Saturday, January 7, 2012

Greece/QEIII ready to be released in both Europe and USA/Sabre rattling between Iran and the USA

Good morning Ladies and Gentlemen:

Before proceeding, I would like to state that there were no new entrants into the banking morgue last
night. The FDIC's last casualties entered Dec 16.2011.

The price of gold fell by $3.30 to $1616.10.  Silver fell by 61 cents to $28.65.  The cartel almost always
whack the price of gold and silver around the jobs report and yesterday was no different. You could tell that a raid was on by looking at the gold shares index  (the HUI) which languished on Thursday despite the huge run up in bullion prices.  On Friday, silver was hit even though gold rose to $1632...a clear signal to the bankers would continue pressing the sell button on the metals throughout the day. Today's commentary will be lengthy so take a few hours to read everything carefully as we prepare for next week.

Let us head over to the comex and assess trading yesterday, inventory movements and amounts of precious metals standing for delivery.

The total gold comex OI fell by 421 contracts from 421,221 to 420,380 despite gold's big advance on Thursday. It looks like we had a few bankers who felt the heat and decided to abandon the gold playing field. The front options expiry month of January mysteriously saw its OI only fall by 3 contracts, from 52 to 49 despite 26 deliveries on Thursday.  So we gained 23 contracts or 2300 oz of additional gold standing. The next big delivery month is February and here the OI fall from 224,763 to 220,180 as we are starting to see rollovers as first day notice approaches.  The estimated volume on the gold comex yesterday was 169,951 which is average at best.  The confirmed volume on Thursday, the day gold rose above the 1600 dollar mark came in at 204,035.

The total silver comex OI is behaving quite different to gold and I believe something big is brewing.
Let me explain.  The huge margin costs have blown out the small guy in silver, coupled with the MFGlobal confiscation.  Only, in the know players willing to take on the establishment, is playing silver and these guys refuse to buckle despite the massive shorting by our banker friends.  The OI in silver rose from 105,688 to 106,471.  The front options expiry month of January saw its OI fall from 62 to 44 for a loss of 18 contracts. We had 42 delivery notices on Thursday so we gained 24 notices or  120,000 oz of additional silver standing.   The next big delivery month for silver is March and here the OI rose marginally from 57220 to 57,726.  The estimated volume at the silver comex came in Friday at 40,208 whereas the confirmed volume on Thursday was also in the same ballpark at 42,796.  The volumes in silver have been declining rather rapidly these past several weeks from previous comex sessions.

Inventory Movements and Delivery Notices for Gold: Jan 7 2012:

Withdrawals from Dealers Inventory in oz
99 (Scotia)
Withdrawals from Customer Inventory in oz
674 (HSBCManfra)
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
24 (2400)
No of oz to be served (notices)
25  (2500)
Total monthly oz gold served (contracts) so far this month
990  (99,000)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


The gold vaults were very quiet on Friday. We had no gold enter the dealer as a deposit but we did have one brick of 99 oz of physical leave the dealer (Scotia).

We had the following customer withdrawal:

1. Out of HSBC  353 oz
2. Out of Manfra: 321 oz

total withdrawal:  674 oz.
we had one adjustment whereby a customer leased 199 oz of gold to a dealer.

The registered or dealer gold rises slightly to 2.527 tonnes (a rounding addition).  Thus in tonnage the registered inventory rests this weekend at 78.6 tonnes of gold.

The CME notified us that we had 24 notices filed for 2400 oz of gold.  The total number of notices filed so far this month total 990 for 99000 oz. To obtain what is left to be served,  we take the OI standing (49) and subtract out Friday notices (24) which leaves us with 25 notices or 2500 oz of gold to be served upon.

Thus the total number of gold oz standing from options exercised this month is as follows:

99,000 (oz served already from options exercised)  +  2500 (oz yet to be served upon)  =  101,500 oz or 3.15 tonnes.

Thus if we add the delivery month of December with the non delivery month of Nov and the non delivery month of January we have a total of 73.83 tonnes of gold delivery notices. This represents 93.93% of dealer available gold at the registered gold comex vaults.  Yet no gold enters and hardly anything leaves the dealer.

And now for silver 

 the chart: January 7 2012:

Month of January now commences:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory3141 (Brinks,Delaware)
Deposits to theDealer Inventory594,781 (Brinks)
Deposits to the Customer Inventory585,535 (HSBC,Brinks,)
No of oz served (contracts)2  (10,000)
No of oz to be served (notices)42  (210,000)
Total monthly oz silver served (contracts)424  (2,120,000)
Total accumulative withdrawal of silver from the Dealersinventory this month268,115
Total accumulative withdrawal of silver from the Customer inventory this month 1,489,566

It looks to me like the bankers boys are preparing for something big.  Again we witnessed massive silver enter the customer and this time also the dealer.

Here are the entries for silver:

Dealer deposit of silver:

1.  Into Brinks  594,781 oz

Customer deposit of silver:

1.  Into Brinks customer:  2089 oz
2  Into HSBC customer:  583,446 oz.

We had the following withdrawals:'

1.  None by the dealer.

The customer withdrawal:

1.  1065 oz out of Brinks
2.  2076 oz out of Delaware

total withdrawal:  3141 oz from the customer vaults.
we had no adjustments.

The registered silver rises to a huge 35.4 million oz.
The total of registered and eligible silver rises to 122.3 million oz.

The CME reported that we had only 2 delivery notices for 10,000 oz of silver.
The total number of notices filed so far this month total 424 for 2,120,000 oz.  To obtain
what is left to be served, we take the OI standing ( 44) and subtract out Friday deliveries (2)  which leaves us with 42 notices or 210,000 oz left to be served upon.

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

2,120,000 oz (served) +  210,000 oz (to be served )  =  2,330,000 oz.

Since January is generally a very quiet options delivery month the numbers for silver and gold are quite high.


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 7:2012:

Total Gold in Trust



Value US$:65,173,461,623.03

Jan 5.2012




Value US$:64,468,299,322.87

Jan 4.2011




Value US$:65,033,703,571.12

JAN 3.2012




Value US$:64,429,378,970.13


Dec 31.2011




Value US$:63,484,275,822.93

Dec 29.2011:




Value US$:61,730,367,104.89

We lost zero oz of gold again from the GLD.  It is very strange that for the past several days   we saw gold whacked in price and yet no gold left.  A week ago Friday we saw gold rise and yet inventory remained constant. Tuesday a big gain and again no gold enters its vault. Wednesday, another big rise in gold and still no gold enters. Thursday, another rise and still no gold enters the GLD vaults.
Yesterday saw gold hit for $3.30 and still no gold enters or leaves the GLD. Very very strange!!

And now for silver Jan 7 2012: 

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

Jan 5.2011:

Ounces of Silver in Trust306,942,851.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,546.99

Jan 4.2012: 

Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79

Jan 3.2012:

Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79

Silver is behaving different to gold with respect to the ETF's.
Yesterday we saw 972,000 oz flee the SLV.  Since demand is high, I expect that this silver is heading for sovereign shores.  

Maybe London is running out of gold and that is the reason that the "nominal" gold holdings are remaining constant.  Probably all gold that remains there have been hypothecated and the real physical stuff is nowhere to be seen.


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

1. Central Fund of Canada: traded to a positive .3 percent to NAV in usa funds and a positive .8% to NAV for Cdn funds. ( Jan 7 2012.).
2. Sprott silver fund (PSLV): Premium to NAV rose big time   to  32.25% to NAV  Jan 7. 2012  WOW!!!!!
3. Sprott gold fund (PHYS): premium to NAV rose  to a 6.4% positive to NAV Jan 7. 2012).  wow


just take a look at the premium in silver...32.25%.

and take a closer look at the premium in gold...6.4%

physical metal is starting to distance itself from paper.The bankers are loathe to attack the Sprott funds.
 They are still shorting Central fund of Canada.  Eric is still on the prowl looking for his silver.

I would also like to point out that Venezuela still has not received its gold from the  Bank of England
I believe that the amount of gold coming from over there is around 99 tonnes.
Its first shipment came from other physical vaults and I do not believe that much came from the B. of E.
which is the key centre to watch.


Now let us head over to the COT report and assess positions there.  First the Gold COT:

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

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, January 03, 2012

Those large specs that have been long in gold, liked what they saw and added another 1,926 positions to their long side.

Those large specs that have been short in gold, guessed wrong as they added, 1743 contracts to their short side.

The commercials;

Those commercials who are close to the physical scene and are generally long in gold, added  1595 contracts to their long side.

Those commercials who are perennially short in gold surprisingly covered 494 contracts.

Small specs:

our small specs that have been long in gold, pitched a tiny 865 contracts from their long side.
our small specs that have been short in gold, did not read the tea leaves correctly as they added a rather large 1407 contracts to their short side. The small specs generally get it wrong.  These small specs are crying the blues this weekend.

Conclusion:  more bullish for gold this week as the commercials are not providing much of the paper gold.

Now for silver:

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, January 03, 2012

Our large specs who have been long in silver added another rather large 2603 positions to their long side.
The large specs who have been short in silver covered a tiny 180 contracts to their short side.

Our commercials:

The commercials who have been long in silver and close to the physical scene added a tiny 76 contracts to their long side.
Those commercials who have been perennially short in silver (JPM and fellow crooks) provided the necessary paper to our large specs to the tune of 1,860 contracts.

The small specs:

Those small specs who have been long in silver pitched 334 contracts from their long side. 
Those small specs who have been short in silver added another 665 contracts to their short side.

Conclusion: the bankers continue the supply the paper with the small specs.  I would say that the report is neutral in silver.


Before heading into the fiat side of things, I want to highlight this article for you as the new  Pan Asian Gold Exchange is ready to start in 2012.  It this article Ned Naylor Leyland discusses how this exchange will be a physical one where no leverage is exhibited in total contrast to the LBMA physical market which I believe the leverage is around 100: 1 but some say 350 to one.

Please try to understand what the author is trying to tell us:

(courtesy of the SLOG)
special thanks to GATA for bringing this to our attention:

nedI had the chance to speak with Ned Naylor-Leyland yesterday, Investment Director with Cheviot Asset Management, and adviser to an offshore precious metals fund. It was a spectacular interview, as Ned is one of the few truly free thinkers in the investment business today.
During the interview Ned shared his thoughts on the new PAGE(Pan Asia Gold Exchange) launch in 2012 & the great opportunities it will provide investors, the recent pullback in gold and silver, and what may end up taking gold to go much higher levels.
In regards to the impending PAGE launch Ned said, “The great thing about this new exchange in China and the philosphy behind it, is its harking back to the old days of gold where you pay cash and get your gold…they’re opening up a 1 to 1 fully allocated recieipts market in gold. If Jeff Christian is to be believed, there is 350 to 1 leverage[in the Western paper gold markets]. That will give you a 0.3% coverage in terms of real metal behind your contract.”
Ned further adds, “I think the opening of the new Chinese allocated market will change people’s perception of holding huge leveraged unallocated positions within the LBMA system.”
dragon1When asked about opportunities the PAGE market transition will provide, Ned said, “I think the arbitrage opportunity will manifest fairly quickly…The chain of custody behind the [gold] price setting mechanism appears to be breaking…the CME and comex futures market mechanisms are clearly nonsense, [investors] are leaving in droves as you would expect…I’ve labeled 2012 as the year of [gold] deliverance.”
In response to the current sell-off in gold, Ned commented, “You’ve got to bear in mind, they’re just selling leveraged paper, no one is selling physical. There is just a tsunami of paper selling in order to maintain the illusion of fiat value…and it will be overcome…the
physical buying will ride over the paper selling.”
He further stated that this sell-off, “gives [investors] an opportunity to diversify and hedge themselves at a reasonable level, because in due course we’ll get a huge move and the market will have recognized what is really going on...we’ll get some kind of event in the market which will drive price discovery and a change in the way markets behave in one fell swoop. The substantial illiquidity of gold and silver will prove to be a big problem for asset allocators and people trying to come in at that point.”
This was another outstanding “must-listen” interview with one of the real intellectuals in the business today.
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Yesterday we got word that conditions are rapidly deteriorating throughout the globe and thus, Europe and the USA were planning QEIII's:

First from Europe:

Bull Market Thinking:

EU CRISIS BREAKING: ECB’s Draghi ‘ready to go full-tilt at QE’ – sources.

ECB’s Draghi…calm in the face of a storm
US, Brussels sources question Merkel’s survival without policy change
The Slog has learned from sources in Frankfurt, Switzerland, Brussels and Washington that the head of Europe’s Central Bank (ECB) Mario Draghi is now “in a position to pursue full-scale QE, and will do so”, following deft political moves on the part of the Italian in recent weeks.
The Slog has been watching Mario Draghi’s performance in the chess-game between Berlin and the European Central Bank with some admiration since he took over. I don’t approve of what he’s doing, but you have to admire the bloke’s skill.
I reported two days ago on anger in Berlin following the ‘consensus’ appointment of Belgian Peter Traet to the role of Chief Economist – rather than replacing Jurgen Stark with another German. Now Mario is showing the strength of support he has on the ECB Council by eking a pro-Sovereign-bailout message out of another German ECB Chief.
European Central Bank Governing Council member Klaas Knot opined that Berlin should support a major increase in the proposed ESM, still currently the EFSF until April/June/August or never, depending on who you talk to.
“The most important obstacle lies in Germany, not in the Netherlands,” Knot said in an interview on Dutch public television last night. “I think that more money is needed and we will use the time to convince our German colleagues. We haven’t moved in the right direction and it’s also clear that measures needed are happening too slowly and too limited in size. A significant acceleration in decision-making is needed”.
This is a pretty direct side-swipe at Merkel, and her refusal to up the Stability Fund or deliver a eurobond prior to FiskalUnion.
If push comes to shove, I’m told, Signor Draghi will simply increase the scale of his current, thinly-disguised QE – and take the heat from Berlin on the chin. But his hope is that he can so increase the pressure on Chancellor Merkel – as the situation deteriorates – that the German leader will be forced to relent. He will then, as one informant puts it, “focus on funnelling every last red cent the banks need to weather the coming storm”.
The Slog’s favourite Bankfurt mole is of the exact same opinion. “Draghi is running rings round Merkel,” he told me last night, “and forcing Berlin into a corner. This man is a talented strategist, for sure. Above all, this shows the division between Brussels and ECB fiscal thinking on the one hand, and Berlin. But you also have the split between the risk-aversion of my colleagues here in general, and the seeming willingness of the Merkel leadership to go for euro survival by steaming ahead towards centralised fiscal discipline.”
The complexity of the politics is confirmed by a State Department source in Washington. But this American goes further:
“Mario Draghi has to think about US, French, German, Greek, Italian and German banking sensitivities more than ever right now,” said the informant, “Our guess [he refers to a section, not the whole of State] is that he risks destabilising Merkel’s position to the point where legislative maneouvres and voter sentiment in Germany end up kicking her out. That’s the last thing we want”.
I think Washington could be overstating the danger to Angela Merkel: I’ve maintained for some months that her survival is central to US foreign policy on Europe, and the Americans are moving to cement any financial alliance they can with Germany. But a mole in Brussels offers this time-worn view:
“Remember that the gameplan here is to keep Germany in the cage – it is the Commission’s chief raison d’etre. There is no doubt that machinations both here and in Paris are at work destabilising Merkel – with the objective of, at worst, bending her will on bailout and stimulation. Berlin is seen increasingly as blind to reality, while the French remain terrified of Greek and Italian default.”
Yesterday, Sean Darby, global head of equity strategy at Jefferies Group Inc., talked from Hong Kong about the next moves in the eurozone on Bloomberg TV. The gist of his view was that Draghi’s ECB would “pile in with upweighted QE at some in the first [2012] half”. This suggests to me that Mario’s intentions are being still more widely leaked.
Stay tuned: this one will accelerate towards a conflict quite quickly from here on.


And now the USA for QEIII 
(courtesy Market Watch)

Fed seen unveiling QE3 bond plans by summer

Mortgage-bond purchases could begin this spring, analysts say
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — A growing number of economists, analysts and bond investors think the Federal Reserve will announce another massive bond-purchase plan by the middle of the year, if forecasts for persistently high unemployment and slowing inflation come to fruition.
While a report Friday showed the U.S. unemployment rate fell to 8.5% in December, the job market is not expected to improve quickly enough for Fed policy-makers, who are looking for a much bigger drop in the jobless rate to support solid economic growth.
There’s debate about how such a program from the Fed will work, but the market’s sense is that someone needs to do something, and the U.S. central bank seems to be the only institution in the country willing and able to take steps to support the economy.
Money managers and strategists say the Fed will have enough reasons — domestic sluggishness, lack of action from Congress and the White House,simmering debt problems in Europe — to begin a third round of quantitative easing, dubbed QE3.
"We have an activist Fed that’s chafing under ongoing weakness in the housing market and chronically high unemployment," said Bill O’Donnell, head of Treasury strategy at RBS Securities. "By the summertime, we’ll be thinking about or even looking at a QE3. It’s reasonable just to do something. It’s very clear that Washington isn’t about to step up with some bipartisan grand plan, and something will need to be done." …


It seems that Greece's austerity measures did not quite match up with the Troika's assessment.
They announced that there will be a delay in the implementation of the primary bail out funds for Greece.
In the following article, Wolf Richter of gives us a thorough analysis of what is going on inside Greece. With strikes by tax collectors and doctors, it does not look likely that Greece will have its house in order:

(courtesy Wolf Richter/

Greece’s Extortion Racket Maxed Out

testosteronepit's picture

Wolf Richter
Just how bad is the real economy in Greece after five years of recession, countless strikes, and 17.7% unemployment? Registrations of new and used vehicles plunged 30% in 2011, after having already plunged 37% in 2010. Only 107,737 vehicles were registered, the lowest level in over 20 years.
And yet, more cuts are coming. Mid January, inspectors from the Troika (EU Commission, IMF, and ECB) will once again head to Greece to inspect its books and come up with a budget deficit number for 2011—no one trusts Greek numbers anymore. And they will once again leave angry. Indications are that the deficit ranged from 9.5% to 10.7% of GDP, significantly higher than the already revised Troika-set limit of 9% that Greece had vowed to abide by.
So, new “structural reforms,” as they’re called, will have to be implemented, including cutting everything in sight ... auxiliary pensions, public sector salaries, social and welfare benefits, healthcare, defense, tax exemptions. Agencies will have to be closed and tens of thousands of civil servants will finally have to be laid off.
All to get the next bailout installment. Of the first bailout package of €110 billion, €73 billion have already been paid. The sixth installment, €5 billion, has been moved from December to March due to lack of progress, and the seventh installment, €10 billion, has been moved from March to June.
“If our mission in mid-January reaches the conclusion that there are delays, then we should revise the March installment,” announced Olivier Bailly, spokesperson for the EU Commission. Piling pressure on Greece is the name of the game.
Then there is the second bailout package of €130 billion put together last October. €89 billion are to be released in February. It will enable Greece to pay for €17.5 billion in maturing bonds due in March. But the Troika imposed conditions.
First, Greece needs to force the financial institutions that hold $206 billion of its bonds to accept a “voluntary” 50% haircut as demanded during the Eurozone summit in October. Negotiations have been dragging. But now word is that bondholders buckled under the threat of losing their entire principle if Greece tumbles into a disorderly default. And a deal has emerged: a 50% haircut with a hit to net present value not to exceed 60%. Their old bonds would be swapped for new bonds with a coupon of 5%. They would have the same status as loans Greece receives from the Eurozone and the IMF.
Second, Greece needs to implement "structural reforms" in the private sector to make it competitive. Among the targets: cutting salaries, reducing the minimum wage of €751 (in France it’s €1,398), scrapping the still existing 13th and 14th monthly salary, and eliminating automatic pay raises.
“So we can get the next loan installment,” Papademos explainedat a meeting with the major labor unions. Employers and unions would have to come to an agreement this month to meet the Troika’s demands. And then the nuclear option: “Without an agreement with the troika and the ensuing funding, Greece faces the threat of a disorderly default in March.”
Disorderly default. Greek politicians muttered threats before, and each time, money materialized. But last October, the Troika saidno. For how Greece solved that situation, read... Greece 'Finds' Treasure, Stays Solvent For Another Month.
But cutting wages didn’t sit well with the unions. At the forefront: Giannis Panagopoulos, president of the GSEE, the highest confederation of private-sector unions in Greece. His resistance was vehement. Salaries, he said, were not the reason for Greece's lack of competitiveness. Instead, companies should secure their jobs. Other union officials spoke up too. So, there won’t be any progress in implementing “structural changes.”
Hence, the Troika inspectors will once again leave angry. But Greek politicians have become expert at their extortion game—even with bond holders. They found that the Troika, after some huffing an puffing, will keep Greece afloat another month. And if the people with the money lose their fear of that threatened end of the world, accept their losses, and move on without Greece?
"True Hell," is how Giorgos Provopoulos, Governor of the Bank of Greece, described the possibility of life without the euro.
Even Beatrice Weder di Mauro, member of Germany’s Council of Economic Experts confirmed that a breakup of the euro in 2012 “cannot be excluded." For more on this, and why people hang on to leftover Deutschmarks, read....  Missing: 13.3 Billion Deutschmarks.

Iran To Hold New "Massive" Naval Exercise Near Straits Of Hormuz, To Run Parallel With Joint US-Israel Wargame

Tyler Durden's picture

The selloff in crude yesterday, provoked bythis Reuters article stating that Iran is ready to resume nuclear talks with the West, is now well over and the accumulation has again resumed, following (not so) stunning news that merely days after its 10 day Straits of Hormuz military exercise ended, the country is already preparing for yet another, "massive" naval exercise. As RT reports, "Iran is planning to hold new “massive” naval exercises near the strategic Strait of Hormuz within the next few weeks, the country’s Fars news agency has said, as Tehran’s tensions with the West continue to escalate following threats of new sanctions against the Islamic Republic over its controversial nuclear program." And this time the wargame comes with a twist - it will likely occur just across from a comparable drill ran jointly by the US and Israel: "The newly announced Iranian drills, codenamed The Great Prophet, may coincide with major naval exercises that Israel and the United States are planning to hold in the Persian Gulf in the near future. AP quoted on Thursday a senior Israeli military official as saying the drills would be held in the next few weeks." And since the Tonkin Gulf Resolution script is being used point by point, any lost escalation "chances" in the end of 2011 will surely be regained within days.
Iranian Defense Minister Ahmad Vahidi was quoted in the Fars report as saying the Islamic Revolution Guards Corps was planning to conduct “its greatest naval war games” near the Straight of Hormuz in the near future.

The announcement came just days after the Iranian navy completed its 10-day naval exercises near the Strait of Hormuz. The drills were held after the Islamic Republic threatened to block the waterway, where an estimated 40 percent of the world's seaborne oil passes, in response to Western plans to ban oil imports from Iran. The Islamic Republic derives some 60 percent of its budget revenues from oil exports.

The exercises, called Austere Challenge 12, which both Israeli and U.S. officials have described as the largest-ever joint drills by the two countries, are designed to improve missile defense systems and co-operation between the U.S. and Israeli forces.
Got CL?


And this assessment by Art Cashin on the Iran situation:

Art Cashin Explains What Is Really Happening In Iran

Tyler Durden's picture

Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.
From UBS Financial Services
Show Me The Money - Iran continues to make headlines (and roil the crude market) with its threats to blockade the Strait of Hormuz. Observers feel the threat is primarily a reaction to the trade sanctions which are beginning to pinch, and pinch tightly. While the people are not exactly in the streets yet, the business community appears to be in an all out scramble. That shows up in the recent frantic trading in the currency black market. Here’s a bit of what the sharp-eyed Bob Hardy wrote on the topic on his nifty GeoStrat blog:
Despite all of the tough talk and threats coming out of Teheran as it wrapped up its ten day naval maneuvers, one only has to look at the dramatic fall in the black market value of the Iranian Rial versus the U.S. Dollar, to know that the country is under a tremendous amount of pressure. The leaders of this military dictatorship cloaked in a theocracy, may threaten to close the Strait of Hormuz if its oil is sanctioned or if it is attacked militarily. They may test fire new missiles and warn the U.S. to keep its aircraft carriers out of the Persian Gulf, but the people understand the risks, and they are voting with their money.

The locals are dumping their Rials for Dollars at such as dizzying rate that the banks are no longer cashing letters of credit at the official rate, which leaves businessmen in the lurch and continues to weaken support for the regime. Multiple media sites are reporting that moneychangers are no longer even advertising rates on their white boards, as they cannot keep up with the fall in the Rial's value.

The currency has fallen out of bed ever since President Obama signed a defense bill on Saturday, December 31st, which included a provision to sanction companies that used the Iranian Central Bank to buy that country's oil. By Monday, January 2nd, the Rial was widely reported to be trading down 12% in the black market from Saturday's rate, and Mehr news service reported that housing prices had tumbled 20% during the last few weeks. As a point in fact, we understand that many hard assets that are not absolutely necessary, are being sold so that people can invest in the U.S. Dollar and other foreign currencies.

This drop was on top of the 10% hit the currency took after Teheran announced that it was cancelling all trading with the UAE several weeks ago, but it soon rescinded that decision. The Rial was trading at 17,800 Rials to the Dollar on Tuesday, January 3rd, which represents a fall of about 17% from the street rate on Saturday before the sanctions announcement. Compare that rate with the official rate displayed on the Central Bank's website of 11,100 Rials to the Dollar, and one can see why the Central Bank has been holding daily emergency meetings. On Wednesday the decline continued in spite absurd comments from the Iranian government that the decline in the Currency had nothing to do with the new U.S. sanctions, because they have not yet taken effect.
This is just beginning. Stay tuned.

Hungary officials have just realized that they are in trouble and the government now embraces the central bank of Hungary as this nations needs badly IMF funding:

(courtesy Bloomberg)

Hungary’s Orban Embraces Central Bank Chief

Hungary’s Premier Viktor Orban retreated in his confrontation withcentral bank chief Andras Simor, seeking to revive talks for an international bailout after a market rout this week. Stocks, bonds and the currency gained today.
“The President can count on the government’s support, including our backing for him personally,” Orban said after meeting Simor in Budapest. The government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank to stabilize the economy, Orban said.
The International Monetary Fund and the European Union broke off talks last month on Hungary’s bid for a bailout after Orban refused to withdraw a new central bank regulation the institutions said may undermine monetary-policy independence and Simor’s authority. The forint fell to a record against the euro yesterday as investors speculated an IMF deal may be delayed.
“It’s clear Orban is retreating, the question is whether it’s enough,” Peter Duronelly, who helps oversee $1.5 billion mostly in Hungariangovernment bonds as chief investment officer at Budapest Fund Management, said by phone today. “If EU leaders expect a total capitulation from Orban, then an agreement won’t be so simple or fast.”
The forint strengthened 0.5 percent against the euro to trade at 317.38 at 11:31 a.m. in Budapest from as low as 324.24 yesterday before Hungary’s chief negotiator, Tamas Fellegi, pledged to compromise with the IMF and the EU on a bailout.

Bonds Gain

The yield on the benchmark 10-year government bond declined to 9.917 percent, falling 48 basis points, the most in six weeks. The yield rose to as high as 11.34 percent yesterday, according to generic prices compiled by Bloomberg. Standard & Poor’s followed Moody’s Investors Service on Dec. 21 in cutting Hungary’s debt to junk, 15 years after the former communist country was awarded an investment-grade rating.
The cost of insuring Hungarian bonds using credit-default swaps fell to 695 basis points today from 735 points, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers. The benchmark BUX stock index rose 1 percent to 16,379.77 at 12:47 p.m.
Talks for Hungary’s second bailout in four years broke down following the central bank law that takes away Simor’s right to name deputies, expands the rate-setting Monetary Council and adds a new vice president. A separate law makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Government’s Plea

The central bank law, which came into effect on Jan. 1, is “fully compatible” with EU rules, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi yesterday. The Cabinet will continue to respect the Magyar Nemzeti Bank’s independence, Matolcsy wrote.
Orban shunned the IMF since taking office in 2010 to prevent interference in what he called his “unorthodox” measures. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to tame the budget deficitand forcing lenders to swallow exchange-rate losses on foreign-currency mortgages. The EU has criticized all those policies.
Orban’s government has also reduced the power of independent institutions and asserted its influence since winning elections, bucking objections from the EU, the IMF, the U.S. and the United Nations.

Orban’s Rules

Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.
“What’s important to monitor is what conditions international organizations will impose and what the government’s reaction will be,” Levente Papa, a Budapest-based strategist at OTP Bank Nyrt., Hungary’s largest lender, said in an e-mail.
The Cabinet is ready to start negotiations on a standby loan agreement with the IMF and the European Union and wants a deal “quickly,” Fellegi, Hungary’s chief negotiator, told reporters in Budapest yesterday. The government seeks a precautionary loan to tap only if market conditions require it.
It’s in Hungary’s interest to obtain an IMF loan “as soon as possible,” Orban said after meeting Simor today. Hungary sees a “good chance” for swift talks with the IMF, Orban said.

Stability Sought

The government will consult with the central bank on a daily basis and will work together to ensure economic stability, Orban said today. The central bank, in a statement, said it will use “available tools” to ensure economic stability.
“The government seemingly now realizes that an IMF deal would bring benefits in terms of cheaper borrowing and financing costs,” Tim Ash, a London-based economist at Royal Bank of Scotland Group Plc, said in an e-mail today before Orban’s briefing. “It is still weighing this up against the likely political costs, and hence is trying still to ensure that it can sell cutting the deal with the Fund as a victory.”
While the start of talks with the IMF may bolster the forint, the move may “well be misplaced and reversed once the government’s foot dragging then restarts,” Peter Attard Montalto, a London-based economist at Nomura International Plc., said in a report yesterday.

‘First Base’

“We are still on first base,” Montalto said. “Investors are still underestimating the time it will take and the distance Orban will have to move on the policy front.”
Hungary defaulting remains a “real possibility” as Orban may balk at unwinding some of his economic policies in exchange for a bailout, according to Christian Schultz, a London-based economist at Berenberg Bank. It would take “a lot of short- sightedness” from Orban to let Hungary’s economy fail, he said.
“If Hungary does agree to a program with the” EU and the IMF, “it would not need to default,” Schultz said. “However, the conditions attached may not be politically palatable for Orban, making bankruptcy a real possibility.”
The government is “hardly on the brink of default” and still has “some space” until the second half of the year to strike a deal with the IMF, Ash said today.
After a stint as premier in 1998-2002, Orban rode a wave of discontent against the previous Socialist governments that implemented austerity measures starting in 2006 and needed a bailout in 2008.
The previous Socialist administration of Prime Minister Ferenc Gyurcsany angered Hungarians when it admitted to lying about the state of the economy to win the 2006 election, sparking demonstrations that included clashes between protesters and police in the country’s worst street violence in 50 years.
Orban swept to power in 2010, grabbing a two-thirds majority in parliament that allows him to unilaterally change the constitution. He pledged to end austerity, a promise he broke. He has been forced to raise some taxes, including the value-added tax, delay a personal flat tax plan, cut social spending and eliminate early retirement.
To contact the reporters on this story: Zoltan Simon in Budapest at; Edith Balazs in Budapest at
To contact the editor responsible for this story: Balazs Penz at

Top Three Central Banks Account For Up To 25% Of Developed World GDP

Tyler Durden's picture

For anyone who still hasn't grasped the magnitude of the central planning intervention over the past four years, the following two charts should explain it all rather effectively. As the bottom chart shows, currently the central banks of the top three developed world entities: the Eurozone, the US and Japan have balance sheets that amount to roughly $8 trillion. This is more than double the combined total notional in 2007. More importantly, these banks assets (and by implication liabilities, as virtually none of them have any notable capital or equity) combined represent a whopping 25% of their host GDP, which just so happen are virtually all the countries that form the Developed world (with the exception of the UK). Which allows us to conclude several things. First, the rapid expansion in balance sheets was conducted primarily to monetize various assets, in the process lifting stock markets, but just as importantly, to find a natural buyer of sovereign paper (in the case of the Fed) and/or guarantee and backstop the existence of banks which could then in turn purchase sovereign debt on their own balance sheet (monetization once removed coupled with outright sterilized asset purchases as is the case of the ECB). And in this day and age of failed economic experiments when a dollar of debt buys just less than a dollar of GDP (there is a reason why the 100% debt/GDP barrier is so informative), it also means thatcentral banks now implicitly account for up to 25% of developed world GDP!
What does this mean? It means that nearly $8 trillion in world economic growth is artificial and exists only courtesy of central bank intervention - if one is looking for the reason why there is no mean reversion to a more stable period of time, there's your answer. It also means that central banks will never unwind their "assets", either actively, or passively, by letting them mature, as doing so would effectively mean an accelerated return to a non pro forma status quo, one in which global GDP suddenly finds itself $8 trillion less. It also means that in this age of ongoing consumer and corporate deleveraging, central banks will have no choice but to continue monetizing not to generate incremental growth, but to offset debt destruction elsewhere.And of course, in order to sustain global GDP growth of ~3%, they will have to print even more, in other words, accrue more liabilities (excess reserves) which of course would be funded by monetizing even more paper issuance (which Congress would be delighted to oblige with). Which is why we find the announcement by the Fed that it will notify in advance what the Fed Funds rate will be, to be beyond humorous: after all in an environment of active monetization, the only possible interest rate is zero (although the ECB tried a brief experiment otherwise, when it held higher rates than 1% to combat inflation even as it tried, unsuccessfully, to create a debt monetizing off balance sheet vehicle- the EFSF and the ESM).
Unfortunately, the worst news is that for everyone who feels that the global economy is fake - you are right: up to 25% of all economic growth is what in a different day and age would have been called "one-time and non-recurring" - unfortunately, since now this is the trump card on which the entire western model depends, "one-time and non-recurring" is better known as "constant and endless."
Our advice to anyone in the trading and investing business who has just had enough of central planning, and its ridiculous impact on capital markets which involves but is not limited toreacting to various disjointed headlines constantly, instead of trading based on a proactive, fundamentally-driven strategy is: find a new job. The new normal may be the "new paranormal", but more than anything it is the new centranormal. Because from now until the inevitable collapse of the financial system in its current form, nothing will change.
chart courtesy of John Lohman


The following article is a must read for you.  Roberts is a former treasury official and today he has laid in simple English the peril the world is in. He describes how the USA got into the mess in the first place by offshoring and financial deregulation.

His key points are in the massive derivatives orchestrated by the major USA banks:

total mortgaged bank derivatives outnumber  the value of homes;

and likewise in the credit default swaps whereby these derivatives outnumber the debt (claims) of sovereigns and banks.

He correctly states that there will be no one left to pay these claims when the event-claim is struck!;

(courtesy Craig Roberts)

The Dismal Economic Outlook For The New Year.
Paul Craig Roberts
Jobs offshoring, financial deregulation, and ten years of wars have severely damaged the US economy and the economic prospects of 90% of the American population. The signs are everywhere in front of our eyes. They are in the income distribution data, the BLS jobs data, the Census data, the poverty figures, and the high number of food stamp recipients.
The signs are in the foreclosed and boarded up homes and the accompanying homelessness. They are in closed strip malls, in office building, warehouse, and shopping mall vacancies, and in the huge population losses of America’s manufacturing cities.
The New Economy was a hoax, like Saddam Hussein’s “weapons of mass destruction” and the “war on terror.” Americans were deceived by “their” corrupt government, by greed-driven corporations, and by corporate shills among economists and the pundit class into believing that they were trading middle class “dirty fingernail” jobs in manufacturing for better middle class “clean fingernail” high-tech service jobs. Instead, reasonably paid manufacturing and professional skill jobs, such as software engineering and information technology, were traded for lowly paid jobs as waitresses and bartenders and for jobs in ambulatory health care.
Consequently, real median US income fell for the vast majority of the population. To keep consumers spending when they had no raises, the Federal Reserve used low interest rates to create a real estate and credit bubble. The low interest rates drove up housing prices, and Americans refinanced their mortgages and spent the equity in their homes. Americans maxed out credit cards. The rise in consumer indebtedness kept consumer demand growing and the economy afloat.
But there is a limit to how far debt can outpace income, and the bubble burst. And when it burst the financial fraud that had been hidden in the euphoria was revealed. That set off the financial crisis.
As the US government is controlled by financial and armaments interests and not by the people, the government responded to the financial crisis by shoveling more debt and more hardships on the American people in order that financial interests did not have to pay for their own mistakes and crimes. Instead of blaming the responsible parties, “our” government handed the bill to the American people.
An important part of the bill is the huge number of new dollars being created in order to keep “banks too big to fail” afloat and in order to finance the federal government’s enormous budget deficit from its illegal wars. Sooner or later, the proliferation of dollars will cost the American people sharply higher prices.
We will return to the dollar crisis later in this column. First, lets look at what the loss of manufacturing and manufacturing related jobs have done to the economy and the prospects of US citizens.
In the first decade of the 21st century, Detroit, Michigan, lost 25% of its population. Gary, Indiana, lost 22%. Flint, Michigan, lost 18%. Cleveland, Ohio, lost 17%. In St. Louis, Missouri, 19% of the housing is vacant. These population losses were not the result of the Black Plague or killer viruses or a nuclear attack. They were the result of corporate CEOs, pushed by their own greed, by the greed of Wall Street and that of large retailers such as Wal-Mart, aided and abetted by “our” government, into moving millions of manufacturing, software engineering, information technology, engineering, research, development, and design jobs offshore.
The process of moving American jobs offshore left cities, counties, and states with shrunken tax base.The resulting state and local budget deficits are being used to dismantle public sector unions and to cut social services. Public assets, such as water companies, and future income streams from parking meters, toll roads and bridges, are being sold off to foreign buyers in order to insure another year of local and state government solvency.
In the first decade of the 21st century, Americans lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer and electronic products fell by 40%; in the production of machinery by 30%, in motor vehicles and and parts by 44%, and in the manufacture of clothing by 66%.
In other words, in ten years the US economy was decimated by jobs offshoring for the sole purpose of higher rewards to capital in the form of multi-million dollar executive bonuses and large shareholder capital gains. A few hedge fund executives were paid a billion dollars in annual renumeration and a couple of dozen of them were paid $500 million in annual compensation. What sense does that make? Huge fortunes paid for one year’s work, not in productive activity but in destroying the financial system and the value of pensions that tens of millions of Americans had worked their lives to achieve.
While this was happening, “our” government squandered several trillion dollars in Iraq and Afghanistan on wars based on lies and deception. The American people were lied to and deceived, and continue to be, in order that arms industries can enjoy record profits and in order that crazed neoconservative war criminals could pursue their ideology of world hegemony and empire. We were even lied to about US war casualties. As Dennis Loo points out in his book, Globalization and the Demolition of Society (2011), the 4,801 Americans killed in action in Iraq leaves out the 50,000 suicides of veterans and active duty US troops. The truth of the matter is that the casualties of the Iraq war are as high as those of the Vietnam war.
With all income gains redirected to the financial and war sectors, the distribution of income in the US has become, according to the Organization for Economic Co-operation and Development (OECD), the worst of all developed countries. The Central Intelligence Agency--yes, the CIA--concluded that America had achieved not only the worst income distribution of all developed countries but also a worst income distribution than Brazil, Mexico, Zimbabwe, Rwanda, Mozambique, and Bulgaria.

The economic “recovery” that Washington and the financial press hype is all talk and no reality. The “recovery” is produced by understating the inflation rate, which overstates GDP growth, and by dropping the long-term unemployed out of the measurement of unemployment. An economy, the driving engine of which has been moved offshore, cannot recover unless the economy is brought back home, and that requires the repeal of Globalism.

Overstatement is common in order to produce good news, but eventually it catches up with the spinmeisters. Last month the National Association of Realtors reported that it had overstated home sales by 3.5 million. Statistician John Williams ( reports that the “birth/death” model, which the Bureau of Labor Statistics uses to estimate the net affect on jobs data of unreported business closures and new start-ups, overstates the annual number of new jobs during troubled economic times by approximately one million jobs annually. Each year the accumulated monthly overstatements are quietly revised away by BLS.
Similarly, data can be understated in order to hide bad news. The understatement of inflation results from basing the Consumer Price Index (CPI) on substitution rather than on a fixed basket of goods, the traditional method. During the “progressive” Clinton regime, a deceptive change was made to the CPI. If the price of a good rises, for example, sirloin steak, the higher price does not appear in the index. Instead, the CPI assumes that consumers switch from sirloin to a cheaper cut, such as round steak. Thus, the rise in prices is negated by substituting goods that represent a lower standard of living.
By understating inflation, the government has been able to produce a “recovery,” when in fact the positive economic growth number is created by counting inflation or nominal GDP growth as real GDP growth. John Williams says that when inflation is measured in the old way, prior to Clinton, the US has experienced essentially no real GDP growth in the 21st century. In other words, we have had a decade of essentially no growth in the GDP while the presstitutes in the media proclaim “recovery.”
The government’s forecasts of its budget deficits are based on the assumption that an economic recovery is underway. If in fact there is no recovery and the economy is about to worsen, the trillion dollar plus deficits that the government forecasts for as far as the eye can see will be even larger. As more debt creation likely means more money creation by the Federal Reserve, the future purchasing power of the US dollar appears to be dismal.
The federal government’s reckless issuance of debt in order to finance its hegemonic wars and the Federal Reserve’s misuse of its authority to create $16.1 trillion in secret loans to US and European banks (as revealed by the GAO audit of the Fed) have created an enormous number of new dollars. In addition, financial deregulation has resulted in banks creating paper claims on real assets that far exceed the value of the underlying real assets. This is an untenable situation. How is it likely to be resolved?
This is a two-part question: there is the banks’ debt and there is the federal government’s debt. Both are serious problems.
Mortgage-backed derivatives exceed the value of the homes, and Credit Default Swaps and other financial innovations have resulted in the paper claims on assets exceeding the value of the underlying real assets. Consider Credit Default Swaps, a form of unreserved “insurance.” Investors, really speculators, do not have to own a Greek government bond or a mortgage-backed derivative in order to purchase a “swap” that insures its value. Thus, the total value of swaps issued on Greek bonds, for example, can far exceed the total value of Greek bonds. The value of swaps issued on mortgage-backed securities can exceed the total value of mortgaged real estate.
Financial institutions, such as US banks, that sold “swaps” on Greek bonds were gambling that Greece would be bailed out and would not default. The financial institutions regarded as gravy the fees paid to them for “guarantees” on which they cannot make good. I don’t know the extent of swaps on sovereign debt, but I recently saw a report that the Bank of America alone has sold $2.1 trillion in swaps on sovereign debt. Imagine the crisis if the Bank of America had to pay off these swaps.
Obviously, if European sovereign debt blows up, the US financial crisis will become deeper.
The GAO audit of the Federal Reserve showed that the Fed made secret loans to banks of $16.1 trillion between December 2007 and June 2010. To put that figure in perspective, it is larger than the US GDP and larger than the US public debt. In other words, it took a tremendous amount of new money to keep the financial system from collapsing. Despite this huge sum pumped into the banking system, the banks are still regarded as weak and troubled. The insecurity of bank depositors is reflected in the one basis point interest rate on Treasury bill money funds. Many Americans are willing to receive a negative interest rate in order to have their money in instruments that can be paid off with newly created money.
When the paper claims on assets exceed the value of the underlying assets, one solution could be slow write downs of bad paper over time as the banks’ profits permit. This would require suspending the mark-to-market rule and permitting the banks to remain “solvent” by counting bad assets as good until profits permitted write-downs.
This would be a sensible solution if the banks have profitable prospects. But with consumers too indebted and broke to borrow and the consumer market too impaired for good sales prospects for businesses, what profitable prospects do banks have? Only those created by the Federal Reserve’s support of the “carry trade,” the ability of financial institutions to borrow from the Federal Reserve at essentially zero interest rates and to put the money in Greek and Italian sovereign debt. This is gambling, otherwise known as “casino banking.”
If reality rules out the solution of gradual write-downs, all that remains is bankruptcy or inflation. The Federal Reserve and the US government have ruled out permitting the banks to fail. That leaves inflation.
Except for a relatively few indexed Treasury bonds, financial instruments are in nominal values. Thus bad debts can be inflated away by driving up the nominal values of the underlying real assets and the nominal values of wages and salaries. It seems that the path that policymakers are taking is to reduce the purchasing power of money in order to drive up nominal asset values so that they exceed the claims against them.
For example, consider a person with a $200,000 mortgage whose home, if he could sell it, is only worth $175,000. This person’s asset is under water. However, if inflation drives up the price of his home to $250,000, the person has gone from a balance sheet $25,000 in the red to one $50,000 in the black. It seems clear that in order to save the financial institutions and itself, the government will sacrifice the purchasing power of the dollar.
Thus, the same solution appears to be in effect for the government’s growing debt. For the moment the US dollar is benefitting from flight from the euro due to the hyped sovereign debt crisis in Europe. As in the past, a scared financial world takes refuge in the dollar and in US Treasury debt instruments. The main difference between Greece’s indebtedness and America’s is that Greece cannot print euros, but the US can print dollars. Thus holders of US debt can always get back the nominal dollar value of Treasury debt issues. Of course, the real purchasing power of these printed dollars can be very low.
The dollar as a refuge is a short-run phenomenon. Once the transfer out of euros into dollars has occurred, how does the Treasury sell the next round of bonds to finance trillion dollar deficits? Sooner or later the Federal Reserve will be back to monetizing the new Treasury bond issues, that is, the Federal Reserve will create new money with which to purchase the new Treasury bond issues.
Sooner or later the new money will find its way into the economy and drive up prices, or the continual monetization of new US Treasury debt will cause the world to lose confidence in the dollar. Heavy sales of US dollars in currency markets would drive down the exchange value of the dollar and raise the prices of imports such as energy, manufactured goods, and food. Either way inflation is the result. Indeed, both can occur together, which is the likely result.
Normally, inflation is associated with a booming economy, but as too much of the US economy has been moved offshore, there is little left to boom other than prices. Therefore, the combination of high inflation with high unemployment is a likely fate that awaits Americans.
I cannot predict how long policymakers can hold economic armageddon at bay with spin, money creation, currency swaps, intervention in gold and silver markets, and outright lies. The onset could be sudden and take place this year, but we shouldn’t underestimate the power of spin over a gullible public that trusts “their” government and fervently believes that Muslim terrorists are out to get them and that the demise of the Constitution, the product of a eight hundred year struggle that produced Anglo-American civil liberty, is worth the price of “safety.”
There is no safety in a police state and a debauched currency. The comfortable world that Americans have known is falling apart at the seams.
Hon. Paul Craig Roberts is the John M. Olin Fellow at the Institute for Political Economy, Senior Research Fellow at the Hoover Institution, Stanford University, and Research Fellow at the Independent Institute. A former editor and columnist for The Wall Street Journal and columnist for Business Week and the Scripps Howard News Service, he is a nationally syndicated columnist for Creators Syndicate in Los Angeles and a columnist for Investor's Business Daily. In 1992 he received the Warren Brookes Award for Excellence in Journalism. In 1993 the Forbes Media Guide ranked him as one of the top seven journalists.
He was Distinguished Fellow at the Cato Institute from 1993 to 1996. From 1982 through 1993, he held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies. During 1981-82 he served as Assistant Secretary of the Treasury for Economic Policy. President Reagan and Treasury Secretary Regan credited him with a major role in the Economic Recovery Tax Act of 1981, and he was awarded the Treasury Department's Meritorious Service Award for "his outstanding contributions to the formulation of United States economic policy." From 1975 to 1978, Dr. Roberts served on the congressional staff where he drafted the Kemp-Roth bill and played a leading role in developing bipartisan support for a supply-side economic policy.
In 1987 the French government recognized him as "the artisan of a renewal in economic science and policy after half a century of state interventionism" and inducted him into the Legion of Honor.
Dr. Roberts' latest books are The Tyranny of Good Intentions, co-authored with IPE Fellow Lawrence Stratton, and published by Prima Publishing in May 2000, and Chile: Two Visions - The Allende-Pinochet Era, co-authored with IPE Fellow Karen Araujo, and published in Spanish by Universidad Nacional Andres Bello in Santiago, Chile, in November 2000. The Capitalist Revolution in Latin America, co-authored with IPE Fellow Karen LaFollette Araujo, was published by Oxford University Press in 1997. A Spanish language edition was published by Oxford in 1999. The New Colorline: How Quotas and Privilege Destroy Democracy, co-authored with Lawrence Stratton, was published by Regnery in 1995. A paperback edition was published in 1997. Meltdown: Inside the Soviet Economy, co-authored with Karen LaFollette, was published by the Cato Institute in 1990. Harvard University Press published his book, The Supply-Side Revolution, in 1984. Widely reviewed and favorably received, the book was praised by Forbes as "a timely masterpiece that will have real impact on economic thinking in the years ahead." Dr. Roberts is the author of Alienation and the Soviet Economy, published in 1971 and republished in 1990. He is the author of Marx's Theory of Exchange, Alienation and Crisis, published in 1973 and republished in 1983. A Spanish language edition was published in 1974.
Dr. Roberts has held numerous academic appointments. He has contributed chapters to numerous books and has published many articles in journals of scholarship, including the Journal of Political Economy, Oxford Economic Papers, Journal of Law and Economics, Studies in Banking and Finance, Journal of Monetary Economics, Public Finance Quarterly, Public Choice, Classica et Mediaevalia, Ethics, Slavic Review, Soviet Studies, Rivista de Political Economica, and Zeitschrift fur Wirtschafspolitik. He has entries in the McGraw-Hill Encyclopedia of Economics and the New Palgrave Dictionary of Money and Finance. He has contributed to Commentary, The Public Interest, The National Interest, Harper's, the New York Times, The Washington Post, The Los Angeles Times, Fortune, London Times, The Financial Times, TLS, The Spectator, Il Sole 24 Ore, Le Figaro, Liberation, and the Nihon Keizai Shimbun. He has testified before committees of Congress on 30 occasions.
Dr. Roberts was educated at the Georgia Institute of Technology (B.S.), the University of Virginia (Ph.D.), the University of California at Berkeley and Oxford University where he was a member of Merton College.
He is listed in Who's Who in America, Who's Who in the World, The Dictionary of International Biography, Outstanding People of the Twentieth Century, and 1000 Leaders of World Influence. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at:


Euro Shorts Surge To New Record High - Is An EC Margin Hike Approaching?

Tyler Durden's picture

The trend of relentless shorting of the Euro currency in the form of non-commercial spec contracts, and as reported by the Commitment of Traders, continues for one more week. As of January 3, EUR shorts rose by another 9%, hitting an unprecedented 138,909 net contracts short - a fresh all time record. What is curious that unlike previously, when an increase in EUR bearishness implicitly meant a increase in USD bullishness, this time that is no longer the case as net spec USD contracts actually declined, and are trading at relatively subdued levels. Overall, this means that FX specs are not playing relative currencies off each other, but are piling into a global European short. Which leads us to the following precautionary observation: just like when a price collapse in gold is required, usually enacted by the reflexive relationship between futures and the underlying, in the form of a margin hike, we wonder how long before Europe, or even the Fed which most certainly does not want a strong dollar, directs the CME to hike EC maintenance margins by some ungodly amount. Because whatever works to keep paper gold weak will most certainly help to keep the dollar even weaker. And with a net drawdown of nearly 250,000 contracts from EUR highs in April to current lows, a EUR margin hike may have as profound an impact as QE, considering the massive amount of shorts currently holed up and demanding the collapse of Europe.

Goldman's Stolper Speaks, Sees EUR Downside To 1.20: Time To Go All In?

Tyler Durden's picture

By now Zero Hedge readers know that there is no better contrarian signal in the world than Goldman's Tom Stolper: in fact it is well known his "predictions" are a gift from god (no pun intended ) because without fail the opposite of what he predicts happens - see here. 100% of the time. Which is why, following up on our previous post identifying the record short interest in the EUR and the possibility for CME shennanigans any second now, it was only logical that Stolper would come out, warning of further downside to the EURUSD (despite having a 1.45 target). To wit: "With considerable downside risk in the short term, within our regular 3-month forecasting horizon, the key questions are about the speed and magnitude of the initial sell-off. If we had to publish forecasts on a 1- and 2-month horizon, we could see EUR/$ reach 1.20. In other words, we expect the EUR/$ sell-off to continue for now as risk premia have to rise initially." In yet other words, if there is a clearer signal to go tactically long the EURUSD we do not know what it may be.
From Goldman
The thinking behind our EUR/$ forecast: When we last changed our FX forecasts in early December, we set our 3-month forecast in line with the spot rate at the time at 1.33. However, linked to the view of our European economists that the crisis will deepen initially before the situation improves, we signalled downside risks, potentially substantial, in the near term before bouncing back to the 3-month target. In terms of timing, the EUR/$ forecast path assumed that the Italian funding hump in February is the key event to watch and therefore the broad design of a comprehensive European policy response would become apparent during 1Q. Beyond that point, the gradual relaxation in Eurozone risk premia would then translate into better performance more broadly of risky assets. Given strong cross-asset correlations - and a risk premium in the EUR itself – this then would also be expected to help the Euro recover. Underlying broader USD weakness would help this move towards 1.45, our 12-month forecast. In that respect it is worth keeping in mind that, relative to the US, the Eurozone actually does address structural fiscal issues.
How are we doing with this forecast: So far, things have not deviated too much. There is some intensification in Eurozone fiscal concerns visible currently and the December summit left important issues unresolved, in particular on the enforcement side of better fiscal policy coordination in the Euro area. Italian bond yields and the trade-weighted EUR have duly responded, with the latter having lost about 3% since early December. The whole idea of markets forcing policymakers into action in our view means it is very likely that these trends will continue in the short term.
Macro changes we did not fully anticipate: Beyond the simple rise in risk premia, there have also been developments that suggest more broadly a downward shift in the expected EUR/$ trajectory. US growth has been more resilient and the ECB liquidity injection more forceful than thought in early December. At the margin, this has shifted the growth/monetary fiscal mix towards a deeper trough and a somewhat weaker subsequent rebound in EUR/$. Moreover, we see a risk of further substantial ECB balance sheet expansion in addition to the one already seen.
About the difficulties of forecasting a market-dependent policy move. A considerable complication when forecasting in the current environment is that we know we would look wrong at some point even if spot perfectly followed the expected trajectory. This is because a majority of market participants have to believe in a Eurozone blow-up, push asset prices lower and therefore trigger a policy response. We have seen this dynamic at work before and the difficulties of translating a market-conditional worse-before-it-gets-better view into a sensible forecast path.
How much lower how quickly? With considerable downside risk in the short term, within our regular 3-month forecasting horizon, the key questions are about the speed and magnitude of the initial sell-off. If we had to publish forecasts on a 1- and 2-month horizon, we could see EUR/$ reach 1.20. In other words, we expect the EUR/$ sell-off to continue for now as risk premia have to rise initially.
1.20 to 1.45 in less than a year? Inserted into our regular forecasts, such a gloomy short-term scenario would also imply a very substantial and steep rally later in the year. We are less sure about that assumption than we were, though the notion that EUR/$ rallies by 25 big figures in less than a year is more common than some often assume. In fact, we have seen quite a few similar moves in recent years, as the table below shows, and typically they have occurred faster than the recovery we currently project. On the other hand, as mentioned above, the marginal macro news on either side of the Atlantic suggests that the expected rebound may not necessarily live up to the more extreme scenarios of the recent past. In that respect, the risks to our current 6- and 12-month forecasts appear skewed toward a less extreme move this time.
Uncertainties about timing. One obvious risk is the exact timing when the point of deepest despair is reached. The Italian bond rollover in February is one obvious point, as mentioned above. But if the Italian government issues mainly short-dated bonds, the funding hump may actually be less of a challenge, in particular with ample ECB liquidity supply. The Greek PSI debate (March) or French elections (April/May) are other potential trigger events, well beyond the 1- or 2-month horizon. There is clearly a risk scenario where a comprehensive policy response may only become visible by the middle of the year. This would imply some clear downside risks to our 3-month forecasts as well and a delayed start to the subsequent Euro recovery. But things could be worse still, with our European economists arguing that an eventual break-up cannot be ruled out. All of this highlights the large uncertainties around any medium-term path when a wide range of outcomes is conceivable.

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