23-Nov (The Wall Street Journal) — Germany maintained its opposition to common euro-zone bonds Wednesday as the European Union’s executive arm announced a reform package that includes the issuance of euro bonds along with new powers to intervene in national budgets.

The European Commission’s proposal to introduce common bonds in the euro zone comes at an inappropriate time, German Chancellor Angela Merkel said just before the announcement was made. She insisted that first the treaty governing the EU should be amended to make it possible to bring fiscal offenders into line.

Germany has long argued that collective euro bonds are not a cure to the currency bloc’s current debt crisis, and could only work at the end of a lengthy process of narrowing the gaps in economic competitiveness among the 17 euro members.

…”Of course, the situation on financial markets would calm down for a couple of months,” Schaeuble said, but added that after that a loss in confidence in the euro zone would actually accelerate.

“Therefore, we won’t go down that path,” Schaeuble said.

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PG View: The first highlighted quote from Schaeuble was circulated earlier as an indication that Germany might be warming to the idea of eurobonds. Of course nothing could be further from the truth; and the second highlighted quote, which slams the door on the notion, somehow got separated from the first…

23-Nov (Reuters) — Belgium is leaning on France to pay more into emergency support for failed lender Dexia, newspapers reported, spooking investors who thought a 90 billion euro ($120 billion) rescue deal only needed rubber stamping.

The countries are wrangling about short-term funding guarantees meant to wean Dexia’s “bad bank” off emergency liquidity and allow it to re-enter financial markets, two Belgian newspapers reported.

“Belgium wanted Paris to guarantee more than had been agreed so far, because France can fund itself at a cheaper rate than our country,” Belgian daily De Tijd said, following a similar report in De Standaard.

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PG View: The take away here is that the only way either country can fund the bailout of Dexia is through additional borrowing. And as is becoming clearly evident, going deeper and and deeper into debt to finance bailouts solves none of the underlying problems. It buys time, but leaves you with bigger problems down the road.

23-Nov (The Economist) ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters).

Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers today were trying to withdraw money from Krajbanka, a mid-sized bank, pictured). But billions of euros are flooding out of Europe’s banking system through bond and money markets.

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PG View: Evidence of a developing bank run is generally a harbinger of even worse things to come. Truth be told though, there’s still plenty of risk whether your euros are in the bank or under your mattress. The same can be said even if you convert your euros to dollars. Gold is likely to garner increasing interest as the asset of choice for wealth preservation amid the worsening turmoil in the eurozone.

23-Nov (Der Spiegel) — Germany has been considered a safe haven of financial stability amid the ongoing euro crisis — but that may be changing. Growing mistrust from investors seems apparent after what has been described as a “disastrous” government bond auction on Wednesday. Just two-thirds of the German bonds sold, leaving analysts concerned but not panicked.

Investors seem to have lost their taste for Germany’s once much sought-after government bonds. At an auction on Wednesday of the country’s 10-year bonds, one-third went unsold according to the German Finance Agency, which manages the nation’s debts. The federal government had initially intended to sell bond issues worth some €6 billion (around $8 billion), but managed to garner just €3.89 billion.

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23-Nov (The Wall Street Journal) — he Dow’s steep losses this week put it on track for its worst Thanksgiving week since 1973, according to the WSJ Market Data Group.

Back in 1973, the Dow fell 4.2% during Thanksgiving week. The index was recently off by just about that amount for this week, with the index down by about 180 today at 11313.

In fact, Thanksgiving has been a turkey in recent years — the Dow fell during the holiday week in 2009 and 2010.

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23-Nov (USAGOLD) — Gold is defensive within the range once again after a terrible German bund auction — suggesting core contagion — pushed the EUR-USD rate to 7-week lows below 1.3400. The corresponding rise in the dollar has the yellow metal trading back below $1700.00.

Generally weak PMI data out of Europe added to the worries presented by the bund auction. In fact, equity markets were already on the ropes before the European open in the wake of weaker than expected manufacturing data out of China. HSBC/Markit Flash Manufacturing PMI fell to 48.0 in November, the weakest reading since March 2009.

Here in the States, initial jobless claims edged higher and durable goods orders fell. While personal income rose slightly more than expected, weak PCE suggests consumers are hunkering down going into the critical Christmas shopping season.

• University of Michigan consumer sentiment (final) revised a tick lower to 64.1 in Nov, below expectations of 64.5, vs 64.2 prelim read.
• US durable goods orders -0.7% in Oct, above market expectations of -1.0%; +0.7% ex-trans.
• US personal income +0.4% in Oct, just above expectations of +0.3%; PCE +0.1%, b elow expectations of +0.4%.
• US initial jobless claims +2k to 393k for the week ended 12-Nov, above market expectations of 390k, vs upward revised 391k in previous week.
• Eurozone Reuters Composite PMI (advance) fell to 46.2 in Nov, vs 46.5 in Oct. Manufacturing falls to 46.4. Services better at 47.8.
• Germany Reuters Manufacturing PMI (advance) fell to 47.9 in Nov, below market expectations of 48.5, vs 49.1 in Oct. Services rises to 51.4.
• France Reuters Manufacturing PMI (advance) fell to 47.6 in Nov, below market expectations of 48.0, vs 48.5 in Oct. Services rises to 49.3.
• France business confidence falls to 95 in Nov, vs 97 in Oct.
• France production outlook falls to -35 in Nov, vs -29 in Oct.
• China HSBC/Markit Flash Manufacturing PMI fell to 48.0 in Nov, vs negative revised 51.0 in Oct.
• Singapore CPI eases in Oct to 5.4% y/y, vs 5.5% y/y in Sep.
• Taiwan industrial output 1.4% y/y in Oct, vs positively revised 1.8% in Sep.
• Malaysia CPI steady at 3.4% y/y in Oct.

23-Nov (The Wall Street Journal) — The European debt crisis appeared to escalate after a failed German government-bond auction Wednesday, indicating that investors are now demanding higher risk compensation even at the heart of the currency bloc’s debt market.

German government bonds, or bunds, carry low yields but are deemed the safest haven in the euro-zone bond market. Germany has fallen short of a targeted bond sale before because of its super-low yields, but that size of the shortfall was stunning in a market already rapidly losing confidence in European Union proposals to contain the debt crisis.

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PG View: The bund auction failure is indicative of contagion to the core of Europe and pushed the EUR-USD rate to new 7-week lows below 1.3400.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.”

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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.

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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.”

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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.

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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.

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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.

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