Saturday, June 23, 2012

Marking time waiting for the Eu Summit next week

Good morning Ladies and Gentlemen:

Before commencing, I would like to report that we had no banking casualties last night as such no new entrants into our morgue.

Gold closed up today to the tune of $1.50 to $1666.00 by comex closing time.  The price of silver however was a little more subdued falling by 18 cents to $26.65, Yesterday Europe bourses were in the red catching up to all of the poor  PMI numbers (Purchasers Managers Indices) on manufacturing form Asia and Europe including Germany together with the poor Philly manufacturing index.  All hopes will rest next week on the big  EU summit where it is hoped that a deal will be struck on Euro bonds and the implementation of the ESM which still needs to be ratified.  It is hoped that the ESM will allow direct purchases of bank indebtedness.  All of these events have no chance of happening as Germany is steadfast and only existing agreed upon facilities will be used.  Greece has 2 billion euros left in the kitty and most of that will be used to pay federal workers at month's end.  They still have 1 billion euros coming but 90% of that money goes back to the ESM.  Greece will keep only 100 million euros of that.  It looks like the first week of July, Greece will be out of funds.  We will go over all of these events but first, let us head over to the comex and assess trading today.  You will see some major surprises.

The total gold comex OI fell by only 34 contracts despite the massive raid yesterday.  The new OI rests this weekend at 415,699 compared to Thursday's reading of 415,733.  Obviously the bankers failed to knock off any of our gold leaves from the gold tree.  The front delivery month of June saw its OI fall by 44 contracts from 666 to 622.   We had 42 delivery notices on Thursday so we lost 2 gold contracts or 200 oz.   The next big delivery month is August and here the OI fell from 218,843 to 217,686.  The estimated volume Friday was extremely light at 112,836 compared to Thursday, the day of the big raid, where the confirmed volume finished at 218,843.  It seems that on the day of raids volumes appreciates considerably due to the non backed supply by the bankers.  The buy side is gobbled up by unknown entities wishing to take on the bankers.

The total silver comex OI completely shook the living daylights out of the bankers on Friday.  They were expecting a drop in OI as the price of silver fell in excess of $1.55 yesterday.  Much to their shock, the total OI  rose by 6034 contracts from 121,949 to 127,983. I believe that this is the highest gain in OI that I can ever remember.  The non official delivery month of June saw its OI remain the same at 12 contracts.  Because we had 0 delivery notices on Thursday we neither gained nor lost any silver.  The next piece of data, no doubt, is also grave concern to our bankers.  The front delivery month of July is only 4 days away and instead of contracting in OI as is the norm, it ROSE by 147 contracts from 33,908 to 34,055.  The midnight oil will be burning at the Hotel du Bankers, New York this weekend.
The estimated volume Friday was quite large at 64,665.  However the confirmed volume on Thursday was an absolutely astounding 98,432 with few switches.  With the price falling on Thursday and the OI rising, our bankers are cleaning up from themselves either from gastric regurgitation, bowel release, or excessive self hair pulling.  They simply cannot understand how total OI rose, the front month of July OI rose, confirmed volume rose and their efforts to knock off any silver leaves went in vain.

June 23.2012


Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
546.55 (Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in
No of oz served (contracts) today
(6)  600 
No of oz to be served (notices)
  618  (61,800) oz
Total monthly oz gold served (contracts) so far this month
(5491)  549,100  oz
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


 The activity today was tiny.

We had no dealer activity.
The customer had no deposit but did have the following withdrawal:

1.  Out of Manfra 546.55.
we did have an adjustment of 98.68 oz whereby a dealer repaid a customer at the Delaware vault.

Thus the dealer inventory rests this weekend at 2.871 million oz or 89.3 tonnes of gold.

The CME reported on Friday that we had 6 notices filed for 600 oz.  The total number
of silver notices filed so far this month total 5491 for 549100 oz of gold. To obtain what is
left to be filed upon, I take the OI standing for June (622) and subtract out Friday's delivery
notices (6) which leaves us with 618 notices or 61,800 oz left to be served upon.

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

549,100 oz (served)  +  61,800 oz (to be served upon)  =  610,000 oz or 18.97 tonnes
we lost 200 oz of gold standing.


June 23.2012

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory4884.45 (Delaware)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory374,773.81  (,Delaware)
No of oz served (contracts)1  (5000)
No of oz to be served (notices) 11 (55,000)
Total monthly oz silver served (contracts)90 (450,000)
Total accumulative withdrawal of silver from the Dealers inventory this monthnil
Total accumulative withdrawal of silver from the Customer inventory this month4,661,544.7

 Friday activity was extremely mild.

We had no dealer activity.

The customer had the following deposit:

1.  374,773.81 oz into Delaware.

We had the following customer withdrawal:

1.  4884.45 oz out of Delaware.

we had one adjustment;

20,338.35 oz leave the customer and enter the dealer and the vault was HSBC.

The total registered silver (dealer silver) rests this weekend at 35.883 million oz
The total of all silver rests at 146.373 million oz.


The CME notified us today that we had a biggy: one contract filed for 5000 oz. The total number of
notices filed so far this month total 90 contracts or 450,000 oz.  To obtain what is left to be
served upon, I take the OI standing for June (12) and subtract out Friday's delivery notices (1)
which leaves us with 11 notices of 55,000 ounces left to be served upon our patient longs.

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

450,000 oz (served)  + 55,000 oz (to be served upon)  =  505,000 oz
the same as on Thursday,  we neither gained nor lost any silver oz standing.

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 .23/2012:

Total Gold in Trust



Value US$:64,488,492,722.31

June 21.2012:




Value US$:65,169,085,552.35

June 20.2012:




Value US$:65,952,699,158.56

no change in the GLD.


And now for silver:

June  23. 2012  for SLV

Ounces of Silver in Trust317,512,767.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,875.75

June  21 2012:

Ounces of Silver in Trust315,766,825.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,821.45

June 20.2012:

Ounces of Silver in Trust315,766,825.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,821.45

June 19.2012:

Ounces of Silver in Trust315,233,318.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,804.85

today:  we added another 1.746 million oz into the SLV

And now for our premiums to NAV for the funds I follow:
(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)

1. Central Fund of Canada: traded to a positive 4.0percent to NAV in usa funds and a positive 4.0%  to NAV for Cdn funds. ( June 23-.2012)

2. Sprott silver fund (PSLV): Premium to NAV  rose to  7.48% to NAV  June 23 2012 :
3. Sprott gold fund (PHYS): premium to NAV rose to    3.2% positive to NAV June23, 2012).

note the rise in premium on the central fund of Canada (equal silver and gold)
and the Sprott silver NAV at 7.48%.  It seems silver is in short supply.


Every Friday night we get the COT on the position levels of our major players.

First let us have a look at the gold COT:

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

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, June 19, 2012

Our large speculators:

Those large speculators that have been long in gold continued to like the landscape as they increased their long side by 3134 contracts.

Those large speculators that have been short in gold decided to cover 955 contracts from their short side.

Our famous commercials;

Those commercials that are long in gold and are close to the physical scene, added 3736 contracts to their long side.

Those commercials that are perennially short in gold  added another 8637 contracts to their long side, much to the sideline cheering from our regulators who seem quite happy orchestrating this soap opera.

Our small specs;

those small specs that have been long in gold pitched 390 contracts from their long side.
those small specs that have been short in gold covered 1202 contracts from their short side.

Conclusion:  extremely bearish and thus the raid that we witnessed the past few days.
The paper players never learn.

And now our silver COT:

Our large speculators;

Those large specs that are long in silver, liked the low prices in silver and continued to pile onto their long
holdings to the tune of 1051 contracts.

Those large specs that are short in silver added a tiny 558 contracts to their short side.

Our illustrious commercials

Those commercials that have been long in silver and are close to the physical scene added a tiny 746 contract to their long side.

Those commercials who have been perennially short in silver from about 100 BCE onward, surprisingly saw these guys cover a very tiny 219 contracts.

Our small specs:

The small guys that have been long in silver pitched a tiny 596 contracts from their long side.
The small specs that have been short in silver added another 862 contracts to their short side.

Strangely it was the large and small specs that supplied the additional silver paper.

Conclusion:  our bankers seem a little timid.  Maybe the reason for their midnight oil meetings. I would say
                   a little bullish because the bankers are staying away.

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

Tuesday, June 19, 2012

And now for some physical stories:

The first is from KingWorld News where we have two interviews:

A)  James Turk
B) Von Greyerz

Turk and separately, Von Greyerz, talk about the growing fear throughout Europe with bank runs as depositors fear for their safety.
Gold is your security.

(courtesy JamesTurk/Von Greyerz/KingworldNews)

Turk, von Greyerz tell King World News about rising fear in markets

10:17a HKT Friday, June 22, 2012
Dear Friend of GATA and Gold:
Growing fear and possible panic throughout the world financial system are the subjects of King World News' latest interviews with GoldMoney founder and GATA consultant James Turk --
-- and gold fund manager Egon von Greyerz:
As gold investors, Turk and von Greyerz themselves don't seem terribly frightened.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

It the following commentary, Turk asks for a proper accounting of gold reserves by the 17 nations
in order to restore confidence in the Euro

(courtesy James Turk of

James Turk: Wooing the Germans

11:45a HKT Saturday, June 23, 2012
Dear Friend of GATA and Gold:
GoldMoney founder James Turk, longtime consultant to GATA, argues that a precise and reliable public accounting of euro-zone gold reserves might do much to restore confidence in the regional currency. Of course, if such an accounting might reveal that euro-zone gold reserves are leased, double- or triple-counted and hypotheticated to infinity, vaulted outside the euro-zone itself, and recoverable only at the cost of terrible international political problems, Europe still will have a long coastline and pretty seashells always can be pressed into service. Turk's commentary is headlined "Wooing the Germans" and it's posted at the GoldMoney Research page here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

I think you will enjoy with video with the Secretary Treasurer of GATA, Chris Powell with Bernie Lo

(Chris Powell/GATA/CNBC Asia)

CNBC Asia posts video of interview with GATA secretary

1:20p HKT Friday, June 22, 2012
Dear Friend of GATA and Gold:
Your secretary/treasurer was interviewed for five minutes this morning on CNBC Asia in Hong Kong by news anchor Bernie Lo. Video of the interview has been posted at the CNBC Asia archive here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

I have great fear that we will see similar acts in various countries:

(UKTelegraph/ Philip Aldrick)

Glencore's Colquiri mine seized in Bolivia

Glencore has demanded compensation from Bolivia after the country's Left-wing government nationalised one of the commodities group's tin and zinc mines.

The company warned President Evo Morales that his actions risked driving out foreign investment, saying it "strongly protests the action and reserves its rights to seek fair compensation pursuant to all available domestic and international remedies".
Mr Morales has already seized the country's natural gas and electricity industries under a policy of resource nationalism that has swept across South America from Ecuador to Argentina.
However, his intervention at the Colquiri mine came only after the government had to deploy hundreds of soldiers to stop violent clashes in which 18 workers were injured. The violence began when nearby co-operative workers seized control of the site last month.
The government had been renegotiating terms with Glencore under which the government's share of total earnings would have risen from 77pc to 79pc, and Glencore would have committed to invest more than $160m in the industry over the next five years, including $56m in Colquiri.
After the clashes, which echoed battles six years ago that left 17 people dead, the unions called on the government to nationalise the mine to restore order.
In response, Alvaro Garcia Linera, the vice president, this week revoked Glencore's licence and signed an agreement between the workers, the state and the co-operatives. He said: "We're recouping a company that belonged to the state and now returns to state hands, and we're also democratically resolving the contradiction between two factions of the Bolivian population – co-operative workers and salaried employees.
"We're not going to hand our country to foreigners who destroyed Bolivia and left it stagnating for 20 years."
The mine, which produced 2,000 tonnes of tin concentrate last year, was acquired by Glencore in 2005. Analysts said it was "not particularly significant", but the troubles contributed to an 8pc fall in Glencore shares over the week as they came alongside concerns over whether its merger with Xstrata would go through.
A spokesman for Glencore, which has invested $250m in the Bolivian mining industry, said: "The action will pose a number of serious questions relating to the government's future policy towards foreign investment in the mining sector."

We have been reporting some sluggish sales of gold in India this past quarter.
However it did not stop the Indians from buying silver coin:

(courtesy Mineweb)

Silver coins hot up in India as gold sales weaken

Many Indian investors are making a beeline for silver, and are refraining from buying gold due to its high price, though gold is expected to give a 20% return in 2012.
Author: Shivom Seth
Posted: Friday , 22 Jun 2012

With gold prices too hot for many in India, silver has regained its sheen. Sales of silver coins are soaring in India, with most consumers buying silver coins which herald good luck and prosperity. Gold, on the other hand, has hit several highs in the last couple of days, deterring buyers from the precious metal.
Delayed monsoons in India have all but grounded sale of gold too. In rural India, sales of the yellow metal are closely linked to monsoon, since good rains that bring on a rich harvest will boost gold purchases by farmers.
So far, in June, rain deficit has already reached 41%. Rural India still accounts for 60% to 70% of gold sales in the country and if the monsoon is below normal this year, gold purchases will struggle to cross the 600 tonne mark this year, say bullion dealers.
The high price of gold, however, has many investors betting on silver. ``People's appetite for investing in the white metal has sky-rocketed lately, with most consumers coming in and picking up silver coins in double digits,' said Sonamull Shah, bullion trader.
An official at Nakoda Bullion added, ``Coin sales are picking up here. Compared to the last two months, sales are showing good recovery, since all those who cannot afford gold are now buying silver.'
Small-sized silver bars and coins are dominating most retail counters now, with consumers choosing the cheaper white metal in hopes of future price gains. Demand from industries and domestic coin makers is also keeping spot prices firm.
India is the largest importer as well as consumer of silver, with the average domestic consumption of the metal around 3,600 tonne per annum.
In Mumbai, the commercial capital of the country, spot silver prices had hit a low of $909.67 (Rs 52,100) on May 17 this year, but had hit a high of $989.61 (Rs 56,680) per kilo on June 5, 2012. On Friday, silver was quoting at $944.33 (Rs 54,055) per kilo.
Analysts are of the opinion that the return from silver this year is expected to be around 6% as compared to a negative return last year. Gold is set to do better. Gold is expected to give a 20% return in 2012, as against a 10% return of the previous year, say analysts.
According to a report of the Indian government's Working Group on Mineral Exploration and Development, ``Indian import of silver for 2012 is expected to decline to a range of 3,500 tonnes to 4,000 tonnes owing to a weak rupee and high import duty as compared to 4,800 tonnes imported last year'.
A weak rupee is creating chaos in the futures market. At the Multi Commodity Exchange, silver for delivery in July was down at $923.66 (Rs 52850) a kilo. Prices for September 5 delivery were also lower at $946.68 (Rs 54,150) per kilo, while those for December 5 delivery, were down at $974.17 (Rs 55,680).
On June 21, silver futures prices fell 1.04%, to $942.67 (Rs 54,003) per kilo as speculators booked profits amid a weak trend overseas. Analysts said the weak trend continued after Federal Reserve extended stimulus measures for six months to boost the flagging economy, but this put pressure on the silver futures prices here.
Despite this, investment demand is picking up in India. Analysts said silver coins had fetched a return of 25.8% since November 2010 in India, and 7% since January 3, 2011.
From end-2006 to date, silver has jumped by 165%, rallying from $349.68 (Rs 20,000) to $926.65 (Rs 53,000). Silver prices had hit a high of around $1,276.60 (Rs 73,000) per kilo in April 2011, but later witnessed a sharp correction.
Monsoons ensure a good harvest, that contributes to more than half of India's gold demand.
The June to September rains are crucial for India with 60% of its arable land dependent on them. Rains in the country impact demand for gold. Rural purchases rise in tandem with a rise in farming incomes, as a result of high crop output.
Though India's annual monsoon rains had covered almost half of the country at the start of June, there has been a palpable slowdown, with no signs of a pick-up this week with a forecast of bright, sunny days. The delayed monsoons have brought to the fore several concerns about the planting of crops.
About 72% of India's billion-plus people live in rural areas. The country's rural destiny still depends on good monsoon rains and robust agricultural production. In 2009, poor monsoons led to the worst drought in nearly four decades, and India had to import foodstuffs, raising global prices to record highs.
However, four years of bumper crops and heavy government investment in rural infrastructure have given birth to what some analysts call an `emerging economy' within India.
This year, with the entire country waiting for the monsoon season to take off, analysts are talking about another dark cloud that may not bear rain. High import duties and high domestic prices have severely pulled down demand for the yellow metal.
India's demand for gold has reportedly fallen far more drastically than that of the world. In the first quarter of 2012, domestic demand for the yellow metal witnessed a 30% crash year on year, even as global demand for gold dwindled 11%.
Imports too have crashed. India's gold and silver imports have fallen 52% in May.
April too witnessed a decline, with gold and silver down by 33% to $3.1 billion.
Imports of the yellow metal had already shrunk to 95 tonnes in the January to March 2012 period, against 283 tonnes in the same period last year. Gold prices zoomed to fresh highs on Tuesday (June 19) of $548.36 (Rs 30,750) per 10 gram, though it slipped by Rs 150 the next day, but was still high at 545.89 (Rs 30,600) for ten grams. Analysts are of the opinion that rural demand for the precious metal could be restrained this year.


And now let us see some of the major paper stories of yesterday and how they will influence the price of gold and silver.  The first big paper is from Eric Sprott of Sprott Asset Management:

Eric Sprott:

A must read as the details many of the issues I have highlighted to you over these past several weeks.
He says that we must not listen to these European politicians that everything will be fixed as they are lying.
He describes the dire situation in Spain with its dual problems of sovereign bonds attached to the hip with problems with the Spanish banks.   Italy will be next. And the contagion is spreading to the stronger core countries like Netherlands who just reported a drop in retail sales of 8.9%, with Spain's retail sales drop of 9.8%

((Sprott Asset Management)

From Eric Sprott of Sprott Asset Management
Ministry of [Un]Truth
Speaking at a Brussels conference back in April 2011, Eurogroup President Jean Claude Juncker notably stated during a panel discussion that "when it becomes serious, you have to lie." He was referring to situations where the act of "pre-indicating" decisions on eurozone policy could fuel speculation that could harm the markets and undermine their policies' effectiveness.1 Everyone understands that the authorities sometimes lie in order to promote calm in the markets, but it was unexpected to hear such a high-level official actually admit to doing so. They're not supposed to admit that they lie. It is also somewhat disconcerting given the fact that virtually every economic event we have lived through since that time can very easily be described as "serious". Bank runs in Spain and Greece are indeed "serious", as is the weak economic data now emanating from Europe, the US and China. Should we assume that the authorities have been lying more frequently than usual over the past year?
When former Fed Chairman Alan Greenspan denied and down-played the US housing bubble back in 2004 and 2005, the market didn't realize how wrong he was until the bubble burst in 2007-2008. The same applies to the current Fed Chairman, Ben Bernanke, when he famously told US Congress in March of 2007 that "At this juncture… the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."2 They weren't necessarily lying, per se, they just underestimated the seriousness of the problem. At this point in the crisis, however, we are hard pressed to believe anything uttered by a central planner or financial authority figure. How many times have we heard that the eurozone crisis has been solved? And how many times have we heard officials flat out lie while the roof is burning over their heads?
Back in March, following the successful €530 billion launch of LTRO II, European Central Bank President Mario Draghi assured Germany's Bild Newspaper that "The worst is over… the situation is stabilizing."3 The situation certainly did stabilize… for about a month. And then the bank runs started up again and sovereign bond yields spiked. Draghi has since treaded the awkward plank of promoting calm while slipping out enough bad news to ensure the eurocrats stay on their toes. As ING economist Carsten Brzeski aptly described at an ECB press conference in early June, "Listening to the ECB's macro-economic assessment was a bit like listening to whistles in the dark… It looks as if they are becoming increasingly worried, but do not want to show it."4 And the situation has now deteriorated to the point where Draghi can't possibly show it. Although Draghi does now warn of "serious downside risks" in the eurozone, he maintains that they are, in his words, "mostly to do with heightened uncertainty".5 Of course they are, Mario. Europe's issues are simply due to a vague feeling of unease felt among the EU populace. They have nothing to do with fact that the EU banking system is on the verge of collapsing in on itself.
When Prime Minister Mariano Rajoy assured the Spanish press that "There will be no rescue of the Spanish banking sector" on May 28th, the Spanish government announced a $125 billion bailout for its banks a mere two weeks later.6 This apparent deceit was not lost on the Spanish left, who were quick to dub him "Lying Rajoy". But Mr. Rajoy didn't seem phased in the least. As the Guardian writes, "Even when the outpouring of outrage forced Rajoy to call a hasty press conference the next day, he still refused to use the word "bailout" - or any other word for that matter - and referred mysteriously to "what happened on Saturday". He went as far as to say that Spain's emergency had been "resolved" ("thanks to my pressure", he said). He then took a plane to Poland to watch the national football team play ("the players deserve my presence")."7 Sound credible to you?
Then there are the bankers. Back in April, JP Morgan CEO Jamie Dimon blithely dismissed media reports as a "tempest in a teapot" that referred to massively outsized derivative positions held by the bank's traders in the Chief Investment Office in London. That "tempest" was soon revealed to have resulted in a $2 billion trading loss for the bank roughly four weeks later. In testimony before the Senate Banking Committee this past week, Dimon explained that "This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge."8 He went on to add that regulators "can't stop something like this from happening. It was purely a management mistake."9That's just wonderful. Can we expect more 'mistakes' of this nature in the coming months given JP Morgan's estimated $70 trillion in derivatives exposure? And will the US taxpayer willingly bail out JP Morgan when it does? Everyone knows the derivatives position wasn't a hedge - but what else is Dimon going to say? That JP Morgan is making reckless derivatives bets overseas with other people's money that's backstopped by the US government? Credibility is leaving the system.
There is certainly a sense that the authorities can no longer be candid about this ongoing crisis, even if they want to be. On June 11th Austria's finance minister, Maria Fekter, opined in a television interview that, "Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support."10 Her honesty sent Italian bond yields soaring and earned her some harsh criticism from eurozone officials, including Italian Prime Minister Mario Monti. As one eurozone official stated, "The problem is that this is market sensitive… It's one thing if journalists write this but quite another if a eurozone minister says it. Verbal discipline is very important but she doesn't seem to get that."11 See no evil, hear no evil… and speak no evil. That's the way forward for the eurozone elites.
We have no doubt that everyone is tired of bad news, but we are compelled to review the facts: Europe is currently experiencing severe bank runs, budgets in virtually every western country on the planet are out of control, the banking system is running excessive leverage and risk, the costs of servicing the ever-increasing amounts of government debt are rising rapidly, and the economies of Europe, Asia and the United States are slowing down or are in full contraction. There's no sugar coating it and we have to stop listening to politicians and central planners who continue to downplay, obfuscate and flat out lie about the current economic reality.Stop listening to them.
NOTHING the central bankers have done up to this point has WORKED. All efforts have simply been aimed at keeping the financial system from imploding. QE I and II haven't worked. LTRO I and II haven't worked, and the most recent central bank initiatives are not even producing short-term benefits at this stage of the crisis. Just take Spain, for example. Following Rajoy's announcement of the $125 billion bailout loan for the Spanish banks on June 10th, Spanish bond yields were trading back over 7% one week later - the same yield level at which other eurozone countries have been forced to ask for further international aid.12 The market still doesn't even know what entity is going to pay the $125 billion, let alone when the funds will actually be released or whether the Spanish government will have to count it as part of its national debt. Spain is the fourth largest economy in the eurozone and larger than the previously bailedout Greece, Ireland and Portugal combined. At this point, it's not even clear if the ECB will be allowed to bail out a country of Spain's size, let alone Italy, which is now asking the ECB to use bailout funds to buy itssovereign bonds.13
The situation in Europe is becoming an exercise in futility. The positive effects of LTRO I and II, which combined pumped in over €1 trillion into European banks back in December 2011 and February 2012, have now been completely erased by the recent bank runs in Spain. Of the €523 billion released in LTRO II, roughly €200 billion was taken by Spanish banks.14 Of that amount, roughly €61 billion was estimated to have been reinvested back into Spanish sovereign bonds, which temporarily helped Spanish bond yields drop back to a sustainable level below 5.5%. Fast forward to today, and despite the LTRO infusions, the Spanish banks are all broke again after their underlying depositors withdrew billions over the past six weeks. The only liquid assets Spanish banks still own that they can sell to raise euros just happen to be government bonds… hence the rise in Spanish yields. So in essence, the entire benefit of the LTRO, which was a clever way of replenishing Spanish bank capital AND helping calm sovereign bond yields, has been completely reversed in roughly 14 weeks. It's as we've said before - it's not a sovereign problem, it's a banking problem. This is why Spanish Prime Minister Rajoy is now pleading for help "to break the link between risk in the banking sector and sovereign risk."15Without a healthy sovereign bond market, peripheral eurozone countries simply have no way of supporting their bloated and insolvent banks.
The smart money is finally waking up to the dimension of the problem here and realizing that it's really a banking issue. Deposit flight has revealed the vulnerability of the European banking system: when depositors make withdrawals, the only assets the banks can sell to raise liquidity are sovereign bonds, which creates the vicious downward spiral that up to this point has always resulted in some form of central bank bailout. Many eurozone authorities still have trouble understanding this. As Spanish Economy Minister, Luis de Guindos, recently stated to reporters at the G20 Summit, "We think… that the way markets are penalizing Spain today does not reflect the efforts we have made or the growth potential of the economy… Spain is a solvent country and a country which has a capacity to grow."16 Every country has the capacity to grow. Not every country has a domestic banking system that has already borrowed €316 billion from the ECB so far this year (pre the most recently announced bailout), and needs to rollover roughly €600 billion in bank debt in 2012.17That may be why the markets are reacting the way they are.
If you want to know what's really going on, listen to the executives of companies that actually produce and sell things. On May 24, Tiffany & Co cut its fiscal-year sales and profit forecasts blaming "slowing growth in key markets like China and weakness in the United States as shoppers think twice about spending on high-end jewelry."18 On June 8th, McDonald's surprised the market with lower than expected same-store sales growth in May, following a lacklustre April sales report that the company stated was "largely due to underperformance in the United States, where consumers continue to seek out very low-priced food."1920 On June 13th, Nucor Corp., the largest U.S. steelmaker by market value warned that its second-quarter profit will miss its previous guidance after a "surge" in imports undermined prices and "political and economic uncertainty affect buyers' confidence".21 On June 20th, Proctor and Gamble lowered its fourth quarter guidance and profit forecast for 2012. Factors that drove the company's challenges included "slow-to-no GDP growth in developed markets", high unemployment levels, significant commodity cost increases and "highly volatile foreign exchange rates".22 Other companies that have recently lowered guidance include Danone, Nestle, Unilever, Cisco Systems, Dell, Lowe's, and Fedex. It's ugly out there, and many companies are politely warning the market about the type of environment they foresee ahead in both the US and abroad.
To give you a hint of how bad it is in Europe today, the most recent retail sales out of Netherlands showed a decline of 8.7% year-over-year in April.23 In Spain, retail sales fell 9.8% year-on-year in April, which was 6% greater than the revised drop of 3.8% in March.24 Declines of this magnitude are not normal occurrences and signal a significant shift in spending within those countries. We fear this is a sign of things to come within the broader Eurozone, which will only serve to complicate an already dire situation that much more.
The G6 central banks are out of conventional tools to solve this financial crisis. With interest rates at zero, and the thought of further stimulus rendered politically unpalatable for the time being, we cannot see any positive solutions to this problem other than debt repudiation. We continue to note the contrast between the reporting companies who by law cannot lie about their fiscal realities, versus the central planners who admit that they MUST lie to preserve calm and control. We'll leave it to you to decide whose version of the truth you want to believe.


As many of you know, we have massive downgrades by the banks on Thursday night.

In the following R.C. Whalen commentary, he simply states that they are too late.
The banks should have been downgraded two years ago. The downgrades know simply do not
serve any purpose:

(courtesy Whalen/zero hedge)

Moody's Bank Downgrade: Too Little, Too Late

rcwhalen's picture

Grand Lake Stream, ME -- First let me send greetings to the readers of Zero Hedge from Leens Lodge in Grand Lake Stream, ME.  David Kotok from Cumberland Advisors is leading a small group on four days of fishing and wine appreciation.  As Kotok said in an email tonight:
"Leens lodge. Sunset. Longest day of year.  To hell with downgrade of banks.  Up here, it is a different world.  Peace.  David."
Photo from the first night dinner is in the link below.   Tomorrow when you read this, I will be out on the Big Lake with Jim Lucier from Capital Alpha Partners.  And no, the cell phone does not work.  This is the best small mouth bass fishing in North America, so if that idea gets your attention, contact Charles Driza at Leens (
Watching the latest move by Moody's to downgrade various global banks, one can only be impressed by the lagging nature of the major ratings agencies financial prognostications.  If you have read any or my work or looked at the ratings produced by my colleagues at Institutional Risk Analytics, you have to wonder why Moody's did not downgrade these banks years ago. 
The whole point of ratings is to give investors and their advisors advanced warning to change asset allocations.  The Moody's ratings downgrade does not serve this need.  Indeed, while many of the banks downgraded -- Bank of America, Morgan Stanley, Citigroup and Goldman Sachs -- have deserved a ratings downgrade for several years, the politically conflicted souls at Moody's are just now getting around to telling us what should have been obvious long ago.
So here is the question: Why should investors care a lick about the opinions of Moody's?  The firm has fundamentally failed in its core mission to give investors at least a couple of quarters warning to change asset allocations.  Instead we have an after-the-fact confirmation of the incompetence and lack of courage of all of the major ratings monopolies.  
So what does the ratings downgrade mean?  First, it means that counterparties of the major banks are going to be forced to begin pricing ratings risk into their credit limits for these institutions.  For MS and GS in particular, the ratings downgrade is a major hit because these broker-dealers are not banks, lacking the funding base to survive a major period of liquidity stress.
The second and related issues is that Buy Side counterparties will now start to curtail business with MS and GS, again because they are not banks.  Each firm has a tiny fraction of its funding needs supported by deposits.  Indeed, both GS and MS are ultimately the clients of JPM and the other large banks, which are net providers of funds to the institutional markets.  Buy Side clients cannot tolerate risk exposures with counterparties with sub-prime credit ratings.  Look for some new names to enter the prime broker market at the urgent demand of major Buy Side clients.
Look at GS at A3 and MS at Baa1.  Do these ratings make you feel more secure about doing business with these firms?  The big winners here are JPM, C and to a lesser degree BAC's Merrill Lynch unit.   Wells Fargo is a winner to the degree that they were not downgraded.  But given WFC's crappy disclosure and over-exposure to US housing, maybe Moody's should rethink the refusal to review the ratings for this TBTF bank. 
But, to the third point, don't believe that these downgrades are to  "reflect declining profitability in an industry being rocked by soft economic growth, tougher regulations and nervous investors," as the WSJ reports.  This is called playing "catch up" ball.
Where was Moody's two years ago when the revenue and profits of the major banks started to decline?  Any analyst spending even a few moments looking at the financials of the major banks would have known about these issues years ago.  The truth is that Moody's and the other ratings monopolies blessed by the SEC are incapable of performing the most basic service to investors, namely providing at least a quarter or two warning about a change in the operating performance of an obligor -- especially if the obligor is a bank. 
We all know that there is no visibility on revenue for MS, GS or any of the major US banks. So ask not why Moody's downgraded the big banks yesterday, but instead ask why Moody's did not tell us this important news in 2010.  The reality is that politics, not financial analysis, governs the behavior of Moody's and the other major ratings firms.
Only when the lack of visibility on forward revenue and earnings was obvious to all did Moody's act -- and only because events in the EU provided cover for this after-the-fact downgrade by Moody's.  
Thanks a lot for nothing Moody's.


This is fascinating:  Mario Monti states that we have one week to save the eurozone.

At the end of June we have another summit where major discussions will be held as the poorer
nations try to persuade Germany to do the following:

a)  eurobonds
b) guarantee European bank deposits.
c) fund the bailouts of the PIIGS nations.

By July 3.2012, Greece will have run out of money as their 2 billion euros of remaining funding
will evaporate.  Greece is to receive the 1 billion euro hold-back.  However 90% of those funds is to go to the new ESM funding mechanism.  Greece will beg from Germany more funding but that will be denied.

So expect troubles to reach a critical pinnacle around the first week of July.

This is why Mario Monti states that they "have a week to save the Eurozone"
Wolf Richter in his paper, talks about the Monti statement.  It is your final reading for the day.

(courtesy John Hooper/the Guardian)

Mario Monti: we have a week to save the eurozone

Italian prime minister warns that there is no room for failure in talks between single currency's big four countries.

by John Hooper
the Guardian:Mario Monti

Italian prime minister Mario Monti has spoken of the potentially disastrous consequences of the collapse of the eurozone. Photograph: Edgard Garrido/Reuters

Italy's prime minister, Mario Monti, has warned of the apocalyptic consequences of failure at next week's summit of EU leaders, outlining a potential death spiral that could threaten the political and economic future of Europe.
The Italian leader is to hold talks with Chancellor Angela Merkel of Germany, the French president, Fran├žois Hollande, and Spain's prime minister, Mariano Rajoy, in the hope that the single currency's big four countries can pave the way for a breakthrough at next week's meeting.
Speaking to the Guardian and a group of leading European newspapers, Monti said that, without a successful outcome at the summit, "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries". The attacks would be focused not only on those who had failed to respect EU guidelines, but also on those like Italy, which he said had abided by the rules "but which carry with them from the past a high debt".
Monti warned: "A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."
Outlining the result of a failure at the talks, Monti said that, faced with creeping economic paralysis, "the frustration of the public towards Europe would grow", creating a vicious circle. "To emerge in good shape from this crisis of the eurozone and the European economy, ever more integration is needed," said Monti. Yet, if the summit failed to resolve the problems quickly, "public opinion, but also that of the governments and parliament… will turn against that greater integration".
Monti said he could see the beginnings of the process "even in the Italian parliament, which has traditionally been pro-European and no longer is".
He made his remarks hours after his predecessor, Silvio Berlusconi, acknowledged that his party had bled support because of its backing for the Monti government's unpopular budgetary measures and spoke openly for the first time of the electoral advantage it could derive from torpedoing Monti's non-party cabinet of technocrats.
Monti signalled that the key eurozone leaders were working on a plan designed to halt the spread of debt contagion while satisfying Germany's refusal to sanction financial irresponsibility. The plan, he said, was one of the "absolutely necessary" outcomes of next week's summit.
The first outcome, he said, would be a clear sign of the eurozone's willingness to integrate further "in such a way that Europeans know where they're going… [and] the markets are convinced that, having given birth to the euro, the will [of the member states] to make it indissoluble and irrevocable is there and will be strengthened by other steps towards integration".
He warned: "There may not be – indeed, there will not be – a fully-fledged, detailed blueprint, but there will some strong elements and a short road – I hope short, a few months – to get from there to the overall project."
Other minimum requirements were "a fuller banking union, with advances in terms of integrated, and if possible unified, supervision"; "a European deposit guarantee" system; and the plan that will be on the table on Friday for "new market-friendly policy mechanisms" to help out countries under attack – provided they had complied with EU demands for fiscal discipline.
On Thursday figures indicating that the eurozone is slipping into recession heightened fears that Italy will follow Spain in asking Brussels for rescue funds. Only a strong performance from Germany stopped the currency union from contracting in the first quarter. But separate data showed the German private sector suffered a severe downturn in May, made worse by a slump in manufacturing.
The German services sector continued to expand, but this solitary piece of good news is unlikely to keep the eurozone from recession in the second quarter, especially after both manufacturing and services contracted in France.
Elsewhere, the US suffered a slowdown in growth across the manufacturing sector and China registered its eighth consecutive contraction in production.
Without recourse to strongly growing export markets, Italy can expect to see its growth hit for another year, analysts said.
Monti said the proposed new mechanism would kick in "when there is a recognition by the European authorities of respect for the rules on public finance and structural reforms". Making intervention conditional on good behaviour could offer a way of providing relief for countries like Italy and Spain, while meeting German demands for fiscal discipline.
Monti avoided giving details but said he was "very favourable" to the purchase of the bonds of countries under attack. The present system, of assistance to the banking sector by way of the state, led to an increase in public debt that raised the yields – and cut the value – of government bonds, which in turn weakened the finances of the banks, creating "a disagreeable spiral… That is why measures to de-couple this are being studied", he said.


Italy's 10 year bond yield:

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.799000.05100 0.89%
As of 06/22/2012.


Nigel Farage does a great interview with Eric King with respect to the turmoil in the Euro zone.
He talks about the upcoming repression with potential capital controls especially if they implement some
sort of debt union.  This will be the major topic of discussion next week as the big boys meet. He correctly states that Spain will need 400 to 500 billion euros which will make the ECB  "penniless" and then the vigilantes go after Italy.  Where will the funds comes from?  The new ESM funding mechanism to bail out these PIIGS nations has not been actually formed yet, it still must be ratified by another 13 countries.

(a very important interview from MEP Nigel Farage and KingworldNews)

Farage expects repression in Europe; Saut sees EU reflation prompting similar Fed move

11:30a HKT Saturday, June 23, 2012
Dear Friend of GATA and Gold:
At King World News, European Parliament member and United Kingdom Independence Party leader Nigel Farage predicts that European leaders will resort to political repression to try to keep the euro project together as the mathematics of bank bailouts keeps failing. An excerpt from the interview is posted at the King World News blog here:
Meanwhile, Raymond James chief investment strategist Jeffrey Saut tells King World News that he expects that the European Union will attempt a reflation of 2 trillion euros, forcing the U.S. Federal Reserve to undertake a similarly massive reflation to prevent a sharp rise in the dollar. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


I want to highlight the second paragraph of Mark Grant's new paper:
Waiting for Godot:

with the Moody downgrade, Grant points out that European banks are highly levered.
Credit Agricole is levered a monstrous 66:1 and Deutsche Bank 64:1.  A drop in asset prices will rip their hearts out. As Grant correctly points out we are reaching our "Iceland moment" where the banks
overcome their sovereign hosts.

you will enjoy this piece

(courtesy Mark Grant out of the box and onto Wall Street

Waiting For Godot

Tyler Durden's picture

From Mark Grant author of Out of the Box
We shall never know the precise moment that it happened but somewhere around World War I would be about right. Everything had been crawling in this direction for a while and then the silent sparks flew and the connection was made and will never be severed again. The financial world had become integrated so that what happens one place in the world affects the rest of the world and the improvements in technology that have happened since this time has only moved the financial institutions in the world ever closer. News is almost immediate and the communication of it is instantaneous and to hold any other view borders on the edge of holding conversations with the Easter Bunny. Consequently when I hear some of the puffy eyed on TV claiming that America has decoupled from the goings on in Europe I become amused and wonder where this poor fellow has been hiding out on the planet. I always think of East Borneo but one is never sure. There is NO decoupling and there has not been any in ninety years and that is the truth of it. There are variations and it is all a matter of focus really and the American equity market is notoriously myopic and if the immediate news of some event in Europe is ignored it will only be for a moment as the effects of each and every event careen around the planet in a variety of ways reminiscent of some out of control eight ball on the pool table.
China is slowing down, part of it is just cyclical but it is slowing down and I expect anemic growth in the third and fourth quarters of this year. Europe is a mess, both politically and economically, and the entire Continent is in recession with the exception of Germany which is about to join its brethren in the outhouse.  To think that this will not affect America is a mad dash to see Cinderella and her Godmother so please allow me to drag you back from this excursion. Now look, I do not run around calling for Armageddon and “end of the world” scenarios. Yes, it is true, some brandish this sword but I do not. I honestly think we are in for some tough times over the next two years and that the world will be in a very unpleasant recession mostly generated out of Europe as they have played the Great Game quite badly but, as I told one Italian newspaper yesterday, we are not going to enter Dante’s Inferno either though we may hang around the gates for a while.
The Days of Wine and Roses
With the dismissal of Mr. Sarkozy and his regime by the French people the politics in Europe took a decided turn into a more combative sport. The poor and wounded nations beg, Ms. Lagarde, ever a femme de France, pleads for Eurobonds, more ECB bond buying and further bailouts for the troubled banks all across the Continent which the countries of the European Union could not afford even if they wanted to and which Germany, in any event, will block so that their coming recession will not be even worse than what is likely to be forthcoming. When America ran into the wall in 2008/2009 the country, with assets of 125% of all of our major banks, strained and labored behind the plow to bail them out but it got done and, regardless of the downgrades by Moodys yesterday, they are now in much better shape than they were during the financial crisis and light years ahead of the large European banks where we find Credit Agricole levered sixty-six to one and Deutsche Bank levered sixty-four to one. I fear we are about to see a repeat of what happened in Iceland and in Ireland where the banks overcame their sovereign nations. The problem is that the European banks are three hundred percent (300%) larger than the assets of the nations in the EU-17 and if one, just one, of the big international European banks roll under the skids of the bankruptcy bus then “woe is me” won’t cover it. The days of wine and roses have ended now in Europe and I fear the porridge will be cold and deficient in nutrients. Now some of you may not agree with my synopsis but I quote the famed economist Miss Holly Golightly:
“Tough beans buddy, 'cause that's the way it's gonna be.”

                              -Breakfast at Tiffany’s
The Continuing Antics
From one perspective, and one that I choose to take with some frequency, Europe is rather amusing. Many of the impoverished or those who enjoy wearing their tailcoats in Brussels rush about like those filling the stateroom in some Marx Brothers movie. Not enough room of course and pleas and commands to move over but all to no avail. The only person that matters is the rather austere lady in the corner that instinctively frowns at all who comes near and so controls the space that is left for everyone else. Those without present their cases, unfold schematics of grand plans, promise more unbelievable cures than any Medicine Man could ever dream up and describe magical castles floating in the air all in an attempt to get the one lady that is still clutching her purse to open it and allow everyone to dine at the Four Seasons. She has done it before, she might do it again but she is mindful of what is in her purse and knows that the bankroll has slimmed by its former use. Besides she has children to feed at home and they will come first; make no mistake about this because any other such notion that you may have will lead you down Alice’s rabbit hole.
“You're willing to pay him a thousand dollars a night just for singing? Why, you can get a phonograph record of Minnie the Moocher for 75 cents. And for a buck and a quarter, you can get Minnie.”

                                      -The Marx Brothers, A Night at the Opera
Waiting For Godot
One truism about life is that everything is fine right up to the moment when it is not. We do not need a “Lehman Moment” to get to the “when it is not” moment. My good friend, the noted economist Paul McCulley, is the grand touter of the “Minsky Moment” and I must ask him soon to give us all a working definition of a “Lehman Moment” which none of us will understand but it is worth a shot. Now think back about the “moments” that we have had; Greece blowing up at the Parthenon, Ireland finding her bags of gold had turned to lead, Portugal running out of empanadas and now Spain fighting windmills of her own design as the Prime Minister decrees the country’s “walk of shame” a “great victory for Europe.” With this kind of reasoning it is no wonder, no wonder at all, why Europe is in such trouble. The inmates have taken over the asylum and Nurse Ratchet has fled. So you do not have to wait for Godot so he can give you a working definition of “folly;” Europe is providing the answer day by day.
In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.
You can't teach an old dog new tricks, but you can't teach a stupid dog old tricks either.


It looks like the bailout of the Spanish banks is beginning and subordination will reign supreme and that losses must occur to junior bank bondholders.

(courtesy zero hedge)

Spain Utters The B-Word, Ruins The Party.... Update - False Alarm: The Taxpayer Rape Will Continue

Tyler Durden's picture

Update: we have entered full retard rumor territory again:
In other words, no B-word; to summarize - Spain float rumors, does not like market response, denies rumor. Taxpayer rape must continue.
Spain just uttered the "B" word and ruined the party:
What is the B-word you ask? Why Burdensharing of course. And we can see why it would be confusing - it never happened once in the past 3 years of central bank coordinated bailouts.
Naturally this means equities wiped out. It also means the free lunch for the banking kleptocrat cartel is now over.
And some other headlines:


Merkel continues to remind Europe of the golden rule: 

" he who has the gold rules.."  ***

Merkel reminds everyone that there will be no direct bailout funding of the banks and that the German taxpayers want a guarantee how their money is spent rescuing the cash starved European periphery nations.

*** I am not so sure that Germany has its gold.  They swapped their Bundesbank gold for gold at West Point.  They are trying to repatriate this gold but somehow they cannot retrieve it. 

Merkel Reminds Europe Of The Golden Rule

Tyler Durden's picture

After a series of idiotic pleadings by Europe's broke insolvent countries that everything is now all fixed, Merkel decided to put some order into the house and reminder everyone who actually still has money:
Which is funny: because the Golden Rule is that he who has the gold, makes the rules. And the rule is, and has always been, that the "guarantee" for further bailouts will be even more gold. Physical not metaphorical.


Now the ECB is taking in real junk as it relaxes collateral rules.  Pretty soon, they will accept any assets as collateral such as various bank's kitchen sinks, toilets etc.  What a farce;

(courtesy zero hedge)

ECB Officially Announces Easing Of Collateral

 Rules, Confirms Europe Has Run Out Of Assets

Tyler Durden's picture

The headline which paradoxically ramped stocks yesterday, is back:
Why paradoxically? Because once again Europe confirms it has run out of actual money-good assets that can be pledged. Going forward, every repo transaction will merely be a dilutive one: those deposits you have with bank XYZ? Why, they are backed by the kitchen sink. Literally.
As for the rating of the actual collateral? Why that will come from the ECB itself of course.
Goodbye European Central Bank. Hello Salvation Army Bank.
or in other words: 
Meet Europe's new currency:

Full text from the bank which will now outbid anyone for anything on Ebay
Further Measures To Lift Collateral Availability
The European Central Bank on Friday announced further measures to increase collateral availability for counterparties. Following is the text of the ECB's press release: 
On 20 June 2012 the Governing Council of the European Central Bank (ECB) decided on additional measures to improve the access of the banking sector to Eurosystem operations in order to further support the provision of credit to households and non-financial corporations.
The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs). It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable. In addition to the ABSs that are already eligible for use as collateral in Eurosystem operations, the Eurosystem will consider the following ABSs as eligible:
1. Auto loan, leasing and consumer finance ABSs and ABSs backed by commercial mortgages (CMBSs) which have a second-best rating of at least "single A"1 in the Eurosystem's harmonised credit scale, at issuance and at all times subsequently. These ABSs will be subject to a valuation haircut of 16%.
2. Residential mortgage-backed securities (RMBSs), securities backed by loans to small- and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least "triple B"2 in the Eurosystem's harmonised credit scale, at issuance and at all times subsequently. RMBSs, securities backed by loans to SMEs, and auto loan, leasing and consumer finance ABSs would be subject to a valuation haircut of 26%, while CMBSs would be subject to a valuation haircut of 32%.
The risk control framework with higher haircuts applicable to the newly eligible ABS aims at ensuring risk equalisation across asset classes and maintaining the risk profile of the Eurosystem.
The newly eligible ABSs must also satisfy additional requirements which will be specified in the legal act to be adopted Thursday, 28 June
2012. The measures will take effect as soon as the relevant legal act enters into force.      


In the following video Biderman and Bianco discuss the slowing USA economy. They talk about the upcoming fiscal cliff whereby the middle class tax cuts are lifted together with spending cuts. Bianco believes that there will be some agreement to maintain the tax cuts and limit the spending cuts. The Debt ceiling will be reached by the end of September and then Geithner has to make the decision to borrow from the federal trust funds or try to make an agreement prior to the election.
The last section on sentiment is important as they discuss the "Bernanke put" on the markets.

(Jim Bianco and Charles Biderman)

Biderman And Bianco Berate Bernanke, Buy Bullion, And Batter Bullishness

Tyler Durden's picture

Critical of the market's reaction to the 'no new QE' news, Biderman and Bianco wholeheartedly believe yesterday's plunge was entirely due to the fact that the 'Bernanke Put' - that we have become so conditioned to expect - did not appear at the levels many expected. Despite a federal deficit of $100 billion per month, it seems the Fed is now in agreement with Biancerman that US growth is limping along at best but notably Jim Bianco believes the fiscal cliff will end up more of a bump in the road as he sees politicians being forced to agree to extend or roll-back (maybe at the very last minute) offsetting the abyss. However, with the debt ceiling looking like it will be hit before the election, it will be interesting to see what political parlance is used if-and-or-when Geithner borrows from the trust funds to keep the government going this time (or not). Positive on Gold longer-term, Bianco sees it like other markets: "Gold is a junky that has not got its money fix" and the only reason to believe Gold is a sell is if you think CBs are done - they are not! Finally the two discuss the fact that 'nobody wants to be bearish anymore' when looking at sentiment surveys - setting up a 'trap-door' for the market.

The discussion of sentiment and the fascinating psychological shift to an aversion to bearishness starts at 4:20:


It looks like all the Spanish bank equity holders will get wiped out as Spain is considering a massive preferred injection into the banks.  The huge number of shares will make their holders minuscule in comparison.  They anticipate a huge 150 billion euros of loss absorbing injection into the banks.

(courtesy zero hedge)

Spain And The Citi: Here Is What Happens Next In The Country With All The Pain

Tyler Durden's picture

While this morning saw a rumor of junior bank bondholder haircuts (and burden-sharing) rapidly denied by Spain's de Guindos, it appears the country's smarter individuals are realizing that perhaps a 'bail-in' (a la Citigroup in 2009) is the better way to go than an unending 'bailout' when it comes to the problem banking system. As the WSJ noted last week "consider the grim fact that even €100 billion may not be enough to put Spain's banks back on their feet, as they could easily face losses of perhaps three times that amount" confirmed in yesterday's Oliver Wyman reality check.
The bigger issue is not the insufficiency of the loan but the fact that such a relatively small loan was impossible for the sovereign to raise itself as no private investors believe their solvency - implying Spain has reached its debt saturation point. Neither government nor taxpayers can afford to take on more debt (which is what the bailout is).
The solution, a precedent set by the good ol' USofA with the Citi preferreds, is to cram-up bond-holders. A compulsory debt-for-equity swap for the subordinated and senior unsecured liabilities, "whereby investors bear the vast majority of the cost of their own mistakes, without liquidating the banks and without pushing the Spanish economy into bankruptcy" may initially cause some turmoil in the interbank lending markets (which would need to be supported by the ECB in the interim as it is already) may be extremely painful for shareholders (who will see massive dilution) and bondholders (arguably rightfully so) but would offer hope for improving market belief in solvency.
A Senior-Subordinated spread decompression trade in credit would seem to make sense - given the considerable hit taken to the subordinated class (whether it triggered CDS or not) and sets up to be the macro trade for the coming months.

especially given the following 'math' from the WSJ's story:
Converting into equity 100% of the €88 billion of subordinated liabilities, and 40% of the €160 billion of senior unsecured debt, would generate more than €150 billion of loss-absorbing equity for the Spanish banking system. Together with the estimated €25 billion in expected operating profits for 2012, before loss provisions, that would yield about €175 billion in new bank equity, without increasing the debt burden of the Spanish taxpayer or requiring a loan from Brussels.

As The Economist wrote back in 2010:
Many investors would no doubt complain about the rough justice of a regulator-imposed reorganisation. To preserve value, officials would have to move very, very quickly, leaving little time to fine-tune various claims or observe normal procedures. The new structure would be based on bankruptcy reorganisation principles, allocating value in accordance with investors’ seniority and ensuring that each class of investors would be better off than in liquidation. The process would not be pretty but overall, investors should be relieved by the result.

Why can’t the bankruptcy code do this today? To an insolvency professional, this restructuring looks somewhat like a “prepackaged” bankruptcy, in which creditors agree to a new, less leveraged capital structure negotiated over a period of months. But a lengthy, voluntary process is impractical in the panic surrounding the failure of a very large, complex financial institution.

As Juan Ramon Rallo notes in the WSJ article last week:
Instead of a bailout, the Spanish state should force a "bail-in," in which much of the banks' debt is converted to equity. This would reduce the banks' leverage and increase the capital available to absorb the coming losses... and after some time, short-term credit would flow again inside a country with much more robust and solvent financial institutions.

Perhaps the 'bail-in' is best summarised by a comment from the WSJ story:
Essentially, this is a proposal for financial restructuring (aka bankruptcy) without bothering to go to the courts. Its cleaner, less disruptive, and less expensive than where we are headed otherwise. The money has already been lost. Someone has to book it.

Seriously, when should investors in the debt of financial entities take a loss if not now? Never?

The closing 10 year Spanish bond yield:


Add to Portfolio


6.380000.22900 3.47%
As of 06/22/2012.

As many of you know, Syria shot down a Turkish Jet Thursday afternoon. It looks like this situation
may escalate into some serious trouble:

(courtesy zero hedge)

Escalation: Syria Says Turkish Jet Shot Down Was Over Syrian Territorial Waters

Tyler Durden's picture

The "Syrianna" story from this afternoon, which many were quick to label as merely a lot of diplomatic hot air and rhetoric, just turned uglier, after Syria not only did not officially apologize as Turkey PM Erdogan implied had happened previously for the shot down Turkish F-4 fighter jet, but instead turned the tables on Turkey, and gave itself an out for what is now a definitive military action. From Reuters:
The Syrian military said it shot down a Turkish military aircraft "over Syrian territorial waters" on Friday.

"Our air defences confronted a target that penetrated our air space over our territorial waters pre-afternoon on Friday and shot it down. It turned out to be a Turkish military plane," a statement by the military circulated on state media said.
The only question remains whether Syria's act was offensive or defensive. Naturally, its version is one of self-defense. Turkey obviously will claim it was in its right to be wherever the plane may be, and will say this was an act of provocation. Then NATO, read Hillary Clinton, will promptly step in, and make this a case in which Turkey was in its right and that Syria committed an act of aggression. From there, things will just escalate, and can potentially deteriorate to a far more troubling scale, because as we reminded earlier, Syria has recently become a major symbol for NATO vs the Russia-China axis:
Here is the rub: Turkey is a NATO member, and by definition the alliance will have to come to Turkey's aid if requested. Syria, however is not just any country as has been made quite clear over the past several months of UN impotence: it is a critical staging ground for both Russia (which has a very critical regional naval base in the city of Tartus) and China, and according to the Jerusalem Post, the three countries are in preparation to conduct the "largest ever" war game. As such Syria, already gripped by fierce local fighting, where just like in Egypt and Libya the presence of US-based flipflop on the ground can be smelt from across the Atlantic, is merely a symbol. The real implication is how far can little escalations push until finally the showdown begins, with NATO on one side and Russia and China on the other?
Ultimately, the key catalyst here may be something as simple as whether the pilot of the Turkish plane are alive or dead. BBC explains:
Given the breakdown in relations between the two countries over the Syrian conflict, this incident has the potential to provoke a serious crisis. When gunfire from Syrian forces crossed the Turkish border earlier this year, Ankara threatened a military response.

Much will depend on whether or not the Turkish pilots have survived. If not, public anger might push the government into some kind of punitive action against Syria.

Syria's response will also influence Turkey's reaction. A clear apology, and a statement that the shooting was unintentional, might be enough to assuage Turkish anger.

But then again, we do not know yet whether the aircraft were clearly in Turkish airspace or not. Initial Turkish reports that they came down eight miles from Syrian territorial waters suggests that they were, but Syria may claim otherwise.
At this point it is clear no apology will be forthcoming as Syria's official story is that Turkey had effectively committed an act of aggression against it. So it is up to the viability of the pilots. If dead, anyone who may have been shorting Brent into the weekend may have a nasty surprise come start of trading Monday.
Where the crash supposedly happened:
courtesy of @Thalion_1

The guys just got downgraded on Thursday and the downgrade means more collateral must be issued by Morgan Stanley.  So what did these bozos do?  They added  more derivatives to their book jumping 49% to 2.57 trillion.  A sigma 6 event coming??

(courtesy Bloomberg)

Morgan Stanley Added Derivatives In Bank In First Quarter

Morgan Stanley (MS), which was downgraded two levels to Baa1 yesterday by Moody’s Investors Service, increased the percentage of the derivatives housed in its higher-rated bank subsidiary in the first quarter.
The notional amount of derivatives in Morgan Stanley Bank NA jumped 49 percent to $2.57 trillion, according to a report released today by the Office of the Comptroller of the Currency. That brought the share of Morgan Stanley’s total derivatives in the bank, which has a A3 rating after the cut, to 5.1 percent from 3.3 percent at the end of 2011.
Chief Financial Officer Ruth Porat said in April that the firm has been “slowly” moving derivatives into the bank, starting with new foreign-exchange contracts and following with interest-rate deals. The movement came as the firm faced questions about whether counterparties would halt long-dated business with Morgan Stanley after it was downgraded.
The bank is still waiting for approval from the Federal Reserve in order to transfer existing derivative contracts into the bank subsidiary, according to a person familiar with the matter, who asked not to be identified because the information isn’t public. Bank of America Corp., the second-largest U.S. lender, moved derivatives from its Merrill Lynch unit to its bank last year after its rating was cut, prompting objections from the Federal Deposit Insurance Corp., people familiar with the matter said at the time.
The increase in derivatives held in Morgan Stanley Bank was driven by a jump in over-the-counter forwards and options, which both climbed to more than 10 times the level at the end of last year, according to the OCC report.
Reuters reported the increase earlier today.
To contact the reporter on this story: Michael J. Moore in New York

How good is the Fed at forecasting events?   This report from Lance Roberts of Street Talk Advisors describes there awful prognosis on the economy:
(courtesy Lance Roberts/Street Talk Advisors/zero hedge) 

Guest Post: The Fed And Goldilocks Economic Forecasting

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalk Advisors
The Fed And Goldilocks Economic Forecasting
fed-revisions-gdptable-062112Beginning in 2011 the Federal Reserve begin releasing its economic forecast for the present year and two years forward covering GDP, Unemployment, and Inflation.  The question is after 18 months of forecasting - just how good has the Fed at forecasting these economic variables?  I have compiled the data from each of the releases for each category and compared it to the real figures and used a current trend analysis for future estimates.
When it comes to the economy the Fed has consistently overstated economic strength.   Take a look at the chart and table.  In January of 2011 the Fed was predicting GDP growth for 2011 at 3.7%.  Actual real GDP (inflation adjusted) was 1.6% or a negative 56% difference. The estimate at that time for 2012 was almost 4% versus 1.8% currently.
We have been stating repeatedly over the last 2 years that we are in for a low growth economy due to the debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity.  The simple fact is that when an economy requires nearly $5 of debt to provide $1 of economic growth the engine of prosperity is broken.
fed-revisions-gdptrend-062112As of the latest Fed meeting the forecast for 2013 and 2014 economic growth has been revised down as the realization of a slow-growth economy has been recognized.  However, the current annualized trend of GDP suggests growth rates in the next two years that will roughly be half of the Fed's current estimates of 2.85 and 3.4%.  A recession in 2013 is a strong likelihood given the current annualized trend of economic growth since 2000.   A recession followed by a rebound in 2014 would leave economic growth running at annual rate close to 1%-1.5% versus the current estimate of nearly 3%.
What is very important is the long run outlook of 2.6% economic growth.  That rate of growth is very sub-par and, over the longer term, does not sustain the level of incomes and employment that were enjoyed in previous decades.
The Fed is as overly optimistic about the level of unemployment as they are about economic growth. One of the Fed's mandates is "full employment." At the beginning of 2011 the Fed predicted the unemployment rate for the year would be 8.7% for 2011, 7.8% for 2012 and 6.95% for 2013.  The unemployment rate for 2011 was 9.1% and is currently at 8.2% currently likely to rise in the coming reports ahead as the economy again weakens.
fed-revisions-unemploytable-062112The Fed sees 2014 unemployment falling to 7% and ultimately returning to a 5.6%"full employment" rate in the long run.  The issue with this full employment prediction really becomes what the definition of reality is. 
Today, even the average American has begun to question the credibility of the BLS employment reports.  Recently even Congress has launched an inquiry into the data collection and analysis methods used to determine employment reports.  Since the end of the last recession employment has improved modestly but mostly centered around temporary and lower paying positions. 
Since mid-2011 there has been a fairly sharp decline in the unemployment rate from 9.1% to 8.2% currently.  The main driver of that decline has come from a shrinkage of the labor pool versus substantial increases in employment.  In our past employment reports we have discussed the increasing number of individuals that are moving into the "Not In Labor Force"category where they are no longer counted as part of the labor pool.  For the Fed the reality of "full employment" and statistical "full employment" are two entirely different things.   While the Fed could be very correct at achieving "full employment" of 5.6% in their longer run scenario - it certainly doesn't mean that 94.4% of working age Americans will be gainfully employed.
When it comes to inflation the Fed's outlook, for the most part, have been below reality.  In January of 2011 The Fed's prediction for 2011 inflation was 1.5% which was 2% lower than what inflation turned out to be. 
As of the latest meeting the Fed's 2012 inflation prediction is 1.6%.  With current deflationary pressures pulling headline inflation down from 3% at the beginning of this year to 1.7% currently the Fed's prediction appears to be fairly accurate.  The question, however, is how long can inflation remain suppressed at or below 2% which is the long run prediction of the Fed? 
The Fed has much more control over inflationary pressures in the economy than they do at stimulating economic growth or increasing employment.  By increasing or decreasing interest rates, using monetary policy tools and coordinated actions the Fed has historically been able to influence inflation.  Unfortunately, their actions in this regard can also be directly linked to economic and market booms and busts. 
fed-policyactions-crisis-062212What the Fed has much less control over are deflationary pressures.  We have discussed that the threat of deflation in the U.S. economy is currently a much greater than inflation.  It is also the primary concern of the Fed.  However, there are two things that are likely occur that could drive headline inflation higher than the Fed's current long run estimate of 2%.  The first is further stimulative action which expands the Fed's balance sheet known as "quantitative easing."  The direct impact of these programs, as liquidity is injected into the financial system, has been higher commodity prices which translates to an increase in headline inflation. 
The second, and more importantly, is that an organic economic recovery will eventually take hold.  During real economic expansions where demand is increasing, wages are rising and the velocity of money is accelerating - real levels of higher inflation take hold.  However, an organic economic expansion is likely some years away as the balance sheet deleveraging cycle continues globally.
Why The Fed Forecasts Like Goldilocks
Is the Federal Reserve really as bad at predicting future economic conditions as it appears?  The answer is no.  The Federal Reserve faces a severe challenge, when communicating to the financial markets and the media, which is the creation of a self-fulfilling prophecy.  Imagine that following an FOMC meeting Bernanke stated:  "The policies and actions that we have implemented to date have done little to curb economic weakness.  The economy is in much worse shape that we have previously communicated as the transmission system of Fed policy through the economy, and the financial markets, is obviously broken."
The immediate reaction to such a statement would be a complete collapse of the financial markets.  Such a collapse in the financial markets would negatively impact consumer confidence which would subsequently throw the economy into a recession.  Conversely, an overly optimistic outlook would lead to an increase of inflationary pressures and asset bubbles.  Neither situation is healthy for the economy in the longer term.  Therefore, communication from the Federal Reserve must be very guided in its approach - not too hot or cold.  This"goldilocks"  appoach works to create a "glide path" to the Fed's destination while giving the financial markets and economy time to adjust to the incremental adjustments to forecasts.
Let me be clear.  I am not making a case for the relevance of the Federal Reserve or its policies.  That is another article entirely.  What I am stating is that the communications from the Federal Reserve should NEVER be taken at face value.  Since the Fed can not communicate its real position at any given time, due to the immediately excessive postive or negative effect on the economy and financial markets, as investors we must read between the lines.  The problem for the financial markets, and the mainstream media, is that they tend to extrapolate current estimates indefinitely and generally in an upwardly biased manner.  This is not the Fed's objective nor have they been able to repeal the economic and business cycles.
The Fed has been slowly guiding economic forecasts lower since 2011.  The reality is that 2.6% economic growth is not a boon of economic prosperity, corporate profitability, increasing incomes or a secular bull market.  It is also not the "death of America" or the return to the stone age.  What is important to understand, as investors, is the impact on investment portfolios, expectated real rates of returns and the realization that higher levels of market volatility with more frequent "booms and busts"are here to stay.

The Extortion Racket Shifts To Italy

testosteronepit's picture

Wolf Richter
One thing Greek politicians have taught other European leaders: fear mongering for the purpose of extortion is the way to go. It might not work, and it might be counterproductive, and it might destroy confidence in the economy and give investors goose bumps and blow up markets, and it might cause spooked consumers to hold back on purchases and worried businesses to freeze hiring plans, thus exacerbating the situation, but it’s nevertheless the way to go.
Greek politicians learned it from Treasury Secretary Hank Paulson who'd walked into the Capitol in September 2008, threatening that the whole world would collapse if his demands weren’t met. Soon, they expertly issued a series of escalating threats to extort the maximum amount in bailout euros from the Troika. It didn’t work very well as the Greek economy continued to spiral out of control, and as the frustrated Troika halted bailout payments from time to time, and as tempers flared, and as the people in Greece became increasingly edgy. But it was the way to go. Then came Spain. And now Italian Prime Minister Mario Monti.
As always, timing is everything. And there was no better time than Thursday, the day before the meeting in Rome of the big four—Germany, France, Italy, and Spain—and a week before the European summit, which isn’t a run-of-the-mill summit, but the summit, the one that would have to save the Eurozone. And the world. Again.
Monti, the unelected technocrat who was supposed to be able to unite parliament, is losing support in Italy, which is mired in its fourth recession since 2001. His real estate tax is widely despised, though he’d picked up some brownie points in the foreign media as deficit fighter, and an imperceptible nod from German Chancellor Angela Merkel. And yields on Italy’s government bonds have spiked to levels where the resulting interest expense would eat Italy’s budget alive [Read.... Italy Trembling on the Brink].
If the summit next week doesn’t result in a grand plan to turn everything around, Monti said, the Eurozone would spiral into its political and economic demise. “There would be progressively greater speculative attacks on individual countries,” he said. And he mentioned Italy by name. A “large part of Europe” would suffocate under “very high interest rates” and would go into paralysis. The public would get frustrated with Europe. A vicious cycle would ensue: while the Eurozone would need greater integration to survive, the people, governments, and parliaments would “turn against that greater integration.” That process has already started, Monti said, “even in the Italian parliament, which has traditionally been pro-European and no longer is.”
Hence, no agreement by end of the summit next week, no Eurozone—though the breakup would be gradual. And he had a grand plan: more integration to where “markets are convinced” that the euro would be “indissoluble and irrevocable”; mechanisms to keep debt contagion from spreading (meaning massive and unlimited bailouts); a full-fledged banking union with unified supervision and European-wide deposit insurance; “new market-friendly policy mechanisms”; and the direct purchase of sovereign bonds that teetering member states could no longer bamboozle the markets into buying. Every item on his list would be funded by taxpayers in other countries, particularly in Germany. And so he also mentioned fiscal responsibility, to satisfy Germany.
That would be the “absolutely necessary” minimum to save the Eurozone. And it would have to be agreed to by next week—though he’d assured the rest of the anxious world less than a week ago that Italy wouldn’t even need a bailout.
But the fear-mongering didn’t sway the German Chancellor during the Rome meeting on Friday. In fact, she left early to fly to Poland to watch Germany’s soccer team demolish the Greeks—and the anti-Merkel triumvirate of Monti, Spanish Prime Minister Mariano Rajoy, and French President Francois Hollande could stew amongst themselves.
There was, however, a nugget of success that the triumvirate threw to the media: €130 billion would be dedicated to growth measures. A step away from Merkel’s austerity. Alas, it wouldn’t be new public money or additional public money, but the activation of private capital and a shuffling of funds within the existing EU budget. It was nothing.
And Merkel brushed off any hopes that the EFSF and ESM bailout funds could hand taxpayer money directly to the banks.Nein, Merkel said, the contracts clearly spell out that states are the partners, not banks. “It’s not that I don’t feel like it,” she said, “but the contracts aren’t made that way.”
Hollande again called for Eurobonds, like a child that doesn't want to see reality; Germany’s refusal is nearly absolute, and it’s not just Merkel, but the population as a whole. Even the banking union that Merkel emphasized she’d be open to could not include any form of common liability; it could only have a common regulator, she said. And so, Monti’s threat has once again proven to be the way to go, though it didn’t work and might become counterproductive.
George Dorgan, a macro-based fixed-income and currency portfolio manager based in Switzerland, writes that Germany won't, and can't, agree to most of the Eurozone bailout measures bandied about. Period. Regardless of what the FT and the Economist wish to believe. And hedge funds betting that Germany will pay in the end are wrong too. Excellent and pungent. A wakeup call. Read.... Eurobonds, Fiscal or Banking Union—They're All Pure Utopia.


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