28-Oct (The Wall Street Journal) — Is anyone surprised at what Europe wrought? Contrary to headlines, European policy makers did not leave Brussels yesterday morning with the “final, even groundbreaking” plan to end the euro-zone’s debt crises that they had promised earlier in the week. Details are still sketchy on many of the announced measures, including those to increase the firepower of the European Union bailout fund and prop up the continent’s banks. Remaining disagreements are serious, and that means we’re far from through with euro-crisis summitry.

What the summit does highlight, however, is that Europe’s piecemeal approach is not going to cohere into a real or lasting solution if policy makers continue to ignore the underlying economic anemia that has afflicted the economies of Europe for decades. The patient has risen from his bed and not fallen down. This is one definition of progress.

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Eurozone Bailout Deal Triggers ‘Risk-On’

28-Oct (USAGOLD) — Gold surged this week on rumors, and then ultimately confirmation, that policymakers had agreed on a deal to address the Eurozone’s sovereign debt and banking crises. Whether or not the measures agreed to will actually mitigate the twin crises is subject to debate and will be under intense scrutiny in coming weeks, but for the time being anyway, the relief associated with more borrowed time (and money) has reignited risk appetite.

The EFSF bailout fund will apparently be expanded to about €1 trillion. Greek bond holders were arm-twisted into accepting a 50% haircut. And European banks will be recapitalized. While there wasn’t much detail beyond this, stocks were off to the races on Thursday and the euro rebounded to new 7-week highs.

The firepower of the EFSF will be amplified via leverage of at least 4x. Leverage was employed because it was politically unfeasible to ask EU member states to make additional contributions or guarantees to the fund. Productive northern European economies, particularly Germany, are loathe to provide any more assistance to what they view as profligate southern European states. Yet what is being widely ignored, is that the very leverage that has been used to bolster the EFSF, in the absence of further direct contribution, has dramatically increased the risk to all the guarantors!

Only Bundesbank President Jens Weidmann seems to have taken notice; warning that EFSF leveraging is similar in design to the leveraged products “that helped to cause the crisis”. I think most rational thinkers would acknowledge that you don’t extract yourself from a leveraged debt crisis by piling on additional leveraged debt, but extraction is probably not really the goal here. Policymakers are simply looking to buy more time. Time that is still getting more and more expensive on some fronts; as evidenced by the record high yield demanded in Friday’s Italian 3-year bond auction.

This is exactly what the bailout deal was supposed to prevent! It was supposed to ensure the market that EU sovereign debt beyond Greece was a safe and secure investment. Yet the markets still seem to have their doubts. And rightfully so; because once you forgive half of Greece’s debt, what’s the incentive for Portugal, Spain, Italy, Ireland, Belgium and a host of others to make the necessary fiscal sacrifices — austerity measures — to get their accounts in order? In fact, one might argue that Greece gets the sweetheart deal because they were the worst of the worst, benefiting by being the first to allowed to default. There may just be a benefit for a second mover, but beyond that, I would think that all bets are off. It can’t even be ruled out at this point that the end-game hasn’t already been set in motion. Cut your deal now, while there are still cards to be played…

Gold has retraced 50% of the decline from 1920.50 to 1534.06 and closed back above the 50-day moving average. Both are encouraging technical indications. The yellow metal has been boosted by a weaker dollar, that has suffered at the hand of a resurgent euro. Gold also seems to be reclaiming its roll as the safe-haven of preference. For even as the EU vows to go ‘all-in’ to save the union, talk of additional quantitative measures to reinvigorate the flagging US economy are on the rise as well. One thing we do know from recent history, hard assets like gold tend to perform admirably when bailouts and easy money are the order of the day.

27-Oct (Reuters) — A growing number of lawmakers do not think another downgrade of the country’s AAA rating will harm America’s economy, raising questions about how much pressure Congress is under to fix the intractable budget deficit.

Analysts warn, however, that signs of complacency on Capitol Hill threaten efforts to cure America’s long-term fiscal health.

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PG View: This is an attitude that will almost assuredly get you that next downgrade.

28-Oct (The Wall Street Journal) — Europe’s new strategy to tame its debt woes invigorated global financial markets despite lingering questions over how the plan will work and whether it will be enough to end the two-year-old crisis.

The Dow Jones Industrial Average rose 339.51 points Thursday, or 2.9%, to 12208.55. With the Dow up 11.9% so far in October, it’s on track for its biggest monthly percentage gain in nearly 25 years. The U.S. gains followed a surge in stocks across Europe. Investors also piled into commodities and junk bonds. The euro surged 2% to $1.4188, its highest point since early September, after details of the plan were disclosed. Asian shares opened higher Friday morning, with Japan up 1.4% and South Korea gaining 1.6% in early trading.

European leaders, meeting through the night in Brussels into early Thursday, brokered a broad package of measures to retool their bailout fund, recapitalize the Continent’s banks and reduce Greece’s debt load. The deal marks the boldest attempt by Europe’s leaders to bring a crisis that began in Greece in the fall of 2009 under control.

Europe’s leaders offered few details, however, signaling that it would take weeks, if not months, to work out the fine print. The dearth of detail and uncertainty about when the plan will be implemented left many economists warning the market’s reaction could be temporary.

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Oct. 28 (Bloomberg) — Italy’s borrowing costs rose to a euro-era record at a sale of three-year bonds, driving yields higher on concern that efforts to contain the sovereign crisis won’t be enough to safeguard the region’s third-largest economy.

The Rome-based Treasury sold 3.08 billion euros ($4.36 billion) of 2014 bonds to yield 4.93 percent, the highest since November 2000, and up from 4.68 percent on Sept. 29. Italy’s bonds extended declines after the sale, while German bunds pared most of their earlier losses.

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PG View: …but…but the EU just committed €1 trillion to ensure this didn’t happen!

by Michael Mandel
25-Oct (The Atlantic) — It all comes down to this: We have to match growth to debt. If we can’t create miracles from growth, we have to consider inflation to reduce the value of our debt

We have only two ways out of our current global economic mess: innovation and inflation. And as the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation).

…There’s no doubt that innovation is a far superior solution to our problems than inflation. Innovation creates new wealth, raises the living standard of future generations, and potentially solves some of the real problems of our time. Inflation creates no new wealth, but merely pares down the mountain of debt to reasonable levels. However, inflation is something we know how to achieve, while using public and private investment to deliver innovation is a complicated process.

We want innovation, we need innovation. But if we can’t have innovation, we may have to accept inflation as the less-desirable but feasible way out.

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PG View: Inflation is surely the path of least resistance. While inflation is an effective tool in paring debt — allowing it to be payed down with an increasingly less valuable currency — the author is correct when he points out that inflation does not create any new wealth. What isn’t mentioned is that inflation also destroys savings. That is why the prudent saver is heeding Mr. Mandel’s advice to “prepare for the worst”, and turning to gold as a means of wealth preservation.

27-Oct (USAGOLD) — Gold remains well bid as risk appetite jumps following the full reveal of the eurozone “master-plan.” The euro has jumped to new 7-week highs and stocks are higher as well after European leaders agreed to leverage the EFSF bailout fund by 4 to 5 times and investors have reportedly agreed to a voluntary haircut of 50% on Greek debt. Reports that China has agreed to invest in the new ESFS SPV are helping the cause.

Europe has been yanked back from the precipice and all is good and right in the world once again. Risk-on revelry may continue for a while, but focus will eventually shift to implementation risks.

US advance Q3 GDP came in at a 2.5% annual pace. While this print was in line with expectations, it was the most robust growth since Q3 of last year. An uptick in the recovery from anemic to not-quite anemic, combined with the weaker dollar, has US stocks called sharply higher. The weaker dollar is helping to underpin gold, while the bounce in growth and another modest downtick in initial claims stokes price risks.

• US Q3 GDP (advance) +2.5%, in line with expectations, vs 1.3% in Q2.
• US initial jobless claims -2k to 402k in the week ended 22-Oct, near market expectations, vs upward revised 404k in the previous week.
• Canada average weekly earnings +0.8% in Aug, but annual pace falls to +1.9%.
• German HICP decelerated to 2.8% y/y in Oct, in line with expectations, vs 2.8% in Sep; CPI 2.5% y/y, just below median of 2.6%.
• Eurozone Oct consumer confidence confirmed at -19.9, slightly above expectations.
• Swedish Riksbank keeps repo rate steady at 2.0%, as expected; adds that it expects to resume a gradual tightening path sometime next year.
• South Korea Q3 GDP (advance) steady at 3.4% y/y.
• Japan total retail sales -1.2% y/y in Sep, vs -2.6% y/y in Aug; large retailers -3.6% y/y, vs -2.6% y/y in Sep.
• BoJ held rates steady at 0.0%-0.1% and expanded asset purchases by ¥5 tln to ¥20 tln. Citing slowing global growth, BoJ cut its economic outlook for current and next fiscal years.

27-Oct (Financial Times) — In typical European fashion, a summit deal which seemed out of reach at midnight last night was triumphantly unveiled at 4am. The deal does not, and was not intended to, have any effect on the core problems facing the eurozone. There is still an urgent need to restore growth to economies which are hamstrung by uncompetitive business sectors, and continuous fiscal tightening. Recession still looms, especially in the southern economies.

What the deal is intended to provide is adequate medium term financing for sovereigns and banks which have been facing urgent liquidity problems. On that, it is notable that the summit has not really raised any new money, apart from an increase in the private sector’s write-down of Greek debt by some €80bn.

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26-Oct (Bloomberg) — French President Nicolas Sarkozy plans to call Chinese leader Hu Jintao tomorrow to discuss China contributing to a fund European leaders may set up to bolster its debt-crisis fight, said a person familiar with the matter.

The investment vehicle was one of the options being considered by European leaders at a summit tonight to expand the reach of its 440 billion-euro ($612 billion) European Financial Stability Facility.

Sarkozy’s plea to his Chinese counterpart would come the day before a planned visit to Beijing by Klaus Regling, chief executive officer of the EFSF, to court investors.

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PG View: A headline from earlier today may offer a suggestion as to how receptive China might be: EFSF Guarantees May Be Backed by Assets, Gold, Bild Says

26-Oct (CNBC) — Euro zone leaders intend to scale up their emergency fund, the European Financial Stability Facility, to around 1.0 trillion euros, EU sources said on Wednesday.

The sources said the 440 billion euros ($611.4 billion) fund, set up last year, would have about 250-275 billion euros available after amounts are set aside for aid to Greece, Ireland and Portugal and for the recapitalizing the region’s banks.

That amount would be scaled up around four times, arriving at a headline figure of around 1.0 trillion.

“The ratio of the leverage will be of at least 4 times,” one source said, while another said the spare capacity available to be leveraged was 250 billion to 275 billion.

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PG View: Leverage is very much a double-edged sword, also capable of amplifying losses. Nobody ever seems to talk about that. Of course Europe can always bailout its bailouts…

26-Oct (Financial Times) — Eurozone leaders will attempt to reduce Greece’s outstanding debt to 120 per cent of gross domestic product by the end of the decade, but were struggling on Wednesday night to pin down details of the private sector’s contribution, needed for a comprehensive deal.

The sharp reduction in Greek debt levels, announced by Angela Merkel, German chancellor, would be likely to force bondholders to accept that their debt payments be cut in half, according to an analysis by authorities. International lenders believe Athens is on track for its debt to peak at 186 per cent of GDP in 2013, compared to 83 per cent for Germany.

But officials were making little progress with bondholders in talks that stretched into the evening, and it appeared likely that negotiations would continue beyond the much-anticipated summit of eurozone leaders. They were gathering in Brussels in an effort to finalise a three-pronged plan to tackle the European sovereign debt crisis.

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Gold Reclaiming its Role as the Safe-Haven Asset of Choice

26-Oct (USAGOLD) — Gold continues to gain ground and nearly 50% of the entire correction from 1920.50 to 1534.06 has now been retraced as concerns about whether policymakers will be able to pull Europe back from the brink persist.

The German Bundestag voted to approve leveraging of the EFSF bailout fund earlier today, but sticking points remain. Germany continues to oppose ECB bond buying. There has also apparently been substantial push-back from the banks regarding an increase in haircuts on Greek bonds from the 21% that was agreed upon in July, to something in the 50-60% range. It may in fact need to be higher even than that. An EU official said today that “involuntary” haircuts can not be ruled out.

That of course would reek havoc with the carefully crafted narrative of an orderly and voluntary restructuring of Greek debt. Forcing larger than agreed upon haircuts would unquestionably be a default and would trigger CDSs on Greek debt. The likely repercussions of that aren’t readily knowable, but there must be a reason that the EU has been working so hard to avoid that eventuality.

Amid all this persistent uncertainty, and in the continued absence of a cohesive and coordinated plan to mitigate the European debt/banking crisis, gold is returning to its role as the safe-haven asset of choice.

25-Oct (Globe and Mail) — Sir Mervyn King, governor of the Bank of England, ordered up another $300-billion (U.S.) in easy money earlier this month, then mentioned, by way of explanation, that we are living through the most serious financial crisis since the Great Depression – “if not,” he said ominously, “ever.” Sir Mervyn’s warning was only marginally more sobering than the collective warnings of Prime Minister Stephen Harper, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney.

This is not to mock. These men know enough not to scare people out of their wits unless it necessary to do so. So the question is, what do these people know that the rest of us don’t?
More related to this story

To put Sir Mervyn’s warning into its historical perspective, it must be noted that “ever” goes back a long way. The biblical record cites one calamitous meltdown 4,000 years ago, “when money failed in the land of Egypt.” Did Sir Mervyn deliberately or inadvertently include the financial crashes of antiquity in his portentous warning? Isn’t it the failure of money that now threatens the world?

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26-Oct (Bloomberg) — Guarantees for bonds in the enhanced European bailout, known as the European Financial Stability Facility, fund may be backed by collateral such as central bank gold, the Bild Zeitung newspaper reported, citing the interpretation of German lawmakers.

The proposal is embedded in a working document prepared for today’s summit of European leaders in Brussels, Bild reported.

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25-Oct (The Wall Street Journal) — Stocks tumbled Tuesday following a mixed bag of corporate earnings and as hopes for a big solution to Europe’s debt crisis waned.

The Dow Jones Industrial Average dropped 207.00 points, or 1.7%, to 11706.62. The losses snapped a three-day winning streak in which the blue-chip Dow rose more than 400 points.

The action followed reports that a Wednesday meeting of EU finance ministers was cancelled, although a scheduled summit among European leaders seeking a way out of the debt crisis is still planned.

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25-Oct (CNBC) — The European Union is doomed to fail because the divide between the northern and southern countries is just too great, former Fed Chairman Alan Greenspan told CNBC in a recent interview.

“At the outset of the creation of the euro in 1999, it was expected that the southern eurozone economies would behave like those in the north; the Italians would behave like Germans. They didn’t,” Greenspan said. “Instead, northern Europe fell into subsidizing southern Europe’s excess consumption, that is, its current account deficits.”

Greenspan predicts that as the south’s fiscal crisis deepens, the flow of goods from the north will stop altogether and southern Europe’s standard of living will go down.

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25-Oct (Reuters) — The International Monetary Fund is considering taking part in a special investment vehicle being proposed by the euro zone bailout fund but has not made a decision yet, euro zone officials said on Tuesday.

“The IMF has indicated that they are considering it — they have not taken a position,” one euro zone official said. “It will all depend on the whole package.”

Euro zone leaders are expected to approve a plan on Wednesday to increase the fire power of the European Financial Stability Facility, a 440 billion euro bailout fund, without euro zone countries having to put more money into it.

Under the plan, the EFSF would create a special purpose investment vehicle (SPIV) which would issue debt and use the proceeds to buy bonds of distressed euro zone sovereigns on the secondary market or extend loans to at-risk governments.

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25-Oct (The Wall Street Journal) — A meeting of EU finance ministers ahead of a gathering of European leaders was canceled Tuesday, raising concerns that governments are seeking more time to wrap up a deal as parts of the package to stem the region’s debt crisis remain in doubt.

The finance ministers from all 27 EU countries were to meet early Wednesday, ahead of the evening summit of EU leaders, to sign off on agreements that as of Tuesday afternoon still appeared out of reach. The meeting of EU heads of state in Brussels will proceed as scheduled,

Eurozone finance ministers have canceled a preliminary meeting that was scheduled ahead of the Wednesday Summit to End All Summits.

“Further work at the level of ministers of finance will be conducted based on the outcome of the heads-of-state meeting. The aim is to adopt all necessary elements and details concerning the package, as promptly as possible,” the government of Poland, which holds the six-month rotating EU presidency, said in a statement.

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