JK Comment: In the vein of the now famous video “Quantitative Easing Explained”. Very entertaining, and enlightening.

29-Nov (USAGOLD) — Gold continues to consolidate above the 1700 level, just below the midpoint of the broad range, as the rumor-mill in Europe continues to churn. Yesterday there was speculation that the IMF would be bailing out Italy to the tune of €600 bln. Today, the rumor from last week that the ECB will lend funds to the IMF so they can bailout Italy is being recirculated. Neither is rather likely, but stock markets continue to latch on to any kind of hope.

To punctuate the need for something to happen — and happen quickly — Italy auctioned bonds today with rather troubling results. The yield on 3-year bonds neared 8% and the 10-year auction netted a euro-era high yield of 7.56%. The bid covers were just 1.5 and 1.34 respectively.

Adding insult to injury, the ECB was unable to sterilize the entire €203.5 bln in accumulated bond purchases it had outstanding. This has happened before, but it suggests that the current secondary market bond buying scheme may be reaching its limit. If the ECB is to continue buying bonds of meaningful quantities — and the latest Italian auctions suggest higher volumes are needed — the central bank may have to concede that full-on quantitative easing is necessary. The latest Reuters survey of economists suggest there is now about a 40% chance the ECB will succumb to the ‘need’ for QE.

• US consumer confidence surged to 56.0 in Nov, well above market expectations of 43.0, vs upward revised 40.9 Oct.
• US S&P Case-Shiller home price index for 20-cities -0.6% (nsa) in Sep; -3.59% y/y.
• Canada Q3 current account deficit narrowed to -C$12.1 bln, on expectations of -C$11.1 bln.
• Eurozone economic confidence fell to 93.7 in Nov, below market expectations of 94.0, vs 94.8 in Oct.
• Eurozone consumer steady at -20.4 in Nov; Business climate and services confidence erode.
• UK GfK consumer confidence ticks lower to -33 in Nov.

29-Nov (Reuters) — Greece’s bank deposit outflows reached 13-14 billion euros in the September-October period, the country’s central bank chief said on Monday.

“In September and October, two very bad months due to political uncertainty, we had a loss of 13-14 billion euros,” Bank of Greece Governor George Provopoulos told a parliamentary committee.

Provopoulos said bank deposit outflows continued in the first 10 days of November.

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29-Nov (CNBC) — The European Central Bank will cut interest rates next week and throw more funding lifelines to stressed banks toiling against the euro zone’s debt crisis, according to a firm majority of economists polled by Reuters.

While Europe’s leaders spar over ways to tackle the crisis, the poll suggested that under its new President Mario Draghi the ECB will act more decisively, perhaps through unconventional means.

The survey of 73 analysts showed a 40 percent chance the ECB will follow the U.S. and British central banks in the next six months and start purchasing government bonds from struggling euro zone economies using freshly created money—or quantitative easing (QE).

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29-Nov (Washington Post) — U.S. home prices are falling again in most major cities after posting small gains over the summer and spring, the latest evidence that the troubled housing market won’t recover any time soon.

The Standard & Poor’s/Case-Shiller index released Tuesday showed prices dropped in September from August in 17 of the 20 cities tracked. That was the first decline after five straight months in which at least half the cities in the survey showed monthly gains.

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29-Nov (Telegraph) — Italy auctioned €7.49bn of three and ten year bonds this morning. It had hoped to sell between €5bn and €8bn.

Yields on three-year bonds rose to 7.89pc, up 2.96pc on last month.

The results place further pressure on Mario Monti, the technocrat prime minister, to drive through austerity measures.

It was the third time in a week that Italy had to pay more than 7pc to auction debt.

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It’s a Currency War Either Way

28-Nov (USAGOLD) — Gold is comfortably back above the $1700 level today, and the euro and stocks are rallying, underpinned by renewed hopes that yet another solution for the eurozone debt/liquidity crisis is nigh. A number of rumors circulated today: A €600 bln IMF bailout for Italy and word that the six still AAA rated eurozone countries may jointly issue “elite bonds” to name just two. The first was repudiated by the IMF and the second was shot down by the German Finance Ministry. Nonetheless, markets continue to hold-out hope.

Meanwhile talk of eventual ECB bond buying, eurobonds, the possibility of the Fed buying European sovereign debt and a breakup of the eurozone continue to make the rounds. Each would likely have pretty grim consequences, but might at least buy some more time. Has anyone else noticed that the gap between crises is getting shorter and shorter?

The breakup of the eurozone, something that was absolutely unmentionable several weeks ago, is suddenly being very openly discussed. But let’s be clear about the implications: The Germans remain adamantly opposed to the ECB printing the single currency and using those devalued euros to buy sovereign European debt. However, you can be reasonably assured that one of the first orders of business of any country that leaves the Union will be to print and devalue their currency. Print and devalue as a whole or print and devalue the individual components. The end result is the same: A continuation of the currency wars.

Countries that leave the EU could conceivably launch their own QE campaigns, but once your take the steps to go it alone, there may be little incentive to make-good on on existing euro denominated debt. There’s going to be turmoil if a country returns to their legacy currency. Investors will be reluctant to lend anyway, given the likelihood of substantial currency devaluations, so why wouldn’t you default as part of that process?

If, as some have suggested, the Fed starts printing and buying European sovereign debt under the guise of protecting the US banking system, the weaker dollar that results would likely incite other nations to competitively devalue. Ben Bernanke, in his now famous 2002 deflation speech, acknowledged that “the Fed has the authority to buy foreign government debt.” Yet, a significant drop in the dollar will dis-incent the world’s largest group of consumers from buying foreign made goods and services. Foreign exporters would almost assuredly respond with devaluations of their own.

As evidenced in this past weekend’s comprehensive Bloomberg article on the $7.77 trillion in secret Fed lending during the height of the global financial crisis, the Fed has considerably — perhaps even unlimited — means at its disposal. And it’s not afraid to use them.

In an environment of perpetual beggar thy neighbor currency devaluations, hard assets such as gold would resume their long-term uptrends as savers seek shelter from continued erosion of wealth. The time to buy gold is in the relative calm of the recent range, before any of these scenarios become reality.

28-Nov (Bloomberg) — Italy’s credit rating was cut to BB from BB+ by Egan-Jones Ratings Co. as the euro-region’s third- largest economy struggles to manage its debt amid record borrowing costs and a slowing economy.

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28-Nov (Reuters) — Germany and France stepped up a drive on Monday for coercive powers to reject national budgets in the euro zone that breach EU rules, as a market rout of European debt eased temporarily on hopes of outside help for Italy and Spain.

The OECD rich nations’ economic think-tank said the European Central Bank should cut interest rates and step up purchases of government bonds to restore confidence in the euro area, which now posed the main risk to the world economy.

In Brussels, finance ministers of the 17-nation currency area meeting on Tuesday are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets, and release a vital aid lifeline for Greece.

Berlin and Paris aim to outline proposals for a fiscal union before a European Union summit on Dec. 9 increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

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By Ambrose Evans-Pritchard
The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May.

Italy faces a “sudden stop” in funding, forced to pay 6.5pc on Friday for six-month money, despite the technocrat take-over in Rome.

German Bund yields have risen to 59 basis points above Swedish bonds since Wednesday’s failed auction. German debt has been relegated suddenly against Swiss, Nordic, Japanese, and US debt. As the Telegraph reported two weeks ago, Asian central banks and sovereign wealth funds are spurning all EMU bonds because they have lost confidence in a monetary system with no lender of last resort, coherent form of government, or respect for the rule of law.

Even if EU leaders could agree on fiscal union and joint debt issuance – which they can’t – such long-range changes cannot solve the immediate crisis at hand. The push for treaty changes has become a vast distraction.

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PG View: Ben Bernanke said in his now famous 2002 speech on deflation, “The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations.”

27-Nov (Bloomberg) — The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

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PG View: Details of massive central bank bailouts were withheld from Congress as they debated banking industry reforms. The secret $13 bln in income allowed the banks to ramp-up their lobbying against said reforms, with enough leftover to juice the bonus pool…

by Gavyn Davies
27-Nov (Financial Times) — It has suddenly become respectable to ask the question: what would happen if the euro broke up? Last week’s rise in German bond yields signals that a euro break-up is being taken more seriously by investors. I am told that London law firms are allocating large amounts of time to examining the validity, following a break-up, of cross-border contracts written in euros. And, to judge from my own inbox, asset managers are beginning to ask about the economics of how it could occur.

When the euro was created, the process took many years of careful planning. The ECU, a basket of fixed amounts of national currencies, traded for several years in the foreign exchange markets, before its name was changed to the euro on 1 January 1999. There were no sudden revaluations and devaluations to disrupt economic relationships within the currency zone.

This movie cannot now be run backwards. It is hard to imagine the 17 members of the eurozone going through an orderly, decade-long process in which national currencies would first be reintroduced, then gradually allowed to deviate against each other within narrow bands, then ultimately allowed to float freely. I am not aware of any currency system which has broken up in such an orderly manner. Much more probable is a severe crisis, followed by the reintroduction of some national currencies, after which the “euro” might be retained by a remaining group of its current members, or it might simply cease to exist altogether.

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28-Nov (Reuters) — Italy’s prime minister faces a testing week as he seeks to shore up the country’s strained public finances, with an IMF mission expected in Rome and market pressure building to a point where outside help may be needed to stem a full-scale debt emergency.

However, an IMF spokesperson poured cold water on a report in the Italian daily La Stampa that said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.

“There are no discussions with the Italian authorities on a program for IMF financing,” an IMF spokesperson said.

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28-Nov (AP) — Germany insisted Monday that it has no plans to float bonds together with the eurozone’s five other triple A rated nations and use the proceeds to provide assistance to some of the single currency bloc’s indebted members, such as Italy and Spain.

The Finance Ministry’s denial came as the International Monetary Fund also dismissed reports it was planning a euro600 billion bailout fund for Italy, and credit rating agency Moody’s warned that the “rapid escalation” of Europe’s financial crisis is threatening the credit worthiness of all eurozone governments, even the most highly rated. Only six of the eurozone’s 17 countries have the top rating — Germany, France, Austria, the Netherlands, Luxembourg and Finland.

Despite the denials, the markets appear to be in a forgiving mood Monday. With the future of the euro hanging in the balance, according to many in the markets, there are hopes that the recent signs of deterioration in the debt crisis will finally get Europe’s leaders to agree on a package of measures that can ease market concerns over whether the euro currency itself can survive. The Stoxx 50 of leading European shares was up 2.6 percent, while the euro was 0.6 percent higher at $1.3362.

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28-Nov (Bloomberg) — Moody’s Investors Service said the “rapid escalation” of Europe’s debt and banking crisis is threatening all of the region’s sovereign ratings.

Credit risks will continue to rise without measures to stabilize markets in the short term, the ratings company said in a statement today. European Union policy makers also face constraints to act quickly to restore confidence, it said.

“In the absence of major policy initiatives in the near future which stabilize credit market conditions, or those conditions stabilizing for any other reason, the point is likely to be reached where the overall architecture of Moody’s ratings within the euro area, and possibly elsewhere within the EU, will need to be revisited,” the statement said. “Moody’s expects to complete such a repositioning during first quarter of 2012.”

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25-Nov (IBTimes) — A panel of economic experts at the Institute of Economic Affairs (IEA) have said that the euro “will be scrapped within months.”

The panellists, which included the economics editor of Sky News, Ed Conway, Conservative MPs Bill Cash and Dominic Raab, as well as the former MEP John Stevens, offered a stark warning over the future of the EU saying that it is now paying back years of mismanagement from the top down.

Although many had varying opinions of the EU and why it has been brought to the point of the breakup, the panel unanimously agreed that the euro would be scrapped, with Mr Conway saying that it “could potentially be gone within months.” Although members of the audience challenged the panel, claiming that the single currency had remained strong, the experts said that it was “inevitable”.

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PG View: Market likely got a whiff of this and probably was more a factor in the intraday retreat in euro, gold and stocks than the SNB failing to confirm euro buying.

25-Nov (RTTNews) — The Swiss franc edged sharply lower against its major rivals on Friday morning in New York amid rumors that the Swiss National Bank might have intervened in the foreign exchange market.

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25-Nov (Reuters) — Spain’s new centre-right government, due to be officially sworn in mid-December, is considering applying for international aid as one of its options to shore up its finances, sources close to the party say.

The People’s Party (PP) inherits an economy on the verge of recession, a tough 2012 public deficit target, rising financing costs on nervous debt markets and a battered bank sector with billions of euros of troubled assets on its books.

“I don’t believe the decision (to seek aid) has been made .. but it is one of the options on the table, because I’ve been asked about it. But we need more time and more information on the current state of things,” one source told Reuters.

If extra funding is needed, either from the European Financial Stability Facility (EFSF) or a credit line from the International Monetary Fund, it would be politically preferable to make the decision independently and quickly, rather than being compelled by market forces at a later date.

“If we have to do it, we have to do it now,” the source said.

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25-Nov (USAGOLD) — Gold rebounded in thin holiday trading as rumors of SNB intervention lifted the single currency from new 7-week lows, tempering the latest bid in the dollar. The FT also reported today that the BoJ has been querying commercial banks about how they might assist the central bank in intervening to weaken the yen. The currency wars continue to ramp.

The situation in euroland continues to deteriorate as officials concede that market activity over the past month has pretty significantly eroded the expected boost in firepower of a leveraged EFSF bailout fund. Speculation is that the firepower could be as little as half what was originally expected.

It would seem that dithering on this front has frittered away any potential advantage of gearing-up the bailout fund. This further narrows the field of viable options to direct ECB bond purchases and issuance of eurobonds, both of which are still adamantly opposed by the Germans.

Yields have risen across the eurozone and Reuters is reporting that Spain’s new government is already contemplating seeking international aid. With the EFSF emasculated, Spain may seek to access the new IMF credit lines that were announced on Tuesday.

25-Nov (Financial Times) — A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials.

European leaders hailed a scheme to offer insurance on losses for investors buying troubled eurozone bonds as a means of leveraging the €250bn spare capacity of the rescue fund four or five fold, to more than €1,000bn.

But the dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.

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PG View: Whether you believe expansion of the bailout facility is an appropriate response to the eurozone crisis or not, continued dithering is narrowing the options that just might prevent a complete collapse of the EU.