13-Dec (CNBC) — European policymakers are taking a page out of their American counterparts’ playbook to address their burgeoning sovereign debt crisis, banking analyst Dick Bove said.

The European Central Bank already has begun its own version of quantitative easing, the program used by the Federal Reserve [cnbc explains] to recapitalize banks during the financial crisis that exploded in 2008, said Bove, vice president of equity research at Rochdale Securities.

At the same time, Bove said the ECB is well on its way to a “partial nationalization” of European banks, in which it will take equity stakes in the institutions as it seeks to stabilize the financial system.

…A move starting Dec. 21 that will allow European banks to borrow at low rates and in turn buy up sovereign debt looks, to Bove, “suspiciously like quantitative easing.”

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PG View: This indeed is very much akin to the Fed allowing US commercial banks to dump MBSs of dubious value onto the Fed’s balance sheet in exchange for dollars, which were in turn plowed back into the Treasury market. The net result of such “policy” however is that private lending suffers as the sovereign debt market is artificially supported. While this may ward off sovereign downgrades and allow for more reasonable refunding costs, it all-but assures a moribund recovery or perhaps a return to recession as private companies are starved of funding.

13-Dec (Financial Times) — Eurozone banks are increasingly tapping emergency central bank funding in a sign of growing problems in the region’s financial system.

Eurozone banks deposited €346.4bn, the most since June 2010, at the European Central Bank on Monday night, the latest figure, suggesting banks are hoarding money instead of lending to rivals because of fears of counter-party risk.

The continent’s banks are also heavily relying on emergency borrowing facilities offered by the ECB. Overnight lending at the central bank, which incurs a penal interest rate and has been high for almost two weeks, hit almost €9bn on Monday.

One trader said: “The financial system is no longer functioning properly…”

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13-Dec (The Wall Street Journal) — Fact No. 1: European governments are among the biggest holders of gold on the planet. Fact No. 2: Massive debts owed by some of those governments are fueling a political crisis in Europe and turmoil in markets around the world.

Those two facts lead to an obvious question from a lot of investors: Why don’t those governments sell gold to pay off their debts?

If only it were that simple.

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PG View: While Europe does indeed have a great deal of gold, it simply isn’t enough in comparison to the massive amount of debt. At least not at these prices…

13-Dec (Bloomberg) — European banks, under pressure from regulators to bolster capital, are selling some of their fastest-growing businesses to competitors from outside the region — at the expense of future profit and economic growth.

…Such sales risk hurting long-term profit, just as Europe enters recession, investors say. It’s the unintended consequence of the decision by European regulators to make banks increase core capital to 9 percent by June instead of 2019. Unwilling to raise equity because their share prices are too low, lenders are selling profitable assets because they’re struggling to find buyers willing to pay enough for their troubled loans to avoid a loss that would erode capital. Investors say the sales risk leaving banks focused on a stagnant economy and deprive them of economic growth from outside the region.

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13-Dec (Bloomberg) — Federal Reserve policy makers said the economy in the U.S. is maintaining its expansion even as the global economy slows, while refraining from taking new actions to lower borrowing costs.

“The economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Federal Open Market Committee said in a statement at the conclusion of its meeting today in Washington. “While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.”

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Gold Choppy, but Defensive with Range

13-Dec (USAGOLD) — Gold has been choppy thus far today, but remains generally defensive in the wake of Monday’s sharp sell-off. The brief intraday pop to 1678.03 was associated with a rumor that Iran had closed the Straits of Hormuz as part of a military exercise. Oil rose sharpy as well, but the market seems to have already discounted that rumor.

Meanwhile, the euro extended to 11-month lows on the ongoing realization that last week’s EU Summit solved absolutely nothing. The veneer of harmony between EU member states that was on display last week is already starting to peel away, with German Chancellor Merkel once again taking a hard-line on maintaining the proposed €500 bln cap on the permanent bailout fund. In this day and age, 500 billion of anything does not a bailout make. As the euro continues its slide, the corresponding rise in the dollar is keeping the yellow metal under pressure within its broad range.

Today’s strong Spanish auction has been widely touted as an indicator of improving risk appetite for eurozone sovereign debt. However, the yield on 10-year Italian bonds closed back above 7% for the first time in 2-weeks, dampening the optimism that sprang from lower Spanish refunding costs.

The FOMC will announce monetary policy at 19:15 GMT today. I’m not expecting any significant policy changes. The Fed is expected to hold rates near 0%, while maintaining Operation Twist. Speculation about QE3 seems premature. There may be some refining of communications, but The NY Times believes that actual Fed forecasting of monetary policy would not likely happen before the January meeting.

Year-In-Review: The Evolution of Counter Party Risk: Europe in Flux

(December 9, 2011 discussion). Its been another year of positive performance for the gold market, trading roughly 20% higher than where it began the year. Stocks, on the other hand, have been largely flat. Another year, another debt milestone, with the U.S. national debt crossing $15 trillion for the first time in history. Europe remains in flux, with yet another agreement coming forward, yet no true signs of action to give the market any reliable sense of direction. The result has been increased volatility within the range, both for gold and equities. The failure of MF Global is being largely downplayed in the media. Co-mingling investor funds with the firm’s risky plays on credit default swaps has destroyed huge sums of private capital. Jon Corzine, in his testimony before the House Agricultural Committee, stated very simply when asked where client’s funds went, “I don’t know.” As a major clearinghouse for commodity futures, MF Global’s failure has put a significant dent in the perceived reliability of the futures market as a whole. The erosion of confidence in this arena suggests large swaths of investment capital may seek physical ownership to gain safer (absent of counter-party risk) exposure to the gold market. If this is indeed the trend, it won’t take long for the broader market to realize just how little physical gold is actually available. 30 minutes, with George Cooper, Peter Grant, and Jonathan Kosares

12-Dec (The Wall Street Journal) — An unusual amount of U.S. government debt will be auctioned before year-end, but the unpredictability of the euro-zone situation likely means investors will scoop it all up without a hitch.

There will be seven Treasury coupon auctions in a span of eight days, about twice the normal frequency. Back-to-back auction weeks aren’t unheard of, but they are rare. Analysts say the schedule panned out this way because the government wanted to avoid selling debt during the holiday-shortened weeks. The Treasury Department wasn’t immediately available for comment.

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PG View: The OECD has already pegged industrial nations’ debt issuance at $10 trillion for 2011. I’m not sure if that disturbingly huge figure is inclusive of everything the US will attempt to cram in before year-end or not.

12-Dec (UBS-via ZeroHedge) — On this day (-1) in 1930, American savers, the Federal Reserve and a Republican President all got a nasty surprise. The banking system had been shaky for a year or two but it looked like things might finally be beginning to stabilize. That is until today.

On this day, a major financial institution, The Bank of the United States went belly up. And, with it went the savings, “in whole or in part”, of over 400,000 depositors.

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Gold Tumbles Back Below $1700

12-Dec (USAGOLD) — Gold is under heavy pressure amid broad-based deleveraging associated with the rapid evaporation of optimism that initially sprang from last week’s EU Summit. As has been the case of late, the ratings agencies have been rather quick to rain on any parade in Europe. This time it was Moody’s who squelched the optimism, saying that the “continued absence of decisive policy measures,” warrants a review of EU members. You may recall that S&P put just about every EU member on negative watch last week.

The other big story this morning stems from reports that European commercial banks have been selling borrowed gold to cover short-term dollar needs, despite rather unprecedented liquidity measures that allegedly were to provide unlimited dollar liquidity. Speculation is that the source of this leased gold is eurozone central banks and/or ETFs.

Both the deleveraging scenario and the gold leasing scenario are highlighted primarily by the selling of paper representations of gold. Physical buyers are grateful for the opportunity to buy gold at 7-week lows, and the movement of gold from weaker into stronger-hands bodes well for the long-term uptrend.

Finally, the sharp 5.1% drop in Indian industrial production in Oct was well below market expectations and a worrying drop from the negatively revised 1.9% increase in Sep. This raises concerns that the economy of the second largest gold consumer in the world may be slowing. This weighed heavily on the rupee and highlighted potential demand risks for the yellow metal.

12-Dec (Bloomberg) — Europe’s failure to agree on a comprehensive solution to the sovereign debt crisis threatens to consign AAA rated bonds in the region to history.

Top-rated agencies in the 17-nation euro area have at least 847.5 billion euros ($1.1 trillion) of debt outstanding, according to data compiled by Bloomberg, and will be at risk should their sovereigns be downgraded. Moody’s Investors Service said today it will review the ratings of all European Union nations after last week’s summit failed to produce “decisive policy measures,” while Standard & Poor’s announced Dec. 5 it may cut 15 euro members, including AAA rated Germany and France.

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11-Dec (Financial Times) — It appears that the faulty plumbing connections in the euro area banking system are now creating something I have never seen before: a crisis of confidence in a monetary system that leads to a frantic sell-off in gold.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low cost dollars for euro area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks, or by gold exchange traded funds.

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11-Dec (Financial Times) — Markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the eurozone and the global economy, as new figures reveal that the borrowing of industrialised governments has surged beyond $10tr this year and is forecast to grow further in 2012.

The Organisation for Economic Co-operation and Development, which represents the leading industrialised nations, will warn in its latest borrowing outlook, due to be published this month, that financial stresses are likely to continue with the “animal spirits” of the markets – their unpredictable nature – a threat to the stability of many governments that need to refinance debt.

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09-Dec (USAGOLD) — The MNI bullet about official gold selling that was posted on this page yesterday was subsequently retracted by them.

From MNI:

The bullet that was posted was posted in error. We had one contact mentioning that this might be the case but when we called other more trusted sources later they said this was not the case and in fact selling by these institutions was totally unlikely.

We later put out a retraction shortly after the initial bullet

We apologize for any confusion.

We apologize as well.

09-Dec (TheBigPicture) — There is a fascinating new study coming out of the Levy Economics Institute of Bard College. Its titled “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson. The study looks at the lending, guarantees, facilities and spending of the Federal Reserve.

The researchers took all of the individual transactions across all facilities created to deal with the crisis, to figure out how much the Fed committed as a response to the crisis. This includes direct lending, asset purchases and all other assistance. (It does not include indirect costs such as rising price of goods due to inflation, weak dollar, etc.)

The net total? As of November 10, 2011, it was $29,616.4 billion dollars — (or 29 and a half trillion, if you prefer that nomenclature). Three facilities—CBLS, PDCF, and TAF— are responsible for the lion’s share — 71.1% of all Federal Reserve assistance ($22,826.8 billion).

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09-Dec (Der Spiegel) — British Prime Minister David Cameron has completely isolated his country on the European stage — and many in his country applaud him for it. But he will soon have to prove that London still has clout in the EU, and that his no to fiscal union wasn’t just a bone thrown to euroskeptic conservatives.

The decision by British Prime Minster David Cameron to block a European Union treaty change by using his country’s veto power has sparked a festive atmosphere among euroskeptics in the United Kingdom. “At last,” Lord Norman Tebbitt, once one of Margaret Thatcher’s closest confidants, blogged on the Daily Telegraph’s website. Cameron, he wrote, has applied the very veto that former Prime Minister John Major should have used against the Maastricht Treaty, which created the euro. “We should just be grateful,” he added.

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08-Dec (The Wall Street Journal) — The ailing housing market is unlikely to return to health before 2016 and is weighing on the two-year-old U.S. recovery, which finally is showing signs of picking up steam.
Charts and Full Results

That’s according to economists in the latest Wall Street Journal survey, who expect home prices will begin to increase in 2012 but—by an 8-to-1 margin—don’t see prices outpacing inflation over the next three years. That means that the value of the largest investment for most consumers—their home—would fail to keep pace with increases in the cost of other items, such as food, clothing and gasoline.

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09-Dec (Bloomberg) — The euro-zone leaders adopted a pact to move toward fiscal union and stepped up stabilization measures to face the immediate crisis. This is progress, but as Thomas Mayer, chief economist at Deutsche Bank, told me this morning:

“The leaders have now defined the end point they want to reach in terms of fiscal governance, but it’s a long way to go there.”

He added:

“We’ll probably see more near-term tension and that will probably then trigger a more hands-on intervention by the ECB.”

The stabilization measures still come back to the European Central Bank, the one institution with the resources to provide the liquidity backstop to stem the crisis. Let’s take the 200 billion euros that could be given to the International Monetary Fund from Europe’s central banks: 150 billion euros from the euro zone and the rest from non-euro members. German Chancellor Angela Merkel says these could be bilateral credit lines.

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09-Dec (USAGOLD) — Gold has been somewhat choppy this morning amid uncertainty about the outcome of the EU summit. Summit attendees are trumpeting a consensus toward treaty changes that may be signed by March. Yet there is still plenty of skepticism over whether Europe can be saved, even with the treaty changes. UK PM David Cameron held out for concessions to protect “the City” — London’s financial district — which ultimately undermined hopes for a treaty change for all 27 EU members, adding an additional level of uncertainty to the whole mess.

At the end of the day, as Chancellor Merkel and President Sarkozy touted their “breakthrough,” the market maintains a sense that only the ECB can truly save the day. There were in fact reports of aggressive ECB bond buying in the secondary market today, perhaps to give the illusion of a positive market response to the summit agreement. The market will likely continue pressuring the ECB to act, and as such hopes ebb and flow, so will asset prices.

PIMCO’s Bill Gross tweeted the following this morning: Oh what a tangled web the EU has weaved. Never ending story, hard to trust. Risk off.

• US University of Michigan sentiment (prelim) rose to 67.7 in Dec, above market expectations of 65.6, vs 64.1 Nov.
• US trade deficit narrowed to -$43.5 bln in Oct, in-line with expectations, vs -$44.2 bln in Sep.
• Canada Q3 productivity +0.3%, above market expectations of -0.2%, vs -1.0% in Q2.

by Wolfgang Münchau
09-Dec (Financial Times) — So we have two crises now. A still-unresolved eurozone crisis and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. The decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split.

…On Thursday night, Angela Merkel and Nicolas Sarkozy clashed with David Cameron in a familiar Britain-versus-the-rest diplomatic standoff. That itself is not new. But a determination to go outside the treaty to overcome the disagreements adds a new dimension to this long-lasting dispute.

The fiscal union likely to be agreed in March may not initially be very effective in resolving the crisis. It focuses on all the wrong issues, mostly fiscal discipline, which is not the real reason why the crisis has spread to Spain or Belgium, for example.

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09-Dec (Financial Times) — European leaders are struggling to cope with a profound split over crisis plans for the eurozone, leaving the UK isolated as the rest of the European Union agrees to press ahead with new fiscal rules to balance budgets.

The measures are designed to restore confidence after a two-year crisis that has stalled growth in the world’s biggest economic bloc.

The refusal by David Cameron, UK prime minister, to agree to a full treaty change for all 27 EU members unless there were safeguards for UK financial services caused a standoff in the early hours of Friday morning with Angela Merkel, German chancellor, and Nicolas Sarkozy, French president.

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