14-Dec (CNBC) — With no workable solutions in sight and a sovereign debt crisis only likely to get worse, the European Union is likely to see an ultimate breakup, widely followed hedge fund executive Kyle Bass told CNBC.

…”They’re going to have to restructure a lot of their debt. Eventually the (European Monetary Union) is going to have to break up,” he said. “The adjustment mechanism that these countries need is a much weaker currency.

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PG View: Bass highlights the persistent threat of a euro break-up that has the market in full-on deleveraging mode. Bass says that the recent coordinated central bank liquidity scheme was just an “airbag” for the eurozone. The takeaway here is that the central banks aren’t even trying to avert a crash at this point, but merely seeking to soften the blow and hope Europe can limp away from the inevitable collision with reality. When the collision occurs, that’s when Bass thinks the ECB will start printing.

14-Dec (Reuters) — Europe’s “no pain no gain” attitude to solving its sovereign crisis risks exacerbating the bloc’s problems, choking off the very growth needed to raise the money to pay down the debt.

From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again.

…”You don’t cut your way to growth.”

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13-Dec (HousingWire) — The National Association of Realtors will revise its existing home sales figures downward dating back to 2007. It said new figures would be released Dec. 21.

The expected revision has been awaited since February when analytics firm CoreLogic challenged NAR on its numbers, suggesting they were far too rosy.

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PG View: Revisions are likely to make the housing crisis look even worse than previously thought. Corelogic data suggest there hasn’t been any rebound at all. That could deal a heavy blow to already fragile consumer/investor sentiment.

14-Dec (MarketWatch) — Gold futures fell more than 5% Wednesday, a selloff that deepened as the euro dropped below the $1.30 level, signaling a new level of anxiety about the Europe’s debt crisis and prompting the metal’s breach of some long-held technical levels.

Gold for February delivery dropped $87.50 an ounce, or 5.3%, to $1,575.60 an ounce on the Comex division of the New York Mercantile Exchange. It fell as low as $1,645.80 an ounce.

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PG View: As long as we remain in a negative real interest rate environment — and today’s 30-year auction is a pretty good indication that we’re here for the long-haul — any pullback in the price of gold is merely a correction.

14-Dec (USAGOLD) — Gold extended to the downside once again, falling below the 200-day moving average, after the Fed refused to spike the eggnog with further accommodations on Tuesday. Additionally, the German’s were out in all their ‘grinch-yness’ today, further amplifying the delveraging pressure.

German Chancellor Merkel reiterated that €500 bln was the max for the EDM/EFSF, which is a speed bump at best if Europe continues to unravel. She also shot down once again any notion that euro-bonds were a viable option. Meanwhile, Bundesbank President and ECB council member Jens Weidmann restated his opposition to ECB bond buying.

As a result of all this “bad cheer,” the euro tumbled below 1.3000 for the first time since January. The corresponding strength in the dollar is adding further pressure to gold. Stocks are under broad pressure. Italian yields have hit euro-era highs.

• US import prices +0.7% in Nov, just below expectations, vs -0.5% in Oct; export prices +0.1%.
• Canada leading indicator +0.8% in Nov, above market expectations of +0.3%, vs +0.3% in Oct.
• Eurozone industrial production -0.1% m/m in Oct (sa), below market expectations of unch, vs -2.0% in Sep; 1.3% y/y.
• Spain CPI – EU Harmonized (final) confirmed at 2.9% y/y in Nov.
• UK claimant count lower than expected at +3k in Nov; unemployment rate remains at 17-year high of 8.3%.
• Norges Bank cut policy rate by 50 bp to 1.75% on concerns over eurozone growth prospects.
• South Korea unemployment rate (sa) steady at 3.1% in Nov.

14-Dec (The Wall Street Journal) — The number of unemployed Britons has soared to the highest level for 17 years, increasing pressure on Prime Minister David Cameron to do more to fuel growth and raising fresh questions about the wisdom of his government’s fierce austerity drive.

The jobless total rose 128,000 in the three months to October to 2.64 million, the highest level since the third quarter of 1994, the Office for National Statistics said Wednesday. The jobless rate rose to 8.3%, its highest level since the three months to January 1996.

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14-Dec (The Wall Street Journal) — Italy and Germany successfully sold bonds on Wednesday, but the stark contrast in their borrowing costs underscored investors’ fragile faith in Italian debt and the perceived safety of German debt.

The rise in Italy’s borrowing costs at Wednesday’s auction to a euro era high will do little to allay fears over the country’s ability to continue raising funds at sustainable levels, with Barclays Capital estimating Italy will need to sell around €220 billion of bonds in 2012.

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14-Dec (Reuters) — The Federal Reserve on Tuesday warned that turmoil in Europe presents a big risk to the U.S. economy, leaving the door open to possible further steps to boost growth even though it noted a somewhat stronger labor market.

The central bank said the U.S. economy was “expanding moderately” despite an apparent slowing in the world economy. But while there had been “some” improvement in the job market, unemployment remained elevated and housing depressed, it said.

“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” the Fed said after a policy meeting, alluding to pressures stemming from the debt crisis in the euro zone, which has raised concerns about tighter credit in the United States.

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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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