Saturday, June 9, 2012

Spain officially asks for a bailout/Italy in the wings/Gold and silver rebound from a brutal raid/

Good morning Ladies and Gentlemen:

Gold closed the comex session at $1590.10 up $3.50.  Silver fell by only 6 cents to $28.46.  Our two precious metals were down badly early in the Asian session heading into the European time zone.  Usually the bankers try to enhance the momentum downward as they continued to supply paper gold and silver.
However on Friday, huge demand surfaced probably from the Chinese who lately have come into the fray when these dips occur.  They, no doubt, entered the precious metals arena with both feet yesterday preventing another rout for our gold and silver.  The big story of the day was Spain which officially asked for bailout funds.  After Spain asked for a euro bailout, a comedy routine equal to Abbott and Costello followed as supposedly there was going to be a Saturday telephone conference on how this bailout would occur.  Eventually there really was no teleconference called for.  Germany said no to Eurobonds stating quite categorically that Spain must use the vehicles already set up to handle the bailouts:

1) the ESFS/ESM to handle the bailouts of the banks.
2.) the ECB to handle the bailout of the sovereign Spain.

Spain wishes direct funds into the banking system (all shared by the Euro nations) as well as a joint Eurobond issue.  Germany wants the Central Bank of Spain to deal with their delinquent banks as well as the ECB to use the banking system to help sovereign Spain  (another LTRO?).  It is truly one big mess. Late Friday night saw the release of a warning from the last of the ratings agencies that they are set to downgrade Spain.  Once these guys lower the boom then massive haircuts to the collateral at the ECB will be initiated and more collateral will have to be sent down of which there is none. Late in the night, we heard that Spain does not agree to the bailout terms.  Monday should be interesting!!  Before going into all of those stories, let us now proceed to the comex and see how trading fared yesterday.

The total gold comex OI fell by a whopping 10,267 contracts as the bankers fleeced our newbie longs again.  It is totally amazing that they do this time and time again. The front delivery month of June saw its OI fall by 406 contracts.   We had only 118 delivery notices filed on Thursday so we lost  again 288 notices or 28800 oz of gold standing for June.  The next delivery month is August and here the OI fell by 11,276 contracts from 237,695 to 226,419.  The estimated volume on Friday was light at 150,908 compared to the confirmed volume on Thursday, the day of the big raid, coming in at 268,065.   The bankers used our high frequency traders to good use amplifying the big losses on gold.

The total silver comex OI fell by only a tiny 1871 contracts, from 121,317 to 119,446.  The bankers are pulling their hair as they just do not know what to do in the silver arena.  They will no doubt be calling for another of those weekend oil meetings.  The June non official delivery month fell from 60 contracts to 49 contracts for a loss of 11 contracts.  We had only 1 delivery notice on Thursday, so we lost 10 contracts or 50,000 oz of silver standing.  We are less than 3 weeks away from first day notice and here the OI fell from 54,360 to 50,781 for a loss of 3579 contracts.  Most of these guys rolled into September.  The estimated volume on Friday came it at a light 39,592.  The confirmed volume on Thursday, the day of the raid came in at a humongous 91,810.  The HFT traders were also used quite diligently by our bankers to also amplify the losses in silver.

June 9.2012


Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
32.15 (Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in
No of oz served (contracts) today
(10)  1000 oz
No of oz to be served (notices)
  1410  (141,000) oz
Total monthly oz gold served (contracts) so far this month
(4909) 490,900  oz
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


On Friday, we had negligible  activity in the gold vaults.

The only transaction was a tiny withdrawal by a customer at Manfra to the tune of 32.15 oz
We had no adjustments.

Thus the registered gold inventory rests this weekend at 2.832 million oz or 88.08 tonnes of gold.

The CME notified us that we had only 10 delivery notices filed today for 1000 oz of gold.
The total number of gold notices filed so far this month total 4909 for 490900 oz . To obtain what is left to be served upon,  I take the OI standing for June (1420) and subtract out today's delivery notices (10) which leaves us with 1410 notices left to be served upon our longs or 141,000 oz.

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

490,900 oz of gold served  +  141000 oz (to be served )  =   631,900 oz or 19.65 tonnes of gold.
we lost 28800 oz of gold standing.

June 7.2012
Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventorynil
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventorynil
No of oz served (contracts)0  (nil)
No of oz to be served (notices) 49 (245,000)
Total monthly oz silver served (contracts)42 (210,000)
Total accumulative withdrawal of silver from the Dealers inventory this monthnil
Total accumulative withdrawal of silver from the Customer inventory this month3,630,282.0

My goodness! we had no activity on all fronts inside the silver vaults
i.e. we had no dealer deposit and no dealer withdrawal
we had no customer deposit and no customer withdrawal and also
no adjustments.

Thus the silver registered inventory rests this weekend at 35.74 million oz
and the total of all silver rests at 143.486 million oz.

The CME notified us that we had zero notices filed on Friday so the number of notices filed so far in the month of June remain at 42 for 210,000 oz.

To obtain what is left to be served upon, we take the OI standing for June (49) and subtract out Friday deliveries (0) which leaves us with 49 notices or 205,000 oz left to be served upon our longs.

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

210,000 (oz served)  +  245,000 oz (to be served upon)  =  455,000 oz


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.

June 9.2012:

Total Gold in Trust



Value US$:64,584,276,358.34

June 7.2012:

Total Gold in Trust



Value US$:65,794,061,698.77

today, we witnessed no gain nor any loss in inventory of gold  at the GLD.


June 9. 2012  for SLV

Ounces of Silver in Trust310,868,004.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,669.08

June 7.2012:

Ounces of Silver in Trust311,838,180.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,699.25

June 6.2012:

Ounces of Silver in Trust310,867,996.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,669.08

surprisingly we lost 970,000 oz from Thursday.  Obviously this is an error and that has been corrected.

data:  6 pm est

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

1. Central Fund of Canada: traded to a positive 5.8percent to NAV in usa funds and a positive 5.3%  to NAV for Cdn funds. ( June 9.2012)

2. Sprott silver fund (PSLV): Premium to NAV  rose to  6.99% to NAV  June 9. 2012 :
3. Sprott gold fund (PHYS): premium to NAV lowered to    2.85% positive to NAV June 9 2012).

note the rise in premium on the central fund of Canada (equal silver and gold)
and the Sprott silver NAV at 6.99%.  It seems silver is in short supply.


Friday night saw the release of the Commitment of traders report which shows positions held by the major players.  Let's see the gold COT report:

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, June 05, 2012

 By goodness, this was some COT report:

Our large speculators:

Those large speculators that have been long in gold liked what they saw with respect to fundamentals
and they decided to pile into gold with both feet:  they added a monstrous 16,523 contracts to their long side.

Those large speculators that were short also saw the light and they decided to cover 1629 contracts from their short side.

Our commercials:

Those commercials that have been long in gold decided that it was necessary to supply the paper to the specs as they unloaded a rather large 15,611 long positions .

Those crooked commercials that have been short in gold added a monstrous 9802 contracts to their short side.

Our small specs;

Those small specs that have been long in gold joined their older and wiser brothers the large specs, in added a huge 5382 contracts.

Those small specs that have been short in gold decided it was time and they covered a large 1879 contracts.

 on a commercial basis, this is a very bearish COT report and will explain the raid on Thursday June 6.
 The good aspect of this is that the raid really failed judging from the action in the precious metals on Friday.  The bad aspect: they will try again.

and now for our silver COT:

Silver COT Report: Futures
Large Speculators
Small Speculators
Open Interest
non reportable positions
Positions as of:

Tuesday, June 05, 2012

Please note the big difference in the silver COT from the gold COT:

Our large speculators:

Our large speculators somehow did not have the same enthusiasm in silver as in gold.
Here the large speculators added a relatively quiet 1310 contracts to their long side.

Our large speculators that have been short in silver added a very tiny 74 contracts to their short side.

Our commercials;

Those commercials that have been long in silver pitched a very tiny 890 contracts from their long side
in total contrast to what happened in gold.

Those commercials that have been short from the beginning of time and are subject to the silver probe by the enforcement arm of the CFTC  (cough!! cough!!), added another 1301 contracts to their short side.

Our small specs;

Those small specs that have been long in silver liked the lay of the land and they added another 359 contracts to their long side.

Those small specs that have been short in silver also decided it was necessary to cover 596 contracts from their short side:

Conclusion:  slightly more bearish due to net commercial shorts have increased their positions.
                    However, the bankers are quite nervous about adding to their short side.


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


In this Kingworld news interview, the London trader is quite shocked at the amount of paper gold sold
in the space of 4 hours on Thursday, the day of the raid.  However what really surprises the trader is the lack of mention of the massive amounts of gold (physical) purchased by China.  He also comments that Russia and Iran are delaying disclosure as to the quantity of gold purchases.

(courtesy Kingworldnews/the London trader/GATA)

This is good timing, just out at King World News about "The London Trader" whose inside look confirms just what the GATA camp has been saying the past few days and pretty much "the scenario."…
With many global investors still rattled by the recent price action of gold and silver, today King World News interviewed the "London Trader" to get his take on these markets. The source told KWN that not only was a shocking amount of paper gold sold in just 4 hours yesterday, but it was also confirmed that the mainstream media is not reporting the staggering amount of physical gold that has actually been purchased by China recently. Here is what the source had to say: "China has purchased hundreds of tons of gold in the last couple of months. China is not disclosing what their true reserves are. Russia is delaying disclosure and so is Iran. We saw record gold imports of over 100 tons through Hong Kong to China in April, as reported by the mainstream media, but what has been reported is just the tip of the iceberg."
The London Trader continues:
"What we've seen is a dramatic acceleration of physical gold purchases as the price has been drawn down. Staggering amounts of physical gold are being purchased. The acceleration of physical purchases, at these lower levels, is the reason why gold has been holding firm and building such a nice base.
I want to be very clear about this, in addition to what is being reported by the mainstream media, we have seen hundreds of tons of additional physical gold being purchased by China over the last three months....


  or you can see it through this site:

'Staggering' amount of gold bought during takedown, London trader tells KWN

9a HKT Saturday, June 9, 2012
Dear Friend of GATA and Gold:
The London trader source of King World News, who is well known to GATA, explains in an interview today how the Federal Reserve's bullion bank agents rig the gold market to profit from both rises and declines. But the trader also reports that "staggering" amounts of real gold and silver were purchased by Eastern powers during this week's price takedown and that those powers are not promptly reporting those purchases officially. The interview with the London trader is headlined "London Trader: Staggering 515 Tons of Gold Sold in 4 Hours" and it's posted at the King World News blog here:
Also at the King World News blog, futures market analyst Dan Norcini describes the danger facing the whole world's economy:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


And here is the solution to the debt problem:  raise the value of gold 800% to 1000%

(courtesy Brodsky and Quaintance/GATA/Chris Powell)

Brodsky and Quaintance: Solution is asset monetization, starting with gold revaluation

9:55a HKT Saturday, June 9, 2012
Dear Friend of GATA and Gold:
In an outline posted Friday at Zero Hedge, fund managers Lee Quaintance and Paul Brodsky make the case for resolving the world debt crisis with an asset monetization and revaluation based on the upward revaluation of gold by 800 to 1,000 percent, creating lots of money with which government debt could be liquidated and bringing hopeless mortgages and the banks that issued them back to solvency:
The Quaintance and Brodsky outline draws on the paper they published last month and allowed GATA to bring to you here, headlined "Brodsky and Quaintance: Central Banks Aim to Redistribute Gold and Push It Way Up":
Their thinking closely resembles that of the Scottish economist Peter Millar, whose May 2006 study, "The Relevance and Importance of Gold in the World Monetary System," also brought to you by GATA with the author's kind permission, argued that an upward revaluation of from seven to 20 times would be necessary for central banks to avert debt deflation:
Wild as the numbers might seem at first, the current world financial situation is wild too, and the upward revaluation of gold by governments from time to time as they try to escape the consequences of their economic mismanagement and political venality is simply a fact of history, even if it cannot be acknowledged and discussed by many supposed gold market analysts.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

And here is another plan involving gold to save the world:

(from our own Eric Reguly, The Globe and Mail Toronto)

A golden idea to save (or doom) the euro

By Eric Reguly
The Globe and Mail, Toronto
Friday, June 8, 2012
ROME -- Gold is back in the news, big time, and not just because the price may be on the verge of another upswing or that Peter Munk is turning Barrick, the world's biggest gold company, into a CEO meat grinder. It's because Germany, it appears, wants to make gold the effective currency of the euro zone before the region plunges to the bottom of the seas like a concrete U-boat.
The weakest euro-zone countries are tapped out financially and economically. But a few of them are brimming with gold reserves. Take Italy, the euro zone's third-largest economy. The Italians love gold and it's stashed everywhere, in their central bank and in their jewellery and safe deposit boxes. (I once saw a religious-festival parade of children in a mountain town, with each child groaning under the weight of heavy gold necklaces and other baubles.) At last count, the central bank had 2,451 tonnes of gold, valued at close to E100-billion ($128-billion). That's not a fortune compared to Italy's E1.9-trillion national debt, but it's not bad when Rome is raiding the pantry to pay its ever-rising debt.

 Germany's idea is coyly named the European Redemption Pact and it is nothing if not creative. While details are scant, here is roughly how this gilded baby would work.
Countries with debts greater than 60 per cent of gross domestic product -- the (ignored) limit under the European Union's Maastricht Treaty -- would transfer those debts into a redemption fund, which would be covered by joint bonds. The scheme has been called "euro bonds lite."
Here's the catch. Countries using the scheme (most would, including Germany, because of generally high debt-to-GDP ratios) would have to cover 20 per cent of their debt with collateral, payable in gold or currency reserves. Default on the payments and you lose your gold. The "sinking" fund would retire the debt over 20 years.
Italy set the precedent in the 1970s, when it was in the midst of one of its blandly regular financing crises and resorted to a gold-backed loan. The loan was quickly paid off, because there was so much political pressure to do so. If the finance minister had forfeited the Italian family jewellery, the entire government would have been embarrassed and humiliated, then turfed from office.
There's a lot to like about the European Redemption Pact, politically and economically, and a lot not to like if you're worried that this German-inspired fund is the mother of all potential loot grabs.
On the positive side, the gold bricks are piled up like Lego in central bank vaults. They are unpledged and devaluation-proof, meaning the gold-backed loans would be ultra-cheap -- probably 1 per cent. Politically, a gold-backed loan is defensible, in the sense that it's cheap. The alternative is trying to flog sovereign bonds at crippling yields -- 5 to 7 per cent. That in turn would mean ratcheting up the austerity programs in an attempt to restore enough investor confidence to bring yields down.
The downside, of course, is potential default, which would mean transferring a huge chunk of a country's hardest, most gorgeous assets -- and hence economic power -- out of the country. You would have to presume, however, that any country would be ultra-careful to make sure it gets the gold back, as Italy did.
The political consequences of the European Redemption Pact are one thing; what the gold-backed loans say about the common currency is quite another. The underlying message is not pretty. Germany, the supervisor of the pact and presumed inheritor of the gold if the loans are not repaid, seems to be saying: We don't trust the euro as it is; it's too weak, so give us a stronger, gold-backed euro. Doubts about the health of the euro only increased on Friday, with more reports that Spain would formally seek a European bailout for its gutted banks as early as this weekend.
If the ailing European countries accept the gold deal, it would strengthen the euro. If they were to reject the deal, it would hurt the euro. Why? Because rejection, in effect, would state that they can’t muster the fiscal discipline to ensure they get their gold back.
The European Redemption Pact is a psychological biggie. If it were to happen, it would say that gold is a key central bank reserve and that it can be an effective crisis-management tool.
Two questions. If Europe goes for the gold-backed deal in an effort to save its sorry butt, what does this say about the credibility, or lack thereof, of fiat currencies around the world? And would it save the euro from extinction?
Desperate times require desperate measures. We can all agree that the euro is a pig. A pig stuffed with gold is an entirely different beast. 



 And now the paper stories which certainly will have an influence on the price of gold and silver.  During the night it was a risk off scenario as markets reacted to Bernanke's speech to Congress where he may be a little reticent in implementing QE iii officially on the balance sheet of the Fed.  Markets were down across Asia and then onto Europe.  However at around 7 am est, Spain officially asked for a bailout only to be denied by Germany  (see below commentaries).  Bond yields on both the Spanish 10 yr bond rose to 6.21%) and the Italian 10 yr bond rose to 5.77%.  The Nikkei was down badly with a loss of 2.09%, however European bourses recovered some of their losses with the Dow advancing.

The DAX ended the day down 13 points for a .22% loss.
The Paris CAC was down 19 points for a loss of .63%
The London FTSE was down only .23%

The Euro/USA cross retreated back to 1.251 after being as high as 1.257.

However the big story starting the day was Spain which on Thursday received a downgrade from Moody's to BBB. All day Friday, the story belonged to Spain as we start off with an official notice from this sovereign that it needs a bailout.  The fun then begins:

Overnight Sentiment: Nothing New Under The Iberian Sun

Tyler Durden's picture

That economic data out of Europe was disappointing overnight should come as no surprise to anyone. That Spain is broke, and there is no money to bail it out under the existing framework (and that Germany is unwilling to come up with a new bailout scheme), should also be no surprise. And yet they somehow manage to stun the market... each and every day. Which is why overnight action has now boiled down to a simple algorithmic exercise: is there a short covering squeeze: if yes, then rip, aka Risk On. If not, then Risk Off. So far, the squeeze has not been initiated which is also to be expected, following the biggest short covering squeeze in up to two years. This too may change if repo desks decide to pull borrow as they tend to do during regular hours, to give the impression that the latest and greatest bailout plan is "working." And in other news, which is completely irrelevant, here is the actual news.
From Bank of America:
Market action
Equity markets are selling off around the world. Investors were disappointed by Fed Chairman Ben Bernanke yesterday who did not lay out a clear road map for further QE. Instead his speech focused on the risk the Euro area economy poses for the US and also the dangers of the fiscal cliff. Markets are also worried that China's central bank's decision to cut its benchmark interest rates is a sign that the economy is slowing faster than investors originally expected.
The worst performing Asian equity market was the Japanese Nikkei down 2.1% followed by the Hang Seng which fell 1.0%. The Korean Kospi slipped 0.7% while the Shanghai Composite fell 0.5%. On the flip side, the Indian Sensex managed to rise 0.4%.
In Europe, equities are down 0.7% in the aggregate. Blue chips are outperforming down only 0.3% while shares listed in London are down 0.7%. At home, S&P 500 futures are pointing to a 0.4% sell off later  today. That would follow the flat close yesterday.
In bondland, Treasuries are bid as the risk on rally from the prior few days begins to fade. The 10-year yield is 9bp lower at 1.56% while the long bond is down 8bp to 2.66%. In Europe, Spain's 10-year yield is  on the rise up 11bp to 6.14% while the Italian 10-year is up 7bp to 5.75%. UK gilts are bid down 12bp to 1.60% and the German bund is down 9bp to 1.28%.
Big pop in the dollar with the DXY index up 0.8%. Commodities are selling off with WTI crude oil down $2.32 a barrel to $82.50 and gold down $11 an ounce to $1,578.60.
Overseas data wrap-up
On the central bank front, yesterday the Bank of England leave its benchmark interest rate unchanged at 0.5% and its asset purchase facility, ie QE, unchanged at £325 billion. Looking ahead it is highly likely that the BoE increases its asset purchase program to counter a slowing domestic economy and headwinds posed by the Euro area. In Asia, the Bank of Korea left its benchmark interest rate unchanged at 3.25% for the 12th consecutive month while the PBoC - China's central bank - cut interest rates for the first time since December 2008. The PBoC cut both the lending and deposit rates by 25bp to 6.31% and 3.25%, respectively.
Fitch downgraded Spain's credit rating three notches to BBB yesterday, with outlook negative, due to the cost of recapitalising the country's banking sector. They estimate it will cost €60bn (€100bn in a "severe stress" scenario), in line with our base case and severe bear case- and the country will be in a recession for the rest of the year and through 2013. Our Euro area economists expect the economy to contract further in 2013 by c.0.4%, although with positive qoq growth from Q1 2013, see our current forecast. Also be sure to read our most recent report on Spain here: Spain Economic Viewpoint, 08 June 2012.


In the following New York Times article,  Landon Thomas describes how Madrid is banking on its troubled 
banks to buy up all of the sovereign's debt because basically there really is nobody out there willing to buy the garbage.  Actually, the author is correct by saying that the Spanish banks are buying the sovereign debt of Spain; the Italian banks are buying the sovereign debt of Italy and the British banks are buying the sovereign debt of England.  We are witnessing very little cross border buying of sovereign debt

As far as Spain is concerned, Madrid is leaning hard on its troubled banks to buy their bonds but according to the Royal Bank of Scotland it is hopeless as they suspect that Spain will undergo a full blown bailout. The Spanish banks own 67% of all sovereign debt issued by Spain.  A default by the sovereign automatically causes the default of the banks.

(courtesy New York Times/Landon Thomas)

Madrid Leans on Its Troubled Banks to Buy Its Bonds

And so, as Madrid tries to come up with the money to bail out its banks, its main lenders are increasingly becoming many of those same institutions.
If it sounds like the most vicious of circles, it is.
Economists warn that over the long term, Spain will have trouble meeting its substantial financial requirements until foreign investors return to the market as regular buyers, injecting new money into the system. Until late last year, foreign investors were doing just that. But lately, much of the foreign money has been staying away.
Foreign investors are leery of the high risks involved in holding the debt of a government facing the twin challenges of persistent budget deficits and a banking industry, hobbled by bad real estate loans, that may soon require a bailout costing as much as 100 billion euros, or $126 billion.
On Thursday, after the financial markets closed in Europe, Fitch Ratings raised red flags over Spain’s creditworthiness by downgrading the country’s debt by three notches, to BBB from A, leaving it just above junk status.
For Fitch and others, the fear is not only that Spanish banks will need a bailout, but that Spain itself might — in which case holders of its bonds would take significant losses.
“We think Spain will require a full bailout package,” said Phoenix Kalen, a bond strategist in London for Royal Bank of Scotland. “Over the long run, Spain would be unable to issue bonds at sustainable yields and would need a full package to restore economic fundamentals.”
On the face of it, the auction Thursday was a success: Spain was able to sell 2.1 billion euros ($2.63 billion) worth of bonds, and demand was much higher than expected. And while the interest rate on the closely watched 10-year note jumped to 6.04 percent from 5.74 percent at the previous auction of similar securities in April — and a potential unsustainable borrowing cost for the government — it was lower than last week’s high of 6.63 percent.
Traders said, too, that for the first time in months a number of hedge funds in London bought the bonds. They are evidently calculating that, at above 6 percent, Spanish bonds are a pretty good bet, especially with talk building that Europe is close to extending some form of a rescue to the country’s banks.
But skeptics point out that the government may have won an easy battle by setting a relatively low target of money to be raised in the auction. They say it remains decidedly unclear whether Spain can raise the substantial amounts it will need to survive by relying so much on its local banks to pay the bill. Ms. Kalen estimates that Spain will require 276 billion euros ($347 billion) to finance its budget deficit and pay off bonds maturing through 2014.
Spain’s banks now own 67 percent of the country’s bonds, the largest such proportion in the euro zone. Despite the perils to both the banks and the government, the incentives are still in place for lending institutions to keep accumulating these high-risk securities.
As long as the Spanish government does not default and demand for loans in the recession-mired economy remains negligible, lending to the government remains in many respects the only game in town for banks. Moreover, they can borrow cheaply from the European Central Bank and make a nice return lending the money to their own government.
“If you are a Spanish bank its very profitable to borrow at 1 percent and lend at 6 percent,” said Santiago Lopez, a banking analyst in Madrid for Exane BNP Paribas. “The risk is that Spain defaults on its bonds, and if that happens you are bust anyway.”
While Spain’s banks are especially weighed down by their government’s debt, they are by no means unique in that regard.
“Spanish banks are buying Spanish bonds, Italian banks are buying Italian bonds and British banks are buying British bonds — this home bias is escalating and it is unlikely to abate anytime soon,” said Carmen M. Reinhart, an expert on international finance and sovereign debt at the Peterson Institute for International Economics in Washington.
Ms. Reinhart has just published a paper titled “The Return of Financial Repression” — the academic term of art for this phenomenon — arguing that the debt needs of many countries, combined with risk aversion on the part of foreign investors, are pushing countries to take extraordinary steps to create a captive audience for their bonds.
Aside from the immediate effect of diverting banks from their primary charge of making loans to businesses and individuals, Ms. Reinhart points out that this practice backfires if the country reaches the default point, as was the case with Greece. “Then you are doomed,” she said.
In her paper, Ms. Reinhart points to numerous steps that European governments have taken to induce their banks and other domestic investors to buy state bonds.
These include France’s efforts to make it more attractive for pension funds to buy government bonds. One of the tactics in Spain has been for the government to put a cap on the interest rates bank depositors can earn, making it that much more attractive to buy higher-yield government bonds.
Italy, with a much larger and sophisticated bond market, has been more blunt in this respect. Last year, banks and businesses organized a “buy Italian bonds” day in which commissions on bond purchases were temporarily waived to get individuals to buy more bonds.
And while specific examples of the government talking banks into buying their bonds are hard to find publicly, analysts in Spain say that in light of the close ties between banks and the public sector there, it is fair to assume that bankers have gotten the message that now more than ever is the time to buy Spanish.
Still, a powerful incentive has been the low-cost loan program the European Central Bank put in place this year. Spanish and Italian banks have been the most aggressive borrowers from this lending window, and they have funneled much of this money back into the coffers of their home governments.
But analysts at Citigroup argue that the even more powerful incentive has been European banking regulations. Government bonds in Europe carry a zero-risk weighting, according to global standards on how much money banks must set aside to insure against losses.
That means that in contrast to the treatment of mortgages or corporate loans, banks need not set aside more capital if they buy additional government bonds, even though these assets in reality may be among the riskiest that the banks own.
While European banks may see these bonds as free from risk, foreign investors certainly do not.
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, recently removed Spain from its benchmark bond index for Europe. That means it need not allocate any portion of its assets to Spanish bonds.


Officially Friday morning, Spain has asked for a bank bailout and that a telephone conference will be held today (Saturday) to  discuss this latest news.  The fun begins:

(courtesy zero hedge)

Spain To Officially Request Bank Bailout For The First Time... Again

Tyler Durden's picture

If it seems like it was just yesterday that Spain officially requested a bank bailout, it is because it was. Recall: "Spain Caves, Admits It Needs European Bailout" from June 5. What happened next is confusing, but it essentially appears that Spain retracted the course of action as it was unhappy with two things: i) the market's response to the announcement, and ii) Germany's response to the request for aid. The first, because as ZH first showed, did not soar as there would obviously not be enough money embedded in the current system to fund a full bailout of Spain, and the second, because Germany is not exactly delighted with having one more country on the dole, and has yet to clarify under just what conditions it will save Spain (in retrospect naive rumors that it has dropped all conditionality notwithstanding). Which brings us to this morning, when we are expected to forget that all of this already happened, and to be shocked that Spain is officially requesting a bailout for the first time./.. again... kinda, sorta... Reuters reports: "Spain is expected to request European aid for its ailing banks at the weekend to forestall worsening market turmoil, becoming the fourth and biggest country to seek assistance since the euro zone's debt crisis began, EU and German sources said. Four senior EU officials said finance ministers of the 17-nation single currency area would hold a conference call on Saturday to discuss a Spanish request for an aid package, although no figure had yet been set. The Eurogroup would issue a statement after the meeting, they said. "The announcement is expected for Saturday afternoon," one of the EU officials said." So now we have rumors of statements of conferences of bailouts. Lovely. At least our Belgian caterer long is doing great to quite great.
More from Reuters:
The move comes after Fitch Ratings slashed Madrid's sovereign credit rating by three notches to BBB from A on Thursday, highlighting Spain's exposure to its banks' bad property loans and to contagion from Greece's debt crisis. "The government of Spain has realised the seriousness of their problem," a senior German official said.

He added that an agreement had to be reached before a Greek general election on June 17 which could cause market panic and lead to Athens leaving the euro zone if parties opposed to the terms of an EU/IMF bailout win.

The EU and German sources spoke on condition of anonymity due to the sensitivity of the matter.
Sure enough this being Europe, nobody actually knows anything:
In Brussels, the European Commission's spokesman on economic and monetary affairs, Amadeu Altafaj, said he could not confirm that there would be a teleconference of finance ministers and said Spain had made no request for aid. "There are no signs of a request," he said.

Well of course nobody will confirm anything: in Europe one only confirms horrible data on a market uptick. Sadly, this time around it seems they may not get it: as a reminder Spanish bank bailout costs have increased by 250% in about one week following yesterday's Fitch announcement, which for some idiotic reason cause the market to spike.
Fitch said the cost to the Spanish state of recapitalising banks
stricken by the bursting of a real estate bubble, recession and mass
unemployment could be between 60-100 billion euros ($75-$125 billion) -
or 6 to 9 percent of Spain's gross domestic product. The higher figure
would be in a stress scenario equivalent to Ireland's bank crash.

International Monetary Fund report, due to be published on Monday, is
expected to estimate Spanish banks' capital needs at a lower figure of
40 billion euros, but market conditions have deteriorated since the data
was collected, officials said.
And so on. Expect more talk, and no math. Why? Here's why.


Germany's response: sorry Spain.  Germany will provide cash only with instruments already approved.  That means no Eurobonds and no direct bailout of the banks by the ECB:

(courtesy zero hedge)

Germany Responds To (Re)newed Spanish Request For Cash: Please Do, But No Backdoor Bailout

Tyler Durden's picture

Just as we noted minutes earlier, following the Spanish (re)submission its (still rumored) bank bailout application, the ball was in Germany's court. And sure enough, Germany has just come out with the token response, which was the worst possible outcome for the insolvent country, which may force it pull the unofficial bailout request for the second time. FromMarketNews: "The German government on Friday reaffirmed that the European bailout funds were ready to support Spain, if Madrid applies for aid and accepts the conditions tied to it.“The decision is up to Spain. If it makes it, then the European instruments for it are ready,” government spokesman Steffen Seibert said at a regular press conference here. “Then everything will run under the usual procedure: a state makes a request, it will be liable and it accepts the conditions tied to it.” Seibert declined to comment on rumours of a possible Eurogroup teleconference this weekend to consider an aid request from Spain that might be forthcoming."
Translated: the framework is in place. As in, no new bailout instruments are being contemplated.
Notice something here: no use of the word FROB anywhere.What is the FROB? Why the Spanish Fund for Orderly Bank Restructuring or bank bailout fund, which as a reminder, is what was rumored on Wednesday by Reuters and the FT as the loophole that Germany had agreed to fund in order to bypass funding Spain at the sovereign level with debt Spain can't afford to incur. In other words: the reason for the biggest market ramp of 2012... has just been found to be non-existant.
Gotta love Europe.  
And with this disappointing German preannouncement to the Spanish pre-rumor of a bailout pre-demand, it is very likely that the entire "Spanish-rescue" weekend script, as explainedmoments ago, has just been scuttled.


 Is there going to be a conference or not?

 Arlette Saenz of ABC news, states that she knows of no technical meeting on the Spanish issue.

and then this crazy headline:  consultants and the IMF to determine Spanish bank needs.

go figure!!

(courtesy zero hedge)

Crazy Pills: Here Comes The Refutation Of The Rumor Of The Conference Of The Bailout Of The Broke... And Consultants

Tyler Durden's picture

Just as we expected earlier, when we suggested that Spain is waiting to see Germany's preliminary response to its (re)newed push for a bailout, Spain has seen the outcome, and does not like it.
And another just brilliant headline:
  • Consultants, IMF to Determine Spain Banks’ Needs
Yup. Consultants:
Crazy Pills:


Markets rejoice, the Dow jumps higher as the following happens:

(courtesy zero hedge)

Friday Humor: Eurogroup Meeting Preview Redux

Tyler Durden's picture

Moments ago the following headline flashed across the Bloomberg terminal:
  • Sentiment Improves Ahead of Weekend Eurogroup Meeting
All one can do here is laugh - we can discuss how this is simply the latest idiotic case of perpetual deja vu, where a broke continent sits down, orders catering service, only to realizes it is broker than before, but not before scheduling its next meeting, while Jean-Claude Juncker utters some more lies... or we can simply once again present David Einhorn's brilliant summation of the sequence of motions that the USS Troikatanic goes through every single time as it achieves absolutely nothing.
Source: Greenlight Capital


OH OH!! late Friday night, Moody's warns of a Spanish downgrade coupled with a threat to
lower the European AAA rated countries in case of a Greek exit.

The threat of a Spanish downgrade is huge as this will be the last of the big 3 to downgrade Spain.  This would automatically force the ECB to ask for more collateral on all of the swaps received during LTRO 1 and LTRO 2 and it would be considerable.  The only problem here is that all of that collateral has already been sent over.

Additionally, a Greek exit will also affect the following sovereigns:

Cyprus, Portugal, Ireland, Italy and Spain.

and finally, no conference is scheduled!
What a mess!!

(courtesy zero hedge)

Friday Dump Complete: Moody's Warns Of Spanish Downgrade, Threatens AAA-Countries In Case Of Grexit

Tyler Durden's picture

First we got Spain miraculously announcing late at night local time, but certainly after close of market US time, that the bailout so many algorithms had taken for granted in ramping stocks into the close may not be coming, because, picture this, Germany may have conditions when bailing the broke country's banks out, and Spain is just not cool with that, and now, after the close of FX and futures trading, we get Moody's giving us the warning the after Egan-Jones, S&P, and Fitch, it is now its turn to cut the Spanish A3 rating."As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook." Moody's also warns, what everyone has known for about 2 years now, that Italy could be next: "However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks." Of course none of this is unexpected. What will be, however, to the market, is when all 3 rating agencies have Spain at BBB+ or below, which as ZH first pointed out at the end of April willresult in a 5% increase in repo haircuts on Spanish Government Bonds, resulting in yet another epic collateral squeeze for the country which already is forced to pledge Spiderman towels to the central bank. 
From Moody's
Moody's: Developments in Spain, Greece may prompt euro area sovereign rating downgrades
New York, June 08, 2012 -- Recent developments in Spain and Greece could lead to rating reviews and actions on many of the euro area countries, says Moody's Investors Service in the report "Rating Euro Area Governments Through Extraordinary Times -- Implications of Spain's bank recapitalisation needs and the rising risk of a Greek Exit".
As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook.
However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks.
In contrast, Moody's says that if the risk of a Greek exit from the euro were to rise further, it could lead to additional rating pressures throughout the region. Greece's exit from the euro would lead to substantial losses for investors in Greek securities, both directly as a result of the redenomination and indirectly as a result of the severe macroeconomic dislocation that would likely follow. It could also pose a threat to the euro's continued existence.
The risk of a Greek exit particularly affects the credit standing of Cyprus (Ba1, Negative), Portugal (Ba3, Negative), Ireland (Ba1, Negative), Italy (A3, Negative) and Spain. However, should Greece leave the euro, posing a threat to the euro's continued existence, Moody's would review all euro area sovereign ratings, including those of the Aaa nations.


finally late Friday evening, this bombshell released hoping nobody will see it:

"Spain resists conditions on the Spanish bank bailout"  spoken by an EU official (unnamed).

and then another bombshell:


(courtesy zero hedge)

And Promptly Coming Right After The Market Close...

Tyler Durden's picture

... is the news (which is not news, because as we had explicitly stated first thing this morning, Spain admitting it needs a bailout absent a new bailout plan in place, launches the country's bond yields into hyperspace) that had it hit 30 minute ago would have sent everything red for the day:
  • Spain Resisting Conditions On Bank Bailout - EU Official, BBG
But why would this news, coming at nearly 11pm Spanish tim, have to come before the market close, when all of the day's gains would have been undone. Why indeed.
And adding some spice to the after hours twist, is S&P which just said that the US will likely be downgraded again by the end of 2012:
  • S&P Affirms U.S. ‘AA+/A-1+’ Unsolicited Rtgs; Otlk Still Neg
Which they won't.


With all of this turmoil, the Spanish 10 yr bond yield rose to 6.216%:


Add to Portfolio


6.216000.12800 2.10%
As of 06/08/2012.

Citibank sees a disorderly Greek exit will cause violent action on all bourses.
Thus the VIX would rise from its now dormant level to over 80.  In other words volatility will the nature of the game as we will witness violent activity.

Citi Matrix Outcomes: If "Disorderly Grexit" Then "VIX At 80"

Tyler Durden's picture

According to some, the next Lehman-like event will be none other than a Greek exit from the Eurozone, especially if not firewalled, or in other words, disorderly. Considering how effective the Eurozone has been to date at anything orderly, it is a fair assumption that any Grexit-type event can only be disorderly. And while we appreciate that now flailing Spain has gripped the public's attention and been exclusively in the headlines for the past week, or ever since the start of the Greek poll moratorium, we can't help but recall that we are less than 10 days away from June 17, and the fact that for all the media disinformation, anti-bailout Syriza is likely to be the winner in the election, getting the automatic 50 extra seats that will make it likely it forms an anti-EUR government with a next step:Grexit. Pardon: a disorderly Grexit. The latest firm which see the Grexit as nothing but the coming of Lehman 2 is Citi, which in this convenient matrix predicts that such an outcome would lead to the same VIX at 80 outcome we saw in those days of September and October of 2008. Perhaps, for ole' fat tails sake, it is not a bad idea to buy some VIX calls here just in case.
Of course, if the ITA-BUND spread hits 720 bps, there will be bigger things to worry about than what counterparty will have the cash to make good on the other side of that VIX bet.
More from Citi:
1/ Managed Grexit with firewall in place but insufficient to remove EMU break up risk or risk aversion: Our analysis suggests that EURUSD can drop to 1.2000 under this scenario (Figure 5). We expect both VIX to move higher to 35vols and BTP yields to temporarily break above 600bp (Figure 5). In ‘International Interest Rate Strategist from 17 May 2011 Citi’s rate strategists published estimates of German bond yields that are theoretically with unchanged probability of EMU break-up  as well as a spike in global risk aversion. In particular, German 2y yields which currently stand 6bp could trade as low as -35bp. In the case of the Bund yields, our rate strategists estimate a drop to 85bp from current 143bp. The BTP-Bund yields spread and Germany-US 2y bond yield spread are expected to widen/ tighten from current levels (Figure 5). Importantly, both Italy-Germany bond yield spread and VIX are expected to remain below their 2011 highs.
2/ Managed Grexit with firewall implemented in response to Grexit: Our analysis suggests that EURUSD can drop to 1.1300 under this scenario (Figure 5). We expect both VIX and BTP yields revisit their 2011 highs. In ‘International Interest Rate Strategist from 17 May 2011 Citi’s rate strategists also published estimates of German bond yields that are theoretically consistent with a 5-10% increase in the probability of EMU break-up (estimated to be 19% at present) as well as a spike in global risk aversion. Under this scenario, the German 2y yields could trade as low as -75bp while the Bund yields could drop to 70bp. The BTP-Bund yields spread and Germany-US 2y bond yield spread are expected to widen/ tighten considerably as a result (Figure 5).
We suspect that any further significant escalation in the euro zone debt crisis could be met with a concerted policy action by all major central banks. In turn this is likely to add to the downside pressure on the short-term government bond yields across the board. In addition, one could argue that escalating demand for safe haven could push US treasury yields temporarily below zero and thus result is somewhat less negative Germany-US 2y bond yield spread. The impact on our projection need not be that great given the relatively small size of the beta coefficient. For example, a drop in the 2y rate spread to only -50bp will mean that EURUSD would fall by 0.4bf instead of our original projection of 1.2bf. 
3/ Disorderly Grexit with excessive volatility in other markets: Our analysis suggests that EURUSD can drop to 1.0100 under this scenario (Figure 5). We deem this scenario much less likely than the previous two given that the policy response by global central banks and policy makers is likely to be swift. We nevertheless decided to include the scenario to provide a worst case estimates. In particular, we keep our assumption for German rates but expect that the BTP yields surge to 800bp leading to further widening in the spreads to Germany to 730 bp. We also assume that VIX moves closer to its Lehman highs (Figure 5). We have to admit that the assumption regarding the BTP yields is somewhat arbitrary. BTP yields surged well above 800bp in the years before the introduction of EUR. 


Somebody is getting ready for a Greek exit..this is the second company that is being chosen to print Greek drachmas:

(courtesy zero hedge)

"Material Banknote Order Reinstated"

Tyler Durden's picture

Another hint?
VANCOUVER, BRITISH COLUMBIA--(Marketwire - June 7, 2012) - Fortress Paper Ltd. ("Fortress Paper" or the "Corporation") (TSX:FTP), announces that its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012.

Chadwick Wasilenkoff, Chairman, Chief Executive Officer and President of Fortress Paper, commented, "The recommencement of this previously delayed order will provide Landqart with momentum to realize additional orders and maximize operating efficiencies. This important order allows Landqart to better optimize the overall mill and should provide a meaningful contribution to its margins compared to recent quarters."

About Fortress Paper 

Fortress Paper operates internationally in three distinct business  segments: dissolving pulp, specialty papers and security paper products.  The Company operates its dissolving pulp business at the Fortress  Specialty Cellulose Mill located in Canada which is also in the process  of expanding into the renewable energy generation sector with the  construction of a cogeneration facility. The Company operates its  specialty papers business at the Dresden Mill located in Germany, where  it is a leading international producer of specialty non-woven wallpaper  base products. The Company operates its security paper products business  at the Landqart Mill located in Switzerland, where it produces  banknote, passport, visa and other brand protection and security papers,  and at its Fortress Optical Facility located in Canada, where it  manufacturers optically variable thin film material.
Well, if the chart of De La Rue is any indication of how banknote printers respond to potential European disintegration, it just may be that the best hedge to a VIX soaring to 80, aka "disorderly Grexit" as explained earlier by Citi, just may be TSX:FTP.
In the meantime, here is the swiss-security-paper complex of Lanqart:  

Now it is Mario Monti's turn to go to a Mutually Assured Destruction  (M.A.D.) in the Euro
area and he asks for a speedy resolution in Spain.  He claims there is a permanent risk of contagion throughout the Euro zone.

(courtesy zero hedge)

Monti Goes M.A.D.; Sees "Permanent Risk Of Contagion In Euro-Zone"

Tyler Durden's picture

We can only assume that the technocrat-in-chief of Italy, Mario Monti, has read the second chapter of 'how to be a European leader' as he switches from Juncker's "When it's bad, you have to lie" mantra to "Maybe the real truth will scare 'em into it" as he pushes the spending of other people's money and a growth agenda (which of course will solve all the insolvency problems). As Bloomberg reports, the blackmail negotiationsthreats continue:
Perhaps he just noticed the underperformance of Italian bonds the last day or two and just how this will rapidly spill back into his back-yard.


and speaking about the underperformance of Italian bonds Thursday and Friday:

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.772000.06300 1.10%
As of 06/08/2012.


In the following commentary Bruce Krasting delves into the situation inside Switzerland where the central bank of Switzerland has been buying up boatloads of Euros and printing up massive amount of Swiss Francs in order to buy these notes as they enter Switzerland. Jordan has been pulling his hair trying to keep the peg at 1.20 SF per euro. Last month he issued 60 billion Swiss Francs purchasing euros. Thus on a 5 day work week, they are averaging $7 million of conversion per minute.  The SNB scared as to the total quantity held, decided to buy other currencies like the Canadian dollar, the Aussie, the yen and Sterling with its newly stacked euros which in turn set off currencies problems throughout the globe.  The Japanese were thoroughly annoyed at the Swiss for raising their currency making exports from Japan difficult.

this is a very important read

(courtesy Bruce Krasting/)

$7 Million a Minute
Bruce Krasting's picture

The Swiss National Bank (SNB) intervened in support of its 1.2000 currency peg against the Euro to the tune of CHF 60 billion ($66B) in the month of May. The vast majority of this intervention occurred during European trading hours. That means that the SNB bought, on average, the equivalent of $7mm worth of Euros every minute during the month. That’s a staggering number to me.
I was aware that there was ongoing intervention. I thought it would end up being a big number. At one point late in the month I was advised that a big American bank dropped Euro 7B on the SNB in a single ticket (think Cetacea). But I’m blown out by the 28% increase in reserves in a single month.
The SNB was clearly concerned with its rapidly growing holdings of Euros. In an effort to diversify its newly acquired Euro reserves it sold Euro 25B and bought dollars, Yen, Sterling and the Canadian and Aussie dollar.
The Japanese must be pissed at the Swiss action. The last thing Japan needs is a stronger Yen, the SNB added to Japan's problems in the month.
I wonder what the folks at the ECB are thinking about this. On one hand, a cheaper Euro is helpful to the Euro economies. But not if the adjustment takes place too quickly. The 8% deterioration in the Euro in May added to the instability in the debt markets of Europe. The Euro weakness was the shining example of all of the European problems. My guess is that the deciders in Brussels and Berlin are angry at the Swiss for trashing their currency at a very bad time. The SNB could have waited a month or two to diversify its holdings in an effort to avoid more market turmoil. But they chose to blast an already unstable market with very big supply.
I would suggest that the policy of diversification has added to the amount of Euros that the SNB had to buy in the EURCHF market. Every day that the EURUSD got weaker, it added to the demand for the Swiss Franc. I believe that the SNB contributed to the global market instability that occurred in May. It’s impossible to avoid the conclusion that the policy actions were a failure.
The question of the hour is, “Can the SNB continue to intervene at this pace?”
My answer to this is, “Absolutely not”. The risks to the country of accumulating reserves at this rate are very high.
I have to believe that the US Fed/Treasury, the Bank of Japan and the ECB have been making calls to the SNB and the President of Switzerland to lay off the intervention and the diversification. The only option left for the Swiss is exchange controls. They will make it very expensive to own Swiss Francs. Negative interest rates (currently -75BP for two months) will get more negative. Reserves will be applied to FX positions and there will be restrictions/taxes on any new money coming into the country.
In my opinion the odds for exchange controls to be established in Switzerland this weekend are very high. If it is not this weekend, it will be before the end of the month.
I was on Swiss radio this week discussing the dilemma the SNB is faced with. I did not make any new friends with the interview. I contrasted the 54% of youth unemployment in Spain to the 3% rate that exists in Switzerland. The announcer remarked that this huge difference was a result of the Swiss managing their economy much better than the Spaniards. I responded that the results are a function of currency manipulation. I don’t think I will be invited back. My rant (link).


Germany's target 2 has now reached 700 billion euros with a huge 54.4 billion increase from May. It seems that all trading is one way with Germany the exporter and the PIIGS nations gracefully accepting their goods as imports.  The Target 2 balance reflects this quite nicely:

(courtesy zero hedge)

Europe's Parabolic-est: German TARGET2 Total Hits €700 Billion

Tyler Durden's picture

Dear German readers: please earmuff your eyes.
Everyone else: please check back in 3-6 months when the Bundesbank's (i.e. Germany) uncollectable "claims" from the Eurosystem hit €1 trillion, following the May increase of €54.4 billion, the third highest monthly increase on record, bringing the total of just shy of €700 billion.

end.  Goldman Sachs lowers its 2nd quarter GDP from 2.0% to 1.8% due to weaker exports and higher inventory levels.  However if you were to include the proper inflation numbers then the USA would be contracting:

(courtesy zero hedge)

Goldman Cuts Q2 GDP Estimate From 2.0% To 1.8%

Tyler Durden's picture

Just as predicted earlier, the GDP downgrades begin.
We revised down our Q2 GDP tracking estimate by two tenths to +1.8% (quarter-over-quarter, annualized) from +2.0% previously. The downward revision primarily reflects weaker-than-expected real export growth in April. This was partly offset by stronger than expected wholesale inventories, which increased by 0.6% (month-over-month) in April.
Surely this explains why the market is about to turn green.


Charles Biderman and Rick Davis discuss the real GDP figures as they state that the real
economy appears to be in a contractionary state if you include the correct adjustment for inflation.

a must see video

(courtesy Charles Biderman/Trimtabs/Rick Davis/zero hedge)

Biderman: "We Are In The First Quarter Of The Next Recession"

Tyler Durden's picture

Rick Davis of The Consumer Metrics Institute plays Clark Kent to Charles Biderman's Superman as the two dig into just how manipulated and misreported the latest GDP data from the government was. Critically, they break down the components and using inflation levels (CPI-U or The BPP) that make some sense when considered with energy price movements during this quarter (as opposed to the deflator that was 'selected' by the BEA) Davis and Biderman are "really worried" that the real economy appears to be in a contractionary state if inflation is adjusted for correctly. Even the anemic 1.88% growth rate is 'very very poor' for an economy that is supposed to be 3 years into a recovery. The per-capita income (the money available to all households to spend) actually shrank - even using the BEA's inflation data. This juxtaposes shrinking household disposable income with a real economy supposedly growing (though slowly) which was driven almost exclusively by consumer spending - leaving Davis and Biderman questioning'where this money is coming from?'. The simple answer is the savings rate has plunged, freeing up over $200bn in annual spending (and student loans have added another $100bn, refis $50bn, and strategic defaults $80bn) - all unsustainable one-time increases. This is what is really scary behind the GDP numbers. Spending is not coming from income. While much is made of the drop in spending driven by the fall in oil prices, Davis points out that the consumer is hitting a wall with his savings and concludes that the BEA is notoriously bad at calling turning points (only getting the Great Recession 'direction' correct after 16 months and magnitude after 40 months) - leaving him of the opinion that we may well be in the first quarter of the next recession.


Dave from Denver issues a great commentary on the potential for more official QEIII.
Pay attention to what the Finnish Prim Minister stated to the press after a telephone conference with Bernanke and Geithner where he commented that "they (Bernanke and Geithner) were very worried about what was going on".  This is at odds with the statement that Bernanke is a lot more relaxed on the USA situation due to recent USA data and Europe.  Really?

Dave correctly states that both Geithner and Bernanke are not worried about the USA economy.
They are worried about the banks and their massive derivatives that may implode.  Signals of that are reaching us as we view the antics of JPMorgan with their credit default implosion with the added blow up of some of their interest rate swaps.

Dave is of the view that the USA will engage in another operation twist. As we have pointed out many times to you, the USA is running out of treasury bills to sell. He suggests that Bernanke will use 2 to 3 year treasuries as objects for sale.

(The mouthpiece Hilsenrath has already stated that the Fed will supply 4 year paper).
Regardless, expect operation twist to commence shortly:

(courtesy Dave from Denver/the Golden Truth)


More QE Signals

I wish I could borrow big city housing the way you can borrow stocks - I would be shorting the heck out of Chicago and NYC properties right now:  "what's that? you have a $500k bid?  I got one to sell there and two more to go at the price if you want them"  - Dave in Denver
It seems that the market status quo after Bernanke's testimony today is that QE is still on hold.  For instance, the purveyor of had this to say:  "that he’s a lot more relaxed about both the recent US data and Europe than the market thought he would be."

Hmmm, really?  I'd love to play poker at the same table with him...In fact, if you step outside of short-sighted, narrow U.S. perspective, the Finnish Prime Minister, after  being on a conference call with Geithner and Bernanke, had this to say:
“They were very worried about what was going on,” Katainen said in a Bloomberg News telephone interview yesterday. Katainen said he discussed with Geithner and Bernanke the options for recapitalizing banks in trouble.  LINK
That was buried on Bloomberg this morning and I had to search google to easily dig up the link.  That's a quite different tenor than is being conveyed by the media after losing a hand of poker to Bernanke.   Moreover, the S&P 500 is still up over .75% after the Bernanke's b.s.  Someone explain to me please why gold and silver have been hammered 2.5% during Bernanke's circus and yet the stock market is flying.  We can't have it both ways.  Please note, my inquiry is purely rhetorical.  If you don't understand why the stock market is up - reflecting QE on - and gold is down - reflecting QE off - please visit and sift through the archives.

This brings to me my topic on looking for QE signals.  To preface, as a good friend of mine pointed out this morning, Bernanke has to be careful about employing more QE, otherwise he'll be accused of supporting the re-election of Obama.  This is why Mr. Katainen's comment is so crucial.  Bernanke and Geithner aren't worried about the U.S. economy per se, they are worried about the U.S. banks and the exposure to European banks via those off-balance-sheet transactions also known as OTC derivatives.  You know, the ones that led to JP Morgan's $2 billion $20 billion in losses this year so far.  If any of the big European banks blow up on Spain/Greece/Italy/Portugal, the Too Big To Fails in this country will suffer a financial nuclear explosion.

My view has been that more QE will first start with some sort of disguised version of it, like a much bigger dollar/euro Central Bank swap program plus more Operation Twist.  Interestingly, and drawing on a great post on FT/Alphaville from yesterday, a signal from hedge funds not being reported on in this country was reported by FT:  LINK  You'll note in the link that the chart shows hedge funds loading up on long bond futures.  This investing stance is based on the unequivocal expectation that the Fed will expand Operation Twist to include the longest part of the Treasury curve.  So far Twist has entailed the Fed selling short term paper and buying in the 7-10 yr area.  But since the Fed is running out of short paper, I would anticipate that it might sell 2-3yr paper and buy even longer duration paper.  Again, this is veiled version of QE, because when the bond market collapses, which it eventually will, the value of the Fed's long duration Treasury holdings will plummet in value, leaving the Treasury/taxpayer with the tab.

Finally, for all those suckers at Bernanke's poker table in the U.S. media, I wanted to highlight this commentary from the FT post regarding the Fed's stance on more QE in 2011, right before more QE was rolled out:
But the situation is reminiscent of last August. All signals before that meeting were for policy to stay unchanged, not least because inflation was higher than it had been in 2010, the last time the Fed acted, and it was rising rather than falling.

In the last ten days leading up to that August FOMC, however, came the debt ceiling debacle, an S&P downgrade of US debt, and full scale market panic about growth. In the end, that meeting produced the Fed’s forecast of low rates “at least through mid-2013”. The next Fed meeting will conclude on 20th June, three days after Greece holds fresh elections, and the potential for similar market turmoil is considerable.
In fact, I can recall in the summer of 2008 - I believe at this same Joint testimony session - that Bernanke said in response to one of the questions that the Fed was prepared to get "creative" with monetary policy if necessary.  I don't have the source of the quote, but I know recently that Bernanke said that the Fed has a lot of options on the table with respect to monetary policy.

Again, my point is that you can't go by Bernanke's prepared, highly massaged statement.  His statement did what it was intended to do which was to trigger a sell avalanche in the paper gold/silver Comex pits. Instead, look at the signals below the smoke being blown and use today's market action as a gifted opportunity to buy more gold and silver before they really take off.  I know the Chinese, Indians and Russians will:  LINK

One last question:  why is the dollar down today if QE is off the table?  With China cutting rates overnight, the dollar should have been flying today...

In the following Washington Post story, Europe's woes are hitting many USA companies
as they are feeling the pinch of Europe's contraction.:

(courtesy Washington Post).   

THE WASHINGTON POST Friday June 8, 2012 7:15 AM  

 Europe’s woes hit economy in U.S.

Cutbacks there cause factories to retrench here

From manufacturers in the Midwest to upscale retail shops in Manhattan, U.S. companies are feeling the pinch of Europe’s economic contraction, helping to hold back the recovery here.
Ford, the iconic U.S. car company, says that Europeans not only are buying fewer cars but also are replacing fewer parts. Kraft Foods says sales of candy and gum in Europe are lagging. And jeweler Tiffany & Co. says fewer European tourists are shopping at its flagship New York store.
Europe is suffering a financial crisis, fueled by dwindling investor confidence in the debts of such countries as Greece, Portugal, Spain and Italy and a beleaguered banking sector. In the United States, analysts are worried most about the impact on companies outside Wall Street.
For companies in sectors such as food, apparel, hotels and technology, sales and profits will lag if the European crisis does not ease.
"The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions," Federal Reserve Chairman Ben Bernanke said yesterday in testimony before Congress.
The problems in Europe add to the reasons that big U.S. companies, despite record profitability, haven’t revved up domestic hiring. Other factors include fears that the economy could dip into recession if an automatic series of tax hikes and sharp spending cuts takes effect at year’s end.
"It’s a really, really tough environment," Ford CEO Alan Mulally said recently. "We’re not just seeing this on the new-vehicle side, but we’re seeing consumers, who are coming in for service, they’re not coming in as much and they’re not spending as much."
Goodyear Tire & Rubber, headquartered in Akron, said that owners of consumer and commercial vehicles in Europe were buying fewer tires and dealers were selling out less frequently as a result.
In response, the company reduced production.
Beyond the toll on exports, Europe’s problems are increasing volatility in the stock market, exacerbating the skittishness of American consumers and generating additional uncertainty for American firms about the pace of global economic growth.
Bernanke has been focused on Europe as well, but he devoted a major segment of his opening testimony to Congress yesterday to his concerns about the looming "fiscal cliff" — the series of tax hikes and deep spending cuts to take effect at year’s end if Congress does not forge a new budget agreement. Many economists say the magnitude of those actions will tip the economy back into recession.
Bernanke said it was critical for lawmakers "to avoid unnecessarily impeding the current economic recovery."
In other world economic news yesterday, hopes that Spain might be close to securing an estimated $65?billion to $80 billion in aid from the European Union eased market tensions. The bailout would be significantly less than previous European Union rescues offered to Greece, Ireland and Portugal.


Finally, this piece where strangely a small banking operation Abacus was indicted for criminal mortgage fraud.  We finally get to see someone charged on the event that caused the turmoil we are now facing.

Bloomberg's Pacchia interviews Prof Bill Black on the reasons for only Abacus being charged and what to expect as the election rolls on:

(courtesy George Washington/zero hedge/Bill Black/Bloomberg/Pacchia)  

Abacus FINALLY Indicted for Criminal Mortgage Fraud

George Washington's picture

Abacus is ground zero for the mortgage fraud which caused the financial crisis.
Abacus has finally been indicted for criminal mortgage fraud, and Bloomberg’s Anthony Lee Pacchia interviewed Bill Black on the meaning and ramifications.
Pacchia sent me the following summary and clip:
Manhattan DA Cy Vance given us a rarity in filing *criminal* charges against Abacus Bank and 19 former employees for mortgage fraud. The papers say the bank originated liar loans, a common practice for most banks. But according to guest Professor William K. Black, don’t expect this case to lead to more prosecutions of large banks despite overwhelming evidence of rampant fraud amongst the big banks in mortgage origination. A couple of his points:

-state and federal authorities don’t have anywhere near the manpower or resources to actually prosecute big banks for fraud.

-Treasury Sec. Tim Geithner has actively discouraged prosecutors from going after big banks.

-the very idea of prosecuting Abacus for a crime while allowing it to remain open is completely nonsensical and is likely to provoke a run on the bank.


And to spice up your weekend, I will close with these videos from non other than Jim Willie:

One Hour with Golden Jackass Jim Willie

Michael Victory's picture

This week I had the opportunity to talk with the one and only Jim Willie of Forgive the less than stellar audio. Jim's message is important and worth any struggle you might confront in order to listen.

In Part One:
Jim talks about life prior to GoldenJackass, zero percent interest rates, interest rate swaps, derivatives, the deep trigger, US dollar, and Fort Knox and COMEX gold and silver.

In Part Two:
Jim discusses the characteristics and rational for a continued gold and silver bull market, and concludes with his ideas for bringing criminal banksters to justice.

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