Tuesday 31 January 2012

Euro Rout Looms.

Baltic Dry Index. 702 -24

LIR Gold Target by 2019: $30,000. Revised due to QE programs

The Compagnia dei Bardi was a Florentine banking and trading company which was started by the Bardi family. The Bardi company was one of three major Florentine banking companies (called "super-companies" by some modern scholars) that assembled large amounts of capital and established wide-ranging, diversified business networks, doing business throughout the Mediterranean and in England. The Bardi traded oil and wine, and had close economic ties to southern Italy and Sicily. Their chief product, however, was high-quality woolen cloth. The Bardi were the largest of these super-companies, however, and seem to have been 50 percent larger than their closest rival, the Peruzzi company.

In 1344, at about the same time as the Peruzzi company, the Bardi company went bankrupt and the Florentine writer Giovanni Villani blamed this on the repudiation of war loans by King Edward III of England

They came, they talked, they argued, they lied they dithered and then they feasted, Europe’s joke of what passes for leaders in the 21st century, met in strike torn Brussels yesterday, and agreed a new version of the Maastricht Stability Pact. The new one is supposed to be more effective than the old one. Of course everyone knows that if Germany or France chose to ignore it citing a vital national need, the new one will be as effective as the old one. This is Europe after all. The land between the Urals and the Atlantic made for liars, bureaucrats, and tanks. We open with the results from Europe’s umpteenth “leaders” summit. Bismarck and Churchill it aint.

"When it becomes serious, you have to lie"

Jean-Claude Juncker. Luxembourg Prime Minister and president of the Euro Group of Finance Ministers. Confessed liar.

JANUARY 31, 2012

Europe Tightens Fiscal Ties

Leaders of Euro Zone Agree on Closer Union; Still No Deal to Reduce Greek Debt

BRUSSELS—Leaders of 25 European Union governments agreed Monday night on what some billed as a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the euro zone—yet Greece's looming debt restructuring threw a shadow over the summit.

The leaders discussed Greece but provided no further clarity on the eventual outcome of an issue that was creating increasing nervousness in financial markets Monday.

European stocks fell Monday and the euro lost ground against the dollar, while Portugal's borrowing costs surged, with the 10-year government bond yield reaching euro-era highs. The summit ended after markets had closed in the U.S.

In a joint statement, the EU leaders noted "tentative signs" of economic stabilization in Europe but said financial market tensions continue to weigh on the economy.

The final shape of the deal to reduce Greece's debt is still unknown after months of wrangling between the Greek government, representatives of bondholders, and officials from the EU, the International Monetary Fund and the European Central Bank.

----One question the summit didn't address: whether official creditors, such as the ECB, will also be needed to reduce Greece's debt to levels that it is likely to be able to sustain in the long term.

After the summit, Greek Prime Minister Lucas Papademos met with other senior European officials, including Jörg Asmussen, the German representative on the board of the ECB. Officials said the talks likely concerned conditions to be imposed on Greece so it can receive its new loans. But afterward, Luxembourg Prime Minister Jean-Claude Juncker, who attended the meeting, said it yielded no conclusions.



In other European news, get ready for a Portuguese bankruptcy. Mr. Market has already moved on from Greece and is in the process of rolling up Club Med. Three year government debt is at 25%. Get ready for a Friday night massacre. Stay long gold and silver, fiat is unravelling.

We do not err because truth is difficult to see. It is visible at a glance. We err because this is more comfortable.

Alexander Solzhenitsyn

Portuguese storm gathers as EU leaders fight over Greece

Surging borrowing costs in Portugal have raised the spectre of a second full-fledged contagion crisis in the eurozone, eclipsing the latest efforts by European Union leaders in Brussels to agree on Europe's bail-out machinery and a strategy for Greece.

Yields on Portuguese 10-year bonds hit a fresh record of 17.38pc on Monday even though the country is already shielded by a €78bn (£65.2bn) package from the EU, European Central Bank (ECB) and International Monetary Fund "troika" and does not have to tap the markets this year.

Reports also emerged on Monday night that European banks were gearing up to ask the ECB's emergency funding scheme for up to twice as much in funds as the central bank supplied in its debut €489bn auction last month.

The news reveals the extent of the liquidity squeeze on banks – with some chief executives looking to tap the ECB for up to triple the amount they originally borrowed, when the three-year money auction takes place on February 29.

The funding facility was launched in December last year to stave off a second credit crisis – with €230bn of bank bonds due for repayment in the first quarter of 2012.

Equity markets fell across Europe on Monday, with France's CAC and Spain's IBEX both down 1.6pc.

Santander Net Slumps on Real-Estate Charges

By Charles Penty - Jan 31, 2012 8:24 AM GMT

Banco Santander SA (SAN), Spain’s biggest lender, said fourth-quarter profit plunged as it anticipated tougher rules on recognizing real-estate losses at home and earnings declined in the U.K. and Brazil. (SANB11)

Net income fell to 47 million euros ($61.9 million) from 2.1 billion euros a year earlier, the bank said in a filing to regulators today. That compared with the average 1.78 billion- euro forecast in a Bloomberg survey of 10 analysts.

Santander and other Spanish banks are under pressure from Mariano Rajoy’s new government to recognize more losses on building land and apartments that have piled up on their balance sheets as a result of the country’s real-estate crash. The lender booked 1.81 billion euros in charges for Spanish real- estate provisions and a 600 million-euro goodwill charge at its Portuguese unit as profit sagged in its biggest markets.

“People do want to see these risks provisioned for properly and the sooner the better,” said Daragh Quinn, an analyst at Nomura International in Madrid, referring to the bank’s Spanish real-estate assets.

Next, how safe is it to use Deutsche Bank as a counterparty? The assumption is that the Bundesbank stand behind them, ready and able to recapitalise them if they were to go the way of Lehman, but supposing their troubles were down to outright fraud? Would the German taxpayer really bailout German peddled American fraud? Maybe maybe not, it depends on how dumb we think the German taxpayer is. Below Der Spiegel on the deepening troubles of Germany’s leading bank. Sounds like another job for the ECB’s LTRO next month. Of course that money is supposed to be lent out by the banks, but with questions over Deutsche Bank and Commerce Bank, SocGen, UniCredit, et al, is any bank in Europe safe to deal with? And just wait till the markets write off Italy and Spain.

"We finished the year, and we reported that we had $17 billion of cash sitting at the bank's parent company as a liquidity cushion. As the year has gone on, that liquidity cushion has been virtually unchanged."

Bear Stearns CEO Alan Schwartz. March 12, 2008. Bust March 17, 2008


To continue reading subscribe to the LIR at Currency Countdown.

Friday 27 January 2012

Recovery? What Recovery?

Baltic Dry Index. 784 -24

LIR Gold Target by 2019: $30,000. Revised due to QE programs

'John Bull can stand many things, but he cannot stand two per cent.'

Walter Bagehot.

For more on John Bull and two per cent scroll down to Crooks Corner. Are ultra-low interest rates helping or hurting the global economies? Is ultra-low, too low to stimulate growth? Are ultra-low interest rates self-defeating?

Is America’s relative boom real? While Europe stays mired in what looks to be a double dip recession, America had shown weak signs of building on a recovery. Yesterday that recovery was shaken, stirred and rocked.

New Home Sales in U.S. Fell in December

By Alex Kowalski - Jan 26, 2012 3:48 PM GMT

Sales of new U.S. homes unexpectedly declined in December for the first time in four months, capping the slowest year on record for builders.

Purchases (NHSLTOT) of single-family properties decreased 2.2 percent to a 307,000 annual pace, figures from the Commerce Department showed today in Washington. The median forecast in a Bloomberg News survey of economists called for a rate of 321,000 home sales. Last year marked the worst year for the industry in records going back to 1963.

The threat of further price declines may be dissuading some Americans from buying a new home even with mortgage rates near all-time lows and more people finding work. Following a lull in 2011, a wave of foreclosures may hamper the recovery in real estate as more distressed properties are put on the market.

----Today’s figures underscore the Federal Reserve’s view that the housing market is holding back the U.S. expansion. In 2011, builders sold 302,000 homes, down 6.2 percent from 2010. Sales in the Northeast and West were also the lowest on record, while purchases in the South were the weakest since 1966.



In European news, more of the same. Doom, gloom and yet more doom.

JANUARY 26, 2012, 10:55 A.M. ET

Rehn: Lenders May Need to Boost Greek Aid

DAVOS, Switzerland—European Union economics commissioner Olli Rehn said euro-zone governments may have to increase their contribution to Greece's debt deal and declared he was hopeful agreements could be struck soon to increase euro-zone bailout funds and International Monetary Fund resources.

He also made an appeal to the U.S. and other countries not to block an expansion in IMF resources—even if they didn't want to contribute directly themselves.

"It's in the interests of all concerned that we conclude a voluntary deal [for Greece] in the coming days, preferably in January rather than February," he said in an interview while attending the World Economic Forum in Davos.

He said once a deal was reached in Greece's debt-restructuring talks, a revised debt-sustainability analysis would follow—after which the contribution of other euro-zone member states might have to be adjusted. "I don't rule out a small adjustment of lending needs of the euro-area member states," he said.

Germany's Chancellor Angela Merkel on Thursday shrugged off suggestions that public creditors to Greece should increase their contribution, stressing that debt restructuring talks with Greece must first of all focus on a voluntary restructuring deal.



Spain's Finance Minister Cristobal Montoro admits unemployment rate has jumped to 24pc

Spain's unemployment rate has jumped to nearly 24pc in the fourth quarter, Finance Minister Cristobal Montoro said on Thursday, confirming that the country is still in the throes of a long and painful economic crisis.

AP 3:18PM GMT 26 Jan 2012

Mr Montoro told a parliamentary commission on Thursday that official figures due out Friday will show 5.4m people were out of work at the end of December, up from 4.9m in the third quarter, when the jobless rate was 21.5pc.

Spain already has the highest unemployment rate in the 17-nation eurozone and is near its record of 24.5pc unemployment, set in 1993.

The new conservative Popular Party government has pledged major labor reforms in a desperate bid to halt further job losses. A similarly-aimed reform in 2010 by the previous Socialist government appears not to have had a major effect on the labor market.

The economy is expected to fall back into recession this quarter - GDP fell 0.3pc during the last three months of 2011 and is expected to slide further through March.

"The government's policy must be to overcome, and do so as quickly as possible, the worst economic crisis in our history, the biggest destroyer of employment, the one that has most sapped our youths' confidence in their future," said Mr Montoro.

Spain, which also has a swollen deficit, is battling to avoid being dragged further into a debt crisis that has already forced Greece, Ireland and Portugal to seek financial bailouts.



We end for the week with China. China must save capitalism, say the elite 1% partying in Davos. But is China all it seems? Is China already in its own bust?

It's now up to China to save capitalism

It's official. Britain is sinking back into recession. OK, so technically we are not yet in one. A recession is defined by two successive quarters of economic contraction. We've only had one quarter formally confirmed. But not many would now bet on a positive outcome for the first three months of 2012.

-----Of course it is right that markets are made more responsible, and of course better ways of sharing the spoils of economic growth more equally have to be found. But advanced economies are finished unless they relearn some of the free market disciplines from which they sprung.

The contrast between Western gloom and Eastern optimism is again striking this year, and it is something that goes beyond the immediate challenges of the eurozone crisis.

According to forecasts aired by Indonesia's minister for creative industries, the total size of the world's middle class will more than double to 4.9bn by 2030, with 85pc of the growth occurring in the developing world. By then, some 65pc of this middle class will be in Asia.

Long term predictions of this sort are always going to be suspect, but few would disagree with the thrust of what the Indonesian minister is saying.

Much of the growth of the next two decades is going to come from the developing world, so that's where business and finance will focus their energies. Asia's low debt to GDP and massive foreign exchange reserves stand in marked contrast to the over indebted West, which still faces years of growth stultifying deleverage.

Asked what he thought the future held, Robert Shiller, Professor of Economics at Yale University, cited research that historically crises of this magnitude last at least ten years. Dating the start of the financial crisis, to August 2007, that would imply another five years to go.

Joseph Stiglitz, Professor Shiller's equivalent at Columbia, retorted that given policymakers were doing many of the wrong things, he found the idea of crisis abatement in 2017 "very optimistic".

Capitalism saved China, it is sometimes said; it's now up to China to save capitalism, for there is depressingly little sign of Western nations standing up for it.



Jan. 26, 2012, 7:36 p.m. EST

China’s yuan set for more international role

HONG KONG (MarketWatch) — Big changes could be underway for China’s currency this year, as Beijing moves forward with plans to free up its forex rules and increase the use of the yuan in its trade with the world.

Unnerved by the financial crisis in the euro zone, Chinese policy makers are contemplating a new approach that won’t be immediately obvious in the currency charts, according to one analyst.

Economist Intelligence Unit’s Asia economist Duncan Innes-Ker in London said the consensus in Beijing is tilting towards efforts to accelerate the internationalization of the yuan — a reform that would also entail a gradual appreciation of the Chinese currency and would bring forward the eventual end of China’s managed foreign-exchange regime.

“What you saw last year was the Chinese trying to diversify their foreign-exchange reserves [which are] being savaged by what’s going on in the euro area,” said Innes-Ker.

The shift seems to have garnered momentum around the middle of 2011, he said, with an expanded international role for the yuan backed by the Ministry of Finance and the People’s Bank of China, and with the Ministry of Commerce — which has traditionally supported a weak currency to help exporters — apparently losing clout.



China’s very mysterious data

By Ambrose Evans-Pritchard Last updated: January 26th, 2012

A quick observation.

I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc.

The Shanghai Container Freight Index fell 1.4pc to a record low of 919.44 in November, after sliding relentlessly for several months. It has picked up slightly since.

The Baltic Dry Index measuring freight rates for ores, grains, and bulk goods, has fallen 44pc over the last year. Kasper Moller from Maersk in Beijing said weak Chinese demand for iron ore was the key culprit.

Cautionary warning. The BDI index also reflects the shipping glut, so it is not a pure indicator.

However, rail, road, river and air freight volume for the whole of China fell to 31780m tons in November (latest data), from 32340m tons in October. Not a big fall, but still negative. (National Bureau of Statistics of China.)

Chinese electricity use was flat in over the Autumn, with a sharp fall in the (year-on-year) growth rates from 8.9pc in September, to 8pc in October, and 7.7pc in December.

Residential investment has been contracting on a monthly basis, and of course property prices are now falling in all but two of China’s 70 largest cities.

So how did China pull off an economic growth rate of 8.9pc in the fourth quarter?

Beats me.

I strongly suspect that the trade and power data reveal the true state of China’s economy.

There clearly was a pick up in early January but I stick to my view that China has inflated its credit bubble beyond the limits of safety – an increase of 100pc of GDP in five years, or twice US credit growth from 2002-2007 – and that Beijing cannot continue to gain much traction with this sort of artificial stimulus.

Indeed, the extra boost to GDP from each extra yuan of credit has collapsed, according to Fitch Ratings.



"Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium."

Murray N. Rothbard

At the Comex silver depositories Thursday final figures were: Registered 35.96 Moz, Eligible 91.03 Moz, Total 126.99 Moz.

Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today, a timely reminder from Walter Bagehot, 1873.

Times of credit mean times in which the bills of many people are taken readily; times of bad credit, times when the bills of much fewer people are taken, and even of those suspiciously. In times of good credit there are a great number of strong purchasers, and in times of bad credit only a smaller number of weak ones; and, therefore, years of improving credit, if there be no disturbing cause, are years of rising price, and years of decaying credit, years of falling price.


This is the meaning of the saying 'John Bull can stand many things, but he cannot stand two per cent.:' it means that the greatest effect of the three great causes is nearly peculiar to England; here, and here almost alone, the excess of savings over investments is deposited in banks; here, and here only, is it made use of so as to affect trade at large; here, and here only, are prices gravely affected. In these circumstances, a low rate of interest, long protracted, is equivalent to a total depreciation of the precious metals. In his book on the effect of the great gold discoveries, Professor Jevons showed, and so far as I know, was the first to show, the necessity of eliminating these temporary changes of value in gold before you could judge properly of the permanent depreciation. He proved, that in the years preceding both 1847 and 1857 there was a general rise of prices; and in the years succeeding these years, a great fall. The same might be shown of the years before and after 1866, mutatis mutandis.

----In consequence, a long-continued low rate of interest is almost always followed by a rapid rise in that rate. Till the available trade is found it lies idle, and can scarcely be lent at all; some of it is not lent. But the moment the available trade is discovered—the moment that prices have risen—the demand for loanable capital becomes keen.


Another weekend and Europe’s monetary crisis drags on. Will Greece bolt for the disastrous monetary union this weekend? Probably not, but next weekend possibly. Europe’s euro is no longer working for most Europeans, just Germans, Dutch and Finns. For them it’s still (temporarily) wealth creating, for everyone else it is now wealth destroying. How long will the dying euro last? The Eurozone is about to get hit with a blast of Siberian winter, will this be the straw that breaks the monetary union’s back? Have a great weekend everyone.

"It is the greenback which is unstable, and not the bullion."

Dr. Franz Pick

The monthly Coppock Indicators finished December:

DJIA: +127 Down. NASDAQ: +138 Down. SP500: +106 Down.

The Dow and SP 500 and NASDAQ have all reversed from up to down.

To continue reading subscribe to the LIR at Currency Countdown.