-balance mess in the footnotes, you will conclude the Wells probably should have reported an accounting loss.

What Rosenberg Is Looking At - Rolling Margin Debt Has Gone Negative

Tyler Durden's picture

With market dynamics continuing to be virtually identical to the start of last year, many struggle to find what incremental events at the margin may  determine what is not priced in by the market (because apparently everything else is). As wepointed out recently, one such potential factor is that short interest on the NYSE has plunged to practically multi-year lows. And yet the melt up has continued indicating the short covering has come and gone, and at this point it is incremental buying that is probably driving stocks. Yet even that may be ending: since we are looking at the margin, it makes sense to present David Rosenberg's observations on what it is that he is looking at the moment, which appropriately enough, is NYSE margin debt, whose 12 month trailing average has just turned negative: traditionally an important inflection point.
From Gluskin-Sheff's David Rosenberg:

When the experts say that the stock market is a leading indicator, maybe they are referring to margin debt — seeing as this provides a bit of a pulse on the investor appetite for risk. The 12-month trend in margin debt slipped into negative terrain in December 2000 and then did it again in April 2008. Both times, heeding this trend paid dividends in the sense that they both led downturns in both economic activity and in equity market valuation. The YoY trend just slipped into negative terrain last November for the first time since 2009 —just something to consider.

Treasury Resumes Pillaging Retirement Accounts To Fund Deficit Spending Until Debt Ceiling Raised

Tyler Durden's picture

Back on January 5, when we first broke the news that the US debt ceiling has been reached, and breached, yet again, we said "And now the Social Security Fund pillaging begins anew until Congress signs off on the latest interim debt ceiling increase." Sure enough, operation rape and pillage is a go.
In other words: Congress better pass the debt ceiling prontt, or else it will have to explain to government retirees the tens of billions in deficit funds, i.e., marketable debt, already issued will permanently offset the level in G-fund holdings.
Lastly, any comparison to similar acts of commingling performed by other insolvent entities in recent months is purely coincidental and no Obama handlers were thrown in jail as a result of this post.


Poppers said...

http://www.bbc.co.uk/news/business-16585844 Moire on China becoming the world reserve currency.

Anonymous said...

BMO is offereing its' clients the ability to buy gold from them. They will hold it . If you want delivery it is $100 per ounce.

Anonymous said...

A cracking round up Harvey...excellent work. Thanks

Randy said...

Hi Harvey,
Keep up the food work. Is CEF safe? If the poop hits the fan will CEF be ok unlike SLV? If you hold CEF in a brokerage account and the broker goes under like MF Global, are you safe?

Randy said...

That was good not food

Eternal Student said...


Considering that Harvey's work gets readily gobbled up by many, that's understandable.


It's truly amazing that a bunch of Bankers in Brussels can tell Hungary what laws it can pass, and what laws it can't.

Similar to the theme I mentioned over the weekend, of where we're headed globally with the IMF as the World's Central Bank.

Anonymous said...


imo, MFG can happen anywhere to anyone. Imagine you were an MFG Customer - it looks like it didn't matter what you held - cash, shares, etc. - you are getting cash and something like 70% to boot.

If you choose to hold shares from one side of a collapse to another, you need to a) register your shares and take possession of the share certificates b) hope the fund/trust does not terminate at anytime in which case you'll only get cash. With CEF, there is no redemption for physical, so either you'll sell your shares or redeem for cash.


check out the prospectus found at the bottom of the page.

Eternal Student said...

It looked like Jesse nailed the prediction on PSLV's follow on offering:


"As predicted. The cash reserves of the Trust had fallen to less than $350,000 by my estimates.

Let's see how this affects the price of silver."

His prediction on 01/09 was here:


"But given the low estimated cash levels in PSLV and the likelihood of another unit offering from their shelf that premium looks a little out of historical bounds."

We had been discussing the premium here previously. Jesse's suggesting that it may have been due to a short squeeze.

Trade Printer said...

Great Entertainment Game I love this. I always welcomed your blog. By Regards Web To Print

Anonymous said...

Why are settlements not coming from "official" dealer accounts? My guess is it is because what is there ( and yes it is real metal ) is only LEASED metal. Comex may not even know that (or want to know that) - but if someone were to actually be given that PM then the paper trail would become uncovered. The PM in the vaults is used to cover the short writers margins which is why they don't care if the margin rates rise.

Harvey Organ said...

To all:

I really enjoy all of your comments.

Today's notice for deliveries:

in gold only 7 notices for 700 oz
in silver only 12 notices for 60,000 oz

in gold we had prior to the notices filed: 33 left to be served

in silver: 54 notices.

looks like they are going to the wire again.

should be an interesting first notice for gold as well.


Anonymous said...

i just saw this today .
i would be interested in any opinions .

Anonymous said...

anon @ 11:01:

first thought was can't comment on politics b/c don't know what's really going on.

Then thought this is just another risk when investing in mining shares. It goes with the territory.

prefer safer play in metals and willing to give up all the potential gain everyone keeps talking about.

Anonymous said...


"Individuals will become more and more aware of the fact that gold is the only way to protect them from what is going to happen. But at this point, of course, it’s only a very, very small minority that understands that. That will change as we go further along in this cycle.

The bottom line is you cannot expect to have anything deposited or held within the financial system that is going to be yours when the day of reckoning comes. Therefore, people must move their money out of the system and have it under their direct control, preferably in precious metals.

If you are all in the banking system, the risk is you will not have anything left. KWN readers need to protect themselves because MF Global is just the first of many, many to come.”

John L.Peterson said...

Good article and right to the point. I am not sure if this is actually the best place to ask but do you folks have any thoughts on where to employ some professional writers? Thanks in advance :)
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