07-Oct (The Wall Street Journal) — The International Monetary Fund is crafting a proposal to offer new short-term credit lines to governments to prevent the spread of global financial crises, senior IMF and finance officials say.

The program has the tentative backing of key world financial leaders who are expected to approve the new lending tool at the coming meetings of the Group of 20 industrialized and developing economies, according to three senior officials from G-20 countries.

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PG View: Yes! Absolutely! More credit, more debt is the answer to the global debt crisis.

07-Oct (The Wall Street Journal) — U.S. bank exposure to the European debt crisis is estimated at $640 billion, nearly 5% of total U.S. banking assets, according to recent research papers written for Congress.

While U.S. Treasury Secretary Timothy Geithner says the U.S. banking sector’s vulnerability to the euro zone problems is “very limited,” the Congressional Research Service estimate is one of the first public assessments provided by the U.S. government that quantifies the potential risks.

According to two different reports provided to federal lawmakers last month, the debt problems of Greece, Ireland, Portugal, Italy, and Spain constitute a ”serious risk” to the European banking system, particularly German, French, and U.K. banks, which have close ties to U.S. banks. Markets believe there’s a very high likelihood Greece will default in the coming weeks. That could cause a cascade of other crises throughout Europe.

…The estimate doesn’t include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn’t account for euro-zone assets held by money market, pension, and insurance funds.

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PG View: Geither’s sense of reality seems to have been distorted by all the absolutely huge numbers bandied about in recent years. Does he really view $640 bln is “very limited?” The Congressional Research Service goes on to say that, “depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher.” What exactly does “considerably higher” mean? Is it twice the $640 bln? More?

07-Oct (Reuters) — Fitch on Friday cut Italy’s sovereign credit rating by one notch and Spain’s by two, citing a worsening of the euro zone debt crisis and a risk of fiscal slippage in both countries.

Fitch cut Italy’s rating to A+ from AA- and lowered Spain to AA- from AA+.

It kept both countries, respectively the third and fourth largest in the euro zone, on a negative outlook suggesting further downgrades could come in future.

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07-Oct (The Wall Street Journal) — Author Michael Lewis says the U.S. and many European nations suffered a moral failure that led to economic collapse.

PG View: Supposed first world countries — including the US — hid risk, which was consequently mispriced, leading to crisis.

06-Oct (The Telegraph) — Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“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.”

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07-Oct (Bloomberg-BusinessWeek) — Once upon a time, like this summer, Dexia SA, the French-Belgian bank, was stable. By the measures global regulators deem important, its capital ratio stood at 11.4 percent of risk-weighted assets, according to data compiled by Bloomberg. That’s well above the 10 percent regulators plan to require of the world’s largest banks under new international rules.

What a difference a summer makes. The Belgian and French governments now have a complicated mess on their hands. Dexia, which had received a government bailout in 2008, saw its shares plummet after Moody’s Investors Service put its main units on review for a downgrade on Oct. 3. Within days, Belgium and France said that they would stand behind the bank’s deposits and suggested a “bad bank” structure could be used to wind down its toxic assets.

How this will be resolved is unclear. But Dexia crystallizes the need for smarter capital rules, credible stress tests and an aggressive plan to recapitalize Europe’s banks quickly should financial calamity strike.

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07-Oct (USAGOLD) — Stocks were somewhat impressed by this morning’s better than expected nonfarm payrolls report for September and the jump in August wholesale sales, but gold remains narrowly confined. Persistent uncertainty surrounding the eurozone debt crisis continues to underpin the yellow metal, along with concerns about an impending banking crisis on the Continent. There will be increasingly intense pressure on EU leaders to devise a solution to the dual crises in advance of the November G20 summit.

• US wholesale sales surged 1.0% in Aug, well above market expectations of 0.2%; inventories +0.4%.
• US nonfarm payrolls +103k in Sep, well above market expectations of+56k, vs upward revised +57k in Aug. Jobless rate steady at 9.1%.
• UK output PPI accelerated to 6.3% y/y in Sep, just above expectations, vs revised 6.0% in Aug; input PPI rose to 17.5% y/y.
• Germany industrial production (preliminary) -1.0% m/m in Aug, above market expectations of -2.0%, vs 3.9% in Jul; 7.7% y/y.
• Switzerland unemployment rate steady at 3.0%.
• Japan leading index (preliminary) -0.8% m/m in Aug, vs 2.0% in Jul.
• Japan coincidence index (preliminary) 0.3% m/m in Aug, vs upward revised -0.3% in Jul.
• BoJ holds target overnight call rate steady at 0%-0.1%.

07-Oct (BLS) — Nonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. In September, job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down.

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Highlights:
• Positive back-month revisions totaled +99k jobs.
• Average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour over the month to 34.3 hours following a decrease of 0.1 hour in August.
• Average hourly earnings for all employees on private nonfarm payrolls increased by 4 cents, or 0.2 percent, to $23.12.
• Broader U6 measure of un/under employment climbed for the third straight month to a seasonally adjusted 16.5%.
• Average duration of unemployment climbed to a record 40.5 weeks.

07-Oct (Belfast Telegraph) — It’s make or break time for the Bank of England. By throwing another £75bn at the economy they really are scraping the bottom of the fiscal stimulus barrel – and they’ll have their fingers crossed that this time it’ll work.

…”We’re creating money because there’s not enough money in the economy,” Bank of England governor Mervyn King told Sky News.

…This is all very good and markets are cock-a-hoop, but is repeating something which obviously hasn’t worked in the past a sensible move?

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I would be remiss if I didn’t say a word publicly about Steve Jobs.

For me and for a lot of us, his passing is a personal matter. I can’t quantify the contribution he made to my life and this website. Without him and Apple, I don’t know if any of this would have happened. His genius was to simplify the complex so that all of us could use it in our daily lives — something he did consistently from the first Mac computer to the I-Pad and now the latest version of I-Phone. I am glad he got these last seven years. He made the most of it.

My start with Apple occurred in the early 1980s. I may have been one of the first people in Colorado to own a Macintosh computer. A friend and client who owned a successful high-end audio outlet called me and said that he was going to send me a computer from one of his stores outside of Colorado for me to test drive. “This is something,” he said, “you aren’t going to believe.” I said “OK, if you feel that way about it, send it to me.” I got my Macintosh a few days later, locked myself in a room for a week and learned how to operate it (staring at that tiny black and white screen). The rest is history. It changed my life and contributed mightily to who I am. My friend — and Steve Jobs — dropped the computer age on my front doorstep and opened a whole new world to me that I still appreciate beyond words. USAGOLD might not have happened without Steve Jobs — and I am sure there are good many others who are thinking the same thing tonight.

We’ll miss you, Steve Jobs. God be with you, and thanks. . . .

Mike Kosares

06-Oct (Financial Times) — “We told you so”. That captures the reaction of many American bankers and policymakers towards Europe these days. Ever since America unveiled its own troubled asset relief programme in 2008, observers in Washington and New York have muttered darkly about Europe’s failure to grasp its banking nettle.

More specifically, it has long been suspected that Europe’s banks were shying away from revealing their bad loans; it has also been clear that some banks would need more capital, particularly if they had to write down deteriorating sovereign debt. Thus the obvious solution to some is what might be called euro Tarp – or a eurozone version of the capital injections and stress tests that in effect halted the American banking crisis back in late 2008 and 2009.

This may yet occur. This week eurozone leaders signalled that they are – belatedly – moving that way.

[source]

Bloomberg (Oct 5)
Video – 4 min

[Source]

Let the QE Roll

06-Oct (USAGOLD) — The Bank of England held the repo rate steady at 0.5% and announced an additional £75 bln in quantitative easing this morning. This was bigger and sooner than the market was expecting. Caught off-guard, Gilts surged and Sterling tumbled to a new 15-month low. The BoE cited strains in the bank funding market as the catalyst for their decision, but the central bank is also apparently worried that inflation will drop below the 2.0% target in 2012. The sovereign debt turmoil across the channel on the continent of Europe undoubtedly factored into the BoE decision as well.

While the economic outlook in the UK may indeed be grim, that second part of the BoE’s justification is dubious at best. Inflation is presently running at more than twice their target and is likely to hit 5% before the end of this year. If UK policymakers really believe the January VAT hike (in conjunction with lower energy and commodity prices) will tank consumption enough to net a 300 bps (or more) decline in inflation, they’d be better off reconsidering the tax hike than increasing asset purchases.

There is a considerable and growing record from a number of major economies that pretty decisively shows that QE has very little stimulative impact. Nonetheless, the absence of meaningful fiscal action on the part of lawmakers in industrial nations — because it will be painful to some of their constituency — means central banks must at least make some effort to stimulate via monetary policy…even if it is largely pointless.

The ECB also held steady on rates today and edged further down the QE path. In his last press conference as President, Jean-Claude Trichet also painted a bleak picture of Europe’s economy, saying, “The economic outlook remains subject to particularly high uncertainty and intensified downside risks.” He also anticipates that inflation will remain elevated in the months ahead, but will decline thereafter.

Trichet went on to announce that the Governing Council has decided to launch a new covered bond purchase program of €40 bln to be conducted in both the primary and secondary market, via direct purchases from November 2011 through October 2012. In addition to its regular and special-term refinancing operations, the ECB will also conduct two longer-term refinancing operations in October (12-month) and December (13-month).

Finally today, the Fed was a seller of $8.870 bln in shorter-term securities. The proceeds of this transaction will ultimately be used to fund the purchase of longer-dated securities as part of the Fed’s Operation Twist. While yields at the long-end of the curve have indeed come down as a result of Operation Twist, initial mortgage refinancing and new mortgage demand data suggest market reaction to the Fed’s program has been tepid, at least initially.

In testimony earlier in the week, Fed chairman Bernanke gave his own dire assessment of the US economy, saying the recovery is “close to faltering.” He hinted that the Fed had more bullets; suggesting that further monetary easing could be forthcoming. With interest rates already at zero and Operation Twist already being implemented, that further easing almost assuredly would be in the form of more full-on QE; debt monetization.

While gold’s reaction thus far has been nonplussed, the reality that the central banks seem to be spooling up their printing presses once again is likely to be seen as broadly supportive to the yellow metal. If/when it is proven that the latest measures aren’t having the desired affect, and once again in the absence of meaningful fiscal policy, do the central banks throw up their hands and say we’ve done all that we can do? Or, do they pile on additional measures? Because with an unlimited supply of ink and paper — or more appropriately computer bits and bytes — there is always more they can do…consequences be damned.

06-Oct (Reuters) — Venezuela will begin repatriating its gold reserves from Western nations by mid-November, the central bank head said on Wednesday.

“We’re in the final phase of the logistics … Soon the Venezuelan people will know when the first boat is coming,” Nelson Merentes said, according to state news agency AVN.

President Hugo Chavez announced in August that the South American OPEC member nation would bring bring home almost all its $11 billion in gold reserves held abroad — a nationalistic move that has hurt market confidence.

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05-Oct (NPR – PlanetMoney) — Europe’s banks are in trouble. They urgently need to raise money to serve as a safety cushion against losses. If private investors aren’t willing to invest, governments should step in.

That’s what Christine Lagarde, the new head of the IMF, said in a big speech this summer.

European officials immediately attacked the idea, calling it “confused” and “misguided.”

Now, just over a month later, European officials are talking about doing exactly what Lagarde said: injecting public money into Europe’s banks.

“Germany is prepared to move to recapitalization,” German Chancellor Angela Merkel said today.

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” European commissioner for economic affairs Olli Rehn told the FT.

The quick reversal explains a lot about a problem European leaders have been struggling with for more than a year now: They’re perpetually a step behind in dealing with the continent’s debt crisis.

Even when European leaders know what needs to be done, they don’t always have the power to do it. The European Union doesn’t have much central authority. Big decisions have to be separately approved by the parliament of each country in the euro zone.

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06-Oct (Der Spiegel) — After they joined the euro zone, the countries of southern Europe suddenly discovered they could borrow money at German-style rates, and any hope of sorting out their dodgy finances vanished. But it was France and Germany who set the worst example, when they broke the euro-zone rules they had forced on others.

…while central governments tried to cap their national budgets to comply with the Maastricht requirements, municipalities piled on debt that was not documented or recorded anywhere at the European level.

Low-interest loans were available everywhere, and it was all too easy to postpone their repayment to a distant future and refinance or even expand government spending.

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AP (Oct 4) — “There was little question about the relevance of the debate. It happened just as France, Belgium and Luxembourg were struggling to keep Dexia bank from being the first major European lender to collapse since the end of the 2008 credit crunch.

But Europe has been slow to address a worsening crisis in its financial sector that is making banks reluctant to lend to each other and give loans to businesses, exacerbating an economic slowdown.

Three rounds of stress tests since the 2008 credit crunch have failed to restore confidence in the banking sector and Dexia was not even one of the nine banks that failed the most recent exercise in July, or among the 16 that barely passed.

While the European Commission, the EU’s executive, disputes the euro200 billion estimate that the IMF says may be needed to recapitalize banks on the continent, it does acknowledge that something needs to be done to address fallout of the worsening eurozone debt crisis.

[Source]

JK Comment: There are countless parallels between what is going on in Europe right now and our own banking crisis in 2008. And if its anything like our crisis, the first band-aids placed on the wound aren’t going to hold.

Julian Phillips – GoldSeek (Oct 5) — The I.M.F. has just warned that the developed world will enter a recession in 2012. Will that be negative for the gold market? We don’t think so. The world has seen the recovery peter out, the sovereign debt crisis arrive, and now sees the I.M.F. recommend that the Eurozone banks be recapitalized. What does this mean for precious metals?

Cast you minds back to the recapitalization of U.S. banks under the TARP measures whereby the Fed bought the toxic debt investments of the banks against fresh money. When we say fresh we mean just that, newly created money in the trillions. This did lower the perceived value of the dollar inside and outside the U.S. The effect on gold was palpable as it rose back through $1,200 and onto new highs.

Already we’re hearing rumors of an E.U. government minister’s plan to walk the same or similar road. With the recent past in mind, we’re certain that will lower the perceived value of the euro and see euro investors seek places to cling onto the value of the euro. This time round, expect markets to discount these actions in the same way. The downturn will therefore be fought with new money creation in the same way the U.S. did it from 2008 on.

[Source]

JK Comment: A good review of the causes of gold’s recent decline, and a helpful reminder: While gold initially trades “on the news”, it eventually trades the government/central bank “response to the news”. As it was in 2008, fears of a recession and bank crisis prompted a flight to liquidity and caused gold to decline (a trade “on the news”). However, the ensuing intervention by the Federal Reserve and US government to add liquidity to the banking system and stimulate the economy caused gold to rise nearly three-fold (a trade on the “response to the news”). Phillips expects Europe to respond in a similar fashion as the US did in 2008, fueling an environment that is undoubtedly pro-gold.

05-Oct (USAGOLD) — Gold remains defensive within its range after Fed chairman Bernanke gave yet another grim assessment of US growth prospects late yesterday, saying the recovery is “close to faltering.” In fact, “close to faltering” has pretty much been the norm since the recovery began. What the recovery is right now is faltering. While Bernanke went on to say that further monetary easing was an option, commodities and stocks — along with gold — retreated ahead of Tuesday’s close. The S&P 500 fell into bear market territory.

Stocks were ultimately saved by a comment from the EU’s Olli Rehn on the FT’s website late on Tuesday that eurozone finance ministers were considering a coordinated recapitalization of European banks. Shares rebounded sharply into the close on heightened risk appetite. The rumors of a new recapitalization plan have since been largely dismissed.

Bernanke’s reference to more easing seemed to have been largely dismissed as well. Perhaps the market believes that further accommodations, further QE is simply not possible. But I wouldn’t be so sure about that. Mortgage applications fell last week, suggesting that the Fed’s Operation Twist — which has successfully driven down longer term yields — has not been successful initially in spurring refinancing and new mortgage activity. With the tool box pretty depleted at this point, more full-on QE is about the only option left.

While the value of QE has proven dubious at best, the threat of a return to recession will heighten calls for the Fed to do something. Anything. If the Fed does indeed ramp up asset purchases under the cover of stimulating a moribund economy, the long-term uptrend in gold would likely re-exert itself.

• US ADP employment +91k in Sep, above market expectations of +75k, vs +89k in Aug.
• ECB Deposits Facility usage soars to 16 month high.
• UK Q2 GDP (final) unexpectedly revised lower, to just 0.1% q/q and 0.6% y/y. Q1 revised lower to 0.4%.
• Eurozone Reuters Services PMI (final) revised down to 48.8 in Sep, below market expectations, vs 49.1 previously.
• Eurozone retail sales -0.3% m/m in Aug; -1.0 y/y.
• ECB Deposits Facility usage surged to €213 bln, a 16-month high.
• Taiwan CPI 1.35% y/y in Sep.
• Australia retail trade +0.6% in Aug, above market expectations, vs upward revised +0.6% in Jul.

05-Oct (Bloomberg) — U.S. employers announced the most job cuts in more than two years in September, led by planned reductions at Bank of America Corp. (BAC) and in the military.

Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Cuts in government employment, led by the Army’s five-year troop reduction plan, and at Bank of America accounted for almost 70 percent of the announcements.

…Compared with August, job-cut announcements climbed 126 percent, the Challenger report showed.

[source]

05-Oct (Bloomberg) — The European Union doesn’t have a new plan to recapitalize banks, the European Commission said.

EU Economic and Monetary Commissioner Olli Rehn “doesn’t speak of a concrete plan in hand,” his spokesman, Amadeu Altafaj, told reporters in Brussels today. “He speaks of an initiative, of discussions in progress and he pleads for a European approach.”

Altafaj was responding to questions about Rehn’s comments to the Financial Times yesterday.

The commissioner “clearly indicated he doesn’t have a new recapitalization plan,” the commission’s chief spokeswoman, Pia Ahrenkilde Hansen, said.

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PG View: Rumors of bank recapitalization lifted stocks in late trading yesterday. They remain elevated today, despite concession that there is no recapitalization plan.

05-Oct (Bloomberg) — Antonio Borges, the International Monetary Fund’s European department head, said European Union authorities are working on a plan to recapitalize the banking sector.

“There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector, precisely to restore confidence,” Borges said today at a press conference in Brussels on the IMF’s biannual economic outlook for Europe.

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