Slovakia Passage of EFSF Initiates Relief Rally in Euro

The euro rebounded and the dollar came under renewed pressure after Slovakia passed the ESFS expansion a day ahead of the expected vote on Friday. The passage comes at the expense of the government itself, which collapsed earlier in the week when the initial ESFS vote was tied to a confidence vote.

While the ESFS bailout fund may now end up with additional fire-power, the details remain up in the air. Nonetheless, bailouts have proven over the last several years to be nothing more than a delaying action, as they do nothing to fundamentally alter the underlying problem. In fact, they may make things worse; as evidenced by the fact that Greece continues to teeter on the edge of insolvency despite multiple bailouts. The US economy too remains moribund despite a huge stimulus in 2009 and extensive and ongoing monetary easing.

The euro rebounded on the latest glimmer of hope that the end is not necessarily nigh. The dollar and gold retreated into their respective ranges as the need for a safe-haven was seen to have diminished; although arguably the greenback is no safe-haven at all. However, movements in all these markets have been generally tepid, amid persistent doubt that debt crisis can indeed be contained.

Now focus is truly on the grand Franco-German deal to save Europe. Details on this as yet undefined plan have been promised by the end of the month. The plan is widely expected to involve bank recapitalization and perhaps a final solution for Greece. They’ll call it a restructuring of Greek debt, but at best it will be a controlled default. Estimates of the haircuts that will be required on Greek debt continue to vary widely, but they’re all generally higher than the 21% haircuts that were promised just in July. Most current estimates are in the 30-50% range, although some still believe they may prove to be as high as 90%.

If the haircut is ultimately closer to that 90% then the low end of the range, the EU is going to have to do some serious recapitalization to prevent the European banking system from imploding. Where the money will come from remains in doubt, but as the ‘too-big-to-fail’ mentality continues to rule the day, they’ll find the liquidity somewhere. Much of it may in fact come from the Fed; and the requisite swap lines are already in place.

One thing we can be reasonably assured of, is that a massive liquidity-pump to save Greece and/or the European banking system and prevent contagion to core-Europe will elevate gold; both as a result of the heightened systemic risk and due to the resulting devaluation of fiat currencies.

13-Oct (Reuters) — Slovakia’s parliament backed a plan to bolster the euro zone’s EFSF rescue fund on Thursday after political parties agreed to hold an early election, concluding the ratification process in all euro zone countries.

The euro zone’s European Financial Stability Facility (EFSF) will now gain more powers to fight the debt crisis in the 17-member club, although political leaders are already planning further measures to counter the deepening crisis.

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13-Oct (ZeroHedge) — Today, instead of the traditional market observations by the Chairman of the Fermentation Committee, we share with readers a critical historical lesson from Art Cashin, focusing on an event that took place 89 years ago, which as Cashin says “one of the most devastating economic events in recorded history and an important backdrop to Europe today. It all began with the efforts of a few, well intentioned government officials.” Many will know what we are talking about already…
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Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to “jump start” a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental “more is better” theory they simply created more and more money.

But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).

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PG View: The hyperinflation of the Weimar Republic is unquestionably Germany’s defining economic moment, much like the Great Depression is ours. It goes a long way toward explaining why Germany continues to balk at further bailouts, leveraging, bond buying and expansive liquidity measures; they understandably fear the inflation. Keynsian thinking says governments should be printing and spending like mad in the face of grim growth prospects and an impending banking crisis, but German’s recall all-to readily that when über-easy monetary policy gets out of control, things can go from bad to catastrophic in a heartbeat.

Cashin’s piece is indeed an important history lesson we all should take heed of. For further insight into the Weimar hyperinflation, be sure to read The Nightmare German Inflation.

12-Oct (The Wall Street Journal) — The recent violent volatility in gold prices is disrupting traditional buying patterns in Dubai, with customers moving from jewelry to bullion as they renew a focus on the yellow metal’s investment potential, a trend that is prompting more city jewelers to stock gold in the form of coins and bars.

Dubai, known as the city of gold, is a long-established market for bullion and wholesale and retail jewelry. Its trade is fueled by demand from India, the world’s number one gold consumer, and domestic consumption which, at 19 tons in the second quarter of 2011, makes the United Arab Emirates the second-largest consumer of gold jewelry and bullion in the Middle East after Saudi Arabia.

Whereas traditional retail demand was for jewelry, there has been a change in buying patterns, said Pradeep Unni, senior relationship manager at Richcomm Global Services, a Dubai-based commodity services company and a broker of the Dubai Gold and Commodity Exchange, or DGCX, which trades a gold futures contract.

…those who are looking to invest in gold now are “those who don’t have gold in their portfolios; people who think that in addition to having a bank account, they need to have gold.”

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12-Oct (USAGOLD) — Minutes from the September 20-21 FOMC meeting show that some participants thought large-scale asset purchases (QE3) should be retained as a more “potent” policy option in support of a stronger recovery. Two members, in fact, favored stronger action.

Two members thought that he current conditions and weak growth outlook “could justify stronger policy action.” They ultimately supported Operation Twist “as it did not rule out additional steps at future meetings.”

[FOMC Minutes]

12-Oct (CNBC) — Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt, officials said on Wednesday, as part of a grand plan to avert a disorderly default and try to end a crisis that threatens the world economy.

Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a “haircut” of between 30 and 50 percent for Greece’s private creditors was under consideration.

That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens.

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12-Oct (Bloomberg) — Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator.

The council made its 4-3 decision against the advice of a city attorney who said the panel did not follow proper procedure. It was the ninth bankruptcy filing this year by a municipal-bond issuer, according to James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

“This was a last resort,” Mark D. Schwartz, the council’s Bryn Mawr-based lawyer, said after he faxed the documents to a federal court yesterday. “They’re at their wits’ end.”

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12-Oct (The Wall Street Journal) — As the world awaits the details of the grand plan hatched by Angela Merkel and Nicolas Sarkozy over the weekend, one can’t help but be reminded of the South Sea Bubble. Like the German and French leaders, a famous 1720 stock offering promised investors “an undertaking of great advantage, but nobody to know what it is.” All that we know about the new euro grand plan will be even grander than the July 21 grand plan that didn’t survive 24 hours of market scrutiny. It will aim to address at one stroke the inter-related problems of sovereign debt, bank capital and bank funding—what U.K. Prime Minister David Cameron has dubbed the big bazooka. What could possibly go wrong?

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by Nick Barisheff
12-Oct (GoldSeek) — The recent correction in gold has once again led, to financial commentators warning of a bubble—just as they have incessantly since it first passed $400 an ounce. A bubble usually ends with day after day of speculative higher highs, not corrections like we have just seen or as we saw in August where a $200 fall was followed by the resumption of its decade long rise. That gold continues to climb a wall of worry, and that so many are even calling it a bubble, is actually an extremely bullish indicator since financial bubbles burst only after sustained periods of exuberance. We are far from the days when people lined up for blocks each day to buy gold, as they did in Toronto in 1980.

A simple rebuttal, however, is never enough when discussing gold. It will continue to be subjected to the most aggressive “perception management” assault of any asset class, because it is a direct challenge to all the world’s fiat currencies. Since no paper currency is convertible to gold at this time, this is some challenge. The warnings of bubbles and the many other reasons for not owning gold will continue unabated as gold persists to $10,000 an ounce, or higher. Independent study of the underlying causes of gold’s rising price, in my opinion, is the best way to gain sufficient confidence to buy and hold gold long enough to protect one’s wealth through the turbulent years ahead.

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JK View: A solid overview of the long term fundamentals underpinning the gold price. Author shows how an “appropriate” perception of the value of gold ought to give any doubter pause. Well worth the read.

12-Oct (Washington Post) — Banks in Europe should temporarily raise their capital buffers to better withstand the effects of debt market turmoil, the president of the European Commission said Wednesday as he presented a broad new crisis plan that was thin on details.

Jose-Manuel Barroso said that until systemically important banks have raised their capital buffers to new standards, they should not be allowed to pay out dividends or bonuses.

The fear gripping the financial sector now is that banks could take big losses on bonds they own from governments with shaky finances, like Greece. That uncertainty is stifling lending — between banks and to the wider economy — which threatens to throw the eurozone into recession.

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12-Oct (USAGOLD) — Gold pushed to a new 3-week highs above 1690.00. While the convincing breach of chart/Fibonacci resistance at 1678.42/1681.68 is encouraging technically, renewed upside momentum has not been forthcoming.

Hope continues to spring eternal with regard to a broad eurozone rescue plan promised by the end of the month. Better than expected industrial production numbers for August helped the cause. The market seems to have largely discounted the Slovakian rejection of the EFSF expansion and the resulting collapse of the government. The euro set new 4-week highs above 1.3800 before retreating into the range, amid expectations that Slovakia will eventually pass the measure. Euro strength comes at the expense of the dollar, with the dollar index falling back below 77.00 on improved risk appetite. The weaker greenback is helping to underpin gold, as are the lingering doubts that a solution for the European problem is at hand.

• UK ILO jobless rate rose to 8.1% in Aug, highest level since 1994, vs 7.9% in Jul.
• France EU harmonized CPI 0.0% m/m in Sep, vs 0.6% in Aug; 2.4% y/y.
• Eurozone industrial production (sa) +1.2% m/m in Aug, above market expectations of -0.8%, vs upward revised 1.1% in Jul; 5.3% y/y.
• India industrial production rose to 4.1% y/y in Aug, vs 3.3% in Jul.
• South Korea unemployment rate (sa) ticked higher to 3.2% in Sep.
• Japan core machinery orders +11.0% m/m in Aug, vs -8.2% in Jul.

11-Oct (Politico) — Is gold the answer?

With the nation smothered in debt, crippled by unemployment and financed by dollar bills backed by nothing more than the faith of the public, some conservatives are calling for a return to the gold standard.

At The Heritage Foundation’s Conference on a Stable Dollar last week, former Bush economic adviser and Federal Reserve Governor Larry Lindsey said the weight of history leaned toward gold.

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11-Oct (BBC) — Slovakia’s parliament has voted against measures to bolster the powers of the eurozone bailout fund, seen as vital in combating the bloc’s debt crisis.

The governing coalition had linked the vote to a confidence motion and as a result has effectively been toppled.

Slovakia is the last of the eurozone’s 17 member states to vote on expanding the European Financial Stability Fund.

However, the BBC’s Rob Cameron in Bratislava says a second vote could be held soon and is likely to succeed.

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11-Oct (The Wall Street Journal) — The U.S. economy remains vulnerable to a new downturn, though the probability of a recession in the next six months to a year is unchanged at 40%, according to Moody’s Analytics.

Though the economy has continued to grow, it remains under pressure from Europe’s debt crisis, Washington’s budget debate and the weak housing market, according to the sister company to credit-ratings company Moody’s Investors Service.

“Policymakers on both sides of the Atlantic must intervene,” said Chief Economist Mark Zandi of Moody’s Analytics. “In our baseline outlook, the U.S. will avoid recession only because we expect policymakers to act in the next few months.”

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By Patrick A. Heller
11-Oct (NumisMaster) — “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

No, that isn’t me speaking with hyperbole. That is a quote last week from Sir Mervyn King, the governor of the Bank of England. He made this statement after the decision by the Bank’s Monetary Policy Committee to put £75 billion (more than U.S. $115 billion) of newly created money into the British economy. The purpose for inflating the money supply is to stave off another credit crisis and recession in that country.

…It’s one thing for hard-money advocates to shout that the sky is falling. It is entirely different when people like the governor of the Bank of England, the president of the European Commission and an advisor to the IMF state that problems are dire and that immediate action is needed to avoid disaster.

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11-Oct (China Briefing) — In an age when the assets of insolvent Western economies are becoming less reliable and international investors appreciate gold as a safe haven, the Chinese know it is time for them to play a larger role in the global gold market. The Pan Asia Gold Exchange (PAGE) – opened earlier this year allowing gold trade in China’s own local currency RMB – may make China the new epicenter of the global gold market and even trigger a bigger wave of speculative gold buying and selling.

Established on March 31 this year, the PAGE is located in Kunming, the capital city of China’s southwestern Yunnan Province (an area well-known as a major gateway to Southeast Asia). The new gold exchange – which markets itself as China’s “gold supermarket” – will allow individuals to buy physical gold or speculate in gold future contracts through an RMB account with a bank or broker.

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11-Oct (The Wall Street Journal) — Slovakia’s lawmakers were scrambling to vote on a crucial expansion of the euro zone’s bailout fund, but their slow progress Tuesday renewed concerns about prospects for the region, while the European Central Bank’s president warned the crisis has “reached a systemic dimension.”

Slovakia, the poorest country in the bloc, is the last of the 17 euro-zone countries to vote on the €440 billion ($600.34 billion) European Financial Stability Facility, which was agreed upon by euro-zone members in July to address the euro zone’s debt crisis.

After months of painstaking negotiations and political jockeying, the agreement to expand the bailout vehicle, crucial to the euro zone’s strategy for containing the debt crisis, remained up in the air amid a split in Slovak domestic politics.

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11-Oct (MarketWatch) — Gold futures edged lower Tuesday with strength in the U.S. dollar prompting the metal to give back some of the previous session’s gains as traders awaited a vote in Slovakia on changes to the euro zone’s rescue fund.

Gold for December delivery fell $4.70, or 0.3%, to $1,666.10 an ounce on the Comex division of the New York Mercantile Exchange. Prices traded between a low of $1,655.40 and a high of $1,686.70.

“The yellow metal continues to move with the ebb and flow of hope that a real solution to the European debt/banking crisis will be forthcoming,” said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

“Reports that the troika will likely be releasing the next tranche of bailout funds lifted the euro, and tempered some of gold’s recent safe-haven bid in earlier trading.,” he said in emailed comments.

But European Central Bank President Jean-Claude Trichet’s “grim acknowledgment of the mounting systemic risks and worries” about the impending European bailout fund vote in Slovakia served to limit the downside,” he said.

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11-Oct (Financial Times) — China has warned that the US could plunge the global economy into a 1930s-like depression if it passes a bill that aims to punish Beijing for holding down the value of its currency.

With the Senate set to vote on Tuesday on legislation that would impose tariffs on imports from countries that manipulate their exchange rates, China has said that the consequences of such a move could be dire, leading to a trade war.

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11-Oct (USAGOLD) — Gold remains generally contained within the recent range. While chart/Fibonacci resistance at 1678.42/1681.68 was slightly exceeded, the yellow metal continues to move with the ebb and flow of hope that a real solution to the European debt/banking crisis will be forthcoming. Reports that the troika will likely be releasing the next tranche of bailout funds to Greece lifted the euro and tempered some of gold’s recent safe-haven bid in earlier trading. However, Trichet’s grim acknowledgement of the mounting systemic risks and worries about the impending ESFS vote in Slovakia served to limit the downside.

• Canadian housing starts rose to 205.9 in Sep, above market expectations, vs 191.9k in Aug.
• Bank Indonesia unexpectedly cut the overnight policy rate by 25 bps to a record low 6.50%. Signalling possible broader shift in Asian policy.

11-Oct (Reuters) — The euro zone sovereign debt crisis has become systemic and risks to the economy are increasing rapidly with Europe’s banks in the danger zone, European Systemic Risk Board (ESRB) Chairman Jean-Claude Trichet said on Tuesday.

Trichet, who heads the European Central Bank as well as the continent’s super-watchdog on financial stability, said the euro zone’s EFSF bailout fund should be made as flexible as possible, but without involving the ECB in leveraging it.

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PG View: The acknowledgement that the problems in Europe are systemic is bad news to be sure, but the policy response to address those issues may fling Europe out of the frying pan and into the fire. More debt, more currency seems to always be the answer…and that’s supportive of gold.

by Ezra Klein
08-Oct (Washington Post) — Christina Romer had traveled to Chicago to perform an unpleasant task: she needed to scare her new boss. David Axelrod, Barack Obama’s top political adviser, had been very clear about that. He thought the president-elect needed to know exactly what he would be walking into when he took the oath of office in January. But it fell to Romer to deliver the bad news.

So Romer, a preternaturally cheerful economist whose expertise on the Great Depression made her an obvious choice to head the Council of Economic Advisers, gathered her tables and her charts and, on a snowy day in mid-December, sat down to explain to the next President of the United States of America exactly what sort of mess he was inheriting.

Axelrod had warned her against pulling her punches, and so she didn’t. It was not a pleasant presentation to sit through. Afterward, Austan Goolsbee, Obama’s friend from Chicago and Romer’s successor, remarked that “that must be the worst briefing any president-elect has ever had.”

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PG View: This is a very comprehensive look back at US policy responses to the financial crisis that is referenced in the Yglesias piece below. Note the measured presentation of the pros and cons in the section entitled: The Fed’s inflation option.