By Nouriel Roubini
20-Dec (Financial Times) — For the last three years the world’s biggest economies – the US, eurozone and China – have been living up to the infuriating euphemism so beloved of policymakers: ”kicking the can down the road”. They have been avoiding the tough decisions that are required to address their fundamental economic, financial and fiscal problems.

The US has postponed its fiscal consolidation and avoided the other structural reforms – investments in infrastructure, education and skills and changes to energy policy – that are required to restore its potential growth rate. The eurozone has been in denial of the fact that some of its member states are insolvent, as well as unable to survive and grow in a monetary union. China has persisted in its weak currency, to support its export and investment-led growth model where savings are too high and consumption too low.

In all cases political constraints – the approaching elections in the US and leadership transition in China at the end of 2012, and the inability of the eurozone’s 17 governments and coalitions to coordinate policies coherently while staggered elections and changes of government take place – have led leaders to avoid the short-term pain and political costs of tough decisions that will yield benefits only over the medium term.

…By 2013 at the latest, but possibly already in 2012, a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China could materialise.

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PG View: I frequently disagree with Roubini, but concur that the ‘can kicking’ does need to stop at some point.

By Bill Gross
19-Dec (Financial Times) — Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.

Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.

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20-Dec (The Wall Street Journal) — U.S. home building climbed to the highest level in 19 months during November and construction permits grew, with most of the increase in housing starts coming from multifamily construction.

Home construction last month increased 9.3% to a seasonally adjusted annual rate of 685,000 from October, the Commerce Department said Tuesday. The results were better than forecast. Economists surveyed by Dow Jones Newswires expected housing starts would rise by 0.3% to an annual rate of 630,000.

The increase in November was driven by a 25.3% increase in multi-family homes with at least two units, a volatile part of the market.

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20-Dec (Bloomberg) — Russia’s central bank boosted its gold holdings to 28.1 million troy ounces last month, from 28 million at the end of October.

The stockpile was valued at $48.2 billion as of Dec. 1, compared with $48.6 billion a month earlier, Bank Rossii said on its website today.

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20-Dec (Reuters) — Greece sold 1.3 billion euros ($1.69 billion) of three-month T-bills on Tuesday, with the yield rising by 5 basis points compared to an auction in November, its debt agency PDMA said.

The sale’s bid-cover ratio was 2.91, down from 2.94 in the previous auction. Greece paid a yield of 4.68 percent, up from 4.63 percent in the Nov. 15 sale, PDMA said.

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PG View: While the prospect of unlimited cheap money from the ECB improved the prospects for Spanish refunding efforts today, Greece was not so fortunate.

20-Dec (Irish Times) — Spain sold €5.64 billion of bills, more than the maximum target, and its borrowing costs dropped as the European Central Bank prepared to start offering banks unlimited three-year loans later today.

The Madrid-based treasury said it sold three-month debt at an average yield of 1.735 per cent, compared with 5.11 per cent at an auction on November 22nd.

It sold six-month paper at 2.435 per cent, down from 5.227 per cent last month.

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20-Dec (USAGOLD) — Gold has pushed more convincingly above the $1600 level, establishing new highs for the week. Focus remains on recapturing the 200-day moving average, which comes in at 1623.17 today. Risk appetite seems to be reemerging amid relative calm in Europe stemming from an encouraging Spanish bill auction. Meanwhile, the results of today’s Greek auction weren’t nearly as positive. Certainly nothing has been resolved in the eurozone, but there haven’t been any new earth-shattering headlines thus far today.

Persistent uncertainty about the situation in Europe, along with plenty of concerns about our own fiscal situation here in America remain broadly conducive to gold. While the range established back in September is intact, some repair of the technical picture — which eroded with last week’s steep deleveraging sell-off — is needed to encourage additional buying interest.

The Russians continue to do their part; adding to their gold holdings again in November. As is typically the case with deleveraging sell-offs in gold, demand for physical has been robust. It is encouraging to the long-term uptrend that this continues to be the case.

I’m also still quite astounded by yesterday’s realization that Japan’s debt load is fast approaching ¥1 QUADRILLION. It’s troubling how quickly we all became accustomed to bandying-about amounts in the trillions, but 1,000 trillion is a number still in the mind-boggling realm. We’re still not hearing much about Japan, even though they have a higher debt/GDP ratio than even the worst offenders in Europe.

• US housing starts +9.3% in Nov to 685k, well above market expectations of 630k, vs 627k in Oct.
• Canada CPI +2.9% y/y in Nov, in-line with expectations. Core +2.1% y/y, just below expectations of +2.2%.
• German PPI +0.1% m/m in Nov; +5.2% y/y.
• Switzerland trade balance CHF3.0 bln in Nov, vs CHF2.2 bln in Oct.
• Germany Ifo business climate improves to 107.2 in Dec, above expectations of 106.0, vs 106.6 in Nov; expectations better at 98.4.
• Sweden Riksbank cuts repo rate 25 bp to 1.75%, in-line with expectations.
• Italy industrial orders (sa) -1.6% m/m in Oct, below expectations of -1.3%, vs -8.2% in Sep; -4.8% y/y.
• Japan Leading Index (revised) -0.3% m/m in Oct.
• Japan Coincidence Index (revised) 1.4% m/m in Oct.
• Hong Kong CPI (composite) moderates to 5.7% y/y in Nov, vs 5.8% in Oct.

Europe Problems Persist into Holiday Week

19-Dec (USAGOLD) — Gold is consolidating around $1600 as the market continues to digest the unending string of events and non-events in Europe. Last week’s losses stemming from a realization that the stability pack agreed to my ‘most’ EU members was nothing more than a hodgepodge of vague promises that may or may not be ratified sometime in March. By the end of the past week, investors were once again inclined to take advantage of the discounted pricing to snap up an asset without counter-party risk.

This week began with the IMF at center stage, looking to raise about €200 bln for a European bailout fund. The source of those funds are to be loans from eurzone nations, many of which don’t have two centimes to rub together. It is of course ludicrous to expect the likes of Greece, Portugal, Spain, Italy, Ireland (and others) to pony up into an IMF slush fund that is clearly too small to make any meaningful difference anyway. If they have the money to put into the IMF, they’d be better served using it to make a dent in their own fiscal imbalances, rather than risking that their money goes to some other country.

Some of the 27 members have already said that they won’t be contributing, most notably the UK. In a matter of hours, the IMF bailout fund shrunk by 25% from €200 bln to €150 bln. The US has been silent on the issue, but it is widely believed that a direct contribution to the IMF to be used in bailing-out Europe is a little to overt to be politically acceptable.

The long-term uptrend in gold remains intact and some of the major banks are predicting the average price next year will be in excess of $2,000 per ounce. The reason of course, is that the underlying fundamentals haven’t changed a bit. In fact, many of the policymakers in Europe continue to search for a way to circumvent the current treaties that prohibit direct ECB buying of sovereign debt. In the meantime, ECB chief Mario Draghi confirmed today that cheap ECB money borrowed by European commercial banks can be used to buy that sovereign debt though. This is similar to the quid pro quo arrangement the Fed established several years ago when our commercial banks were in dire need of liquidity and had loads of MBSs to unload.

19-Dec (The Wall Street Journal) — The head of the European Central Bank said Monday it embarked earlier this month on “major” liquidity providing steps for banks in the euro-zone to prevent a recession, as its mandate prevents it from buying bonds to finance governments.

The European Central Bank is aiming to avoid the possibility of an economic slowdown or even a recession next year by providing unlimited liquidity to euro-zone banks, which are to face a credit crunch, ECB President Mario Draghi said.

Banks will be experiencing a very difficult period of funding constraints in the first quarter and probably throughout 2012, and the ECB “wants to avoid a further slowdown in economic growth and a possible recession,” Mr. Draghi said at his first hearing at the European Parliament’s Committee on Economic and Monetary Affairs since he took over the helm at the ECB on Nov. 1.

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¥959,111,159,657,593

It takes a while to turn those 13th, 14th and 15th digits, but there will be a 16th soon… A recent estimate says the ¥1 quadrillion level is likely to be reached by the end of the fiscal year in March.

That’s more than ¥7.5 million in debt for each citizen.

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19-Dec (GoldCore) — Bullion banks remain positive on gold for 2012 with major banks predicting an average gold price of between 13% and 28% above today’s spot at $1,595/oz. It will be interesting to see if these forecasts get as much international media coverage as the poll of 20 hedge fund managers has.

UBS have reiterated their bullish outlook for gold and believe gold will average $2,050/oz in 2012. This is 28% above today’s spot price of $1595/oz.

Goldman Sachs said overnight that gold will average $1,810/oz in 2012 – which is 13% above today’s spot price.

Barclays Capital have said this morning that gold will average $2,000/oz in 2012 – which is 25% above today’s spot price.

Gold will move higher due to “structural pillars of support” in an environment of negative real interest rates and rising inflationary pressures, as well as continued central bank buying.

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17-Dec (Barrons) — It’s one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It’s something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%.

That, in essence, is what’s happening to investors whose bars of silver and gold were held through accounts with MF Global.

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold “warehouse receipts” to prove it—they’ll have to forfeit 28% of the value.

…That has investors fuming. “Warehouse receipts, like gold bars, are our property, 100%,” contends John Roe, a partner in BTR Trading, a Chicago futures-trading firm. He personally lost several hundred thousand dollars in investments via MF Global; his clients lost even more. “We are a unique class, and instead, the trustee is doing a radical redistribution of property,” he says.

…Adding insult to the injury: Of the 28% haircut, attorney and liquidation trustee James Giddens has frozen all asset classes, meaning that traders have sat helplessly as silver prices have dropped 31% since late August, and gold has fallen 16%. To boot, the traders are still being assessed fees for storage of the commodities.

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PG View: Yeah, if someone other than you is holding (what you think is) your gold and/or silver, you’re a “unique class” until you’re not… The MF Global trustee seems inclined to ignore individual property rights and the CME is inclined to protect the interest of its shareholders, while investors who thought they owned gold and/or silver get the shaft. Buy physical and take delivery.

19-Dec (ZeroHedge) — In a just released piece by Goldman’s Eugene King which explains the firm’s justification for why gold will peak at over $1900 in 2012, and which we will discuss in greater detail shortly, Goldman brings up a very interesting point, namely that the ongoing weakness in gold stocks, and the broad decoupling of gold miners from gold price can be attributed to one primary thing: the emergence of synthetic means of expressing a position on the gold market and “bypassing” direct gold cost pass thru exposure in the form of gold stocks.

Supposedly this is a good thing, although we would caution that this is potentially a very insidious scheme to allow the world’s cash-rich entities (read banks full of those ones and zeros that these days pass for “money”) to procure real gold assets at very cheap prices and valuations, even as the broader retail investors proceeds to chase paper gold in the form of “synthetic CDOs” such as GLD (which as we first noted over a week ago may well disappear when the paper claims collapse and suddenly everyone has a claim on the underlying physical), only after the fact realizing they merely used gold as a paper pass thru equivalent.

…So while we appreciate the fundamental and technical reasons for why gold stocks are underperforming, the sinking feeling we have is that as synthetic exposure in the form of CDOs has surged in the past decade, allowing more and more retail investors to foolishly believe they are invested in “actual gold” (and not paper claims thereof), this has acted as a grand distraction preventing those who want real exposure in the form of controlling the underlying asset from expressing their interest in the right way. Because all it would take is for banks with a glut of credit money to bid up all the gold miners, and thus control the entire physical gold supply chain, at which point the “distraction” of precious metal ETFs can simply go away.

Our advice, as always, stay away from ETFs: they are nothing short of what synthetic CDOs were back during the credit bubble years.

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PG View: Yes indeed; the explosion of artificial paper supply over the last several years has made it difficult for the real underlying asset to find its true price…and mining shares have suffered accordingly.

19-Dec (Financial Times) – Dominique Strauss-Kahn, the former head of the International Monetary Fund, made a defiant return to public life on Monday warning European leaders that they were in denial about the Continent’s economic crisis and have only weeks to come up with real solutions.

…He said that European leaders had consistently underestimated the severity of the financial crisis and made repeated mistakes in focusing on cutting debt at the expense of growth.

“The problem is that they are still in denial,” he said.

…What’s more, Mr Strauss-Kaun said the firewall to staunch the spread of the crisis “doesn’t really exist”. The €500bn European Stability Mechanism would only be operational in months when “the question is a question of weeks. The question is not a question of months.” And he was sceptical about whether the IMF would be able to raise an extra $200bn in funding when the US did not want to contribute more.

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18-Dec (Financial Times) — Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis.

Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.

In his first interview since becoming ECB president on November 1, Mr Draghi said struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, European Union law would have been broken and “you never know how it ends really,” he said.

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19-Dec (Washington Post) — European ministers will try to come up with €200 billion ($261 billion) in new loans to the International Monetary Fund on Monday to boost a firewall against the debt crisis and make up for Britain’s refusal to pitch in.

Even if the European Union finance ministers manage to cobble together the promised sum in their afternoon conference call, that amount is widely seen as insufficient to calm market worries that the eurozone does not have the funds to rescue large economies like Italy and Spain.

…Reaching the €200 billion target for loans to the IMF may be difficult after the U.K., the largest economy among the 10 EU states that don’t use the euro, said it won’t contribute. Hungary, Romania and Bulgaria have also ruled out sending any additional money to the Washington-based fund.

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PG View: The UK and some of the Eastern European countries have already said “no” to providing additional funds to the IMF. Let’s be honest here though, the likes of Greece, Italy, Portugal, Spain et al really have nothing to give either. Not that that will necessarily stop them… They’re just loans after all; more paper, more promises, more debt.

16-Dec (Fitch Ratings) — Fitch Ratings has placed the ratings of all investment grade rated eurozone sovereigns and their debt with Negative Outlook onto Rating Watch Negative (RWN). The euro area country ceiling of ‘AAA’ is unaffected. The rating actions are as follows:

- Belgium ‘AA+’/'RWN from ‘AA+’/Negative Outlook (‘F1+’ Unaffected)
- Spain ‘AA-’/'F1+’/RWN from ‘AA-’/'F1+’/Negative Outlook
- Slovenia ‘AA-’/'F1+’/RWN from ‘AA-’/'F1+’/Negative Outlook
- Italy ‘A+’/'F1′/RWN from ‘A+’/'F1′/Negative Outlook
- Ireland ‘BBB+’/'F2′/RWN from ‘BBB+’/'F2′/Negative Outlook
- Cyprus ‘BBB’/'F3′/RWN from ‘BBB’/'F3′/Negative Outlook

…Following the EU Summit on 9-10 December, Fitch has concluded that a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.

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Fitch Affirms France at ‘AAA’; Outlook Revised to Negative

16-Dec (Fitch Ratings) — Fitch Ratings has today affirmed France’s Long-term foreign and local currency Issuer Default Ratings (IDRs) as well as its senior debt at ‘AAA’. Fitch has also simultaneously affirmed France’s Country Ceiling at ‘AAA’ and the Short-term foreign currency rating at ‘F1+’. The rating Outlook on the Long-term rating is revised to Negative from Stable.

…Relative to other ‘AAA’ Euro Area Member States, France is in Fitch’s judgement the most exposed to a further intensification of the crisis.

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16=Dec (Bloomberg) — Switzerland’s economic growth will almost grind to a halt next year as the franc’s appreciation and floundering global demand hurt exports, according to the KOF Economic Institute.

The economy will expand 0.2 percent next year and 1.9 percent in 2013, the Zurich-based institute said in a statement today, cutting previous projections. Swiss National Bank President Philipp Hildebrand will meet with the government today after the SNB yesterday maintained its cap of 1.20 francs per euro to fight deflation and help exporters.

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16-Dec (MNI) — The European Central Bank has not yet launched its first ultra-long, three-year financing operation, but the move has already given a downward push to Eurozone bond yields.

Rates tumbled Friday in Italy, Spain, Portugal and other peripheral markets, partly in response Spain’s auction on Thursday, in which the government was able to sell nearly twice the amount of debt it expected at levels well below where secondary market bonds were trading.

That the newly auctioned Spanish debt will be eligible to be used as collateral in next week’s three-year LTRO was not lost on analysts.

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16-Dec (USAGOLD) — Gold probed briefly back above the $1600 level in overseas trading, bolstered by the oversold condition that developed earlier in the week and short-covering ahead of the weekend. The bottoming pattern that emerged at 1565.85/1560.70 now provides a good intervening barrier ahead of the September low at 1534.06. A close above $1600 today would offer some encouragement. More important, would be a short-term close above the 200-day moving average, which comes in at 1621.58 today.

There does seem to be some sense of relief in the eurozone, as evidenced by narrowing spreads. Speculation is that the ECB in loosening its collateral requirements may be providing essentially free money to commercial banks, which are in turn plowing that money back into the sovereign debt market. Such a funding loop is not really a solution to the problems plaguing Europe, but it seems to be providing some short-term relief.

Here in the States, some eleventh-hour wheeling and dealing seems likely to avert a midnight shut-down of the government. The House and Senate are expected to vote on yet another stopgap spending measure of about $1 trillion. Debate over an extension of the payroll tax cut and unemployment insurance continues.

• US CPI flat in Nov, below market expectations of +0.1%; core +0.2%, above expectations of +0.1%.

BY MOHAMED EL-ERIAN
15-Dec (ForeignPolicy) — Europe entered the year with an acute emergency in the periphery of the eurozone, the European Union’s elite 17-member club that shares a common currency. Misdiagnoses and inadequate policy responses allowed the contamination to travel sequentially from the outer reaches of the zone (Greece, Ireland, and Portugal) toward its inner core.

In this first of three morphings in 2011, Italy and Spain were disrupted as interest rates soared, turning liquidity concerns into solvency ones. France was then impacted, with its AAA rating threatened by its exposure to the neighborhood’s problems. Then Germany, Europe’s strongest economy and the one that everyone looks to for a solution, had to contend with the embarrassing failure of a highly visible government debt auction.

…These are consequential developments whose impact will be felt for years, and the latter is not limited to Europe. Virtually every country in the world is exposed.

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