By Mohamed El-Erian
31-Oct (Reuters Blogs) — It is time to say goodbye to the confident reassurances from American policymakers that Japan could not “happen here.” It is also time to regret the smug assertions that Japan’s “lost decade” of growth was due to a combination of uniquely Japanese failings – from insufficient policy activism to weak corporate governance and poor political leadership.

American policymakers, together with their European counterparts, are realizing something that Japan has been experiencing for a while: It is very difficult to manage well an economy hobbled by structural impediments and balance sheet excesses. Absent a major change in the effectiveness of the policy approach, this realization will likely lead to broadening societal concerns about the possible “Japanization” of America and, with that, worries that under such circumstances the country would not be able to navigate such a phenomenon as well as Japan has.

The US continues to find it difficult to generate meaningful economic growth and to create enough jobs. Despite multiple fiscal and monetary stimulus programs – indeed, record breaking ones – the economy has failed to recover decisively from the sharp contraction that followed the global financial crisis.

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01-Nov (Financial Times) — The premium Italy pays to borrow over Germany rose to a fresh euro-era high on Tuesday, leaping over a critical level that can trigger margin payments and that has previously exacerbated crises in Portugal and Ireland.

Italy’s 10-year bond spread to German Bunds hit 454bp, above the 450bp level used by some clearing house, as investors fretted that the latest eurozone deal was coming undone after Greece called a referendum on the measure.

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President Obama will open two days of the Group of 20 economic summit in Cannes, France, on Thursday with a pair of bilateral meetings dealing with the European debt crisis, which is likely to dominate the event.

Obama is to meet with French President Nicolas Sarkozy and German Chancellor Angela Merkel, White House officials said Monday.

…“We have shared back and forth some of the experiences we had during the crisis, and in particular, the need to move with overwhelming force,” Lael Brainard, the Treasury Department’s undersecretary for international affairs, said during a White House briefing for reporters.

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PG View: “Overwhelming force” means liquidity. Lots and lots of liquidity. That’s bad for the euro, and if the US is to maintain a weaker dollar in relation to the euro, policymakers here will have to respond to weaken the greenback. QE3 should do nicely…

01-Nov (Bloomberg) — Greece’s plan to hold a referendum on Europe’s bailout for the nation poses a threat to financial stability in the region, Fitch Ratings said.

The vote “dramatically raises the stakes for Greece and the euro zone as a whole,” Fitch said in a statement today, adding that it increases the risk of a “disorderly” default.

Greek Prime Minister George Papandreou late yesterday called for a referendum on Europe’s plan to contain the country’s debt turmoil. Austerity measures by the government to reduce the deficit have eroded Papandreou’s popularity and sparked a wave of social unrest, while a poll published Oct. 29 showed most Greeks believe the new bailout package is negative.

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01-Nov (USAGOLD) — Gold has tumbled back below 1700.00 as the grand bailout deal for Europe agreed to last week is already falling apart. Greek PM George Papandreou has pledged to submit the new plan to the voters. This not only delays implementation, but passage of the referendum is anything but a sure thing. The Greeks are already rioting over oppressive austerity measures imposed by the EU. If the referendum is rejected, it would arguably be a Greek rejection of the EU. The rest of the policymakers that have been working furiously in recent months to craft an acceptable deal are probably mad enough at Papandreou today to just let Greece go…

The palpable relief that ensued last week after the announcement of the deal is gone and risk aversion has resurfaced with a vengeance amid widespread uncertainty. The EUR-USD rate has collapsed to a three week low and global stocks are under heavy pressure as well. The dollar and US Treasuries have surged, pushing gold lower.

• US FOMC begins 2-day meeting.
• Switzerland retail sales -0.9% y/y in Sep, well below market expectations, vs upward revised -0.8% y/y in Aug.
• Switzerland SVME manufacturing PMI falls to 46.9 in Oct, below market expectations, vs 48.2 in Sep.
• UK CIPS Manufacturing PMI falls to 47.4 in Oct, below market expectations of 50.1, vs negative revised 50.8 in Sep.
• UK Q3 GDP (first release) 0.5% q/q, above market expectations of 0.3%, vs 0.1% in Q2; 0.5% y/y, down from 0.6% y/y in Q2.
• Thailand CPI rises to 4.2% y/y in Oct, vs 4.0% y/y in Sep.
• South Korea CPI moderates to 3.9% y/y in Oct, vs 4.3% in Sep.
• China manufacturing PMI (CFLP) falls to 50.4 in Oct, vs 51.2 in Sep; HSBC/Markit manufacturing PMI improves to 51.0 in Oct, vs 49.9 in Sep.
• RBA cut the cash rate 25 bps to 4.50% on deteriorating global growth picture and signs of domestic caution. Move was widely expected.

01-Nov (Reuters) — The leaders of France and Germany scrambled on Tuesday to limit damage after Prime Minister George Papandreou decided to let Greeks vote on a bailout package — a move that stunned markets and threw Greece’s euro zone membership into question.

European politicians complained Athens was trying to wriggle out of the 130 billion-euro rescue deal agreed at a summit only last week, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union of the referendum.

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PG View: The size of recent anti-austerity protests and riots, as well as the polls, show that the bailout deal is widely unpopular amongst Greek citizens. If the deal is voted down, it may in fact be a referendum on continued Greek membership in the EU. Out of the frying pan and into the fire George…

31-Oct (Bloomberg) — The elderly will likely be the most vulnerable Americans in Washington’s future budget fights. Right now, their grandchildren may be among the biggest casualties.

With Democrats and the 37 million-member AARP seniors’ lobby working to protect Medicare and Social Security, and Republicans opposing tax increases to curb the deficit, programs for young people may be disproportionate targets if negotiators can’t reach a budget deal and automatic spending cuts kick in.

That’s sparking concern that lawmakers are sacrificing the U.S.’s future investment in children, education, infrastructure and other programs.

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31-Oct (Financial Times) — Bankers have warned that the eurozone rescue fund might face lacklustre demand this week for a planned bond issue designed to finance Ireland’s bail-out.

The bond from the European financial stability facility will seek to raise €3bn ($4bn) and will be in 10-year bonds rather than a 15-year maturity because of worries over demand, say bankers.

…Bankers familiar with the issue said the EFSF had been considering a €5bn issue. However, the EFSF has denied this, saying it had always sought a €3bn issue.

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31-Oct (CNBC) — The German government tried to deflect responsibility on Monday for a 55-billion euro accounting blunder that has exposed it to charges of ridicule for being inept and hypocritical after its steady criticism of Greek bookkeeping practices.

Finance Minister Wolfgang Schaeuble has summoned executives from the nationalized mortgage bank Hypo Real Estate (HRE) to explain how they made a simple accounting error that ended up raising Germany’s total debt load by 55 billion euros.

…Schaeuble’s spokesman Martin Kotthaus tried to deflect any blame, saying the ministry received a certified statement from auditors that the balance sheets had been checked and approved. He said it was too early to tell exactly who messed up.

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PG View: Sort of makes one wonder what other landmines might be out there, when a €55 bln error can get overlooked.

31-Oct (BBC) — Bank shares and the euro fell on Monday as fears over the eurozone persisted.

European stock markets slumped about 3%, as the value of the big banks retraced much of the gains they had made since a new rescue deal was agreed by eurozone leaders last Wednesday.

The euro fell 1.5% against both the dollar and the pound.

Worry over the Italian government’s ability to finance itself remains at the heart of the crisis, as Rome’s cost of borrowing rose to new highs.

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31-Oct (CNNMoney) — The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv (FISV), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

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31-Oct (The Economist) — EUROPE’S long-awaited crack at a bold euro-crisis solution calmed markets for all of two days. After digesting the plan, and observing a dismal Italian bond auction, equities are dropping today and the sovereign bond yields around the euro-zone periphery are rising. This development comes as little surprise. The euro zone needed to put together a credible, suitably large backstop for government debt. Instead, leaders cobbled together a plan to provide a guarantee against some losses on government debt and to leverage up the European Financial Stability Facility’s paltry €440 billion in capital. But even a leveraged up fund looks small against the scale of maturing debt, and the enterprise is weakened by reliance on the backing of peripheral sovereigns which are themselves under threat.

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PG View: Policymakers keep throwing bigger and bigger numbers around, even as the gap between initial relief and new-found worries narrows.

31-Oct (Bloomberg) — The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

Fixed-income investments advanced 6.25 percent this year, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

…“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

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PG View: Yep, over the past three decades, 30-year US Treasuries have gained 11.5% annually compared with a 10.8% increase in the S&P 500. That’s rather startling, but as the article points out, it’s something that is unlikely to be repeated for any 30-year period beginning any time soon, given that the Fed has manipulated yields to lows that are not even remotely reflective of current risks.

31-Oct (BusinessInsider) — John Paulson gave a speech last night to the Chinese Finance Association, where he discussed gold, inflation, the outlook for the economy, and what he’s investing in.

A key point: He’s still a big believer in gold, and he thinks talk fo a bubble is ludicrous.

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31-Oct (The Wall Street Journal) — MF Global, the brokerage run by former Goldman Sachs chief Jon Corzine, today filed for bankruptcy protection, becoming one of the highest-profile U.S. victims of bad bets on European government debt.

With the Chapter 11 filing, MF Global also is likely to be added to the ignominious list of the 10 largest bankruptcies in U.S. corporate history.

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21-Oct )The Wall Street Journal) — A rescue effort for MF Global has landed in bankruptcy court. MF Global, the ailing brokerage run by Jon Corzine, filed for bankruptcy protection in a New York court on Monday morning.

MF Global Finance USA Inc. listed $100 million to $500 million in assets in a barebones first bankruptcy filing. The company listed $10 million to $50 million in estimated liabilities.

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31-Oct (USAGOLD) — Gold retreated after the BoJ massively intervened to suppress the yen, boosting the dollar in the process. The yellow metal traded as low as 1704.90 before rebounding intraday, likely on the realization that this latest round of intervention has further solidified gold’s role as the safe-haven of last resort.

While Europe announced that it would markedly expand the firepower of its bailout capabilities via leverage last week, the absence of any details has shifted the market’s attention to implementation risks. In addition, investors realize that even with a bigger EFSF, there is not likely to be any immediate positive impact on growth. The announcement today of much weaker than expected German retail sales in Sep may have driven home that point.

MF Global continues to destruct. The primary dealer was suspended from transacting new business with the New York Fed this morning.

The BoJ intervention launches an action packed week with an FOMC meeting on Tuesday/Wednesday (Bernanke presser on Wednesday), US payrolls for Oct on Friday and the G20 Summit in France on Thursday and Friday.

• US Chicago PMI fell to 58.4 in Oct, below market expectations of 59.2, vs 60.4 in Sep.
• Canada GDP +0.3% in Aug, just above expectations, vs +0.4% in Jul.
• MF Global suspended from conducting new business with the New York Fed.
• Germany retail sales +0.4% in Sep, well below market expectations of +1.0%, vs upward revised -2.7% in Aug; +0.3% y/y, down from +2.5% y/y in Aug.
• France PPI unch in Sep; 6.1% y/y.
• Eurozone CPI Flash Estimate unch at +3.0% y/y in Oct, above expectations of +2.9%.
• Eurozone unemployment rate ticked higher in Sep to 10.2%, above expectations, vs upward revised 10.1% in Aug.
• Italy CPI – EU Harmonized (preliminary) +0.9% m/m in Oct, above market expectations of 0.4%, vs 2.0% in Sep; 3.8% y/y.
• Japan construction orders -9.3% y/y in Sep.

31-Oct (AP) — Eurozone economies will see a “marked slowdown” next year, the Organization for Economic Cooperation and Development warned Monday, as it called on the European Union to clarify its anti-crisis measures.

In an update of economic forecasts timed to coincide with this week’s meeting of the Group of 20 major economies, the OECD said “patches of mild negative growth” are likely in the eurozone in 2012.

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PG View: Apparently last week’s detail free European bailout announcement isn’t good enough for the OECD. It shouldn’t have been good enough for anyone…

21-Oct (Reuters) — Japan sold the yen for the second time in less than three months after it hit another record high against the dollar Monday, saying it intervened to counter excessive speculation that was hurting the world’s No. 3 economy.

The intervention vaulted the dollar more than 4 percent higher, which would mark its biggest one-day gain in three years, and Finance Minister Jun Azumi said Tokyo would continue to step into the market until it was satisfied with the results.

Indeed, his deputy later said the intervention was not over yet, when asked to assess its effects as the dollar began slipping from the day’s high.

“I don’t think intervention has ceased yet,” Fumihiko Igarashi told reporters.

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PG View: The notion that the yen was a “safe-haven” was pretty much a fallback position in the wake of the SNB’s intervention against the franc. Now that this well anticipated return volley in the global currency war has been fired, the yen is effectively off the table has a haven as well.

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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