Thursday, April 5, 2012

Europe in turmoil/Spanish 10 yr bond exceed 5.68%/Euro/Swiss Franc falls to 1.20/Gold and silver rebound

Good evening Ladies and Gentlemen:

Gold closed up by $15.80 to $1628.10 at comex closing time.  Silver rose by 70 cents to $31.72.
Today we saw a mini-crash of the Euro-Swiss Franc to below the floor 1.20 (E/CFH). Spanish bonds
yields rose to 5.68% with credit default swaps on this nation rising as well. German and UK production both fell setting the stage for Europe to bleed red ink. The Netherlands released data showing that its GDP has contracted these past two quarters.  However the USA showed up to rescue the day causing Europe to show only tiny losses as did the USA.

Let us now proceed to the comex and see how things shape up for Monday. The total gold comex OI fell by only 1268 contracts despite the massive raid on Wednesday.  The OI rests this weekend at 406,496 contracts compared to Wednesday's level of 407,761.  With gold falling by $56.00 one would have thought that OI would have fallen much further.  The front delivery month of April saw the OI fall by only 126 contracts from 4,378 to 4,252 contracts.  We had 313 notices for delivery on Wednesday.  Therefore we actually gained 187  additional contracts or 18,700 oz. The next big delivery month in gold is June and generally it is the second highest in gold ounces standing.  Here the OI fell by 2010 contracts from 237,632 to 235622.  The estimated volume at the gold comex today was a very meager 122,772 compared to yesterday's big raid volume (confirmed) at 212,249.

The total silver comex has now completely dumbfounded analysts and commissioners at the CFTC.  We had a monstrous raid and a loss of over $2.00 in the silver metal and yet the OI actually rose by 654 contracts instead of contracting big time.  The total OI rests this weekend at 117,088 compared with yesterday's level of 116,434.  As I told you silver is trading quite differently to gold and it seems that these long entities may be willing to take on JPMorgan.The front non delivery month of March saw its OI fall by one contract.  We had one delivery so everything matches.  We neither gained nor lost any silver ounces standing. The next big delivery month for silver is May and here the OI rose by 383 contracts to 50,878.  We are still 3 1/2 weeks to first day notice but the OI for the front month is remaining resolute.  This will be worth watching. The estimated volume today at the silver comex was a weak 41,248 compared to the massive raid volume on Wednesday at 73,780. The bankers must be in a tizzy as no silver leaves are falling from the silver tree.

April 5.2012:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
90,450.859 (JPM)
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in
No of oz served (contracts) today
(859)  85,900 oz
No of oz to be served (notices)
3393 (339,300)
Total monthly oz gold served (contracts) so far this month
(2496)  469,600
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


Today, we had no gold enter the dealer as a deposit and no gold left as a withdrawal to the dealer.
The only transaction was a withdrawal of gold from the customer at JPMorgan to the tune of 90,450.859 oz.
We had no customer deposit.

The dealer or registered gold inventory rests at 2.443 million oz or 75.99 tonnes of gold.
The CME reported that we had a very chunky 859 contracts or 85900 oz served today on our longs.
The total number of notices served so far this month total 2496 or 249600 oz of gold.  To obtain what is left to be served, I take the OI standing for April (4252) and subtract out today's deliveries (859) which leaves us with 3393 or 339300 oz left to be served upon.

Thus the total number of gold ounces standing in this delivery month of April is as follows:

249,600 oz (served)  +   339300 (oz to be served upon)  =   588,900 oz or 18.3 tonnes
we gained 18,700 additional oz standing in gold today.


April 5.2012 chart:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory52,371.71(Brinks Delaware,Scotia)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory1,383,434.337(Delaware,HSBC,JPM)
No of oz served (contracts)2 (10,000)
No of oz to be served (notices) 11 (55,000)
Total monthly oz silver served (contracts)171 (855,000 )
Total accumulative withdrawal of silver from the Dealers inventory this month603,302.87
Total accumulative withdrawal of silver from the Customer inventory this month 700,494.99

The CME reported huge activity today.  However all the action was with the customer as the dealer had no deposits and no withdrawals.

The customer had the following deposit:

1. Into Delaware:  172,760.067 oz
2. Into HSBC:  607,371.4 oz
3. Into JPM:  603,302.87

total deposit;  1,383,434.337 oz

We had the following customer withdrawal:

1. Out of Brinks:  11,969.39
2. Out of Delaware;  1018.4
3. Out of Scotia:  37,383.92

total withdrawal;  52,371.71 oz

we had no adjustments.
The registered or dealer inventory rests this weekend at 31.53 million oz
The total of all silver rises to 139.519 million oz.

The CME notified us that we had only 2 notices served upon our longs for a total of 10,000 oz
The total number of notices served so far this month total 171 for 855,000 oz.  To obtain what is left to be served upon, I take the OI standing for April (13) and subtract out today's deliveries (2) which leaves us with 11 notices or 55,000 oz left to be served upon.

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

855,000 (oz served already)  +   55,000 (oz to be served upon) =    910,000 oz

for the third straight day we neither gained nor lost any silver ounces.


 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.

April 5:2012

Total Gold in Trust



Value US$:67,435,726,914.40

april 4.2012:




Value US$:67,022,802,454.63

april 3.2012




Value US$:69,309,014,575.63

we neither gained nor lost any gold at the GLD today.

And now for silver April 5; 2012:

Ounces of Silver in Trust309,292,746.900
Tonnes of Silver in Trust Tonnes of Silver in Trust9,620.08

April 4.2012:

Ounces of Silver in Trust311,322,033.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,683.20

april 3.2012:

Ounces of Silver in Trust311,186,298.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,678.98

april 2.2012:

Ounces of Silver in Trust312,972,913.200
Tonnes of Silver in Trust Tonnes of Silver in Trust9,734.55

My goodness something is going on.  We lost 2.03 million oz of silver from the SLV.



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

1. Central Fund of Canada: traded to a positive 4.3percent to NAV in usa funds and a positive 4.4% to NAV for Cdn funds. ( april 5.2012)

2. Sprott silver fund (PSLV): Premium to NAV  fell slightly   to  6.07% to NAV  April 5.2012 :
3. Sprott gold fund (PHYS): premium to NAV fell to  2.40% positive to NAV April 5 2012). 


Although I do not follow Bix Weir, his letter to the CFTC is quite good:

(courtesy Bix Weir)

Open letter to the CFTC re the JPMorgan abusing Lehman Brothers segregated customer accounts.

The writer is Bix Weir:

April 5, 2012
Commodities Futures Trading Commission
3 Lafayette Center
1155 21st St. NW Washington, DC 50581
Re: Flawed Investigations and Breaking The Law
I have written the CFTC many letters attempting to explain the obvious ongoing manipulation in the silver market because you clearly could not figure this out on your own. In each one of these letters I laid out the case of who was doing it, how they were doing it and why as well as a way to fix the situation. Yesterday the CFTC announced it has fined JP Morgan $20M for "Unlawfully handling Customer Segregated Funds"...
CFTC Orders JPMorgan Chase Bank, N.A. to Pay a $20 Million Civil Monetary Penalty to Settle CFTC Charges of Unlawfully Handling Customer Segregated Funds
This letter was intended to be a congratulatory letter to the CFTC for FINALLY going after JP Morgan but upon reading the order again I have changed my position. Here's why...
"CFTC order finds that from at least November 2006 to September 2008..."
"As of November 17, 2006, JPMorgan included LBI's customer segregated funds in its calculation of LBI's net free equity, even though these funds belonged to LBI's customers, not to LBI, the order also finds."
"...on September 15, 2008, Lehman Brothers Holding, Inc. filed for bankruptcy. Two days later, LBI requested that JPMorgan release LBI's customers' segregated funds. JPMorgan improperly declined the request"
ARE YOU KIDDING ME?! The CFTC has sat on this obvious illegal activity for over 4 years without doing anything about it?! WHAT WERE YOU DOING FOR FOUR YEARS?! In the meantime the customers of MF Global had their lives destroyed by the very actions that JP Morgan had taken years earlier! Who really deserves the blame - the criminals or the regulators who didn't do their jobs?
No, this is beyond incompetence...this is criminal neglect by the CFTC and you should all be sent to jail for colluding in the corruption!
Read your own summary paragraph in the press release...
"The laws applying to customer segregated accounts impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal," said David Meister, the Director of the CFTC's Division of Enforcement. "As should be crystal clear, these laws must be strictly observed at all times, whether the markets are calm or in crisis."
That "AS SHOULD BE CRYSTAL CLEAR" comment incriminates your behavior. It IS crystal clear but the CFTC purposefully decided to delay this enforcement action for four years! The MF Global debacle was not only avoidable it was a direct result of the CFTC's decision not to ENFORCE any laws related to large, "too big to fail", banking interests. As a matter of fact, an ex-Director of the CFTC Enforcement Division, Dennis Klejna, was the principle approver of the transfer of segregated customer funds from MF Global to JP Morgan. And the icing on the corrupt cake is that he had already been found "guilty without pleading guilt" in an almost identical fraud at REFCO!
JP Morgan Lawyer Exposes Corruption at JPM, MF Global & the CFTC
So what now? The CFTC has clearly demonstrated that there will be no regulations enforced against large banks in the United States. All there is at the CFTC are incompetent bureaucrats that shuffle behind their bankster bosses creating new laws and rules after the fact and never to be enforced.
The next debacle is going to be in the Silver Market. WE ALL WARNED YOU YEARS AGO! Go ahead and shut your eyes, ears and mouths to the silver manipulation but YOU will be shown as fools once again.
Our Founding Fathers are rolling in their graves.
Signed...One Disgusted Citizen -
Bix Weir


Here is Blythe Masters being interviewed by Sharon Epperson on CNBC.
She was lying throughout!!

(courtesy zero hedge)

Lars Schall is still trying to get the Bundesbank to answer about those gold swaps with the Americans and also why its gold is not repatriated back to Frankfurt:

(courtesy Lars Schall/GATA)

Lars Schall: Bundesbank again refuses to answer questions on Germany's gold

By Lars Schall
Wednesday, April 5, 2012
On April 3 I wrote the following inquiry to the Press Office of Deutsche Bundesbank, Germany's central bank.
"Dear Ladies and Gentlemen:
"My name is Lars Schall. I am a freelance journalist for finance. May I ask you to help in a matter in which the Bank of England, the U.S. Treasury, the U.S. Exchange Stabilization Fund, the Board of Governors of the Federal Reserve, and the New York Federal Reserve were not cooperative in any way?
"See 'Germany Should End the Secrecy and Bring Its Gold Home,' Monday, October 10, 2011:
"The contact with the press office of the New York Fed was especially unsastisfying (January 3, 2012):
"The questions I have for you are:
"-- Does the Bundesbank have swap arrangements with any of those mentioned parties related to the German gold reserve overseas?

"-- Regarding the swap arrangement between the ESF and the Bundesbank that was mentioned during the Federal Open Market Committee meeting in January 1995 (see Page 125 at, is this strictly a swap arrangement related to foreign currency / exchange?
"Yesterday, April 2, I published an interview headlined "Peter Schiff -- There Will be a Lot of Pain":
"I've asked Mr. Schiff:
"Roughly 66 percent of the German gold reserves are located at the New York Fed. If you would be the head of the German central bank, the Deutsche Bundesbank, would you repatriate this gold?
"Schiff replied: 'I would not hold my gold in the United States. I would be afraid that the U.S. might decide to seize it for an emergency. So if I was Germany, I would ask for all of my gold to be returned from the Fed, and I would buy as much gold as I could in the open market.'
"Q: Why should Germany buy more gold in the open market?
"Schiff: Just to have more gold. Germany should get rid of its dollar reserves and other currency reserves. That would be a much better way to go."
"Moreover in the past I've asked James G. Rickards, author of the recent book 'Currency Wars':
"'A huge chunk of the foreign gold reserves located at the New York Fed belongs to Germany. What are your thoughts related to the German gold reserve in custody at the New York Fed? Let's assume you were the head of the Deutsche Bundesbank with the best interests of the German people in mind, and assuming that we're heading to a system of currencies backed by gold. What would you do in that respect?'
"Rickards: It depends on the German gold policy. If Germany wants to leave monetary policy to the United States and is willing to accept whatever policy plans the U.S. comes up with, Germany should probably leave the gold where it is. That is a question of confidence. But if Germany wants to pursue its own policies or perhaps have a more gold-backed euro or maybe even go back to a deutsche mark, then they should bring the gold to Germany and store it in secure vaults under control of the Bundesbank. For as long as it stays in the United States, the gold is vulnerable to confiscation. So you really don't have the control over your own monetary policy as long as your gold is in other hands. During the Cold War, given the Russian threat, I am sure it made sense to have the German gold in New York. But today I would be concerned more with the Federal Reserve's printing presses than with Russian tanks, and thus I would like to have the gold in Frankfurt.
"And consider this exchange between the financial journalist Nomi Prins and me:
"'Officially, Germany has the second largest gold reserve in the world. Roughly 66 percent of the gold is located in the vaults of the New York Fed. Do you think that Germany should relocate its gold reserve from New York to Frankfurt just to be on the safe side?'
"Prins: I wouldn't keep 66 per cent of my gold at the Fed. [Laughs.] Yes. If I was Germany, and taking note of what is going on in the global economy, in the U.S. economy, and how the Fed is artificially propping things up, I would want to pull out my gold assets. I would want tangible physical assets in my possession. I don't see why the German central bank wouldn't want to do that. It just doesn't make sense to me.
"Can you comment on this, please, since it's of your concern?
"I'm copying this inquiry to Chris Powell at GATA, James G. Rickards, and Max Keiser. Could you send your answer -- if there is one -- to them as well, please?
"Thank you very much.
"Kind regards,
"Lars Schall
"P.S.: Please see this PDF:
A few hours later I was informed by the Bundesbank press staff that my inquiry had been assigned reference number 2012/005186. The final answer came soon after.
"Dear Mr Schall:
"Thank you for your query. In general we do not comment on third-party articles and opinions. Furthermore, we kindly refer to our answer to you from 1 December 2010, which is repeated hereunder.
"'The Deutsche Bundesbank keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centres.
"'The Bundesbank applies the principles of safety, cost efficiency, and liquidity to the management of foreign reserves in general, and to that of gold reserves. Generally, changing depositories cannot be ruled out in this respect.
"'In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks (ESCB). We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions.'
"For additional information you may want to see our annual report for 2011, Page 125:
"With kind regards,
"Magnus Makela
* * *
So the Deutsche Bundesbank brushed off my questions one more time. Compare this reply with "Bundesbank Joins Fed in Demanding Secrecy for Gold Swaps," December 1, 2010:
So the Bundesbank is repeating what was back then largely a recycling of old phrases that had little to do with my questions.
With regards to my third question and the opinions of Peter Schiff, James G. Rickards, and Nomi Prins, I hope that this new campaign will have much more success:
Please support this cause of public concern and become part of it here:


Let us now see some of the major stories which will effect the physical price of gold and silver.

In Europe overnight major developments as highlighted by zero hedge:

1.  The Swiss Franc soared  as the EUR/Swiss Franc broke the 1.20 floor for a second as European economy softens
      (see German Production and UK Production).  Thus a scramble for safety yet the Swiss franc is
       manipulated.  Gold will be the ultimate winner as Europe seeks a safe haven.

2.   However all eyes are focused on Spain which saw its 10 yr bond yield over the German Bund rise over
      400 basis points for the first time since Sept 2011.

3.   Doubts exist on the sincerity of the Spanish budget for 2012 and 2013.

4.   The Post LTRO period is seeing demand for sovereigns wane as margin calls and collateral becomes

5.   The Netherlands reported that their economy has contracted these past 2 quarters.

(courtesy zero hedge)

Renewed European Fears Send CHF Soaring, Force Swiss National Bank To Defend EURCHF 1.20 Floor

Tyler Durden's picture

And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.
Needless to say, the FX trading specalists at the SNB, and its bosses, whoever they may be in Hildebrand's absence, have said they will defend the floor with all they have. Keep a close eye on the EURCHF. 
Bank of America summarizes the remainder
Market action
Asian equity markets finished mixed. Starting with the markets that finished higher we have the Shanghai Composite up 1.7% and the Korean Kospi climbing 0.5%. On the flip side, the Japanese Nikkei lost 0.5% while the Hang Seng lost 1.0%. The Indian Sensex was closed today.
Spain is in the spotlight after yesterday's government bond auction had less demand than was expected. Investors are nervous about the country's economic growth prospects. Rising fear is helping send European shares down 0.4% in the aggregate. Blue chips are underperforming the broader market, down 0.6%. At home, futures are pointing to the third consecutive sell off in a row. The S&P 500 is set to open down 0.1% after falling 1.0% yesterday.
In bondland, Treasury yields are backing up marginally. The 10-year and the long bond are both up 1bp to 2.23% and 3.37% respectively. In
Europe, the UK gilt is down 2bp to 2.19% and the German bund is flat at 1.78%.
The dollar is up marginally in the currency markets with the DXY index 0.1% higher. Commodities are trading higher. Gold is $4.85 an ounce higher at $1,625.53 and WTI crude oil is up 60 cents to $102.07.
Overseas data wrap-up
Despite the Netherlands officially entering a recession by contracting for two consecutive quarters, inflation remains sticky. Inflation in the Netherlands rose by 2.9% yoy in March, matching the prior month's increase. Normally, a contraction in output should put downward pressure on prices; however, the recent run up in Brent oil prices by $12 a barrel since the end of January is counteracting the normal macroeconomic drivers of inflation.
UK manufacturing output fell 1.0% MoM in February: notably below market expectations of a small 0.1% rise, with declines in output reasonably widespread across industries. The unexpected weakness of this data may pare back sentiment somewhat after all of the manufacturing, services and construction PMIs had surprised on the upside earlier this week.

Courtesy of Bruce Krasting
There was a mini flash crash in the EURCHF cross this morning. Two charts on the price move: (Link and Link)


I was watching markets on a screen. When I saw the EURCHF price break I called a lady I know on an FX desk. She picked up the phone after a few seconds and yelled at me:
“We’re 16 bid. It’s a piece of shit!”
and then hung up...


“FX Bank is prepared to buy Euros and sell Swiss Francs at 1.2016 currently. There is no breach of the CHF peg at this time. It was just some computers gunning stop losses. Nothing to worry about. Please excuse me, as I have to take another call. Have a nice day!"

The price break took place in under a minute; it might have been for just a few seconds. There are some reports that the Swiss National Bank (SNB) actual bought some Euros during the fray. I’m not sure that is true. If it did happen, then the SNB bought them from a computer, and the computer lost money.
What happened this A.M. shows that the EURCHF market is wound tight. It could uncoil quickly. I have no doubt that the SNB has resting orders in the capital markets for buying up to 10 billion EURCHF. I also don’t doubt their resolve to do more. But nine hours after the mini crash the EURCHF is sitting at 1.2021, a measly 0.17% away from the SNB wall. That’s too close for comfort. Something has to give. Another bad day in the Spanish bond market might do it.
If we see a headline in the next few days that the SNB was forced to actively defend the peg, and in the process absorbed tens of billions of Euros, it will be very unsettling across all markets. It would be a sign of financial desperation; the ultimate “risk off” move.
I don’t think it’s possible for the EURCHF to trade so close to the peg without some accident happening that could start the hot money rolling. Either we drift back up to the "safer" mid 1.20’s, or we're going to have anIntervention Party. This might sort itself out by the weekend. One thing is certain, the US VIX is not priced for a hard landing of the EURCHF.



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As of 12:00:00 ET on 04/05/2012.

Bloomberg News

Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive

By Jeff Black on April 05, 2012

European Central Bank President Mario Draghi quashed talk of an early exit from emergency stimulus measures as Spain struggled to borrow in financial markets, a reminder of the risk that the region’s debt crisis could flare again.
Speaking just hours after Spanish Prime Minister Mariano Rajoy warned his country faces “extreme difficulty,” Draghi said yesterday that talk of the ECB starting to withdraw its support for euro-area banks is “premature.” At the same time, in a nod to growing inflation concerns in Germany, he said the ECB won’t hesitate to counter price risks if needed. Policy makers left their benchmark rate at a record low of 1 percent.
The ECB has expanded its balance sheet by about 30 percent since Draghi took office in November, pumping more than 1 trillion euros ($1.3 trillion) into the banking system in a bid to stem the debt crisis. Pressure to unwind the emergency measures is rising in Germany, where workers are winning some of the biggest pay increases in two decades, threatening to stoke inflation.
“Premature Bundesbank calls for an ECB exit strategy have now triggered a new round of market wobbles, with a focus on Spain,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The risk of a new irrational market panic remains serious.”

Spanish Yields

European stocks rose, with the Stoxx Europe 600 Index rebounding from its biggest retreat in four weeks, as France prepares to sell long-term debt. The country will sell as much as 8.5 billion euros of 5, 15 and 30-year bonds and notes today.
While the ECB’s three-year loans to banks have helped ease tensions on financial markets, lowering borrowing costs for debt-strapped governments, bond yields are rising again in Spain.
The euro area’s fourth-largest economy sold 2.59 billion euros of bonds yesterday, just covering the minimum amount targeted. After the auction, yields on the country’s ten-year bonds surged to more than 5.6 percent, the highest in three months.
“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves,” Rajoy told a meeting of his People’s Party as he seeks to push through the deepest budget cuts in three decades.

Exit Pressure

Declining to comment directly on the Spanish auction, Draghi said governments must make use of the window of opportunity created by the ECB’s emergency measures to deliver on promised structural reforms and fiscal consolidation.
Draghi faces pressure from some ECB policy makers to start planning an exit as higher energy costs keep euro-area inflation above the central bank’s 2 percent limit and price pressures brew in Germany.
Two million public service workers in Europe’s largest economy will get a pay increase of 6.3 percent by the end of next year under a deal struck with the government, according to the Ver.di union. IG Metall, Europe’s biggest labor union with about 3.6 million workers, is demanding 6.5 percent more pay.
The ECB hardened its tone on inflation in yesterday’s policy statement, saying “all the necessary tools are available to address upside risks to price stability in a firm and timely manner” and that it will pay “particular attention to any signs of pass-through from energy prices to wages.”


Still, Draghi said the economic outlook is subject to downside risks and inflation will remain contained in the medium term.
“The combination of inflation and sovereign debt risks essentially leave the ECB stuck between a rock and a hard place,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The central bank is likely to keep interest rates and non-standard measures unchanged for the foreseeable future.”
Widening economic divergences in the 17-nation euro area and the threat of the debt crisis intensifying again make it harder for the ECB to set its “one-size-fits-all” policy.
The European Commission forecasts growth of 0.6 percent in Germany this year and contractions in Italy, Spain, Belgium, Greece, Cyprus, the Netherlands, Portugal and Slovenia. The euro-area economy is projected to shrink 0.3 percent.

Spanish Woes

“Single monetary policy naturally focuses on maintaining medium-term price stability for the euro area as a whole,” Draghi said. “It is up to national policy makers to foster domestic developments which support the competitiveness of their economies.”
Spain is struggling with unemployment in excess of 23 percent and a budget deficit that hasn’t been under the European Union’s 3 percent limit since 2007. Investors began to doubt the country’s ability to carry a debt load of nearly 70 percent of gross domestic product last year after the debt crisis spread beyond Greece. Spain’s debt-to-GDP-ratio may rise to almost 80 percent in 2012.
In defending budget reductions worth more than 27 billion euros to cut 3.2 percent from the national deficit, Rajoy raised the specter of an international bailout that would see Spain join Greece, Ireland and Portugal in needing EU and International Monetary Fund aid.
“We remain concerned about the risk of another bout of financial market tensions linked to the debt crisis, and note the troubling rise in bond spreads in both Italy and Spain in recent weeks as a potential early sign of re-emergence of market stress,” said Simon Barry, chief economist at Ulster Bank in Dublin. “On balance, we think that if there is to be a move in ECB interest rates this year, it’s more likely to be a cut rather than a hike.”
To contact the reporter on this story: Jeff Black in Frankfurt at
To contact the editor responsible for this story: Craig Stirling at


Today almost all banks that used the LTRO for carry trades( i.e. Italian and Spanish sovereigns purchased by their host banks) are deeply underwater as yields climb past levels last seen in November 2011 or just prior to LTRO introduction. It seems that the reliquifying of these banks is now off the board as LTRO banks today have spread yields of 305 basis points against 180 basis points for non LTRO banks.

Simply stated there is just no demand for these bonds.

(courtesy zero hedge/Peter Tchir)

LTRO #Fail And Two Types Of Credit Losses

Tyler Durden's picture

Two weeks ago we noted that all those banks that 'invested' in Spanish and Italian 'Sarkozy' carry-trades post LTRO2 are now under-water on their positions (on a MtM basis). The last week or so has seen this situation deteriorate rather rapidly withSpanish yields now backed up all the way to mid-November levels (and notably Spanish equities below their November lows) removing all the LTRO-exuberance leaving all Spanish banks under-water on their carry trades (should they ever have to MtM). At the same time, the critical aspect of LTRO (that is reliquifying tha banks to avoid the credit contraction vicious cycle that was beginning) has also failed. LTRO-encumbered banks now trade with a credit spread on senior unsecured (but now hugely subordinated) paper of305bps on average (compared to non-LTRO-encumbered banks trading at 180bps on average) - back up near January's worst levels and almost entirely removing any of the tail-risk-reduction expectations that LTRO was supposed to provide. As Peter Tchir notes, there are two types of credit losses - default/restructuring (Greece and soon to be Portugal/Spain et al.) and bad positioning (or forced selling as risk becomes too much to bear - Spanish Govt/Financial credit) - these two sources of self-fulfilling pain are mounting once again. The simple truth is that without endless and infinite LTRO (or printing) funding for banks there is not enough demand for Europe's peripheral junk (as the Spanish auction highlighted) and the lack of performing collateral means the next stage will be outright printing (as opposed to a veiled repo loan) and that fact is beginning to creep into US financials as systemic contagion spreads.
European bank credit spreads (especially those for LTRO-encumbered banks) are rapidly heading back towards crisis levels...
and European Sovereign yields are snapping gains rapidly with Spain at 5 month high yields, Italy at 6 week high yields and Bunds seeing saefty flows pushing them near record low yields...

Via Peter Tchir of TF Market Advisors,

There are signs that the credit situation in Europe is deteriorating.  Bond yields and spreads are worse across the board once again.  Of some concern is that Italy is underperforming Spain a bit today, in CDS, the 5yr, and 10yr points.  The “firewalls” can’t really handle Spain, but there is nothing to do if Italy becomes the focal point again.  Curves are flattening again in Spain and Italy, with 2 year yields out almost 20 bps in each country.  Two year bonds were at the heart of the LTRO, so their continued weakness is very concerning.  The moves remain small (20 bps is barely 0.3% on a price basis), but the fact that weakness has seeped into the most “protected” part of the curb is a clear sign that the weakness is real.

The other warning sign I saw today is an increase in bid/offer spreads in Europe.  Yesterday the big guys maintained ½ bp markets in Main, and only some weaker dealers resigned themselves to obscurity with ¾ bp markets.  Today, some big dealers have shifted to ¾ bp markets and the hangers on have shifted to 1 bp markets.  See here for our old description of how CDS Index trading works.  Fast momo is probably killing it today.  Dealers definitely widen bid/offer spreads sooner than they used to.  Job preservation has become more important than bragging rights for who kept the tightest markets longer, but it is a clear sign that client activity is sporadic, and at least some dealers are caught off-sides.

Which leads right back to the two ways to have credit losses.
The one way to lose money in credit is when you buy a bond and it defaults.  That is the way that comes to mind for most investors.  This is by far the easiest to protect against.  With enough analysis and care, you can avoid defaults.  You can construct portfolios so that you are compensated enough on the bonds that work out, that you make up for your defaults.  In any case, this takes time and can be managed, but is the easy part of credit trading.

The credit losses that are harder to control, are when you are forced to sell because the risk becomes too great.  It is a subtle difference, but is the key driver.  Investors buy too much of a bond because the perceived risk is low.  As spreads widen and volatility increases, the perceived risk increases.  This may cause them to cut positions and take “credit” losses.  Whether or not the default risk has changed, the perception of that risk has changed and you get forced sellers.  Hedge funds are a prime example.  There are many ways to get to 10% returns in the credit markets, but one common strategy, particularly when risk is perceived as being low, is to lever up trades.  If you think LTRO is solving everything, and there is no way credit is going wider, how do you get to 10%?  You buy some 5 year Spanish debt at 4% and leverage it at least 2:1.  As yields hit 3.5% you look like a genius.  Not only are you getting “carry” but some nice price appreciation.  But now as yields bak up to 4.6% what do you do?  Your premise that LTRO saved everything is shaky at best.  Bonds that you bought in late January at 101.1 are now trading at 98.6.  That is a 2.5% loss, or over 6 months of “carry”.  If you were leveraged 2:1, the loss is closer to 5%, and is still over 4% including accrued interest.  It takes a lot of conviction in the world of monthly returns to ignore the fact that these same bonds traded at 92 back in November.

This is the “other” form of credit loss and is the one we are seeing right now.  This really isn’t about default risk, it is about bad positioning.  But as these investors cut positions, we will see the awful truth about liquidity in credit markets.  It is almost always “one way” liquidity.  On the way up, you can sell as much as you want at a price, but can barely buy any.  On the way down, the opposite is true.  As the price moves increase, the desire to cut position size increases, reversing the positively self-fulfilling cycle that started with LTRO1 and began to break down about 2 weeks ago.  Then wait until people start having to hedge their CDS counterparty exposure risk (since that is still not exchange traded).  That can drag the financials down as it creates new pressure on their credit spreads (totally avoidable if the regulators had put any of this on an exchange sometime in the 4 years since Bear Stearns’ demise).

I’m a little surprised that we haven’t seen any ECB intervention yet, so have to be a bit cautious on being too bearish here, but none of the signs are good.  As I wrote yesterday, I think the EU wants to have EFSF assume the role of secondary market intervention, but in typical EU fashion, they haven’t managed to set it up properly yet.  That likely happens early next week, and I think the ECB will hold off until then, unless we crack 6% on the 10 year yields before the EFSF is prepared to act.

The TFMkts Best Ideas remains bearish risk assets, but will be looking to take that risk down today on weakness, and for the “fixed income allocation” strategy, are looking for opportunities to reload some of the HY risk we shed, especially since the premium to NAV is finally coming down.

IG18 is worse than I thought and is all the way out to 96 now, another indication of how poorly positioned people are for this move (the fact that it was trading so rich was the reason it seemed such an obvious short to us).  This makes the late day trading that much more interesting.  How to trade position ahead of tomorrow’s big NFP number when the US stock market will be closed?


UBS author Deo, comments that he feels that Spain's GDP will contract big time with real estate weighing down this economy with official unemployment rising to 26%  Bank credit is falling exponentially:

(courtesy  UBS/ Stephane Deo/zero hedge/

On The Pain In Spain

Tyler Durden's picture

Much has been made, and rightly so, of the echoing crisis that is evolving in Spanish bank and sovereign credit (and equity) markets in the last few weeks. The impact of the LTRO on the optics of Spain's problems hid the fact that things remain rather ugly under the surface still and with the fading of that cashflow and reach-around demand from the Spanish banking system, the smaller base of sovereign bond investors has shied away. Stephane Deo, of UBS, notes that while the Spanish budget is a positive step (with its labor market reforms), Spain's economy remains weak and will face a severe recession this year followed by still significant contraction next year. However, he fears the measures announced may not be enough to calm investor angst as he doubts the size of fiscal receipts numbers and the ability to half the deficits of local authorities. Furthermore, the measures will have a large impact on corporate earnings - implicitly exaggerating the dismal unemployment numbers (which is increasingly polarizing young against old) with expectations that the aggregateunemployment rate could well top 26% and youth well over 50%. This will only drag further on the housing market, which while it has suffered notably already, is expected to drop another 25% before bottoming and credit is contracting rapidly (compared to a modest rise overall in Europe). Spanish banks remain opaque in general from the perspective of the size and quality of collateral and provisioning and Deo believes they are still deep in the midst of the provisioning cycle and tough macro conditions will force restructuring and deleveraging.Spain scores 5 out of 5 on our crisis-prone indicator and markets, absent intervention, are starting to reflect that aggressively.
UBS: Spain After The Budget
A few months ago we wrote a piece on Spain (see “Next on the watch list: Spain” 11 November, 2011) as we thought the market was way too sanguine on the Spanish risk. Since then our three worries have become bigger if anything: the deficit slippage last year was larger than expected, the GDP this year has been revised down since then, while the banking system still needs further resolution, in our view.

From a macro economic point of view, Spain remains weak; it will face a severe recession this year followed by another contraction next year.We also believe that the adjustment in house prices is far from finished. By contrast, we present the labour market reform which is a positive. On paper, the deficit reduction target is ambitious: a 3.2ppt decline from 8.5% to 5.3% with credible macro economic assumptions; GDP is expected to contract by 1.7%, with domestic demand down by a striking 4.4%. This fiscal consolidation is a step in the right direction. We think, however, that the measures announced might not be sufficient: some fiscal receipts numbers could be too high; we also have doubts on the planned halving of the deficit of local authorities.

The government plans to capture €5.4bn from these new measures which compares to the €17bn corporate receipts captured in 2011 or €30bn net profit generated by Spanish IBEX-35 stocks. Several measures affect corporate taxes: 1) Financial expenses will be deductible up to 30% of gross EBIT. 2) Depreciation rates will be regulated. 3) Upfront fraction payments are newly implemented. 4) Goodwill amortisation reduced from 5% to 1%. 5) Tax on repatriation of foreign subsidiaries dividends which are based on tax havens.

We believe that the Spanish banking sector is likely to require further writedowns of loans and real estate beyond what is being enforced by the recent change in provisioning rules by the Government. In addition, we expect the system to continue to make a strong and sustained effort in re-balancing its balance sheet through de-leveraging and replacing short-term wholesale funding (inter-bank, ECB, commercial paper) with more stable sources (time deposits, long term bonds).

Concerns are likely to remain over the extent of the problems facing the banking system, and we believe it will take some time to demonstrate to the market that spending has been cut at both the regional government and central government levels. The path of Spanish bond yields for the next 9 months depends a lot on changes in growth expectations, not only in Spain but also elsewhere in Europe (and indeed globally). Without growth expectations turning up significantly, we expect the structural deficiency of demand for bonds to re-establish itself in the form of higher sovereign yield spreads in the shorter term.

Top-down Macroeconomic outlook - prepare for a big decline in GDP

Given The Output Gap - unemployment will increase to well over 26%
But as we have noted before remains massively polarizing for the youth...
And while housing has dropped around 20%, it is expected that it has 25% more price depreciation to go (while in reality many question the government data that reflects this relative modest price drop relative to 50-60% drops in Ireland for instance)...
and bank credit extension is falling dramatically - with loans to households very negative YoY...
leaving banks increasingly the only marginal buyer of sovereign debt as foreign ownership plummets...

So in summary, a quick scorecard for the crisis-factor in Spain:
Government Bond (unaided access to public funding markets) - Fading rapidly - Check!
Housing - Prices down hard but falling further and reaccelerating - Check!
Unemployment - rising, accelerating, and increasingly polarizing youth - Check!
Banking - Opaque, unclear collateral, restructuring likely, deleveraging needed - Check!
Credit (the juice to keep growth going) - declining rapidly and negative - Check!

But apart from that...


England's QE will continue until conclusion in May.  Then Mr King must decide if more QE is needed:

(courtesy Bloomberg)

King’s Stimulus Affirmed as BOE Readies QE Debate in May

Bank of England Governor Mervyn King and his committee voted today to complete their current round of stimulus as they get ready to debate next month whether to bring the program to a halt.
With some on the nine-member Monetary Policy Committee toughening their stance about the threat of inflation and King insisting the U.K.’s predicament still feels “like a crisis,” the panel backed finishing their 325 billion pounds ($516 billion) of quantitative easing. That sets the stage for a showdown in May, when officials will have new forecasts and data on first-quarter gross domestic product.

Policy makers are trying to nurture a recovery under pressure from Europe’s debt crisis and Chancellor of the ExchequerGeorge Osborne’s fiscal squeeze. While surveys this week indicated the economy is gaining momentum, Adam Posen andDavid Miles still called for another expansion of stimulus last month at a meeting when the majority of their colleagues favored waiting to gauge risks to inflation.
“Attention now turns to the May meeting, which is certainly a live one,” said David Tinsley, chief U.K. economist at BNP Paribas SA in London and a former Bank of England official. “The committee may not feel particularly moved to change its view that the risks around the inflation target are ‘broadly balanced.’ Still, it remains a close call.”

Pound Weaker

The pound remained lower against the dollar after the announcement. It traded at $1.5822 as of 12:07 p.m. in London, down 0.4 percent on the day after data showed manufacturing output unexpectedly declined in February for a second month.
U.K. government bonds stayed higher, with the 10-year gilt yield 6 basis points lower at 2.15 percent.
All 39 economists in a Bloomberg News survey had forecast the MPC would maintain its current 50 billion-pound program of asset purchases, which began in February. The panel also left its benchmark interest rate at a record-low 0.5 percent, a decision predicted by all 53 economists in a separate survey.
U.K. inflation eased to 3.4 percent in February from 3.6 percent in January and the Bank of England forecasts it will slow to the 2 percent target by the end of the year.
While Posen and Miles called last month for an additional 25 billion pounds in stimulus, Martin Weale and Spencer Dalesignaled they are concerned inflation may slow less than predicted. Dale, the central bank’s chief economist, said on March 20 that an “obvious worry” is tension in the Middle Eastthat “could put further upward pressure on oil prices.”

Posen’s View

Posen has since signaled that his view is shifting, saying last week that he is now closer to the central forecast and isn’t “as worried about downside risks as I once was.” The Bank of England will publish the minutes of today’s meeting on April 18.
Inflation is also proving a concern for euro-area policy makers. The European Central Bank held its benchmark interest rate at 1 percent yesterday and President Mario Draghi said that there are near-term “upside” price risks.
In the U.K., Markit Economics said Britain’s economy may have expanded as much as 0.5 percent in the first quarter after its gauges of manufacturing, services and construction all unexpectedly increased in March. Both the manufacturing and construction surveys showed price pressures rose. A gauge of new jobs gained 9 percent in the first quarter from a year earlier, London-based recruitment company Reed said today.

New Game

“I think the game has moved on,” Brian Hilliard, chief U.K. economist at Societe Generale SA and a former Bank ofEngland official, said in a Bloomberg Television interview. “I had thought they might just close out the program with another 25 billion pounds” in May, “but I doubt it now.”
Osborne said in his annual budget on March 21 that he will press on with his spending cuts to rein in a deficit of more than 8 percent of GDP. He said the economy will grow 0.8 percent this year and 2 percent in 2013.
The British Chambers of Commerce said earlier this week that while the U.K. will probably avoid a recession, the recovery remains “weak.” Factory output fell 1 percent in February, the country’s statistics office said today.
Unemployment (UKUEILOR) is at a 16-year high and consumers are being squeezed as inflation outpaces wage growth. VocaLink, which processes salaries, said today that annual growth in take-home pay slowed in the first quarter to 1.7 percent from 1.8 percent in the three months through February.

Zigzag Economy

BAE Systems Plc (BA/) employees in Samlesbury, England, where work is done on the Eurofighter Typhoon jet, agreed last month to accept pay cuts to save the jobs of 120 colleagues.
The Bank of England’s economic outlook is being clouded by what King has said will be a “zigzag” pattern of GDP. The economy may shrink in the current quarter due to an additional public holiday for Queen Elizabeth II’s Diamond Jubilee in June before growing again in the third quarter, he said.
“The clouds appear to be lifting a bit, but the bank will want a bit more time to assess the data,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s about 50-50 that they’ll do more QE. When they restarted in October I thought they’d get up to 350 billion pounds, but I’m increasingly not convinced that will happen.”
To contact the reporters on this story: Svenja O’Donnell in London at; Scott Hamilton in London at
To contact the editor responsible for this story: Craig Stirling at


As we told you yesterday, it looks more likely that Portugal will need a bailout

(courtesy:  Bloomberg)

Portugal Says Some Town Halls May Need to Restructure Their Debt

Some of Portugal’s municipalities may need to restructure their debt once the government determines the exact amount they owe, a spokesman for Parliamentary Affairs Minister Miguel Relvas said.
“We are waiting to find out the overall debt figure,” Antonio Vale said in a phone interview from Lisbon today. “It may be possible that some town halls restructure their debt.”
Portugal is cutting back on money transfers to town halls, while encouraging local administrations to merge as part of a plan to save money and comply with the terms of a 78 billion- euro ($102 billion) bailout from the European Union and the International Monetary Fund.
“Most town halls are healthy,” said Vale. He said the government will first determine the total debt held by the country’s 308 town halls before it comes up with a plan to deal with each municipality on a case-by-case basis.
The European Commission said yesterday in a report on the third review of Portugal’s financial aid program that “a procedure for an orderly debt restructuring for regional and local governments will be designed and implemented.”
The southern European country’s town halls face similar issues to those of Spain, whose regions and municipalities have been shut out of capital markets. Spain’s government is offering them loans to help pay suppliers.
In Portugal, town halls hold as much as 9 billion euros of debt and may face default unless the government provides aid soon, Fernando Ruas, president of the association of municipalities, said in an interview on March 21.
“At a company we call it insolvency,” Ruas said. “It could happen that some town halls could have to restructure their debt if the government doesn’t intervene.”
To contact the reporter on this story: Henrique Almeida in Lisbon at
To contact the editor responsible for this story: Jerrold Colten at


Mark Grant maps out what he feels will happen with respect to the USA quantitative easing and Europe QE
and how the situation will deteriorate rapidly.  This is a must read.

(Mark Grant..Out of the Box and onto Wall Street)

How The Rout Will Decide The Route

Tyler Durden's picture

From Mark Grant, author of Out of the Box and Onto Wall Street
The Rout Will Decide The Route
“The ride is the thing; to sit out is to opt-out of the hand that you have been dealt. You were handed the cards at birth, you get to play them as you choose. Use all of the skill that you can master in their play and never, ever stop the shuffle!”
                                                                          -The Wizard
This month marks my thirty-ninth year on Wall Street. What a ride it has been. Inflation and Deflation, a whole host of political shenanigans, fighting it out in the board rooms of four investment banks, hiring and firing people, playing Liar’s Poker in the trading room at Salomon Brothers, watching the stars of various luminaries rise and fall, helping to create the present day structure for corporate bonds tied to Inflation, a constant stream of re-inventions, almost twelve years of writing “Out of the Box” and still here; playing the Great Game. I have always said that experience is not replaceable by innate intelligence. There is no way to excel at the Great Game except by playing it. Age gives you the opportunity to acquire some wisdom as you head down the path and, if you do things right, you are better armed than the younger combatants.
So here I stand at three decades and nine and I will share with you what I have learned in the hopes that you may benefit from my musing.  For the last four years the markets have been living off the mother’s milk of the Fed. The spigot has been open, money has been pouring out and equities have been buoyed by the flow while yields have come down because of it. The last Fed minutes marked a significant day in the market place that is not well understood and that is the day that the spigot was shut off. Now if there is great adversity it could be opened again but for now; no more Monetary Easing, no more Quantitative Easing and this is a game changing event; make no mistake about it.
Now there are those that will go on playing assuming that not much has happened and I will tell you that this is a losing hand. Many people in the markets will assume that the equity markets and the bond markets will just keep rolling along but the easy glide that had been facilitated by the flow of money is no longer there and so change is surely afoot. Within fifteen minutes after the Fed released their minutes I was on-line with commentary suggesting you take profits, raise cash and re-think just how the Game was going to be played. Equities are now going to turn down, long experience teaches you something and while I cannot predict how far down they will go; that is going to be the new heading. Also as a result of the lack of any more new money, and if there is some sort of normalcy, yields are going to rise especially in longer maturities and preparation is now the key to protecting what profits the Fed has helped you achieve.  The days of compression are over and spreads are also going to begin to widen. Then Inflation is likely coming, the great killer of portfolios, and the adept will begin to switch strategies now. Injections of liquidity drive markets up and the end of liquidity injections drive markets down and do not be fooled into thinking otherwise.
A Projection based upon Normalcy
Now the current 10 year Treasury yields 2.18% and the average for the 10 year over the last ten years is approximately 3.86% so if the Treasury market goes back to its average condition then there will be a thirteen point loss from our present position. If the statistical deviation from where we are currently were to kick-in because of Inflation or politics or the forthcoming drop in monetary supply then the 10 year would yield 5.54% and the resultant loss from today’s price would be around twenty-five points.  You wince, I wince but there you are. Now let us consider a shorter time horizon and use the date of the Lehman bankruptcy as the starting point which was 9/15/08 and when the Fed began injecting liquidity. The average yield for the ten year during that period of time was 3.00% so that a return to that average would result in a 7 point decline and if the statistical deviation were to come to pass then the loss would be about 13.25 points.
Then just for the fun of it let’s do the same exercise for equities. The Dow Jones average price over the last ten years was 10,714. This would mean that the Dow Jones would drop 18% if we returned to the ten year norm and a 33% loss if we use the derivation. Then using the Lehman date as the kick-off the average price for the Dow is 10,560 giving us a 19% loss or a 35% loss with the derivation.
A Projection based upon European Disruptions
The first scenario is built upon two sets of normal reactions when the Fed shuts off monetary easing. This projection is based upon the very serious fiscal and monetary problems in Europe causing quite different reactions. With our central bank finishing its easing and the ECB continuing in the pumping out of newly printed money then things will go in a quite different fashion. Treasuries will rise in price while risk assets will widen to Treasuries and the divergence between European equities and bonds and American equities and bonds will be quite pronounced. Equities will go down in both cases in America but the drop will be horrifying in Europe and none too pleasant in the United States as the Dollar will soar versus the Euro as America’s safe haven position takes on great credence. There will be a return to very wide spreads for Corporates and other credit risk bonds in the U.S. and Treasuries could head to all-time low yields if the Eurozone begins to break-up.
Liquidity never solves issues of solvency and the time that it buys is generally of a relatively short duration. After the $1.3 trillion loan by the ECB to the European banks which helped drive up the prices for European sovereigns what do we now find as the liquidity ebbs? Yesterday’s Spanish auction was abysmal and the French auction today did not go too well with rising yields and less demand. The austerity measures are driving Europe into a worsening recession and the financial positions of Spain and Italy are deteriorating even as new measures are put into place. In fact there are only two ways out of the European mess which are growth, not happening, and Inflation which may be the ultimate strategy employed by the EU and the ECB if the construct holds to the point of changing strategies which is surely no outlier event.
Please note, it is critical to note, that these are NOT opposing scenarios. The Dollar appreciates in either one, equities decline however it goes, risk assets widen to Treasuries in both cases and it is only the question of the yield on U.S. Treasuries that remains in doubt which is totally dependent upon how bad the situation becomes in Europe. On the Continent I foresee no way out; much lower equity prices, much higher yields for credit assets and sovereigns as succored by both the solvency issues and more liquidity which will only weaken the entire structure with the ECB already at a 4 trillion dollar debt and the quite real possibilities of Italy and/or Spain falling into the deep abyss of economic or political collapse.
The rout is not in question; only the severity of it.


Andrew Hall is one of the best financial commentators on oil. He states that it is impossible for Saudi Arabia to increase its production from 10.5 billion barrels per day to 12.5 billion.
There is just no excess production capacity:

(Andrew Hall/zero hedge)

Andrew Hall On Saudi "Excess Production Capacity" Promises

Tyler Durden's picture

When it comes to energy, and specifically crude oil trading, few names are as respected, if controversial, as former Citi star trader, Andrew Hall, whose $100 million pay package in 2008 forced Citi to sell energy unit Phibro to Occidental. He currently is primarily focused on his own fund Astenbeck, where he trades what he has always traded - commodities, and primarily oil. As such, his view on the oil market is far more credible than that of the EIA, or any conflicted Saudi Interests. So what does he have to say about the biggest wildcard currently in the energy market, namely whether or not Saudi Arabia, can push its production from its recent record high of just under 10,000 tb/d to the 12,500 tb/d that would be needed to replace all lost Iranian output (a question we asked rhetorically two weeks ago). The answer? Don't make him laugh.
Here is where Saudi oil production has been, and where Saudi promises it can take it.
From the recent Astenbeck investor letter:
Contrary to what various pundits and politicians assert in the media, OPEC is not sitting on 2+ million bpd spare capacity. The news last month that Saudi Arabia was planning to demothball the Dammam oil field after 30 years because of "tight market conditions" has a whiff of desperation. The plan will reportedly add all of 100 kbpd of heavy crude to Saudi Arabia's capacity.
In other words, forget Saudi Arabia pumping more. The only hope should there be escalation in Iran will be how much oil is extracted from the SPR. And as everyone knows, the only one who benefits from that particular idiocy would be China.


The following is interesting from Fortune Magazine;

From Fortune Magazine/Art Cashin/zero hedge/

Art Cashin On Bernanke's Secret Banker Meeting To Keep Europe Afloat

Tyler Durden's picture

Last week Mario Monti, like a good (ex) Goldmanite, did his best to buy what Goldman is selling, namely telling anyone gullible enough to believe that the "European crisis is almost over." Funny then that we learn that just as this was happening, Ben Bernanke held a secret meeting with the entire banker caretel, in which discussed was not American jobs (seasonally adjusted or otherwise), nor $5 gas, but... helping European with its debt crisis. But, but... Mario said. In the meantime, European spreads are back to late 2011 levels.
From UBS Financial Services
Consorting With The Other Side - Fortune broke an interesting story on a private lunch that Bernanke had with some key bankers. Here’s a bit:
FORTUNE -- After completing a series of public lectures in Washington, D.C. last week, Federal Reserve Chairman Ben Bernanke quietly slipped into New York City for a private luncheon on Friday with Wall Street executives.
Fortune has learned that attendees included Jamie Dimon (J.P. Morgan), Bob Diamond (Barclays), Brady Dougan (Credit Suisse), Larry Fink (Blackrock), Gerald Hassell (Bank of New York Mellon), Glenn Hutchins (Silver Lake), Colm Kelleher (Morgan Stanley), Brian Moynihan (Bank of America), Steve Schwarzman (Blackstone Group) and David Vinar (Goldman Sachs).

Sources say Bernanke spoke at length about monetary policy, in an apparent effort to persuade attendees that they needed to take a more active role in helping to deal with the European debt crisis. He spent virtually no time discussing regulation, although that mantle got taken up by both Dimon (domestic regulation) and Schwarzman (global regulation).
I find it absolutely fascinating that he concentrated on the problems in Europe and not on U.S. lending or jobs. Is there more connectivity and concern with Europe than we think? We’ll watch more carefully.
Well, it was either a discussion of Europe, or Bernanke was getting his semi-annual evaluation from his bosses.


I thought that the economy was improving?

(courtesy Barry Grey/Jim Sinclair)

New round of mass layoffs in North America
By Barry Grey
31 March 2012
The US electronics retail chain Best Buy on Thursday announced it would close 50 stores this year and lay off 400 corporate and support workers as part of a plan to cut $800 million in costs and restructure its business. The Minnesota-based firm was one of a series of American and Canadian companies that announced major layoffs this week.
Best Buy announced the downsizing and cost-cutting plan on the same day it reported a $1.7 billion loss for its fourth quarter, which ended March 3. The company, which has 1,450 locations nationwide and 2,900 globally, is seeking to avoid the fate of its former rival Circuit City, which went out of business in 2009, wiping out tens of thousands of jobs.
Best Buy’s announcement follows last month’s announcement by the retail giant Sears Holdings of plans to sell off 1,250 of its Sears and K-Mart stores in a bid to raise $770 million, following a $2.4 billion quarterly loss. Sears did not give an estimate of job losses, but the scale of the downsizing suggests the elimination of between 10,000 and 20,000 positions.
The crisis of these retail giants is indicative of the deepening impact of economic slump and mass unemployment three-and-a half years after the Wall Street crash of September 2008. It underscores the fragile and marginal character of the jobs “recovery” of which President Barack Obama has boasted over the past several months. Obama is seeking to boost his reelection chances by presenting himself as a job creator.
While the official jobless rate has declined from 9.1 percent to 8.3 percent since last September and US payrolls have, according to the Labor Department, netted a total increase of 774,000 jobs over the past three months, there are still 5 million fewer private-sector jobs than at the official start of the recession in December 2007.


I brought this to your attention yesterday.  Expect a new wave of foreclosure activity courtesy of the deal Ombama
did with the attorney generals.

(Nick Carey/Reuters/Jim Sinclair)

 Americans brace for next foreclosure wave 
By Nick Carey
GARFIELD HEIGHTS, Ohio | Wed Apr 4, 2012 7:09pm EDT
(Reuters) – Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.
But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.
"We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010," said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.
"Last year was an anomaly, and not in a good way," he said.
In 2011, the "robo-signing" scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.
Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.


I will leave you with this terrific paper written by Graham Summers as he demonstrates
what can happen in a European collapse.  He takes publicly traded data on the biggest
German bank Deutsche Bank of to show how things can unravel quickly:
(Graham always uses dollars so please divide by 1.30 to get the correct euro figures)

(courtesy Graham Summers/Phoenix Research Capital/)

Why the ECB Expanded Its Balance Sheet By Over $1 trillion in Less Than Nine Months

Phoenix Capital Research's picture

Between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed’s QE 2 and QE lite combined (and in just a nine month period).

This rapid and extreme expansion of the ECB’s balance sheet (again it was greater than QE lite and QE2 combined… in nine months) indicates the severity of the banking crisis in Europe. You don’t rush this much money out the door this fast unless you’re facing something very, very bad.

The two largest interventions were the ECB’s LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively.

As a result of this, the ECB’s balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.

So why did the ECB do this?

Simple… because everyone (even German banks) is lying about their true exposure to the PIIGS. And the European banking system is literally on the verge of systemic collapse.

Let’s consider the PIIGS’ exposure of German powerhouse Deutsche Bank (DB) widely considered to be one of the strongest banks in the EU.
According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).

This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.

Let’s consider Commerzbank as an example. Let’s say Greece defaults and creditors get 20 cent on the dollar (this is likely wishful thinking). This means Commerzbank now faces 2.3 billion Euros’ worth of write-downs on its Greek holdings… which means it’s wiped out 21% of its entire equity… which pushes its leverage levels through the roof and most likely renders it totally insolvent (there is no way Greece is the only toxic junk this bank owns).

Mind you, I’m just doing back of the envelope analysis here. But based on this brief analysis right off the bat we know the following:

  1. The Bank of International Settlements is either completelyclueless about the risks posed to the financial system by PIIGS’ debt OR intentionally downplays those risks (neither is good).
  2. The Guardian’s datablog (which obtains all of its data from publicly accessible records) somehow comes up with numbers that are dramatically different (and higher) from those published by the Bank of International Settlements.

Now let’s take our analysis a step further.

Deutsche Bank trades on US stock exchanges and so has to publish SEC filings on its balance sheet risk. Well, according to Deutsche Bank’s own filings, it had 1.6 billion Euros’ worth of credit exposure to Greece at the end of 2010. True, this is credit exposure not direct exposure to sovereign debt… but it’s still four times what the Guardian claims to the case.

More interesting that this, the term “Greece” is only mentionedtwice in Deutsche Bank’s 2010 416-page annual report. Remember, this was the year in which the Greek Euro Crisis nearly took the system down: between January 2010 and June 2001, when the first Greek bailout was announced, the Euro lost 17% if its value. Worldwide, stock markets cratered despite central bank intervention. And it was only the Fed’s promise of QE lite and QE 2 that got the global equity rally rolling again.

So it’s a bit odd that Deutsche Bank’s 2010 416-page annual report would only mention the term “Greece” two times. Regardless, let’s fast forward to Deutsche Bank’s Third Quarter 2011 filing (its most recent) for some more recent data.

This time around, the term “Greece” shows up six times in the 100-page report. And this time around Deutsche Bank states it has 881 million Euros’ worth of exposure to Greek sovereign debt (TWO TIMES what The Guardian claimed).

By the way, Deutsche Bank has only 59 billion Euros’ worth of shareholder equity, so this position alone is worth roughly 1.5% of the banks’ equity. True, this is not a huge percentage, but if Greek creditors take a 70-80% haircut, Deutsche Bank wouldneed to raise capital.

On a side note, I want to point out that we’re completely ignoring the fact that if Greece defaults so will Italy and Spain whose sovereign debt and financial institutions Deutsche Bank has 14.8 BILLION EUROS worth exposure to: an amount equal 23% of Deutsche Bank’s TOTAL EQUITY.

But let’s just focus on Deutsche Bank’s exposure to Greece for now. According to its Third Quarter 2011 filing, aside from the 881 million Euros’ worth of exposure to Greek sovereign debt, Deutsche Bank also has 665 million Euros’ worth of exposure to Greek financial institutions, and a whopping 1.3 BILLION Euros’ worth of exposure to Greek corporates (plus a negligible 8 million Euros’ worth of exposure to Greek retails) for a total of 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses.

So… having taken our analysis one step further, we find that one single German bank, one of the alleged strongest I might add, has in fact, far, far more exposure to Greece and its economy than both the Bank of International Settlements and the mainstream financial press indicates.

Bear in mind, the numbers presented in Deutsche Bank’s are simply those that Deutsche Bank’s executives have told the company’s accountants are acceptable for public disclosure (we have no clue about the banks off-balance sheet risk).

It’s also worth noting that in 2010 Deutsche Bank claimed to have only 1.6 billion Euros’ worth of credit exposure to Greece, whereas by late 2011 the number has swelled to 2.8 billion Euros.

I have to ask… how exactly does a bank, which is supposedly managing its risk levels and adjusting its exposure accordingly,manage to increase its credit exposure to something as financially toxic as Greece by 75% in a nine month period?

This hardly strikes me as good risk management. But here’s how Deutsche Bank’s accountants try to explain that none of this (even the 2.8 billion Euros’ worth of exposure) is actually a big deal.

If the above chart sounds like it’s written in obfuscating language, let me translate it for you. According to Deutsche Bank’s accountants, once you include collateral held (likely garbage assets valued at mark to model fantasy land valuations), guarantees received (from GREEK institutions!?!?!),and “risk mitigation”, Deutsche Bank’s “actual” exposure to Greece drops from 2.8 billion Euros to only 1.2 billion Euros.

So… this is a bank whose credit exposure to Greece increasedby 75% as the Greek Crisis worsened from 2010 to 2011... now claiming that thanks to their risk management, their “real” exposure to Greece is only 1.2 billion Euros.

Ok, well if we’re going to play by those rules, let’s consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.

At these levels, and using the currently proposed Greek 50% haircuts as a model for future defaults in the EU, Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’ exposure.  This would wipe out 16%-25% of the bank’s entire equity and render it borderline insolvent.

Thus, by our own analysis we find that even the German powerhouse of DB has PIIGS exposure that could easily wipe out a quarter of its equity, if not more.

By extension, if this is how exposed a German bank is to the PIIGS, how bad do think the rest of the EU banking system is?


This is why the ECB has been freaking out and pumping so much money into the EU banking system. You don't spend over $1 trillion in nine months unless something very, very bad is coming down the pike. That something "BAD" is the collapse of Europe's banking system: a $46 trillion sewer of toxic PIIGS debt that is leveraged at more than 26 to 1 (Lehman was leveraged at 30 to 1 when it went under).

If you're not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

This report is 100% FREE. You can pick up a copy today at:

Good Investing!

Graham Summers

I wish everyone a happy Easter and Passover weekend.

I will see you on Monday.


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