Saturday, September 29, 2012

Spain releases its 2013 budget showing a need of 60 billion for its banks/More public sector rioting in Spain,Italy, and Greece/ Big transporation strike in South Africa/

Good morning Ladies and Gentlemen:

Gold closed down by $10.70 to $1771.10.  Silver also fell by 10 cents to $34.52.  Generally on first day notice both silver and gold rise.   However the backdrop of problems in Europe weighed in on gold and silver as the bankers continued to push the sell button. Spain introduced its 2013 budget showing that they are in need of 60 billion euros to shore up the banks.  They need much more and the markets certainly threw a tantrum as European boures were deeply in the red.  The public sectors in Greece, Italy and Spain are witnessing daily rioting on the streets. Finally Fitch warns that the UK is in jeopardy of losing its coveted AAA rating.  We will cover these and other stories but first...............

Let us head over to the comex and assess today which happens to be first day notice.

The total gold comex OI rose an astonishing 11,585 contracts on Friday.  It certainly negates the loss of 8900 contracts on Thursday.  The active month of October saw its OI settle at 6344 contracts and thus at first glance, 634400 oz of gold looks to be standing or  19.7 tonnes of gold.  This is very high for October as most players bypass this month and head straight to December.  The open interest is an important tool for us as it is a measure of demand for gold. The non active November gold contract saw its OI rise by 225 contracts from 1145 up to 1370. Judging from the huge number of investors standing for delivery in October, the December delivery month will certainly be a dandy.  In the December gold month the total OI rose an astonishing 14,360 contracts from 339,606 up to 353,966.  That should put December at record OI levels.  The estimated volume at the gold comex on Friday was very good at 168,084.  The confirmed volume on Thursday was also very good at 195,807.

The total silver comex OI rose another monstrous 3256 contracts from 134,402 to 137,658.  This level is multi year highs.  The non active October contract month saw its OI rise 104 contracts from 305 to 409.  The November silver month is also non active and here it rose 19 contracts to 42.  The December OI rose 2293 contracts from 84,679 up to 86,972 also a record level for December.  The estimated volume on Friday at the silver comex was 50,832.  The confirmed volume on Thursday was also high at 49,219.

It looks like we will have a royal rumble in both December gold and December silver.

Comex gold figures for September:

Sept 29-.2012    first figures for October: 

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
96.45 (HSBC
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
34,438.312 (Scotia)
No of oz served (contracts) today
(1980) 198,000 oz
No of oz to be served (notices)
(4364)   436400 oz
Total monthly oz gold served (contracts) so far this month
(1980)  198,000 oz
Total accumulative withdrawal of gold from the Dealers inventory this month

Total accumulative withdrawal of gold from the Customer inventory this month


Today, we had tiny activity inside the gold vaults today.
 we had the following  dealer deposit

1.  1999.91 into Brinks.

we had no dealer withdrawal.

The customer at the following deposit:

1) Into Scotia:  34,438.312 oz.

we had a tiny withdrawal by the customer of 96.45 at HSBC.
we had no adjustments.
Thus the registered or dealer inventory rests this weekend at 2.556 million oz.

The CME notified us that on first day notice we had 1980 notices served for 198,000 oz.  The total number of notices for the month is thus the same 1980.

To obtain what will likely stand for October, I take the OI standing for October (6344) and subtract out Friday's notices (1980) which leaves us with 4364 notices or 436400 oz of gold left to be served upon our longs.

Thus on first day notice, the total number of gold ounces standing for delivery is as follows:

198,000 oz (served)  +  436400 oz to be served upon   =   634400 oz or 19.73 tonnes of gold.

Now Blythe will be busy trying to pay cash and wittle that down.


September 29/2012  initital standings for the October silver month 

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory 11,465.76 (Delaware,Scotia)
Deposits to the Dealer Inventory290,616.000 (Brinks)
Deposits to the Customer Inventory308,230.000 (Brinks)
No of oz served (contracts)49  (245,000)
No of oz to be served (notices)360 (1,800,000)
Total monthly oz silver served (contracts)49  (245,000 oz)
Total accumulative withdrawal of silver from the Dealers inventory this monthnil
Total accumulative withdrawal of silver from the Customer inventory this month11,465.76

Again, we had considerable activity inside the silver vaults today.
However we had the following dealer deposit:

i) 290,616.000 oz into Brinks.

we had no dealer withdrawal.

we had the following customer deposit:

i) 308,230.000 oz into Brinks.

We had the following withdrawal by the customer:

i) 996.65 oz out of Delaware
ii) 10,469.11 oz out of Scotia

total withdrawal by the customer;

11,465.76 oz

we had two adjustments:

i) 4134.75 oz whereby a customer leased some silver to the dealer at Brinks.
ii) 50,610.28 oz of silver whereby this silver was repaid back to the customer account from the dealer at HSBC.

The dealer inventory rests this weekend at 41.426 oz
The total of all inventory rests at 142.046 million oz.

The CME notified us that we had a small 49 notices which represents 245,000 oz of silver. The total number of notices are thus the same at 245.  To obtain what is left to be served upon, I take the OI standing for October (409) and subtract out Friday's delivery notices (49) which leaves us with a rather large 360 notices left to be served upon or 1,800,000 oz

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

245,000 oz (served)  +  1,800,000 oz (to be served upon)  =  1,824,500.
This is extremely large for a non active month.
It looks to me like we have players willing to take on the bankers by taking actual delivery of metal in both silver and gold.

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.

Sept 29.2012:

Total Gold in Trust



Value US$:75,391,461,299.97

Sept 27.2012:

Total Gold in Trust



Value US$:74,840,249,207.71

Sept 25.2012:

Total Gold in Trust



Value US$:75,803,893,441.72

no change at the gold GLD on Friday. 


And now for silver:

Sept 29.2012:

Ounces of Silver in Trust319,115,479.800
Tonnes of Silver in Trust Tonnes of Silver in Trust9,925.60

Ounces of Silver in Trust322,990,383.800
Tonnes of Silver in Trust Tonnes of Silver in Trust10,046.12

Ounces of Silver in Trust322,021,629.800
Tonnes of Silver in Trust Tonnes of Silver in Trust10,015.99

Ounces of Silver in Trust319,599,599.800
Tonnes of Silver in Trust Tonnes of Silver in Trust9,940.66

sept 21.2012:

Ounces of Silver in Trust319,599,599.800
Tonnes of Silver in Trust Tonnes of Silver in Trust9,940.66

we lost a huge 3.875 million oz from the slv vaults today.

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

Sprott and Central Fund of Canada. 

(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 5.8percent to NAV in usa funds and a positive 5.9%  to NAV for Cdn funds. ( Sept 29 .2012)  

2. Sprott silver fund (PSLV): Premium to NAV  remained constatnt on Friday  today at  4.22% to NAV  Sept 29/2012   :
3. Sprott gold fund (PHYS): premium to NAV fell to 2.5% positive to NAV Sept 29.2012.  

 Now we witness the Central fund of Canada  gaining big time in its positive to NAV, as we now see CEF at a positive 5.8% in usa and 5.9% in Canadian.This fund is back in premiums to it's former self and it is  about time. Even the Sprott silver fund is almost back to a normal positive to NAV with its premium  at 4.22%. Investors are seeking out physical supplies.  .

It looks like England may have trouble in finding gold and silver for its clients.
It is worth watching the premium for gold at the Sprott funds which is a good indicator of shortage as investors bid up the premiums.


At 3:30 pm we get to see position levels by our major players.  Let us see what we can glean from 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, September 25, 2012

Quite a dandy report!!

Our large speculators:

Those large speculators that have been long in gold saw global quantitave easing and decided to load the boat with gold contracts.  At the close of Tuesday, Sept 25.2012, the large specs added a monstrous 9006 contracts to their long side and the covered a rather large 3775 contracts from their short side.

Our commercials:

The commercials who are close to the physical scene and are generally long in gold pitched a rather large 4296 contracts from their long side.

Those commercials who are perennially short in gold added anotehr 8426 contracts to their short side being cheered on by the regulators who seem hopeless to stop this madness.

Our small specs:

Those small specs who are long in gold added a fairly sizable total for them to the tune of 1487 contracts.

Those small specs who are short in gold added another 1546 contracts to their short side.

In conclusion:

From a bankers perspective, we are extremely bearish as the commercials went net short another 12,722 contracts.  The bankers are the ones who supplied the non backed gold paper to our specs who are now celebrating this weekend.  The bankers are regrouping, holding more midnight oil sessions trying to figure out who to stem demand away from the longs.


And now for our silver COT:

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

Tuesday, September 25, 2012

Our large speculators:

Our large speculators that have been long in silver added another large 1573 contracts to their long side.

Those large speculators that have been short in silver added a tiny 118 contracts to their short side.

Our commercials:

Those commercials who have been long  in silver and are generally considered closer to the physical scene added a large 2567 contracts to their  long side.

Those commercials who have been short in silver from the beginning of time, continued to supply the non backed paper to another 3752 contracts.  The bankers are now close to record short levels.

Our small specs

Our small specs that have been long in silver added 1160 contracts to their long side.

The small specs that have been short in silver added another 1430 contracts to their short side.


Again it is still extremely bearish from a bankers point of view as again they went net short another 1185 contracts.

The risk of further raids by the bankers have now intensified.


And now for some important physical stories:

We have now reached record levels in price for Euro gold and Swiss Franc gold.
In Euros:  Euro/gold equates to 1375.5 euros/per oz of gold.  It reached its record high on Thursday at 1380 euros/oz of gold. In Swiss Francs:  1666 Swiss Francs/oz of gold.  This is very bullish for gold as many in Europe watch only the Euro price of gold.  If it finishes at its zenith at month end will be get a whole new slew of buyers as they chart the price of gold once of month at the conclusion of each month.

(courtesy zero hedge)

Euro And Swiss Franc Fall To New Record Lows Against Gold

Tyler Durden's picture

Euro And Swiss Franc Fall To New Record Lows Against Gold
Today’s AM fix was USD 1,781.00, EUR 1,374.65, and GBP 1,098.77 per ounce.
Yesterday’s AM fix was USD 1,755.25, EUR 1,365.32and GBP 1,084.16 per ounce.
Silver is trading at $1,670.75/oz, €26.96/oz and £21.52/oz. Platinum is trading at $1,670.75/oz, palladium at $637.90/oz and rhodium at $1,075/oz.
Gold climbed $26.00 or 1.48% in New York yesterday and closed at $1,777.30. Silver surged to hit a high of $34.74 and finished with a gain of 2.15%. Euro gold rose to a new record high at €1377. 
Gold prices are up on Friday, as the new austerity budget from Spain was received favourably and it increased the appetite for higher risk assets, sending bullion, commodities – brent crude oil at $112, the euro and equities to rise.  
Gold prices in euros held near the prior session's all time record high of EUR 1,380/oz, hit after rising spot prices coincided with a weaker euro on Thursday.  Euro-priced gold was up 1.1% at EUR 1,375.48/oz.  
US gold futures for December delivery were up $2.50/oz at $1,783.00 this morning. 
Quarterly performance for, gold, silver and platinum were all up.  Gold is on the way for an 11.4% gain. Silver racked up the largest gain and rose over 25%.  Spot platinum and palladium were up 15.4% and 9.8% for the 3rd quarter. US gold American Eagle coins was improved from last quarter (138,000 ounces vs. 133,000 ounces) however still the lowest quarterly figures in over 2 years.
Gold reached highs in euros and Swiss francs yesterday, in London trading it hit EUR 1,379.60/oz compared to EUR 1,375/oz last September.  In Swiss Francs gold traded at CHF 1,666/oz.
Europeans have been viewing scenes of violence and riots from protestors in Madrid and Athens over the past few days. 
Barclays Plc. announced yesterday it was opening its own London vault to store gold and other precious metals due to demand from their clients.
Investment banks have readjusted price targets upward in the past few days with some calling for gold at $2,000 and higher in the next few months.  
This signals that the recent rally of the euro against the dollar was largely due to the poor US monetary and fiscal situation and the greenback’s weakness and not due to any great confidence in the single currency per se.
Protests and violence clearly show that the eurozone debt crisis is far from over and there remains the risk of a currency crisis in the European Monetary Union (EMU).
Finally, we are confident that the new record euro and Swiss franc highs will soon be followed by new highs in gold.
For breaking news and commentary on financial markets and gold, follow us on Twitter.

Spain Must Leave The Euro – The Telegraph

The following is not good:

(courtesy GATA/Reuters)

Judge throws out CFTC's position limits rule

By Alexandra Alper and Karey Wutkowski
Friday, September 28, 2012
WASHINGTON -- A federal judge handed an 11th-hour victory to Wall Street's biggest commodity traders today, knocking back tough new regulations that would have cracked down on speculation in energy, grain, and metal markets.
Judge Robert Wilkins of the U.S. District Court for the District of Columbia threw out the U.S. Commodity Futures Trading Commission's new position limits rule and sent the regulation back to the agency for further consideration.
Wilkins ruled that, by law, the CFTC was required to prove that the position limits in commodity markets are necessary to diminish or prevent excessive speculation.

He also ruled that the amendments to the 2010 Dodd-Frank financial oversight law "do not constitute a clear and unambiguous mandate to set position limits, as the commission argues."
The ruling is a major victory for traders just two weeks before parts of the new position limits rule were scheduled to go into effect.
The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association brought the suit against the CFTC, arguing that the regulations would force their members to drastically alter their businesses, cost them tens of millions of dollars, and send customers fleeing.
Wall Street has also long argued that regulators have not proven that position limits would curb speculation in markets and prevent disruptive price spikes.
The CFTC and industry groups that brought the suit did not immediately have comment.
The agency passed the position limit rule last year, in a bid to limit the number of contracts traders can hold in 28 commodities, including oil, coffee, and gold.
* * *


Von Greyerz sees the wealthy realizing the globe is facing massive quantitative easing, will resort to buying gold and keeping that gold totally outside of the banking system:

(courtesy Von Greyerz/Kingworld news)

Von Greyerz sees wealthy buying gold and moving it outside banking system

3:12p ET Friday, September 28, 2012
Dear Friend of GATA and Gold:
Gold fund manager Egon von Greyerz is unusual in the gold world for being bullish on the metal in the short term as well as the long term. Today he tells King World News that he sees wealthy people buying gold and taking it outside the banking system, beyond counterparty risk. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


This should be interesting as India will offer future contraqcts in silver.  Now we will see if there will be real shortages develop. If so then this should make life miserable for JPMorgan:

(courtesy GATA)

Multi Commodity Exchange of India (MCX) will offer futures trading in two new contracts

  • Silver 1000 and cotton seed oil cake or Kapasia Khalli (as it is popularly called in Hindi), from tomorrow, September 27, 2012.

    Silver 1000 is a first of its kind innovative deliverable 1 kg silver contract with New Delhi as the base delivery centre. With New Delhi being one of the largest consumers of silver in India, this contract will cater to the needs of small jewellers and retail investors, who wish to take physical delivery of 1 kg silver bar in demat or physical form.

  • Shreekant Javalgekar, MD & CEO, MCX said, ``MCX`s contracts have always tried to meet the varied needs of all the stakeholders of a commodity`s value chain. The Silver 1000 contract is a unique contract that will go a long way in meeting the needs of physical market participants and retail investors as it will enable them to take delivery of 1 kg silver bar at lower margins as compared to the hitherto 30 kg bars. With the festive season fast approaching, this contract is an ideal offering from the Exchange to the market participants.


I brought this to your attention on Thursday and it is worth repeating as South Africa undergoes a transporation strike on top of their mining strike:

( courtesy  Jim Sinclair commentary)

South African Truckers Swell Strikers in Country to 100,000 By Carli Cooke – Sep 27, 2012 12:37 PM ET
South African truckers swelled the ranks of workers on strike to almost 100,000, escalating a conflict with mine owners and police that has shut 39 percent of the nation’s gold production and led to 46 deaths.
“This truck drivers’ protest has been accompanied by serious provocations, intimidations, public violence and even elements of criminality,” Police Minister Nathi Mthethwa said today in a statement. Workers must refrain from intimidating and assaulting those still working, or destroying property, he said.
Miners have been emboldened to bypass union-led talks and make pay demands directly to management after Lonmin Plc last week awarded platinum workers a record increase of as much as 22 percent. Photographer: Alexander Joe/AFP/GettyImages
Security forces yesterday fired rubber bullets at strikers at a factory in Howick, National Union of Metalworkers of South Africa Regional Secretary Mbuso Ngubane said today by mobile phone. About 20,000 transportation industry workers are on strike, the South African Press Association reported today.
Wildcat strikes have spread as workers sidelined traditional representatives for negotiating with management including the National Union of Mineworkers, a backer of the governing political party. Julius Malema, expelled by the ruling African National Congress, has called for workers to disrupt mines and the state to take over the operations.


And now for the important paper stories which will have an influence on the physical price of gold and silver:

Yesterday's rally in Europe was on hope that Spain can get its house in order with respect to the upcoming budget.  Today that rally faltered as reality sunk in as bourses were mainly in the red and Spanish and Italian bond yields both rose. Citibank states that the Spanish budget is far too optimistic on the GDP forecast front.  

Strikes are occurring at the public sector in Spain, Italy and Greece.

"Elsewhere things are back to normal as strikes by public sector workers move from Greece and Spain to Italy: university professors, public administration employees and health workers in the CGIL and UIL unions are expected to stop work today with rubbish collectors also expected to join the work stoppage."

Asian stock markets were up on news of that QE announcement on Thursday morning of another QE over there.

Your early morning sentiment from Europe and Asia with emphasis on the Spanish budget for 2013:

(courtesy zero hedge)

Overnight Sentiment: Spanish Budget Hangover And Month End Window Dressing

Tyler Durden's picture

Those confused by yesterday's rapid move higher in stocks, which fizzled by day's end, which was catalyzed by the non-event of the Spanish budget declaration which will prove to be a major disappointment as all such announcement are fated to be, can take solace in the following summary by DB's Jim Reid: "Yesterday's risk rally on the back of the 2013 budget announcement coincided with a trend seen over the last couple of years of rallies into month and quarter ends. We'll probably get a clearer picture of underlying sentiment by early next week with the new quarter starting, especially as it commences with a bang with the Global PMI numbers on Monday." In this vein, tonight's overnight sentiment showing weakness confirms yesterday's move was one which merely used Spain as a buying catalyst without reading anything into it. Because an even cursory read through shows major cracks. Sure enough the sellside readthroughs appeared this morning: "In our view the Spanish 2013 budget is based on a too optimistic GDP growth assumption" from Citi. Once again, the market shot first, and asks questions later, as the weakness in the futures confirms, EURUSD retracing all overnight gains, and Spain now 1.6% lower on this, as well as uncertainty of today's latest non-event - the local bank stress test vers 304.2b - whose results will be announce at noon NY time, and which just may find Bankia (and its Spiderman towel collection) is quite solvent once again.
Citi continues: "Spanish budget highlights resistance to pass serious and convincing reforms due to domestic politics. Most recommendations from Europe were postponed until after regional elections.... Budget is ambitious and challenging effort in line with Bank of America estimates; only surprise is new tax measures that could add 0.3% of GDP in revenue; growth assumptions still too optimistic" and so on from Bank of America's Ruben Segura-Cayuela and Laurence Boone, and UBS summarizes: "Pare back long positions in Spain." And while Spain has yet to do anything but give out empty promises, we just learned that September inflation soared by 3.5% on expectations of a 2.8% rise due to the arrival of a VAT hike this month. Just call it stagflation and a record high misery index: it's not like the people don't know.
Elsewhere things are back to normal as strikes by public sector workers move from Greece and Spain to Italy: university professors, public administration employees and health workers in the CGIL and UIL unions are expected to stop work today with rubbish collectors also expected to join the work stoppage.
Once again recapping the Spanish announcement with DB:
So Spain’s 2013 budget targets a reduction in the deficit from 6.3% of GDP in 2012 to 4.5% in 2013. As ever, growth is the key to whether these targets can be met and so far the evidence of those making such cuts has been that growth has disappointed. On that note, the Spanish government’s projections are based on an assumption of a 1.5% contraction in the Spanish economy this year, followed by a 0.5% contraction in 2013. The latter looks particularly optimistic with DB’s economists forecasting a 1.1% contraction in 2013. The government was keen to point  out that cuts in spending, rather than tax hikes will account for the majority of the deficit reduction. Tax revenues are budgeted to increase by just under 4%, although this is largely mitigated by an increase in interest costs which will increase by 30%. Ministry spending was cut by 8.9% and public servant wages were frozen.

In terms of reforms, the Spanish government announced that it will introduce 43 new laws in the next 6 months to liberalise the energy, services and telecom sectors. New measures will be introduced to reform public administration and deepen labour market reform including wage bargaining. The government, however, shied away from the politically sensitive move of freezing pension indexation. Perhaps most importantly, the EU's economic chief Ollie Rehn said that the Spanish plan goes beyond what the European Commission had recommended in July and represents a “major step” - which may provide Rajoy some comfort that additional conditionality attached to EU/ECB aid will be limited.

The Spanish Government remains undecided on a bailout, with Finance Minister De Guindos saying "The government is in contact with the countries involved…to see what the different possibilities are and how they would work…then we will make a decision" (WSJ). For now the fact that reforms have been announced and that Europe has provisionally endorsed them will arguably encourage Spain to hold out for a few more days and weeks. Watch out for headlines from the important European players over the next few days reacting to Spain's news. This will show how far they think Spain have come.

Meanwhile markets continue to ponder when Moody’s will conclude its review on Spain’s Baa3 rating. Moody’s said in August that the review is “likely to continue through the end of September” however it did say it would wait for more information on Spain’s banking recap needs (which are due today) before deciding. Overnight, US-based rating agency Egan-Jones downgraded Spain’s rating to CC from CC+. Although, after having downgraded Spain seven times this year alone (Reuters), markets could hardly be surprised by this move.
Some more from Citi:
Spanish budget and reform plans. Yesterday the government presented the budget proposal for 2013. The government expects that the 2012 deficit target of 6.3% of GDP will be met as, according to Economy Minister Christobal Montoro, tax revenues will exceed targets. For 2013 the budget cuts will be focused on reductions in expenditures particularly on social spending rather than tax increases. The budget is based on the forecast of a contraction in GDP by 1.5% in 2012 and 0.5% in 2013. According to the economy minister, there would be an adjustment in expenditures of 0.77% of GDP in 2013 and an adjustment in revenues by 0.56% of GDP. Including the measures implemented in 2012, the budget includes an increase in revenues by 3.8% YY in 2013 and a cut in central government spending by 7.3% YY. Over a two-year period the minister expects that the new tax measures would boost revenues by €4.7bn. In order to improve the liquidity situation, the government plans to tap €3bn from the €69bn national pension reserve to help fund pensions. The government also announced the creation of an independent fiscal body to oversee the implementation of the budget measures. In addition, the government approved a reform package under which 43 new laws are planned to be introduced in the next 6 months. According to the proposal the package includes measures to limit early retirement, but not an increase in the retirement age; and further labour market reform initiatives – including a decree on wage bargaining. In addition, there should be a liberalisation of the energy, services and telecoms sectors.

Comment: In our view the 2013 budget is based on a too optimistic GDP growth assumption – we expect a contraction by 1.8% in 2012 and by 3.2% in 2013. In that respect, the total fiscal tightening measures of 1.3% of GDP are probably not enough to meet the 2013 deficit target of  4.5% of GDP. On the reform agenda, leaving the retirement age unchanged and only taking measures to restrict early retirement looks disappointing. However, the wage bargaining decree seems to be a good step. It remains to be seen how quickly the measures will be implemented.
For those who think Olli Rehn's immediate canned remarks praising the Spanish promises are sufficient to get Spain to request a bailout and the conditionality is in place, think again. Rehn is just one voice - many more will have to speak up, especially those who actually fund the bailout mechanisms.
EU's Rehn suggests Spain's economic reforms would meet the Commission's conditionality requirements for financial assistance – EU Economic and Monetary Affairs Commissioner Olli Rehn acknowledged Spain's detailed timetable for economic reforms, which he described as an ambitious step forward and being "clearly targeted at some of the most pressing policy challenges", while going in some cases beyond what the European Commission has asked of Spain. Mr Rehn stressed that he "particularly welcomed the ambitious plans to establish an independent fiscal Council, to further liberalise professional services, and to effectively reduce the fragmentation of the internal market in Spain."

Comment: Alongside an austere 2013 budget relying more on spending cuts than tax increases, this reforms package is, in our view, designed to pre-empt the likely conditions of any international bailout. Reading between the lines, we believe that Commissioner Rehn is sending a clear signal that the Commission would be unlikely to require extra conditionality to give a green light to a Spanish request for financial assistance. However, it remains unclear if the euro area creditor countries – which have to approve a MoU for a Spanish programme in the ESM board – are fully convinced by the Spanish budget and reform package.
Elsewhere in overnight markets:
Markets continue to ponder when Moody’s will conclude its review on Spain’s Baa3 rating. Moody’s said in August that the review is “likely to continue through the end of September” however it did say it would wait for more information on Spain’s banking recap needs (which are due today) before deciding. Overnight, US-based rating agency Egan-Jones downgraded Spain’s rating to CC from CC+. Although, after having downgraded Spain seven times this year alone (Reuters), markets could hardly be surprised by this move.
Recapping yesterday’s action, European markets closed broadly higher, with the Stoxx 600 (+0.3%), CAC (+0.7%), DAX (+0.2%) and FTSE100 (+0.2%) all rebounding from the week’s earlier lows. Spanish 10-yr yields rallied 12bps while the EURUSD gained 0.3%. Markets were helped by a positive lead-in from China where stocks rallied 2.6%, fuelled by yet more rumours of policy action ahead of Chinese holidays next week. Spanish news aside, European data remained soft. The EC’s economic sentiment index hit a fresh 3-year low of 85 (vs 86.1 expected). The ECB’s credit aggregates report indicated that lending to the private sector fell 0.6% (vs 0% expected). In Germany, there were more signs that the economy is slowing, with unemployment rising for the 6th straight month. Meanwhile, Spanish data was predictably weak with housing permits and retail sales down 37% yoy and 2.1% yoy respectively.
Events in the US took a back seat but the S&P500 (+1%) posted a solid gain, closing near the day’s highs, with the bulk of the intraday move coming after the Spanish finance minister said that reform plans go beyond EU recommendations. There were further hawkish comments from the Fed's Charles Plosser, who said that the economy is in a 'funk' and that he was dubious that QE3 would stimulate an economy which is being held back by uncertainty and deleveraging. Markets shrugged off the weaker data prints. Pending homes sales (-2.6% mom vs +0.3% expected), durable goods orders (-13.2%, impacted at the headline by declines in aircraft orders and defence capital goods) and final Q2 GDP (revised back down to 1.3% saar) all surprised to the downside. On a more upbeat note, initial jobless claims fell 26k to 359k, and is encouragingly back at the lower end of the year-to-date range (352k to 392k).
Moving to overnight markets, Asian markets are trading with a positive tone with the Hang Seng (+0.3%) and Shanghai Composite (+1%) leading the way, supported by this week’s record liquidity injections from the PBOC. Domestic Chinese media are reporting comments from Premier Wen that the Chinese economy is due to improve in the coming months, and the government may ease policy if Q3 data disappoints. The Nikkei (-0.7%) is underperforming following the usual monthly data dump in Japan, with the key highlights showing IP down 1.3% mom and CPI unchanged from last month at -0.4% yoy.
In other European news, there was more debate about the ESM’s role in banking recaps. The Bundesbank's Weidmann said that legacy liabilities in banks are national responsibilities and governments should only share risks after Euro-wide bank supervision is in place. Meanwhile, the German president signed the ESM ratification into German law. Back in Spain, the parliament of Catalonia approved holding a referendum on independence from Spain.
However, Spanish Deputy Prime Minister Sáenz de Santamaría said the central government has constitutional means to prevent such a referendum "is willing to use them".
Turning to the day ahead, the key event will be the release of Spain’s banking stress tests (time yet to be confirmed). Elsewhere in Europe, the key datapoints are French and German consumer spending data and EU CPI. In the US, we get August personal spending and Chicago PMI reports. China’s final HSBC PMI will be released over the weekend for those not watching the golf.


How interesting:  Monti says the ECB conditionality and the IMF will hinder bond requests.
I guess Monti is scared that auditors will find that Spain and Italy are truly in a financial mess and they are cooking the books.  This is the reason that both do not want conditionality!:

(Courtesy Bloomberg news)

Monti Says ECB Conditions, IMF Role Hinder Bond Requests

By Andrew Davis and Andrew Frye on September 28, 2012

The European Central Bank should not impose extra economic conditions on nations using its bond- buying mechanism, and the International Monetary Fund shouldn’t have an oversight role, said Italian Prime Minister Mario Monti.
Countries such as Italy and Spain are reluctant to request the bond buying they championed because of uncertainty about what conditions the central bank would seek to impose, he said. The program is only available to countries that are already taming public finances and conditions should not go beyond European Union recommendations made in June, Monti said.
Oversight should be limited to establishing “checks so the countries continue to behave in that positive way,” Monti said in an interview with Erik Schatzker on Bloomberg Television yesterday in New York. “If this is the conditionality that will be finally delivered, should a country be in a market situation suggesting its use, there would be nothing dishonorable.”
The yield on Italy’s benchmark 10-year bond has fallen more than 110 basis points since Aug. 2 when ECB President Mario Draghi first said the bank was prepared to act in tandem with the EU to attack high borrowing costs by buying bonds of distressed euro-area nations. The rally eased after Sept. 6 when Draghi released details of the plan and said the bank would impose strict conditionality and seek IMF participation in overseeing the plan.

Define Conditions

Monti said “it’s not necessary” for the IMF to be involved, and the ECB and the EU need to move quickly to define the conditions that recipient nations should expect.
“I believe that should be really kept to a minimum, because there is no reason to delay something that was already rather well defined in June by the European Council,” he said.
Spain’s 10-year bond yield is hovering near 6 percent and the government announced yesterday a fifth austerity package that may be a move to head off tougher conditions demanded as part of a bond-buying program. Monti said that he didn’t know whether Spain making a request for international aid would help bring down Italian yields or make the country more vulnerable. “We are in unchartered territory,” he said.
Monti is coming under pressure from within his own coalition as the country prepares for elections. The premier, whose diplomacy at the June 28 European summit in Brussels helped set the groundwork for the ECB program, had his crisis- fighting leadership questioned yesterday by Former Italian Prime Minister Silvio Berlusconi.

Berlusconi’s Criticism

“Monti went to Brussels, and he returned telling all the newspapers he won,” Berlusconi said, citing an agreement among EU leaders to expand their use of the European Stability Mechanism rescue fund. “But the fund’s capital is only 500 billion euros” ($650 billion), which is “nothing compared with the size of the public debt in Europe.”
Under Draghi’s bond-buying plan, the ECB will put its resources next to the ESM’s funds.
Italian yields have fallen about 200 basis points since Monti was appointed to lead a government of non-politicians after the resignation of Berlusconi in November. In less than a year he has overhauled the pension system, revamped labor markets, cracked down on tax evasion and implemented 20 billion euros of austerity measures that pushed Italy deeper into its fourth recession since 2001. The cuts have left the country on track to bring its deficit within the EU limit this year.

Monti’s Plans

The premier is rushing to implement those reforms before the elections, due by April. Monti said he won’t run as he has already been appointed as a lifetime senator, and he has no political plans. He still left the door open to second term.
“All I am saying is, I will be a senator -- should there be any special circumstance where the political forces would believe that there might be a need for my service, I would consider it,” Monti said.
Monti’s approval rating rose 1 percentage point to 52 percent of voters this month, according to a Sept. 17 poll by IPR Marketing. That compares with a low of 46 percent in June and a high of 59 percent in February. An eventual second Monti term was backed by 81 percent of investors and business leaders, including at least 40 chief executive officers, who took part in a Sole 24 Ore Radiocor survey this month.
``It would be a step forward for the country,'' Fiat SpA (F) Chief Executive Officer Sergio Marchionne said to reporters in Paris today. ``It would add credibility and remove uncertainty. There are no alternatives, given his abilities.''
Monti didn’t think a second term would be likely.
“I am very confident that elections would bring about a political majority large enough with a political leader that can govern the country,” he said.
Italy’s two biggest political parties, which agreed in November to support Monti’s administration, are resuming their rivalry as campaigning begins. The Democratic Party, led by Pier Luigi Bersani, and Berlusconi’s People of Liberty party are vying to win enough votes to form a government.
“The rigor and credibility Monti provided can’t be turned back on,” Bersani said yesterday.
To contact the reporters on this story: Andrew Davis in Rome at; Andrew Frye in Rome at
To contact the editor responsible for this story: James Hertling at

The misery index in Spain is very high.  It is a combination of both inflation and unemployment.
It has never been higher:

(courtesy zero hedge)

Chart Of The Day: The Misery In Spain Is Everywhere... And Has Never Been Higher

Tyler Durden's picture

We, just like everyone else, have grown quite tired of all phrases containing some variant of "Pain in Spain." Which is why instead we are focusing on its Misery. As in Misery Index, defined as the combination of inflation and unemployment. Following today's announcement of a surge in Spanish inflation which soared from 2.7% to 3.5%, trouncing expectations of a modest rise to 2.8%, it is clear to see that the Misery in Spain has never been higher.

... which for some context - is double the misery of the average European or Italian and triple that of an American...

Charts: Bloomberg


The real truth behind what you read and see on TV:

(courtesy Mark Grant/out of the box and onto wall street)

The Operatic Grandeur Of "More Europe"

Tyler Durden's picture

Via Mark J. Grant, authoer of Out of the Box,
Europe is becoming quite strange. The World is becoming quite strange. A politician gets up and speaks and says nothing, no one listens to what he said, then he is roundly congratulated for his bold words that were heard by no one and then everyone disagrees with what they think he might have said. The Continent seems to be in a dream-state where the worse it gets; the better it is because the ECB will be drawn in and provide liquidity like the ever-after will provide Redemption. I am not sure America is any better actually. In the United States we admit we are printing money while in Europe they “print and deny” but the outcome is about the same.
It is a weird economic scene these days, a Dali landscape that is melting, when worse is better and our leaders intone the old magic; “the higher, the fewer; the never, the less.” I expect, any day, that the ECB will buy all of the sovereign debt of Europe and declare each nation “debt free and without risk.” It will be a gigantic do-over where the ECB is to be re-capitalized by odd aliens that we have not yet met. Greece falls and falls again and the EU demands a plan, which is given, and we herald their actions for yet one more plan that will never be implemented and “God Save the Queen.” Portugal falls and Ireland falls and Spain drafts a new plan, as directed, so that they can get more money and the markets rejoice because it is one more scheme that has all of the chance of implementation of the Tudors taking the Spanish throne.
On the other hand I suppose it is because we cannot invest money off-world either so that we are stuck within the boundaries of what is available and something must be done with the paper printed by all of the Central Banks but it is getting increasingly difficult to make much sense of it. Isometimes feel, with the announcement of each piece of bad economic news as the markets rally, that it means that the Divinity is coming, disguised as a Central Bank, and that we should all close our eyes and partake of the ecstasy of the Saints as we and they receive Stigmata. I must be unclean and unwashed and not worthy as I have received none of blessings bestowed upon the sanctified believers. I watch, I wonder, I gape in fact and ponder just when reality will intrude back into our make-believe state of existence.
"’Tis but a Midsummer Nights Dream"
                              -William Shakespeare
Three Card Monti
You knew it would come to this! I smiled, all alone in my oak paneled office, I smiled and was delighted that it was finally put into writing. The German Chancellor had sung the tune from the rafters; belted out “More Europe” and it is a catchy tune designed for the entire Opera House of the Continent. She has formed the Aria into melodious tones and captured the hearts of her audience until they believed and fell into the Rapture that it was “Money for Nothing” and that the German’s and their bed fellows would provide it whenever asked all in the name of the national anthem which she had so wonderfully performed.
Monti had approached the altar and was received into the flock.
The first move made in the newest version of Three Card Monti is Mr. Monti’s “The European Central Bank should not impose extra economic conditions on nations using its bond-buying mechanism and the International Monetary Fund shouldn’t have an oversight role.” This sleight of hand may be translated into English as “We do not want to be audited either by the IMF or by the ECB; we do not need any foreigners looking at our books because that would be a disaster. We should be given the money for free which is the transformational theme of the Aria sung by Ms. Merkel entitled ‘More Europe.”
“Countries such as Italy and Spain are reluctant to request the bond-buying they championed because of uncertainty about what conditions the Central Bank would seek to impose,” said Mr. Monti as he moved the next shell ahead of the last one. The English definition here is that “We do not want conditions. We do not want anyone telling us how to behave. We do not want the Troika in Rome or Madrid. We just want the money that you have told us that you would give us when we want it.We love the German Chancellor’s rendition of ‘More Europe’ but we do not wish to pay for hearing it. You told us about the Opera but you never said we would have to purchase tickets for the performance.”
Oversight should be limited to establishing checks so the countries behave in a positive way,” Mr. Monti said in a recent interview. This may be translated into the formalized checks such as “How was lunch? Was the fettuccini cooked properly? Everything going ok? Need any more money  today or can we wait until tomorrow?” The very incorrect Italian translation would be, “You must reduce your deficit. The austerity measures that you agreed to must be actually implemented. You cannot give government jobs to family members. Our money is not your money and has to be repaid regardless of how loudly and often you sing ‘More Europe’ on the steps of the Vatican.”
So Here We Are
Good is bad. Bad is wonderful. “More Europe” was written in Babylon and no one can understand the meaning. Economic and fiscal reality is a thing of the past as the world’s Central Banks will provide manna, sustenance and well-being. It is not just the ECB but the markets that are “unlimited and uncapped” and the conditions, there are always conditions I assert, while ignored for the moment, have a funny way of rounding the corner and saying “Hello” just when you don’t expect them. This is where we are as we round the corner. This is where we are going I predict. Good will become good and bad will become bad once more
You may say, “It ain’t so” but I say that it is.


One by one, the  AAA ratings on European nations are in trouble.  Fitch is warning England that there is likelihood that they will lose their coveted rating due to increased pressures on their economy as they have limited fiscal space to absorb further shocks which will duly arrive.

Fitch Warns UK Likelihood It Loses AAA Rating Has Increased

Tyler Durden's picture

One-by-one, the highest quality collateral in the world (according to ratings that is) is disappearing. To wit, Fitch warns that a downgrade of the UK's AAA rating is increasingly likely: "weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK's 'AAA' rating, which has been on Negative Outlook since March 2012." The Negative Outlook on the UK rating reflects the very limited fiscal space, at the 'AAA' level, to absorb further adverse economic shocks in light of the UK's elevated debt levels and uncertain growth outlook. Global economic headwinds, including those emanating from the on-going eurozone crisis, havecompounded the drag on UK growth from private sector deleveraging and fiscal consolidation as well as from depressed business and consumer confidence, weak investment, and constrained credit growth. But no mention of unlimited QE?

Via Fitch: -London-28 September 2012: Fitch Ratings has affirmed the United Kingdom's (UK) sovereign ratings as follows:

--Long-term foreign currency Issuer Default Rating (IDR) affirmed at 'AAA'

--Long-term local currency IDR affirmed at 'AAA'

--Country Ceiling affirmed at 'AAA'

--Short-term foreign currency rating affirmed at 'F1+'

The Outlooks on the Long-term IDRs have been maintained at Negative.


However, weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK's 'AAA' rating, which has been on Negative Outlook since March 2012. With a structural budget deficit second in size within the 'AAA'category only to the US ('AAA'/Negative), and general government gross debt (GGGD) approaching 100% of GDP in 2015-16 under Fitch's revised baseline estimates - the upper limit of the level consistent with the UK retaining its 'AAA' status - thelikelihood of a downgrade has therefore increased.

Global economic headwinds, including those emanating from the on-going eurozone crisis, have compounded the drag on UK growth from private sector deleveraging and fiscal consolidation as well as from depressed business and consumer confidence, weak investment, and constrained credit growth. Fitch now expects the economy to contract by 0.3% in 2012 compared to an expectation of growth of 0.8% when the UK sovereign rating was last formally reviewed in March 2012. The weaker than anticipated economy is reflected in lower corporate tax returns and higher public sector net borrowing, which in the five months to August was GBP59bn compared to GBP48.4bn over the same period in 2011. In light of these developments, Fitch has updated and revised its medium-term fiscal projections for the UK.

Fitch expects only a weak recovery beginning in 2013 and output is not expected to surpass its 2007 pre-crisis peak until 2014. However, the relative resilience of the labour market underscores the continuing uncertainty regarding the medium-term growth potential of the UK economy. Fitch has not revised its previous judgement that the potential annual growth rate of the UK economy is around 2.25% and this assumption is reflected in Fitch's latest economic and fiscal projections published today.

Fitch projects that GGGD and the government's preferred measure - public sector net debt excluding financial interventions (PSND ex) - will peak in 2015-16 at over 97% and 80% of GDP, respectively, before registering a decline in 2016-17. This is one year later than the authorities' supplementary target of having PSND ex decline as a share of GDP in 2015-16, and compares to a previous Fitch projected GGGD peak of about 94% of GDP in March 2012. Fitch's projections assume that the commitment by the Chancellor in last year's Autumn Statement of an additional GBP8bn and GBP15bn of deficit-reduction measures in 2015-16 and 2016-17 respectively will be implemented, though they fall outside the term of the current government and have yet to be specified. It is also assumed that the government implements its consolidation programme as laid out in the 2012 Budget. Fitch's projections are consistent with the government continuing to target a cyclically adjusted current balance by the end of the rolling, five-year forecast period.


The Negative Outlook on the UK rating reflects the very limited fiscal space, at the 'AAA' level, to absorb further adverse economic shocks in light of the UK's elevated debt levels and uncertain growth outlook.

downgrade of the UK's 'AAA' sovereign rating would likely be triggered by the following:

-- General government gross debt failing to stabilise below 100% of GDP and on a firm downward path towards 90% of GDP over the medium-term.

-- Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast.

-- A material downward revision of the assessment of the UK's medium-term growth potential.


The true state of affairs in Japan..a look at Japan's average salaryman.

A great commentary from a fellow who at one time lived in Japan:

(courtesy Wolf Richter/

The Pauperization Of Japan

testosteronepit's picture

Wolf Richter
"Pauperization,” the word, became infamous when three executives of huge consumer products companies voiced it as the new challenge in Europe. To market their products successfully, they changed their commercial strategies and applied what worked in poor countries [The “Pauperization of Europe"]. In Japan, a similar process has hounded the economy, but for much longer. And nothing shows this better than the plight of the ubiquitous but hapless “salaryman.”
He is a cultural phenomenon. He enters the formidable corporate hierarchy upon graduation and struggles within it till retirement. Most of the time, the career trajectory flattens sooner or later. Often enough the aging salaryman is shuffled aside to a “window job” where he might not even have the tools to work, such as a phone.
His life is defined by commutes in packed trains and long hours at work. After work, at restaurants and bars, the informal part of work begins with clients or coworkers to hash out inter-office issues, price differences, design problems, or product failures under the influence of alcohol—the official excuse to be direct in a culture that prizes vagueness.
In return for his labors, the salaryman hands his paycheck to his wife. She manages the household budget, pays the bills, buys what is needed, and makes investment decisions. Stories abound of the Japanese housewife who blew the couple’s life savings on leveraged investments that no one understood. And she’s known for her impeccably wrong timing [The Japanese Are Dumping Their Gold].
She also gives her husband a monthly allowance, kozukai, to buy lunch, dinner, drinks, etc., though regular visits to “soapland,” due to their higher costs, would have to be covered by special company cash bonuses. Now a lot of these structures are loosening up, and lifetime employment is no longer the ground rule, nor is marriage, but for those who end up married, especially if the wife stays at home, the allowance still applies.
In 1979, Shinsei Bank started one of the most insightful polls into consumer spending habits, or rather into male consumer spending ability—the Salaryman Pocket Money Survey. Back then, the average salaryman’s allowance was ¥47,175 ($590) per month. By 1990, the peak of the bubble when money grew on trees, wives indulged their husbands with an allowance of ¥77,725 ($971) per month. Then it crashed. By 2004, it landed on the ¥40,000 mark.
This year? ¥39,756.
And those with kids receive ¥15,000 less than those without kids.
The bursting of the Japanese bubble, now in its third decade, has ravaged salaries, bonuses, household budgets, and thus allowances—and spending. The zero-interest-rate policy that the Bank of Japan has perfected, extensive quantitative easing, and two decades of stimulus budgets that have left Japan saddled with the worst debt-to-GDP ratio in the world ... all conspired against the hapless salaryman. He works harder and longer than ever before, for less pay, and even his lunch money is getting cut.
In 1992, the average salaryman spent ¥746 ($9.32) on lunch; this year, ¥510 ($6.38). Back then, when everybody was still assuming that this was just a temporary lull in the excitement, the average salaryman took an almost leisurely 27.6 minutes to eat lunch; this year, he inhaled it in 19.6 minutes. After-work drinking took the biggest hit: in 2001, the average salaryman forked over ¥6,160 ($77) when he went out to drink. That’s a serious amount of beer. Hence the image of a midnight train stuffed with drunken and barfing guys. This year, he spent only ¥2,860 ($35) per drinking excursion.
The beer industry caught the brunt of it. Beer shipments, a closely watched index based on data from the five major brewers, dropped by 3.7% in 2011, the seventh straight year of declines. Only 442.39 million cases were shipped, the lowest EVER in recorded Japanese beer history. But this August, a miracle occurred. For the first time in years, there was an uptickin beer shipments for the month of 2.8%. Where there is beer, there is hope.
Or maybe not. Eating out got slammed. Again. In 2010, 22.6% of the salarymen said they didn’t eat out at all; in 2011, 35.8% weren’t eating out; and this year, 37.9%. If this trend keeps going, it will destroy the core of Japanese social life. (But those are the lucky ones. The number of welfare recipients set a new record: 2.115 million individuals and 1.543 million households,according to the Ministry of Health, Labor, and Welfare.)
Japanese housewives and other traders who are stuck in an old paradigm are frequently selling gold for the wrong reasons. The most egregious example is that gold often drops when the euro drops. Examining price relationships among the US dollar, the euro, and gold reveals an important pattern for investors. Read.... The Bottom Line on Gold, the Dollar, and the Euro, by Louis James.
And here is my book about Japan. It all started in France with a Japanese girl—a “funny as hell nonfiction book about wanderlust and traveling abroad,” a reader tweeted. Read the first few chapters for free.... BIG LIKE: CASCADE INTO AN ODYSSEY, at Amazon.


If the "Arab Fall" reaches Saudi Arabia this author believes oil will reach 300 dollars per barrel:

(courtesy Marin Katusa/Casey Research)

Why an Islamic Revolution in Saudi Arabia Is a Surefire Way to Send Oil to $300 a Barrel

-- Posted Friday, 28 September 2012 | Share this article | Source:
By Marin Katusa, Casey Research
There is little that would rock the oil world more than a revolution in Saudi Arabia.
But with a coming leadership crisis, it is becoming all too likely.
Saudi is facing major economic challenges as dramatic increases in social spending and domestic fuel consumption eat through the kingdom's all-important oil revenues.
Saudi Arabia is smack in the middle of the Middle East, an ever-tumultuous region currently rocking and rolling more than usual as the Arab Spring challenges longstanding autocratic assumptions, while war-torn Syria and defiant Iran tip the delicate Sunni-Shia religious balance in the world's most important oil region.
While the House of Saud might present itself as a stable, strong, and cohesive royal family, in truth the king and his successors are growing old and incapacitated in a throne room full of competing contenders. Meanwhile, the only other organized social group in the country – the Islamists – are waiting just outside the door.

Want to see oil at $300 a barrel?

To see $300/bbl oil, or to watch the news as Saudi troops attack Tehran, or to see a stranglehold on US oil imports, watch what a failed succession battle in the House of Saud that ends up destroying the whole family and ushering in an Islamist age in Saudi Arabia would do to the price of oil.
It could happen sooner than you think.

A Shaky House of Saud

The king of Saudi Arabia, Abdullah Aziz bin Saud, is almost 90 years old. In Saudi Arabia's royal system, the throne passes not from father to son but from brother to brother. The problem with the system is that none of King Abdullah's brothers are exactly young and full of vigor.
Crown Prince Salman, next in line to the throne, is already 76. He got the Crown Prince nod after two of his elder brothers died. The remaining brothers now average 80 years of age.
A king who ascends the throne in his seventh or eighth decade is unlikely to have the energy or even the time to enact significant reforms. And reforms are needed. I'm not pushing democracy – Saudis don't generally want democracy. What I'm talking about are the endemic problems that are battering the world's biggest oil producer: high unemployment, a corrupt bureaucracy, a crippled economy, a weak education system, and a society full of frustrated youth.
While the country crumbles, the three pillars that have long supported the royal family are also weakening. Massive oil revenues, which have long been used to buy public support, are being squeezed by sharply increased domestic demand. The Wahhabi Islamic establishment that supported the House of Saud is increasingly fractious and is losing credibility. And the royal family itself is struggling to maintain its rock-solid façade after losing two crown princes to old age in just a few years.
The country's foreign relations are little better. The Middle East is in turmoil, and Saudi Arabia's longstanding alliance with the United States is in distress.
Alongside these tangible problems is a multitude of intangible challenges that are revolutionizing the country. The regime used to control the population by controlling access to information, but of course that age is now almost over. The Internet has connected young Saudis with the rest of the world, and that worldview is prompting them to question some of the rules of their society.
Even the religious establishment in Saudi Arabia is seeing its power eroded. Young Saudis are increasingly independent, using the Koran to guide their decisions without following specific decrees from a particular religious leader.
The fact is, Saudi society today bears little resemblance to the passive masses of just a decade ago, and a decade from now the difference will be even bigger.
Trying to lead his country through these modern challenges is a 90-year-old king, backed by a 76-year-old crown prince and their octogenarian brothers.
Not surprisingly, it's not working very well.

New Battles, Old Tactics

When the Arab Spring in Tunisia and Egypt sparked protests in Saudi Arabia, the protesters were not demanding democracy or trying to oust the royal family. No, the young Saudis who filled those streets had more basic demands.
At the top of the list is jobs – 60% of Saudi's citizens are under the age of 20, and the unemployment rate for young adults is nearly 40%. These young people want to be given the opportunity to better themselves and their country, but instead they cannot find work and live on government handouts.
Adding fuel to the fire, those handouts have been shrinking. Saudi Arabia's population has skyrocketed in the last half century. In 1972 the country had 6 million inhabitants; by 1992 that number had climbed to 17 million; and today there are 28 million Saudi Arabians. Oil incomes have climbed too, but not nearly apace. As such the government has been struggling to keep the population appeased with fewer dollars per head every year.
The population keeps growing, and each person in the kingdom keeps using more oil. The result: shrinking oil revenues have to go further. It's not a recipe for success, but when you're 89 years old, you go with what has worked in the past.
And that is precisely what happened in the wake of the Arab Spring: King Abdullah drowned the protestors in money – a $130-billion social-spending package that built new housing, increased payrolls, and boosted unemployment payouts. Saudi Arabia's entire annual budget is just $180 billion, so the king almost doubled spending to appease the protestors.
This tactic cannot work forever. Even in Saudi Arabia there is only so much oil money. The Saudi royals already need an oil price of at least $80 a barrel to support all their social programs, and with domestic oil consumption rocketing upward, that baseline price will keep climbing.
But the unrest continues.

The Summer of Saudi Discontent

After King Abdullah offered billions of dollars in social spending, many protestors went home... except in the country's oil-rich eastern provinces, where the protests never stopped.
For the last 18 months Saudis in the eastern Qatif region have been demonstrating regularly, demanding the release of all political prisoners, freedom of expression, and an end to ethnic and religious discrimination. When Saudi security forces turned on the demonstrators last November, killing five, the protests took on a distinctly anti-Saud tone.
In June, King Abdullah ordered the country's security forces to go on a state of high alert due to what he called a "turbulent situation" in the eastern region.
The unspoken side to the situation is that the turbulence is distinctly religious.
Most Saudis are Sunni Muslims, and Sunni Islam is the only allowed religion in the country. However, 15% of the country's inhabitants are Shia, and they have faced direct and indirect persecution for decades.
Guess where the Shia live? In those turbulent, oil-rich eastern provinces.
That is one aspect of Saudi discontent. But there are more.
For example, last week Saudi security forces raided al Qaida cells in Jeddah and Riyadh. Evidence recovered during the raids supports the suspicion that a new branch in the Arabian Peninsula is gathering momentum for a wave of attacks. The royal family is at the top of their list of targets. Toppling the House of Saud would be a major victory for al Qaida, simply because of the instability that would ensue.
All told, between external threats, internal divisions, and domestic struggles, the Saudi royal family looks very unstable indeed. So what would happen if the House of Saud crumbled?
Remember, religion is the only social structure in Saudi Arabia. There are no political parties, unions, or social organizations, aside from a few charities run by members of the royal family. Were the House of Saud to fail, the only candidates ready to step up would be the Islamists.
The shift to Islamist rule in Egypt has made the world pretty nervous. Longstanding allegiances are in limbo, and long-term relationships are changing.
Imagine if it happened in Saudi Arabia.
Islamist leadership in Saudi would not be the moderate, democratic version we're seeing in Egypt. The Islamists in Saudi Arabia are Wahhabi Muslims, who practice the strictest and most conservative version of the religion. I can see these imams making several moves.
First, a Saudi Arabia led by Wahhabi Islamists would not stay at peace with the Shia Islamic Republic of Iran. Both branches of Islam believe the other has strayed so far from the path that its followers are infidels. Odds of open war between Saudi Arabia and Iran would shoot sky-high the moment Islamists took power in Saudi Arabia.
Even worse, a Wahhabi Islamist Saudi Arabia might well turn its strongest weapon against the infidels of the West – by turning off the oil taps. It would be the 1973 oil crisis all over again, but in an even more oil-dependent world.
The price of oil shot up 300% in six months during the oil crisis. Today, that would mean an oil price of $300 per barrel.
It would also mean the end of the era of friendly US-Saudi relations... and the demise of the petrodollar. That is a story in itself – one of great significance to anyone who owns US dollars. I have discussed previously how a US-Saudi deal to only use dollars to trade oilcreated a deep pool of support for the US's currency - and what will happen if the petrodollar dies. The short version is that as the global oil trade moves away from US dollars into yuan, yen, rubles, and pesos, the world would have yet another reason to devalue the dollar.
Expensive oil, open Sunni-Shia war in the Middle East, the loss of one of the world's biggest oil producers as a stalwart ally, and an inevitable increase in religious politics across the Arabian Peninsula – such are the likely outcomes if the House of Saud comes tumbling down.
It is not inevitable. There are 7,000 princes in the Saud royal family, the result of multiple wives and lots of progeny. In that mix there is undoubtedly a prince with the right mix of progressive thought and religious reverence to lead Saudi Arabia through its succession and into the future.
But whenever a throne room is that crowded, it is very easy for a brawl to break out, depriving that perfect prince of his chance and giving the Islamists their opening.
Either way, oil investors with the right picks in their portfolio will prosper, and the Casey Research energy team will be available to guide you along the way.

Your opening Spanish 10 year bond yield at 7 :36 am:

Spanish bonds are now well above the 6% level showing weakness.


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6.055000.10400 1.75%
As of 07:16:03 ET on 09/28/2012.

your opening Italian 10 year bond yield at 7:37 am

Italian bonds are now well above the 5% level showing weakness.

Italy Govt Bonds 10 Year Gross Yield

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5.175000.05200 1.02%
As of 07:21:16 ET on 09/28/2012.

Your  key early currency crosses:  (showing tremendous USA dollar strength)

Eur/USA  1.2927  up .0017
USA/Japan 77.60  up .004
GBP/USA    1.6205  down .0027
USA/Canada  .98047 down .0002


Your early European trading levels prior to NY opening  (7: 43 am) 

red ink all over the place.

FTSE  down 4.03 points or .07%
Paris CAC down 31.1  points or .90%
German DAX down 25.38 points or .35%

and Spanish Ibex down 123.3 points or 1.57%.


Your closing Spanish 10 year bond yield: 


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5.938000.00700 0.12%

Your closing Italian 10 year bond yield: 

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.092000.02600 0.51%

Your closing figures from Europe: 


FTSE  down 37.35 points or  0.65%
Paris CAC down 84.50points or 2.46%
German DAX down 73.87  points or  1.01%

and Spanish Ibex down 133.8points or 1.71%.

The Dow closed down 48.84  (.36%)     points.

Your closing currency crosses tonight:

Euro/USA 1.2856 down .0058
USA/Japan: 77.915 up .318
GBP/USA  1.6168 down 0063
USA/Can: .9834 up 0030

And now for some USA stories.

The first story is a must read.

The author from Silver Doctor contributor, AGXIIK, offers his reason for further concern as the fiscal cliff approaches.  On December 31st, the 100% insurance guarantee on all insured deposits disappears. The FDIC will revert back to $25,000 per account.  This will result in the following:

1. The big banks will be the recepients of the purchase of mortgaged back securities (from QEIII).  Much of this stuff is junk and with this purchase, bank accounts swell in dollars as they remove the bad junk from the books of the banks.

2.There will be a huge demand to park these funds and as such treasury bills will resemble the bills of Germany and Holland going negative.

3.  Running parallel to this, the removal of the FDIC will cause big depositors to leave the banks and park their money in treasuries.  This will also hasten the downturn in yields into the negative territory.

4. The Social security trust is now facing its own fiscal cliff.  Instead of earning 5 to 6% on its bonds as they are cashed in for further bonds, the new yield is around on average 1.7%.  The social security trust will be bust in 10 years.

A great article for you to read:

(courtesy silver doctors/AGXIIK)


Submitted by SD Contributor AGXIIK:
As of January 2013 the FDIC stops offering 100% coverage for all insured deposits.  That amounts to $1.6 trillion in deposits, 85-90% deposited with the TBTF mega banks.  Once the insurance ramps back to $250,000 the FDIC risk amelioration offered to large depositors will cause them to flee from the insecurity of the much reduced FDIC coverage.  This money will rotate immediately into short term Treasury securities.  The treasury, in order to handle this flood of money, will immediately offer negative interest rates.  This financing will resemble the .5% negative interest rate offered by the Swiss and Germans on the funds flooding to their banks from Spain, Greece and Italy. 
This will be a bank run much larger than the Euro banks flight to safety
I have noticed two disturbing matters that will most certainly come as a result of the Fed MBS program.
1.  The funds from the Fed purchases will rotate to the Too Big To Fail Banks. This debt is already junk bond status due to the nature of the underwater mortgages and delinquencies, hence the reason for the new Fed goon Squad going after borrowers.
This debt will be as bad or worse than the debt of Greece, Spain and Italy, rated CCC-
2. The banks receiving these funds will rotate the money immediately into short term treasury securities that will be priced at NIRP. the reason for that follows:
3.  As of January 2013 the FDIC stops offering 100% coverage for all insured deposits.  That amounts to $1.6 trillion in deposits, 85-90% deposited with the TBTF mega banks.  Once the insurance ramps back to $250,000 the FDIC risk amelioration offered to large depositors will cause them to flee from the insecurity of the much reduced FDIC coverage.  This money will rotate immediately into short term Treasury securities.  The treasury, in order to handle this flood of money, will immediately offer negative interest rates.  This financing will resemble the .5% negative interest rate offered by the Swiss and Germans on the funds flooding to their banks from Spain, Greece and Italy. This will be a bank run much larger that the Euro banks flight to safety.
4. The Social Security Trust fund must make at least 5-6% return to maintain its balance and provide income to the SS recipients.  The TF is still guaranteed to go bankrupt by 2033, 21 years from now.  The TF is required by law to invest in Treasury bonds.  The actuarial problem now facing the TF is that they will be rolling old bonds yielding 5.6% into a yield pool averaging 1.4%, a 75% drop in income.  This dramatic yield drop coupled with a 60% increase in SS recipients from 50 million to 91 million in the next 10 years will assure the TF will go bankrupt in about 10 years.
This irreducible math is going to prove an insurmountable obstacle to those who are recently retired, have long live genes or plan to retire in the next 10 years.  If the SS TF goes bankrupt then benefits will be cut by 25% .  Inflation adjustments were never able to front run the lost in income.  The inflation rate of 8% today and 15% tomorrow will destroy the senior investment pool.
Another few unintended consequences of QE 3.  Thanks Ben.   May you rot in hell!

Check out these similar articles:
  1. FDIC Rejects Bank of America Mortgage Bond Settlement
  2. 4 More Banks Closed by the FDIC
  3. 5 More US Banks Closed Tonight By the FDIC
  4. The FDIC is Working on Memorial Day Weekend!?!
  5. First National Bank of Olathe, Kansas Becomes 64th Bank to Fail in 2011


The next big crisis:  student loan delinquencies are on the rise and will become the next subprime crisis.
There is now 914 billion in Federal student loans and the rate of default has been rising to 13.4%.  Thus it looks like over 120 billion dollars of these loans will eventually default.

Your next subprime mess: student loans

(courtesy zero hedge)

The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default

Tyler Durden's picture

Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst. This is a question that we specifically posed a month ago when we asked "As HELOC delinquency rates hit a record, are student loans next?" Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out the reason why its was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system.
Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates. The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. The number is stunning because it is nearly 50% greater than the old benchmark, which tracked a two year default cohort, and which was a "mere" 8.8% for the 2009 year. Broken down by type of education, and using the new improved, and much more realistic benchmark, for-profit institutions had the highest average three-year default rates at 22.7 percent, with public institutions following at 11 percent and private non-profit institutions at 7.5 percent. In other words, more than one in five federal student loans used to fund private for-profit education, is now in default and will likely never be repaid!
And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated),there is now at least $122 billion in federal student loan defaults. And surging every day.
Ladies and gentlemen: meet the new subprime.
Another that quietly reported today on the change in the Department of Education's default tracking methodology was Bloomberg in "Student-Loan Default Rates Soar as Federal Scrutiny Grows." Needless to say, it was not impressed, because the new data indicated that there had been a concerted push by all sides to misrepresent the severity of the student debt problem, by over 50%. The "why" is quite simple:
The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.

“Default rates are the tip of the iceberg of borrower distress,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, California.

On the stump, President Obama has touted an executive order that eases the process for applying for a loan program that lets students make lower payments tied to their income -- easing their burden and making it less likely they will default.

Under the new three-year measure, colleges with default rates of 30 percent or more for three consecutive years risk losing eligibility for federal financial aid. Schools can also be barred from the program if the rate balloons to 40 percent in a single year. The sanctions don’t take effect until results are released in 2014.
There it is again: a mega-government which gives amply with one hand, and yet with the other skews the incentives in the system to represent reality as far better than it truly is. One way to underwhelm reality and to soothe the blow of the true extent of the popped student loan bubble was using a shorter data cohort.
Some for-profit colleges encourage students to defer
payments in their early years, in an effort to keep down default rates that could jeopardize their federal funding, according to a report by the Senate Committee on Health, Education, Labor and Pensions released in July.

The report accused for-profits of using the tactic to manipulate their default rates. It singled out the role of SLM Corp. (SLM), the largest U.S. student-loan company commonly known as Sallie Mae. A subsidiary, General Revenue Corp. counsels for- profit colleges on keeping down default rates. University of Phoenix, owned by Apollo Group Inc. (APOL), is a customer, according to the Congressional report
Whether or not the reason for the government to demand more accurate data was to scapegoat the private sector yet again, what it did instead if expose just how deep the student loan hole already is. Because now that we know the revised default data, we can put it together with the recently revised as of a month ago revised total student loan notional number. Recall from the Fed:
The revisions to the data are fairly substantial: as of our August report, 2011Q2 student loan balances were reported at $550 billion. We now estimate that student loans outstanding in that quarter (2011Q2) amounted to $845 billion, $290 billion or 53.7% higher than we reported earlier. These previously excluded loans were also missing from the total debt outstanding; as a result, our estimate of total debt outstanding in 2011Q2 is also revised upward by $290 billion (2.5%).
This is what student debt looked like a month ago when we firstreported the data:
One can see why everyone in the Federal administration has been so reticent about disclosing the true state of the Federally-funded student loan bubble. Because if one simply assumes the rising default rate has kept constant across all recent cohorts since the updated 2009 number, it would mean broadly speaking, that of the $914 billion in Federal Student Loans at least 13.4% will end up in default. Over $120 billion.
Of course all else is never equal: Federally funded student loans are now increasing at a rate of over $60 billion per quarter. This means that in just about 18 months, the total size of the Federal student loan market will hit $1.3 trillion. Why is that number important? Because that is how big the subprime market was at its peak in late 2007, when everything went to hell and the last credit bubble popped. From Responsible Lending:
As can be seen on the table above, 20% of all subprime mortgages was then expected to default (the ultimate number ended up being far higher). Note that as mentioned above,already over 22% of for-profit student loans are in default.
In other words, the Federal student loan bubble has not only popped, but has all the carbon copy makings of the next subprime crisis. Only when it pops it won't be New Century and Countrywide Financial on the hook: it will be all of America's taxpayers. Remember: these are Federal loans.
And the biggest problem: unlike housing where there is always at least some recovery of collateral, as the house remains, with student debt there is no recoverable asset as the asset is a human being. Granted said human effectively becomes a debt slave courtesy of the non-discharge nature of the student loan, which can not be wiped out even with a personal bankruptcy, but assuming the taxpayer can recover any money using discounted garnished wage flows of what are effectively perpetual(ly discouraged) debt slaves of the system, is simply idiotic.
We give Bernanke at most 2 years before everyone is aware of the true extent of not only the student debt bubble, but that it has already popped, at which point student loans will be the next "asset" to be monetized by the Federal Reserve.


Goldman Sachs reduces his 3rd quarter GDP forecast growth to only 1.9% from his previous forecast at 2%.  

(courtesy zero hedge)

Goldman Cuts Q3 GDP Forecast To Stall Speed 1.9%

Tyler Durden's picture

There was a time when Goldman, which recently went full retard with its bull thesis, seeing only upside in everything from stocks (and a once in a lifetime opportunity to sell bonds... just like in March, and then back in the summer of last year, and so on), to EURUSD, to housing, just like it did in December 2010, only to be humiliated a few short months later, had its Q3 GDP forecast at 2.3%. In fact the latest Q3 annualized forecast of 2.3% economic growth as recently as September 11. How much has changed in two short weeks. Apparently, out of leftfield, so many things have gotten worse that a whopping 0.4% or 20% of the growth in the quarter has bee eliminated in under three weeks. Just out from Goldman: "While nominal personal spending and core PCE prices rose in line with expectations in August, real spending gains were modest and income grew less than expected. We reduced our Q3 tracking estimate for real GDP growth from 2% to 1.9%." And that's why Jan Hatzius gets paid the big bucks. Only problem is now that Goldman has gotten the QEternity it lobbied for so long and hard, where will the upside growth come from?

DJ Fed's Fisher: Recovery Has Been Disappointing
Fri Sep 28 13:45:10 2012 EDT

Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is "drowning in unemployment" after several years of listless jobs growth.
The recovery so far has been "disappointing," said Mr. Fisher, at a luncheon hosted by the Metroplex Technology Business Council at the University of Texas Dallas. Mr. Fisher argued that immigration policy is "idiotic" because it discourages overseas talent educated in the U.S. from staying.
Mr. Fisher has argued vociferously in recent weeks that the Fed's decision to launch opened-ended mortgage bond buying as an economic stimulus was a mistake.
Mr. Fisher, a non-voting member of the Fed's policy-setting committee, has opposed further monetary stimulus for more than a year.
Mr. Fisher feels that markets are "addicted" to monetary easing, and should be disabused of the notion that the Fed stands behind securities prices. He compares short-term focused Wall Street traders to sufferers of attention-deficit disorder, and the Fed their doctor, doling out Ritalin.
Mr. Fisher, Richmond Fed president Jeffrey Lacker and Philadelphia Federal Reserve President Charles Plosser have become the most strident opponents of the quantitative easing policy, dissenting from Chairman Ben Bernanke's policies at meetings, and, increasingly, in public.


I will conclude with this week's wrap up courtesy of Greg Hunter from USA watchdog:

Greg Hunter’s 
There were lots of fireworks at the United Nations this week.  Yesterday, the Prime Minister of Israel, Benjamin Netanyahu, was drawing a red line of his own on a crude picture of a bomb.  Don’t laugh, because he was really talking to the U.S. audience in illustrating his point that Iran is getting close to building a nuclear bomb.  It was simple but effective.  Earlier in the week, Iran’s President Mahmoud Ahmadinejad rejected charges that his country was becoming a nuclear threat to the world.  He cleared up the controversy about the quote “wiping Israel off the face of the earth” and said he was talking about “occupied territories.”  Ahmadinejad says he has long been misquoted.
Ahmadinejad keeps saying he wants peace but contradicted himself earlier in the week when he said Israel will be “eliminated” because it does not belong in the Middle East.  President Obama also addressed the UN and told Iran that the time to resolve the nuclear standoff peacefully was “not unlimited.”  Obama also said, “. . . United States will do what we must to prevent Iran from obtaining a nuclear weapon.”   By the way, Iran test fired anti-ship missiles this week.  The world is inching towards war, not away from it.  We’ve all heard about the “unlimited” QE (money printing) by the Federal Reserve it says is to revive the economy.
Now, the Fed has announced it is ready to bail out the EU if things spiral out of control.  The ECB also has an “unlimited” printing money policy.  Is there any wonder why gold is surging and everyone is predicting higher prices?  It appears it is not working because the numbers for durable goods are in for August, and they plunged more than 13%.  I have been telling you this for a couple of years that there is no real recovery, and there is not.  John Williams at calls the economy “bottom bouncing at best.”   Join Greg Hunter as he gives his analysis on these stories and more in the Weekly News Wrap-Up.


I wish you all to have a grand weekend and I will see you Monday night.


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