21-Nov (Financial Times) — New curbs for US banks that restrict their ability to trade with their own capital will hit liquidity and demand for eurozone government bond markets at a time when both are in short supply, bankers have warned as they prepare to lobby regulators to water down the rules.

The Volcker rule, passed as part of the Dodd-Frank reform package, will ban proprietary trading by all US banks starting in July 2012. Since the draft regulations came out last month, bankers have been warning that it would hit liquidity from equities to corporate bonds.

But eurozone sovereign bonds have raised particular concerns because US banks have historically played an important role in a market that has seen flows dry up because of worries over spiralling debt and the health of economies such as Italy.

[source]

21-Nov (Politico) — It’s all over.

After a frantic day of last-ditch negotiations, the 12-member supercommittee folded late Monday, failing to cut $1.2 trillion from federal spending and setting into motion harsh across-the-board cuts.

In a statement from the panel’s co-chairs less than an hour after U.S. markets closed, Rep. Jeb Hensarling (R-Texas) and Sen. Patty Murray (D-Wash.) said that “after months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”

[source]

21-Nov (Bloomberg) — Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

[source]

21-Nov (Reuters) — ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone’s periphery to its core economies and was affecting economies outside of Europe.

“These are very challenging times… The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon,” Stark said in a speech to Ireland’s Institute of International and European Affairs in Dublin.

“The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt.”

[source]

PG View: The risks certainly extend beyond the confines of the Continent as well.

21-Nov (BusinessInsider) — Mark Twain once said; “History doesn’t repeat itself, but it does rhyme.” which is a line that any market participant has heard at least as often as “Those who cannot remember the past are condemned to repeat it” by George Santayana. Yet, ironically, as often as these lines are quoted throughout the mainstream media and by analysts and economists alike; human nature keeps us “hoping” that somehow “this time might be different.”

That is the case today. The mainstream media and the analyst community have been espousing that even though there are many headwinds currently in the economy and the geopolitical scene alike; the markets will still rise in 2012 as earnings press higher to new record levels. It is possible, of course, that this time could indeed be different. Maybe the crisis in Europe will somehow be ameliorated. It is possible that the “Super Committee” will come through with a plan that will begin the deficit reduction process without collapsing the economy. There is hope that the economy can somehow press forward without a recession in the next 4 years as estimated by the majority of economists and obtain growth of near 4% on average. These are possibilities that, as investors, we can certainly “hope” for. Those outcomes would certainly be much better than the alternative.

…However, as investors, “hope” is not an investment strategy.

[source]

21-Nov (Bloomberg) — Euro leaders must reach “a momentous deal” toward fiscal and political union by mid- January to save the 17-nation bloc, Credit Suisse said in a note to investors.

The analysts, led by Jonathan Wilmot, the bank’s London- based chief global fixed-income strategist, also predicted the European Central Bank will move “more aggressively” to lower its benchmark 1.25 percent rate and provide banks with longer- term funds.

“In short, the fate of the euro is about to be decided,” according to the note, which was published today.

At the same time, Italian and Spanish 10-year bond yields could jump above 9 percent and French yields could go above 5 percent, Credit Suisse’s note said. Yields on German bunds could also rise.

[source]

21-Nov (FMX) — We believe that the Super Commitee’s lack of action portends for inaction by our government until the 2012 election is concluded. We also believe, that no matter who wins the printing presses are gearing up.

…We’re buying physical assets on dips and selling stocks on rallies, essentially the Rogers position at levels far worse than his, but we believe having a long way to go. Gold is among those assets.

[source]

21-Nov (The Wall Street Journal) — Spain’s central bank said Monday it has seized small Valencia-based lender Banco de Valencia, the country’s latest ailing bank to require state aid as the sector struggles to digest the fallout from the collapse of a decade-long housing boom.

The Bank of Spain said in a statement that it will inject up to €1 billion ($1.35 billion) in capital and will grant a credit line of up to €2 billion to Banco de Valencia, which was partly owned by Spain’s Banco Financiero y de Ahorros SA.

[source]

21-Nov (CNBC) — With the U.S. congressional joint select committee on deficit reduction — or “super committee” as it has become known — needing to agree on cuts of $1.5 trillion within the next 48 hours, HSBC analysts are predicting Washington will agree to put off making tough decisions.

“Difficult decisions may be delayed. The super committee may come up with a procrastination plan that specifies targets for spending cuts and revenue increases, but leaves the details to congressional committees to write the necessary tax and spending legislation,” Kevin Logan, chief U.S. economist at HSBC, wrote in a research note as the deadline neared.

With time running out, Logan said he expects the difficult decisions to be kicked back to the very congressional committees who couldn’t agree on a deficit reduction plan in the first place.

[source]

PG View: Sounds like just another gimmick to buy a little more time.

21-Nov (USAGOLD) — Gold has probed back below $1700 this morning as continued deterioration of the situation in Europe prompts further deleveraging and flight to the dollar. Nonetheless, the yellow metal remains well within the confined of the broad 1920.50/1534.06 range; in fact, just below the midpoint.

Over the weekend, Spain became the third eurozone country in as many weeks to oust its government. However, like Greece and Italy before it, a change in government does nothing to fundamentally alter the underlying fiscal trajectory. And the constraints of the monetary union leave few policy options for these new governments; other than more austerity and the persistent hope of further bailouts and/or some form of bond market relief.

The crescendo of voices calling for the ECB to start monetizing debt is mounting. However, Germany continues to voice its objections because they ultimately would be obliged to foot that bill; something German voters appear to be adamantly opposed to, even at the expense of a collapse of the EU.

Moody’s has warned France that its AAA credit rating is in jeopardy. Add to the mix the failure of the US super committee to reach any kind of accord on debt reduction and we have a recipe for economic calamity of epic proportions. Whether the ECB eventually caves to the overriding demand and starts printing euros to buy periphery debt or not, the sharp escalation in systemic risks could be the trigger for QE3 here in America. That should continue to result in strong demand for gold on retreats within the range.

• US existing home sales +1.4% to 4.97 mln, above market expectations
• Canada wholesale trade +0.3% in Sep, below market expectations of +0.4%, vs +0.3% in Aug.
• UK Rightmove house prices -3.1% m/m in Nov, biggest monthly drop since Dec 2007.
• Eurozone Current Account (sa) €0.5B surplus in Sep, vs negative revised -€5.9 bln deficit in Aug.
• Japan Sep Leading Index revised down to -2.5%, vs -2.2% previously.
• Japan Sep Coincident Index (revised) confirmed at -1.4% m/m.
• Taiwan export orders 2.7% y/y in Oct, vs 5.3% in Sep.
• Singapore Q3 GDP revised to 6.1% y/y from 5.9% y/y previously.
• Thailand Q3 GDP rises to 3.5% y/y, vs 2.7% in Q2.

21-Nov (Reuters) — Washington’s most ambitious effort in years to come to grips with its mounting debt is set to end with a whimper on Monday as negotiators plan to announce they have failed to reach a deal.

The Republican and Democratic leaders of a 12-member congressional “super committee” are set to declare defeat in a joint statement to be released after three months of talks failed to bridge deep divides over taxes and spending.

[source]

PG View: Let’s be honest here, the formation of the super committee was simply a means for the full Congress to shirk their responsibility to come up with meaningful fiscal reforms. They bought themselves 3-months and the pretense for tabling this critical issue until after the 2012 elections. And now it seems the Sword of Damocles that is sequestration appears to have been a sham all along to boot.

21-Nov (Financial Times) — The sharp rise in French bond yields sparked by growing investor concerns about eurozone sovereign debt has negative implications for France’s triple A debt rating, Moody’s warned on Monday.

“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications,” the US rating agency said in a weekly credit outlook note.

[source]

by Ambrose Evans-Pritchard
21-Nov (Sydney Morning Herald) — LET US all extend our sympathies to the Spanish people. They face the greatest national emergency since the Civil War, yet their vote for drastic change is useless, even if democracy has, in this case at least, been respected.

As union leader Javier Dos put it, the European Union-imposed austerity plans of the incoming Partido Popular are ”nothing more than the continuation of policies leading Europe towards disaster”.

The new government of Mariano Rajoy has precious few policy levers at its disposal and cannot alone do anything at this stage to prevent a death spiral within the straitjacket of Economic and Monetary Union.

The immediate destiny of his country lies in the hands of Germany, the AAA creditor core, the EU authorities, and the European Central Bank, the nexus of policy-making power that together dictates whether Spain will be thrown a lifeline or be pushed further into depression and social catastrophe.

[source]

18-Nov (AP) – Rejecting the idea Congress can’t control its spending impulses, the House turned back a Republican proposal Friday to amend the Constitution to dam the rising flood of federal red ink. Democrats — and a few GOP lawmakers — said damage from the balanced-budget mandate would outweigh any benefits.

The first House vote in 16 years on making federal deficits unconstitutional came as the separate bipartisan “supercommittee” appeared to be sputtering in its attempt to find at least $1.2 trillion in deficit reductions to head off major automatic cuts. The lead Republican on that panel said members were “painfully, painfully aware” of its Wednesday deadline for action and would work through the weekend.

The House voted 261-165 in favor of the measure to require annual balanced budgets, but that was 23 short of the two-thirds majority needed to advance a constitutional amendment.

[source]

18-Nov (Reuters) — A high-profile effort to trim stubborn U.S. budget deficits appeared near collapse Friday as Democrats and Republicans were unable to agree on tax increases and benefit cuts.

A 12-member “super committee” in Congress has until midnight Wednesday to strike a deal that would save at least $1.2 trillion over 10 years.

Members say they think a deal is still possible, but privately aides are more pessimistic.

Friday is shaping up to be a make-or-break day, one super committee member said.

“We should know by end of today, and I’ll give myself until 11:59 p.m., as to whether or not there will be a deal,” Democratic U.S. Representative Xavier Becerra of California said at a renewable-energy conference.

[source]

Gold Defensive as European Bailout Rumors Swirl

A swirl of rumors on Friday, centered on possible resolutions to the European crisis, prompting gold to trade in a choppy manner at the low end of Thursday’s range. There was simultaneous talk that the Germans were mulling an “orderly” default clause to eurozone treaties once again, along with a rumor that the ECB might be allowed to make “unlimited” bond purchases in exchange for “significant” reforms in the countries whose bonds would be bought.

Clearly the latter doesn’t differ materially from the current situation — where bailouts are traded for austerity — other than it conceivably negates the need for the ECB to sterilize their bond purchases. And of course size. “Unlimited” is potentially a really big number.

Providing bailouts in exchange for austerity has also arguably been an abject failure, as evidenced by the need for multiple bailouts for Greece and the lack of meaningful improvements of the situations in Ireland and Portugal. It also fundamentally fails to address the underlying issue of too much debt. Creating more debt to solve a debt crisis may kick the can down the road, but at the end of the road you’re even deeper in debt. Meanwhile the imposed austerity weighs on the economy and increases the level of unemployment, reduces tax revenue, adds to the cost of social safety nets, creating bigger deficits.

On the other hand, creating a mechanism for orderly defaults, paves the way for more defaults than Greece alone. While policymakers in this camp continue to maintain that a Greek default would be a one-off event, how that would be enforce once the precedence has been set is beyond me. The European banking system may well be able to survive a Greek default — although the notion that bond haircuts are “voluntary” is ridiculous — but, if the dominoes start falling, the risk of a catastrophic collapse of the eurozone escalates dramatically. It will be anything but “orderly”.

Along with these two diametrically opposed “solutions,” the proposal that the ECB lend money to the IMF, which would then affect the bailouts seems to be gaining traction. There is a chance that this plan would provide the necessary political cover in Germany, but it is a complete end-run around the no bailout clause of the Maastricht Treaty. The ECB would not be bailing out sovereign nations, the IMF would be doing that, with euros printed and borrowed from the ECB. This too fails to address the underlying root problem and piles more debt on top of already too much debt. Nor does it address the underlying concern of the Germans that have kept them pretty adamantly opposed to both direct purchases of periphery bonds and issuance of euro-bonds.

In this scenario, the monetary base in Europe is still dramatically expanded, raising the specter of inflation. Debt is still monetized, creating a moral hazard, but that debt just ends up on the balance sheet of the IMF rather than the ECB. This creates liabilities presumably for all IMF members, everyone from Afghanistan to Zimbabwe, obviously inclusive of the United States. What ends up on the ECB balance sheet are the loans to the IMF. It’s just a big shell game. Round and around the debt goes, where the risk is nobody knows… Until it’s too late.

Bottom line, there is no easy way out of this mess. Europe can forestall some of the pain by following along the path of least resistance blazed by the quantitative easers before them, or they can bite the bullet now and hope to come out of the resulting recession/depression in a position to generate long-term sustainable growth. The former will likely condemn Europe to a decade or more of low growth, high unemployment, the periodic reemergence of crises and perhaps social unrest. The latter, would be intensely painful initially and would likely include social and geopolitical unrest as well. And while it may be the only true path toward a long-term solution, it a path that is very unlikely to be chosen.

18-Nov (Bloomberg) — The euro strengthened the most in a week against the dollar amid speculation European Central Bank buying of Italian and Spanish bonds will stem surging borrowing costs in the region.

Europe’s shared currency rose from yesterday’s five-week low versus the yen as ECB President Mario Draghi called on politicians to accelerate the implementation of agreed reforms of the region’s rescue fund. Switzerland’s franc appreciated versus most major peers. The Canadian dollar rallied after data showed consumer prices rose in October more than forecast.

“The underlying reason they are buying bonds is negative, but the fact that they are doing it is being viewed as positive,” Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York, said of the ECB. “This market is really reacting on rumors and headlines at the moment. There is no overtly bad news out of Europe today.”

[source]

18-Nov (Financial Times) — Our friends and rivals over at The Daily Telegraph have gotten their hands on an interesting document from the German government detailing its proposals for EU treaty change, and have helpfully posted it online (with an English translation by the Open Europe think thank).

Although the Telegraph focuses on its implications for Britain, there is a significant amount of detail on how Berlin would like to change eurozone economic governance, including yet another stab at enshrining bondholder “haircuts” in the EU treaties.

…Under a section headed “The establishment of a procedure for an orderly default as part of the ESM”, Berlin makes clear that countries which are deemed to be insolvent – rather than just suffering a temporary loss of access to the financial markets – would be allowed, in effect, to declare bankruptcy and default on their bonds:

[source]

18-Nov (Reuters) – Standard & Poor’s plans to update its credit ratings for the world’s 30 biggest banks within three weeks and may well mete out a few downgrades in the process, possibly surprising battered global bond markets.

Among the institutions that could be downgraded are Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Morgan Stanley (MS.N), said Baylor Lancaster, an analyst at CreditSights Inc.

[source]

18-Nov (MarketWatch) — The dollar slipped against the euro, with the shared currency gaining ground on a report European officials may discuss a plan that would see the European Central Bank loan money to the International Monetary Fund to help finance bailouts.

The euro briefly traded above $1.3600 versus the dollar and remained higher at $1.3570 in recent action, up from $1.3458 in North American trading late Thursday.

A proposal that would see the ECB lend money to the IMF that would be used to finance bailouts of governments threatened by insolvency is gaining traction, Dow Jones Newswires reported, citing unnamed people familiar with the matter. Read Market Pulse about the proposal.

Although Germany and the ECB remain opposed, talks may soon begin amid a lack of other alternatives as officials seek to stem a debt crisis that’s seen posing a growing threat to the European banking system and the world economy, the report said.

[source]

PG View: This is a total end-run around the intent of the “no-bailout” clause in the Maastricht Treaty.

17-Nov (The Wall Street Journal) — Total central-bank gold purchases in the third quarter more than doubled from the second quarter and were almost seven times higher than a year earlier as countries continued to diversify reserves, according to a World Gold Council report.

At 148.4 metric tons, gold buying among central banks was at the highest since the sector became a net buyer of the precious metal in the second quarter of 2009, according to the quarterly report.

Central banks and other official institutions, by comparison, had bought 66.5 tons of gold in the second quarter and 22.6 tons in the third quarter of 2010.

“Central-bank buying was a highlight of the quarter. Statistics this year have been remarkable,” Marcus Grubb, managing director of investment at the gold council, said in an interview.

[source]

17-Nov (Bloomberg) — Ireland’s government laid out plans to raise sales tax and pledged to consider “ambitious” asset sales in documents shown to lawmakers in Germany before their Irish counterparts, drawing criticism from opposition politicians in Dublin.

The draft documents, provided to the German parliament’s budget committee by Chancellor Angela Merkel’s government and obtained by Bloomberg News, detail a proposed increase in value- added sales tax next year to 23 percent from 21 percent. The document is prefaced with an unsigned “Letter of Intent” from Irish Finance Minister Michael Noonan and Irish Central Bank Governor Patrick Honohan to European officials.

[source]

PG View: This article clearly illustrates how the sovereignty of EU member states is eroding, driving home the point of the recent Ambrose Evans-Pritchard piece entitled The great euro Putsch rolls on as two democracies fall.

17-Nov (MarketWatch) — Mariano Rajoy’s center-right opposition party is favored to win Sunday’s election in Spain, but he is unlikely to have any time to savor his victory as fears grow that the debt-laden nation may end up needing a bailout given its skyrocketing borrowing costs.

The election comes at a tense moment for Spain, with markets refocused on the hard times facing one of the euro zone’s weakest links.

After a historically expensive auction Thursday, government bond yields ES:10YR_ESP -0.55% hit euro-era highs atop 6.8%. A level of 7%, which Italy has been fighting off, is viewed as unsustainable. Spain’s IBEX-35 stock index has slumped 16% year-to-date.

Analysts say that Sunday’s election could offer at least short-term relief for investors. A switch to the Popular Party from the embattled Socialists could buy Spain some time to take the necessary measures to win back the confidence of investors.

[source]

PG View: It is likely that yet another embattled incumbent government in the EU will fall this weekend.

Gold Retreats Into the Range

Gold has come under more intense selling pressure, retreating within its range, after failing to register a sustained push back above the $1800 level. Given the ongoing sovereign debt turmoil in Europe, and the corresponding interbank liquidity crisis, its not surprising to see periodic bouts of deleveraging as institutions and individual investors seek to raise cash. However, dips in the physical gold market continue to attract buying interest.

The World Gold Council reported that central bank gold demand hit a 40-year high in Q3, driven by a “a slew of new entrants…wishing to bolster gold holdings”. So not only is central bank gold demand increasing, but it is broadening as well. That’s important, though hardly surprising; as faith in sovereign debt and currencies continues to erode. With such assets losing their appeal, the options for alternative reserve holdings narrow pretty quickly. Arguably it is gold — because of its global appeal and liquidity — that ends up being the preferred choice.

I had a lengthy conversation with a very well connected banking source in Germany yesterday and the tenor of that discussion was disturbing to say the least. He contends that the German citizenry is sufficiently fed-up to the point of being prepared to allow the monetary union to collapse. This is a markedly different anticipated outcome than the one I envision, but my contact is a very sharp guy, well connected and has been involved in the German banking industry for decades. I never dismiss anything he says. Just maybe the Germans will be the ones that finally capitulate to the reality that you don’t extract the EU from a sovereign debt crisis by incurring ever-more sovereign debt. The bitter pill that will undoubtedly lead to a protracted recession — or worse — must be swallowed now, before that pill is simply too big to choke down.

I on the other hand continue to believe that as the risk of a eurozone collapse ratchets higher, it will strike enough fear in the hearts of Germans that they will ultimately cave to the demands of those that believe the ECB should be monetizing sovereign debt like mad. Despite a decidedly different mindset when it comes to debt and inflation risks, politicians in Germany are still politicians; disinclined to inflict pain on their constituents if there is a way it can be easily avoided and with the necessary political cover. But as I said, my source’s alternate view now gives me some pause.

Mervyn King suggested today that the UK may need additional stimulus to insulate it from the worsening crisis on the Continent. And of course, the Fed has pretty consistently maintained that it stands ready to intervene further to ward off recession — a recession that is all-but assured if Europe starts contracting.

Either way though, I think gold continues to serve in its long standing role as solid and dependable reserve asset when just about everything else is being called into question. For the individual saver and investor, gold performs a similar duty as a reliable alternative means of saving and a critical hedge of the more traditional asset classes.