Tuesday, July 3, 2012

Good evening Ladies and Gentlemen:

Gold had a good time climbing by $24.10 to $1621.30.  Silver was up 77 cents to $28.44.
It seems that gold and silver are now decoupling from the markets.  I would like to emphasize that the European summit accomplished nothing.  We were basically lied to as we were told that seniority of bonds will not be part of the picture.  That is not true as Germany stated that only the first 100 billion euros to aid the Spanish banks has had their seniority lifted.  All new funds advanced will still have their seniority.  Also the loans to Spain will be put onto Spanish balance sheets and will be removed only with a new regulator for all of Europe.  Good luck on that one!!

Let us now travel to comex and see how trading fared today.

The total gold comex OI rose approximately 600 contracts from 418,129 to 418,751.  The non official delivery month of July saw its OI fall from 67 to 42 for a loss of 25 contracts.  We had 15 delivery notices filed yesterday so we lost 10 contracts or 1000 ounces of physical gold standing.  The next big delivery month is August and here the OI remained relatively constant at 209,619 dropping only 500 contracts from Monday;s level at 212,152.  The estimated volume today was quite tame at 124,889. The confirmed volume on Monday was extremely low at 11,927.

The total silver comex OI lost approximately 700 contracts falling from 123,965 to 123,242.  The front delivery month of July saw its OI fall from 2811 to 2385 for a loss of 426 contracts.  We had 331 delivery notices filed yesterday so we gained 85 contracts of additional silver standing.  My bet is that we had some errors in official OI standings yesterday.  The next non official delivery month for silver is August and here the oI fell marginally from 307 to 288 for  a loss of 29 contracts.  The estimated volume at the silver comex today was big at 62,993.  The confirmed volume yesterday was also quite large at 64,019.  It seems that there are some major entities taking on the bankers.

July 3.2012


Withdrawals from Dealers Inventory in oz
200.0000 oz
Withdrawals from Customer Inventory in oz; 24,884.01 (Brinks,Scotia)
deposits to the Dealer Inventory in 
Deposits to the Customer Inventory, 
No of oz served (contracts)  served
6   (600 oz)
No of oz to be served (notices)
 36  (3600 oz
Total monthly oz gold served (contracts) so far this month
(673 )  67300 
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

We had small transactions today.  The dealer had a very suspicious 200.000 oz of gold leave Brinks at the dealer end.  I get very suspicious of exact round numbers.  We had no deposits whatsoever.  The customer had the following withdrawal:

From Brinks:  771.51 oz
From Scotia:  24,112.50

total customer withdrawal:  24,884.01 oz

we had an adjustment of 307.25 oz leave the dealer at Scotia and enter the customer.

The total registered or dealer gold inventory lowers to 2.579 million oz.

The CME notified us that we had 6 delivery notices filed today for 600 oz of gold.
The total number of notices filed so far this month total 673 for 67300 oz.
To obtain what is left to be served upon, I take the OI standing for July (42) and subtract out today's delivery notices (6) which leaves us with 36 notices or 3600 oz left to be served upon.

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

67300 oz (served)  +  3600 oz (to be served upon)  =  70,900 oz.
we lost 10 contracts or 1000 oz of physical gold standing


July 3.2012  for silver:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory26,586.70
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory596,331.11(HSBC)
No of oz served (contracts)41 (205,000)
No of oz to be served (notices) 2344 (13,720,000)
Total monthly oz silver served (contracts)753  (3,765,000)
Total accumulative withdrawal of silver from the Dealers inventory this monthnil
Total accumulative withdrawal of silver from the Customer inventory this month26m586.70
Small action inside the silver vaults today.

We had no dealer activity.
The customer received the following deposit at HSBC:

1.  596,331.11 oz

The customer had the following withdrawal

1.  25,539.000 oz leaves Brinks  (again a little suspicious)
2. 1047.70 oz leaves Scotia.

total withdrawal by customer:  26,586.70 oz
we had no adjustments.
The dealer or registered inventory rests tonight at 37.096 million oz
The total of all silver rests at 147.103 million oz.

The CME notified us that we had only 41 notices filed for 205,000 oz.
The total number of notices filed so far this month total 753 for 3,765,000 oz.
To obtain what is left to be served upon, I take the oI standing for July (2385)
and subtract out today's delivery notices (41) which leaves us with 2344 contracts or 13,720,000 contracts left to be served upon our longs.

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

3,765,000 oz (served)  +  13,720,000 oz (to be served upon)  =  17,485,000 oz.

we have gained back 1/2 of what we lost on the second day of silver notices.


The following story is absolutely fascinating.  You will recall that the President of Barclay's resigned on the Libor scandal.  Now it seems that the Bank of England made them do it.  I wonder why?  Maybe it has  something to do with the forward
price of gold.  Because interest rates received for loaning gold is next to nothing, then it is necessary to lower LIBOR as a cost for that lease.  The audit of the Fed will likely show the same result.

Very important..(courtesy zero hedge)

The Bank Of England Made Me Do It

Tyler Durden's picture

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:
In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.
And below is the "note"

Like I said, the finger is pointing to the Fed with respect to the Libor lie.
There is no question that the gold suppression scheme is critical in this mess because the cost component of the lease is libor.

(courtesy zero hedge)

And Now The Fed Gets Dragged Into LiEborgate

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As was first reported two days ago, and confirmed today, Barclays' natural response to allegations it single-handedly manipulated the interest rate complex for up to $500 trillion notional in IR-sensitive swaps and other products (it didn't - everyone else did it too), was to drag everyone into the scandal, starting off with the Bank of England (and about to drag Whitehall into it too), and specifically the man who was next in line for governorship of the English Central Bank: Paul Tucker. What does this mean? Well, as we suggested also two days ago, now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.) Yet the fact that Goldman is hell bent on global domination by stretching its tentacles into every monetary policy administration is no secret: it is only a matter of time before GS also runs the English CTRL-P macros. More interesting is that in addition to the BOE, Barclays today also dragged America's very own Federal Reserve into the fray.
From MarketWatch:
Barclays also said in the document that the lender believed other banks were making Libor submissions that were too low during the credit crunch. “The evidence shows that the intent was to protect Barclays from the unfounded negative perceptions by bringing Barclays Libor quotes closer to the pack but not to affect the ultimate rate,” the bank said.

Barclays also cited subsequent research by the New York Federal Reserve staff members that, according to the lender, concluded that banks’ Libor quotes were systematically below their borrowing rates by 39 basis points after the Lehman bankruptcy. “Barclays own submissions for tenors of 1 month to 1 year Libor were higher than actual Barclays trades on 97% of the occasions when Barclays had actual trades during the financial crisis,” the lender said.
Translating the bolded: the Fed knew all along that Barclays self-reported levels were impossible. And did nothing. Which of course was not an issue until 2 days ago. Now that heads are rolling, it is.
So we wonder: will the captured and corrupt congressional critters even pretend to have the guts to escalate LiEborgate on US soil, where the real bodies are buried, or will everyone continue to tiptoe around the issue, hoping it just blows off on its own? If the latter, look for many new and exciting$0.99 apps to hit the iTunes store in the next 12-24 hours. After all must keep the fat, lazy, easily distracted muppets, occupied with cool retina displays and even cooler games where stuff happens fast without draining the battery for hours.

The first section of his commentary is very important as he again points out the balance sheet of sovereigns is extremely faulty.

The right hand side does not include many derivatives and guarantees
 that the state has so encumbered the nation. The total debt of the nation is much higher.

The left hand side does not list any of the contingent liabilities of the state and as such its numbers are also faulty.

So when viewing a debt to GDP number, please remember to use the proper liabilities and encumbrances on the state.

(courtesy Mark Grant/Out of the Box andOnto Wall Street)

Secrets Of The Trade

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Submitted by Mark Grant, author of Out of the Box
The Balance Sheets
After almost four decades on Wall Street I believe I can read and comprehend a balance sheet. In my experience when I have studied one and then found the numbers to be inaccurate I back-up from any investment like a man running from flowing lava. If the numbers are not real then I want nothing to do with whoever represented them to me. If someone is going to play funny numbers with the state of their company then they will do other things that are not on the up and up as well.
In America we have certain laws about these things. If GE or IBM has guaranteed something and it is not on their balance sheet then it is Fraud and litigation may be pursued both criminally and civilly. Then if the company is guilty of fraud the CEO and the CFO can find themselves in jail. They also have similar laws in Europe but they are not applied to sovereign nations and often times not to banks in Europe. Much more so than in America; politics is above the law in Europe. It is not necessary to argue about this or to assess their motives or even to take a particular ethical position; it is just the way of it.
When we receive the official debt to GDP ratios for any country in the European Union they are inaccurate and inaccurate as a matter of official European policy as enumerated in the documentation of the EU’s  official statistic agency, Eurostat. All of the nations in the European Union do not count derivatives, sovereign guaranteed bank bonds, sovereign guaranteed corporate bonds, sovereign guaranteed regional debt or any other contingent liabilities. While I note that this would be totally illegal for any American corporation; this is the way numbers are counted in Europe. I take no ethical stand here but just point out the truth of it so that judgments can be made based upon complete information and so that the debt to GDP ratios are not taken as Gospel when handed out by Europe.
The right hand side of the balance sheets is not all of it however. When the European Union counts up the left hand side of a balance sheet it is also inaccurate. Here the promises to pay, the contingent assets such as the Stabilization Funds are counted as if they are fully funded. The EFSF and the perhaps coming ESM are not funded and have never been funded and money only is sent by the nations in Europe as needed such as for Greece, Ireland, Portugal and now Cyprus and Spain. The Europeans proclaim in loud rhetoric that they have these firewall funds in the great hope that speculators will not become involved with their bond markets because of their much shouted wall of Euros which, not only is obviously untrue, but it also obviously did not work as a grand scheme. In other words Europe counts their promises to fund as real assets and does not count what they have actually guaranteed as guarantees, so in their rather arcane world, they are not liabilities. Further, as we have seen in a number of European nations, if the government loans money to some bank or regional government then it is not counted as a loan and applied to the liabilities of the sovereign but it is categorized as an “investment” and placed upon the left hand side of the balance sheet as an asset. Now they can do anything they like, of course, and my musing will change absolutely nothing in the way they conduct their business but I can point out and I do point out that the European balance sheets are inaccurate which is one reason why I am unwilling to suggest that money be put in these enterprises.
I don’t know, in my rather straight down the middle Kansas City mind I prefer a reality where one plus one is two and not where some European auditor, when asked about the sum of one plus one says, “What number would you like?” This was the way of it in “Alice in Wonderland” of course as the meaning of the word was determined by the speaker but this is not a wise path to be followed by an investor. Recently I wrote about Firewalls and the hocus pocus of their being touted as the cure-all for Europe. Europe missed the train on this one altogether as no amount of money, either pledged or funded, will do one thing to help the worsening financial crisis of the countries in Europe. You may think of the nations of Europe as horses in a corral. What is the value of a bigger and bigger fence that surrounds them if the horses are full of cancer? The fence, of whatever size, does nothing and I mean nothing to help the sickness of the horses. Europe is battling with windmills when they should be addressing the financial health of each country. “The horses are sick,” I say, “forget fiddling with the fence.”
As each month passes and financial projections are proved to be whims of fantasy and as people and institutions alike look at the balance sheets in Europe with an ever growing nauseous feeling there are real consequences for how Europe has behaved. It is not the speculators that are hurting Europe but Europe itself as real money investors, in scores, are departing the scene for other pastures due to Europe’s bad manners. My commentary goes to some 5,000 large financial institutions in forty-eight countries and I can report with absolute certainty that many, many major money managers, of all types, are just not willing to invest money in Europe anymore and while the governments of Europe can pressure and “suggest” that their own institutions keep up the flow of cash into European investments and auctions these same money managers, in the end, are accountable to their clients and consequently the numbers begin to look quite dismal as yields back up and as European equities seriously decline. Given the massive amount of money that needs to be raised during the next twenty-four months in Europe we are going to see great difficulties in funding and the Europeans will have no one to blame but themselves when the capital does not show up!
July 4 in America
This is our Independence Day of course. We have forgiven the Brits long ago and no grudge is held and so much time has passed that we do not even mention them in our celebrations. I am reluctant to admit it but many Americans may not even know who we are independent from but that is the way of it in myopic America. I do have worries about many of my friends on Wall Street on this day however as this is the day of the Great Grill Off in America. Sad but true that while Wall Street is full of many agile minds that the dexterity of our bodies has not kept up as we spend the day sitting behind desks and staring at screens. Consequently I have turned to the Wizard for some help.
First the attire must be correct. Do not head out to your grill in shorts. It may be warm or even hot where you are but if you are wearing shorts you will get scalding  grease on your legs as you try to impress family and friends with your manly grilling skills and the result will not be good. People are not impressed when their host needs to be rushed off to the hospital with third degree burns or when he goes up in flames in the middle of the cocktail hour. The fireworks come later in the evening and, in any event, they are not you.
So no shorts and then your shirt must be black or navy blue perhaps. You will inevitably get grease or the marinade all over your shirt and you will look like a dork if your shirt is some lighter shade. Your wife or girlfriend will frown at you using that grimace that only women can manage when the man they are with looks like a dork and so I am trying to help you avoid this situation. There is no need to look like a sloppy mess in public and this can be avoided with the right attire.
Next you will take the meat out of the refrigerator at about 10:00 A.M. in the morning. You will leave it out and not put it back in and yes I know that your mother told you that you would die from salmonella poisoning if you did this but mom was not correct about this one item. You may recall that restaurants tout their “dry aging” and this means leaving the meat out of the fridge so that the pores open up because they close up when cold. Just trust me here; you will not die if you follow my advice and your family will be just fine. 
Now if you want to be the great July 4 Hero and Master Chef I am going to share the Wizard’s secret since 1776 recipe for July 4 success. You will go to the best grocery store that is available and have the meat man, he is also called a butcher but you may not know this, cut you “the first five ribs of the Prime Rib.” Now write this down because you will be thinking about your portfolio and will not remember it or type it in your iPhone so you can play it back later. Having accomplished this goal you will also need some things to help you be the greatest griller since the Indians did Thanksgiving. You must buy a Taylor meat thermometer because you can read it and it has a red line that you can see through the haze and the other thermometers are of lesser quality so do not be cheap and get the “It’s just heat” one or something.
Then go to the spice isle. It is where they have all of those little bottles that your wife fusses around with and they are also in that silly affair that spins around in your kitchen if you bump into it. You will need “Kitchen Bouquet,” garlic powder, Lawry’s seasoning salt, onion powder and paprika. Next wander around and find a bag of wood ships, Hickory or Apple Wood will do. Then go to the cookware isle and buy a large tin pan that can be thrown away because, if not, your wife/girlfriend will not be friendly with you when she has to clean it as you say, “I cooked and cleaning up is for you and it is only fair” which is what goes on in America on July 4. Also buy a “baster” and make sure that the basting part is metal and not plastic as scorched platic on your Prime Rib will not be appreciated by any of your guests. So now you are armed with the tools of the trade and home you go with the Prime Rib.
So it is 10:00 and you are in jeans and a back polo shirt and let the celebration begin. First get an electric knife, and try not to cut off your fingers please, and “score” the top of the Prime Rib. Now this is not like “score” at the game or “score” with your date when you were younger but this means to cut the top fat on the Prime Rib into squares. You can manage this; I have great faith in you and it is easier to do when you first take the Prime Rib out of the fridge. If you screwed up and are taking it out of the freezer then you will have to go back to the store and start all over as frozen Prime Rib just will not do; not do at all.
So the meat is scored and then you take the Kitchen Bouquet and slather it all over the meat. It is a messy affair and paper towels need to be at hand but this is the base for the marinade. Next you liberally toss on the Lawry’s, the garlic powder and the onion powder in no particular order. The last ingredient is then the paprika and then you put the rib roast in the tin foil pan and you leave it sitting out for the rest of the day and far enough in on the counter so that Fido does not claim it for himself and spoil the whole affair. You may also, at this point, take the Taylor meat thermometer and you place it in the thickest part of the roast making sure not to touch any bones which will give you a very inaccurate reading if you do.
Around two hours before you want to eat you must turn on the grill. Meat does not cook on a cold grill and even if you are a contrarian by nature I assure that this ploy will not work. So fifteen minutes goes by, the grill has been turned on and the little dial, yes I know it is not a smart dial, Apple does not make these gizmos, says 325-350 degrees and you are ready to begin. You take the Prime Rib, still nesting inside the tin pan, and you place it on the grill. You then liberally toss around some of the wood chips that have been soaking in a ceramic or metal bowl for the last hour or so and scatter them about on the grill. Then you close the cover and go have a drink or two because the roast needs no attendance for the next forty-five minutes. Then every one-half hour you go check on the meat, look at the thermometer because we do not have self-turning off thermometers yet and baste the meat each time you check on it in its own juices. This means using the baster to extract the juices from the pan and squirt it here and there on the Prime Rib while making every effort to keep it off of yourself. You will also sprinkle some more of the wood chips around because it flavors the meat. The somewhere around two hours after you first put the meat on the grill the thermometer will read “Beef Rare” which is when you take it off of the grill if you want your meat to be medium-rare. Yes, I know there is a trick here and you will be concerned that the meat will be too rare but this will not be the case as the Prime Rib continues to cook when you take it off the grill.
So you have basted and wood chipped and the meat thermometer says “Rare” and off comes the Prime Rib and back into the kitchen and please do not forget to turn off the grill as house fires are unwelcome on July 4 and the fire department is busy attending to the idiots that did not follow the Wizard’s advice. Then have another drink, do not get drunk however as it is so unseemly, and wait about fifteen minutes before you cut the meat. After fifteen minutes you take the Prime Rib out of the tin pan, very difficult to cut it in the tin pan you know and place it upon a wooden platter where you will cut it. I suggest the electric knife again though the more macho of you may prefer a regular knife which works better if it is serrated. If you do not know the meaning of this word please ask your wife/girlfriend and she will explain it to you. Slice it as thinly as you can, after the drinks you have swilled, and serve it along with whatever else you have made on a nice platter remembering, like with your clients, that presentation is an important part of the affair and it will be the same with your guests who will “ooh” you and “aah” you for being the Master of the Grilling Universe. You can serve it with corn on the cob and a Caesar salad or potatoes or creamed spinach or whatever else you can manage.
Finally, keep this in mind; you are host. You grilled the dinner. When you are hosting it may be the fireworks that get lit; but not you.


The German economy is now sputtering and as such cannot possibly lend money to the rest of Europe.
The following der Spiegel commentary is very important:

(courtesy zero hedge/der Spiegel)

Germany Rumbling As Spiegel Leads With "Euro Endangers German Economy"

Tyler Durden's picture

Objective analysis, or media spin to gauge popular reaction to Plan Z? Whatever it is, today's staff lead article in the English section of Spiegel has a piece that will likely raise more than a few eyebrows: "The common currency union was supposed to benefit the economy of the entire European Union. Now that the euro is struggling, however, it is bringing growth down with it. Germany's economy, once seemingly immune to the crisis, is now facing mounting difficulties."
From Spiegel:
When the board of Commerzbank met last Tuesday, Stefan Otto was supposed to make an appearance. The chairman of Deutsche Schiffsbank, a Commerzbank subsidiary based in Hamburg and focused on the shipping industry, had been summoned to Frankfurt to present the bank's financial results. But the presentation was cancelled; Commerzbank had no need for the numbers, having previously decided it no longer wanted anything to do with German shipping.

The executive board of Deutsche Schiffsbank was not notified in advance of the parent company's reversal. The supervisory board was also taken by surprise. Only three months earlier, Commerzbank CEO Martin Blessing had declared the financing of ships and commercial real estate to be part of the bank's core business. And although it was expected to shrink, Germany's second-largest bank intended to create a separate segment for the business.

But the executives had underestimated the risks that the European sovereign debt crisis presents to Commerzbank, and how much capital the ship and commercial real estate business ties up. Now Blessing has slammed on the brakes. Deutsche Schiffsbank Chairman Otto characterized the parent company's about-face as the "decision of a cautious businessman and not of a skydiver."

Commerzbank has recently made a huge effort to satisfy and even exceed the capital requirements set by the European Banking Authority (EBA). But if the euro crisis worsens, new gaps could soon open up, say banking industry insiders.

In Spain alone, Commerzbank is exposed to the tune of €14.2 billion ($17.9 billion) via investments in banks, companies and the government. The lower the rating agencies assess the creditworthiness of these borrowers, the more capital the bank will have to place in reserve for these investments in the future -- to say nothing of potential defaults.

Commerzbank isn't alone with such problems. The euro crisis and the higher capital requirements being imposed by regulators have adversely affected almost all European banks. And because of growing fears within the banks of a collapse of the euro zone, they are preparing for the worst by withdrawing to their home markets and winding down many investments.

This has serious consequences for the economy, not just along the periphery of the euro zone, but also in Germany, which had proved to be crisis-proof and was in fact booming until recently.
The euro crisis hasn't yet reached the German labor market. Last week, Frank-J├╝rgen Weise, head of the Federal Employment Agency (BA), announced a new jobless low: With 2.8 million people out of work, the unemployment rate had declined to 6.6 percent, the lowest level in 21 years. But in the economic cycle, the labor market is considered a "trailing" indicator. In other words, when things go up or down in the economy, it takes up to six months before jobs are affected.

Indeed, even though the German job market remains robust, BA head Weise says he sees "signs of weaker development." Month after month, the BA surveys all 176 employment agencies throughout the country about early indicators, so as to forecast labor market developments for the coming months. According to these indicators, the jobs situation will not deteriorate until autumn. But "we are nervous about 2013, because of all these risks relating to sovereign debt in the euro zone," says BA chief Weise.
Why is all of this relevant? Because as we get closer each day to the German ESM/Fiscal Pact constitutional court ruling, now expected on July 10, or a day after the ESM was supposed to go into operation, passions will rise. In fact, the Germany CSU chief Seehofer is already making waves with several announcements that put the bailout MOU achieved by Monti over so much blood and tears under question:
  • German CSU chief says the CSU can't back limitless German Euro aid
  • German CSU chief says concerned markets may question German Euro strenth
  • German CSU chief says the CSU doesn't want new constitution for Germany
  • German CSU chief says CSU rejects transferring powers to EU "Monster State"
  • German CSU chief says Merkel has no majority without CSU lawmakers
In other words, politicians are already preparing for the fallout from what this latest compromise will mean for Germany once the euphoria from last week's still completely unclear MOU fades, and with Spanish bonds having topped at 6.33% we wonder: was this it?
So when all fails, Germany will need a plan Z. The plan is outlined above, and it involves what Ray Dalio and increasingly more people say is a very real option: Germany just getting the hell out of Dodge first.


Charles Biderman on Europe.  It is self explanatory:

Biderman On Europe And The Rally: "It's All Bullshit"

Tyler Durden's picture

The sensible Sausalitan is back and this time he is taking on the "baffle 'em with bullshit" conclusion of last week's "non-game-changer" EU Summit. After some self-congratulatory chatter on his timely call for markets to ebb from April, Charles Biderman (CEO of TrimTabs) chokes back the spittal as he reflects on what came out of the mouths of European leaders last week: "I cannot see anything new from last week's summit" as he summarizes the findings clearly "The ECB possibly will print more money and save some Spanish and Italian banks". We can't help but agree with Charles when he adds: "Where have I heard that before? Printing Money To Save Banks - wow, how original?". Biderman still believes the Fed will engage in more money-printing but the stock market's current rally is temporary and will falter once again until Bernanke pre-announces his next print-fest."Money-printing is the only solution left for Central Banks and in reality without fundamental changes in the way Europe and the US is run, the best money-printing can do is keep the dieing alive a bit longer"


Spanish 10 yr bond yields closed today at 6.24%

The Italian 10 yr bond yield closed at 5.86%

as the euphoria over the summit continues to lower these two sovereign yields.


Today, the ECB again lowered collateral terms to the banks which probably signify that they are fresh out of any good collateral

(courtesy zero hedge)

ECB Further Eases Collateral Terms

Tyler Durden's picture

Two weeks ago, the ECB, which is now largely expected to cut rates by at least 25 bps imminently, announced it was aggressively expanding the eligible collateral pool of worthless "stuff" it would accept at face value in exchange for fresh EUR bills, in essence engaging in clear cut money printing with the footnote that it was really a loan. The only problem is the loan quality is absolutely worthless and the ECB knows this. Hence money for nothing. Today, the ECB has released another announcement on collateral eligibility, saying that "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances." However, lest it be seen as merely the latest confirmation that Europe no longer has money good assets, and the ECB is merely encouraging banks to pledge anything they can get their hands on in order to obtain a short-term liquidity injection, it also added the following rider: "[counterparties] may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force." But before someone takes this to mean that the ECB actually cares what "assets" on its balance sheet make back its now record €3+ trillion in liabilities, it added Rider B: "Governing Council may decide on derogations from the requirement laid down in paragraph 1." Translated: the free for all rehypothecation race is on, and probably in its last lap, as once any and all collateral is already pledged, the ECB's only hope will be to allow already hypothecated collateral to be rehypothecated. Something which in a non-banana republic would have cost Jon Corzine his job.
The European Central Bank Governing Council on Tuesday adopted a further change to ECB rules on the eligibility of collateral for Eurosystem refinancing operations.
In its preamble to the new rule, the Governing Council said “counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances.”
As a result, the Governing Council adopted the following change to its collateral rules, effective immediately:
“The following Article 4b is inserted in Decision ECB/2011/25:
Acceptance of government-guaranteed bank bonds
1. Counterparties that issue eligible bank bonds guaranteed by an EEA public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force.
2. In exceptional cases, the Governing Council may decide on derogations from the requirement laid down in paragraph 1. A request for a derogation shall be accompanied by a funding plan.”
Source: ECB


I am going to leave you tonight with this Graham Summers piece.
When reading this remember that Europe and the USA does not have a liquidity crisis but an insolvency crisis.  Also remember that most of the EU members lied to us on results of the Friday summit.  Supposedly seniority was to be replaced.  That is not so, only the first 100 billion euros to rescue the Spanish banks will have seniority lifted.  This is becoming a real farce.

(courtesy Graham Summers/Phoenix Capital Research)

The EU is Out of Money. End of Story. And Neither the Fed Nor the ECB Can "Print" To Save the Day

Phoenix Capital Research's picture

While various media outlets and “analysts” try to claim that the EU summit was somehow a success and that Europe’s issues are solved, the fact remains that Europe is out of money.  And I mean TOTALLY out of money.

I realize this flies in the face of what 99% of analysts are claiming. But this is a proven fact. Of the various entities that could hold the EU together (the ECB, the IMF, Germany, and the two bailout funds: the EFSF and the ESM) none and I mean NONE of them actually have the capital to do it.

I am continually bombarded with emails from people saying, "well, if things get bad the Fed or ECB will just print and everything is solved."

This is beyond wrong. It is just groupthink based on the idea that the Fed has intervened ever since the Great Crisis began in 2008 (ZeroHedge recently ran an article showing that the Fed has intervened in over two thirds of the months since the Crisis began).

However, even Fed intervention has a limit.

To whit, the Fed has now pulled back from any aggressive monetary policy for over a year. There has been no money printing. Instead, the Fed has re-arranged its portfolio to attempt to flatten the yield curve.

Why is the Fed doing this instead of simply engaging in more QE? The answer is because QE removes Treasuries from the banking system. We are facing a solvency Crisis and Treasuries are the senior most asset on US bank balance sheets.

When the Fed buys a Treasury from a US bank, it is providing liquidity (cash) to the bank to meet the bank's short term funding needs.

However, by removing the Treasury from the bank's balance sheet, the Fed is removing one of the banks senior most assets: the very asset against which the bank has leant or traded hundreds of billions and  possibly even trillions of Dollars' worth of loans  and trades.

Put another way, the Fed, by buying Treasuries is making insolvent banks even more insolvent. It is a short-term gain (liquidity) for a long-term disaster: banks need as much collateral as they can get their hands on right now. And with Treasuries rallying (raising the value of the banks' assets) any aggressive Fed program to take Treasuries out of the system would be a MAJOR step towards another solvency Crisis a la 2008.

The same pattern is playing out in Europe right now though on a much grander scale (its banking system is nearly four times as large as that of the US).  While everyone continues to believe the ECB can save the day, the fact remains that the ECB has NOT bought a single sovereign bond in 14 weeks.

Why is this? The same reason that the Fed is not doing more QE: Europe is facing a solvency Crisis. Removing sovereign bonds from the market may be helpful from a purely liquidity standpoint (cash for trash) but the Crisis in Europe is not based on liquidity, it’s based on solvency. And EU banks need as much senior assets as they can get.

Everytime the ECB buys a sovereign bond it's removing much needed collateral from the EU banking system (a sovereign bond may be garbage, but it's usually less garbage than a EU mortgage loan or an EU corporate loan).

This in turn only increases the solvency issues in the EU banking system. And remember, bank runs are already underway in Spain, Italy, France, and Greece. So banks are desperate for capital and collateral.

THAT is why the ECB cannot and will not simply print to "save the day": doing so would NOT save the day but would in fact accelerate the EU banking Crisis.

So the Fed and the ECB WILL NOT be stepping in unless the entire system starts to go. This leaves the IMF which is a US-backed entity and thus cannot perform a large-scale EU bailout (it's an election year in the US and voters will not tolerate a US-lead bailout of Europe).

So all that is left to prop up Europe are the two mega-bailout funds (the EFSF and ESM) and Germany.

The EFSF's capital is already full committed and stretched to the limit in propping up Portugal and Ireland. So it's not an option anymore.

As for the ESM... well, it doesn't even exist yet: it has yet to be ratified by all the countries that need to vote on it. Moreover, Spain and Italy together are to account for 30% of the ESM's funding. So... these countries would be bailing themselves out!?!

Finally, both Finland and Netherlands are rejecting the idea that the ESM can be used to buy bank bonds. So the ESM, assuming it can even get ratified, will face
major political pressure regarding how it spends its capital.

This leaves Germany as the one and only true EU prop. However, Germany is stretched to the limit.

First off, the country is only €328 billion away from reaching an official Debt to GDP of 90%: the level at which national solvency is called into question.

Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany's REAL Debt to GDP is closer to 300%.

In Euro terms, Germany now has €1 trillion in exposure to the EU via its various bailout mechanisms. That's EQUAL TO roughly 30% of German GDP.

If even a significant portion of that €1 trillion goes bad (which it will as this money has been spent helping the PIIGS), Germany's financial system will take a MASSIVE hit.

This will guarantee Germany losing its AAA status, which in turn makes its funding costs much higher (see what happened to France in the last year: that country is now facing bank runs and its own solvency Crisis which you'll be hearing about in the coming weeks).

Angela Merkel is up for re-election next year. There is no way on earth she'll opt to let Germany get dragged down by the EU. She's even said she will not allow Eurobonds for "as long as [she] lives."

This is not empty rhetoric. This is fact. Germany has expressed its intentions dozens of times in the last month: NO Eurobonds and NO guarantee of EU banking deposits.

The reasons for this are simple: EITHER option renders Germany insolvent. It's already teetering on insolvency to begin with. But to allow Eurobonds or some kind of guarantee of the EU banking system to occur on top of the money Germany has already spent propping up the EU will take Germany down.

The German economy is already slowing. Most Germans are fed up with the Euro. Merkel would rather die than let her country become like Greece (which the creation of Eurobonds or EU deposit guarantees would most assuredly result in).

So Germany is tapped out as well. This leaves... NOBODY.

Again, Europe is out of money. End of story. This is the truth and investing based on the idea of some magical bailout occurring is like investing on Hank Paulson's Bazooka policy for Fannie and Freddie (three months later the markets imploded).

Smart investors are using this latest rally in the markets to prepare for what’s coming: an EU banking Crisis that will make 2008 look like a joke. On that note, I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investments (both direct and backdoor) you can make to profit from it.

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

Good Investing!

Graham Summers


As tomorrow is the July 4. holiday, I have decided not to give a commentary until I get back. I will do a comprehensive review of events of this week.  No doubt all the fun will begin next week when everybody gets back from their holiday.

All the best


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