22-Nov (Bloomberg) — Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” as the nation struggles to recover from recession.

The odds of the U.S. returning to recession are as high as 50 percent, El-Erian said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. U.S. economic growth was worse than expected and congressional policy makers are gridlocked over what to do about the economy and the deficit, which risk exacerbating an already weak recovery, he said.

“We have less economic momentum than we thought we had and we have no policy momentum,” said El-Erian, who also serves as co-chief investment officer with Pimco founder Bill Gross at the world’s largest manager of bond funds.

[source]

22-Nov (HousingWire) — The U.S. and other major industrialized economies face more pain ahead, with the world “in a balance-sheet depression” that could make another credit crisis likely.

The world economy will go through a period of deleveraging through at least the year 2018. In the meantime, the U.S. is predicted to slip into another recession either in 2012 or 2013, according to a November-December economic report from Simon Hunt Strategic Services, based in Surrey, England.

[source]

22-Nov (CNBC) — The debt situation on either side of the Atlantic is unlikely to improve for some time, but the United States remains the key engine for growth in the world, albeit hampered by political partisanship, while Europe will continue to suffer because of lack of liquidity in the banking system, Anthony Fry, UK Chairman of Espirito Santo Investment Bank told CNBC.

On the collapse of the so-called “super committee” of Congressional Democrats and Republicans tasked with devising a bi-partisan plan to drive down the US deficit, Fry said it was important to consider the context, particularly the Presidential election next year.

“We are within 12 months of a US presidential election and there’s a lot of politics going on and the combination of high politics and economic crisis is a potentially toxic one,” Fry said.

[source]

22-Nov (International Monetary Fund) — The Executive Board of the International Monetary Fund (IMF) approved on November 21 a set of reforms designed to bolster the flexibility and scope of the Fund’s lending toolkit to provide liquidity and emergency assistance more effectively to the Fund’s global membership. These reforms, which have been under preparation for some time, will enable the Fund to respond better to the diverse liquidity needs of members with sound policies and fundamentals, including those affected during periods of heightened economic or market stress—the crisis-bystanders—and to address urgent financing needs arising in a broader range of circumstances than natural disasters and post-conflict situations previously covered.

“I commend the Executive Board for the expeditious response to support the membership in these difficult times,” said IMF Managing Director Christine Lagarde following the Executive Board meeting. “The Fund has been asked to enhance its lending toolkit to help the membership cope with crises. We have acted quickly, and the new tools will enable us to respond more rapidly and effectively for the benefit of the whole membership.

“The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness,” she added.

The reform replaces the Precautionary Credit Line (PCL) with the more flexible Precautionary and Liquidity Line (PLL), which can be used under broader circumstances, including as insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders during times of heightened regional or global stress and break the chains of contagion. The Fund’s current instruments for emergency assistance (Emergency Natural Disaster Assistance and the Emergency Post-Conflict Assistance) are consolidated under the new Rapid Financing Instrument (RFI), which may be used to support a full range of urgent balance of payments needs, including those arising from exogenous shocks.

[source]

PG View: Yes! More credit is the answer! Why didn’t someone think of this sooner?

22-Nov (Fed) — A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 1, 2011, at 10:30 a.m. and continued on Wednesday, November 2, 2011, at 8:30 a.m.

…Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most probable outcome was a moderate pace of economic growth over the medium run with only a gradual decline in the unemployment rate.

…A few participants felt that the continuation of the current stance of monetary policy, coupled with the possibility of a rebound in energy and commodity prices, posed some upside risks to inflation.

…A few members indicated that they believed the economic outlook might warrant additional policy accommodation.

[source]

Gold Rebounds Into Range

22-Nov (USAGOLD) — Retreats in the gold price continue to attract buying interest amid safe-haven demand associated with the turmoil in Europe and the latest failure of lawmakers in the US to get a handle on our own exploding debt. Yesterday’s retreat was broadly associated with deleveraging and a fairly typical attack on the price of gold going into options expiry. The yellow metal has probed back above $1700 level intraday.

While it is likely that we will continue to see these periodic bouts of delveraging as the debt/liquidity crisis in Europe continues to manifest, such retreats have pretty consistently proven to be good buying opportunities. The negative pressures are being offset by the creeping reality that in a world overburdened by too much debt, the easiest solution is increasingly seen to be printing fiat currency and monetizing said debt. This same reality is what’s driving the marked rise in central bank interest in gold.

Bolstering holdings of hard assets is a perfectly logical response to a world where many industrialized nations are trying to devalue their currencies simultaneously, while also paying yields that don’t remotely reflect the real risk of sovereign debt. That logic holds true whether your a central bank, a sovereign wealth fund, or your average individual investor.

One can also reasonably assume that in the absence of much needed fiscal reform here in the US, the ball has been lobbed back into the Fed’s court. With our interest rates already at 0-0.25%, there aren’t really any other options that more easing of the quantitative kind. If the US falls back into recession on its own fundamentals, or whether a collapse of Europe drags America back into recession, the Fed is likely to try and fulfill its dual mandate by buying printing and buying more assets.

The recent dollar strength — and ongoing delusion that Treasuries are a safe-haven — perhaps makes a QE3 even more appealing. If a European collapse (or fear thereof) prompts both the ECB and the Fed to flood the market with liquidity — even as the BoE and BoJ remain in QE mode — imagine the spectacular rise in gold and other hard assets that would likely result…

22-Nov (Financial Times) — Ever since the eurozone bond markets first started to get the jitters, hedge fund managers have been whispering that gold could play a part in resolving the crisis.

Until recently, this discussion has mainly been the preserve of gold market conspiracy theorists and backbench German politicians.

But now the use of gold to fund a eurozone bail-out is coming closer to reality. Buried within a draft of the European Commission study on joint ‘eurobonds’, reported by the Financial Times this week, is the suggestion that gold could be used as collateral for these bonds.

[source]

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.