15-May (The Hill) — Treasury Secretary Tim Geithner on Tuesday warned Speaker John Boehner (R-Ohio) against playing with the U.S. debt ceiling.

Boehner, who’s giving a speech on the economy later in the day, will say that the debt ceiling, set to be breached early next year, should not be raised unless greater spending cuts and reforms are enacted, according to prepared remarks released by the Speaker’s office.

…“This commitment to meet the obligations of the nation, this commitment to protect the creditworthiness of the country, is a fundamental commitment that you can never call into question or violate,” Geithner said Tuesday in reaction to the leaked Boehner remarks.

“You can’t put that into question, you can’t put that into doubt, you can’t threaten to put that into service … of the partisan political agenda of any side of the American political spectrum. It is not responsible to do that,” he said in his address to the Peterson Foundation.

[source]

PG View: You had to know that the debt ceiling debate was going to come back around before the November elections…right?

15-May (Financial Times) — Andrea Stautberg, 27, and her husband James wanted to buy a house after finishing graduate school in 2009. But in the face of a tough economic climate, uncertain job prospects and $115,000 in student loan payments, the couple instead decided to save money by living with James’s parents in Texas.

They stayed for more than a year – longer than the three months they had planned – before deciding to rent a flat.

“We are looking to buy a house, but have yet to get preapproved,” said Ms Stautberg. “We lived with his parents for as long as we did to pay back our student loans and still save for a down payment.”

The Stautbergs’s story illustrates how difficult it has become for young Americans to buy their first homes, despite low interest rates and years of declining house prices.

[source]

15-May (USAGOLD) — Greece announced earlier in the New York session that ongoing talks centered on forming a coalition government had broken-down, breaking the relative calm of this Tuesday morning. Stocks tumbled, the euro fell below 1.2800 for the first time since January. The dollar surged and gold retreated back to the low end of yesterday’s range.

New election are now almost a certainty and if the anti-austerity Syriza party garners even more support the next time around as is widely expected, there’s going to be an interesting clash between a new Greek government and the troika. I wouldn’t be surprised if there were a secret hope across euroland that Greece gives Belgium a run for its money for the record term of a caretaker government. You may recall that Belgium went 541-days without a government from the general election on 13-Jun-10 to the swearing-in of a coalition government on 06-Dec-11.

At this point’, given the magnitude of moves in both the dollar and the euro, gold is holding up relatively well. Yesterday’s low at 1548.15 is intact, providing an intervening support level ahead of 1534.06 and the range low at 1522.40.

• US CPI unch in Apr, below expectations of +0.1%; core +0.2% on expectations of +0.1%.
• NY Empire State index 17.1 in May, well above market expectations of 9.3, vs 6.6 in Apr.
• US retail sales +0.1% in Apr, below market expectations of +0.2%, vs negative revised +0.7% in Mar; ex-auto +0.1% on expectations of +0.2%.
• Eurozone Q1 GDP (sa) – 1st Release unch q/q, above expectations of -0.2%, vs -0.3% in Q4-11; unch y/y.
• Individual preliminary Q1 y/y GDPs: Germany 1.2%, France 0.3%, Italy -1.3%, Portugal -2.2%, Greece -6.2%.
• Germany ZEW Economic Sentiment tumbles to 10.8 in May, below expectations of 16.5, vs 23.4 in Apr; Current Situation rises to 44.1.
• Turkey unemployment rate (sa) rises to 10.4% in Apr, vs 10.2% in Mar.
• Japan consumer confidence index (sa) slips to 40.0 in Apr, vs 40.3 in Mar.
• Japan tertiary industry index (sa) -0.4% m/m in Mar, vs unch in Feb.
• Japan machinery orders ex-Elec&Ship -3.5% m/m in Mar, vs +4.8% in Feb.
• Singapore retail sales (nominal) +9.1% y/y in Mar, vs 19.0% y/y in Feb.
• South Korea unemployment rate (sa) steady at 3.4% in Apr.

*** This is an updated and corrected version. The IMF has NOT stated that it plans to buy $2.3 billion of gold as reserves. INSTEAD, the IMF has only stated that it plans to increase its reserves. ***

[source]

15-May (WSJ Blogs) — Here’s the headline that has jolted global markets over the last few minutes:

*DJ Greek Coalition Talks Have Failed-Presidency

Just like that, stock futures have erased earlier gains, European stocks are sharply lower and the euro has fallen below $1.28 for the first time since January. Commodities are in the red and safe-haven Treasurys are getting a lift after Greece’s president admitted defeat in his talks with party leaders to form a coalition government.

[source]

PG View: While gold has retreated into negative territory as well, it remains comparatively well supported, relative to the euro.

15-May (BBC) — Greece is set to go to the polls again after days of coalition talks failed to produce agreement on a new government, says the leader of the Socialist Pasok party, Evangelos Venizelos.

A final round of talks on Tuesday morning broke up without a deal.

In elections on 6 May, a majority of Greek voters backed parties opposed to austerity plans demanded by the EU and IMF in return for two bailouts.

A caretaker government will be appointed on Wednesday, reports say.

[source]

15-May (MNI) — A third round of “quantitative easing” is not something Federal Reserve policymakers are eager to undertake, but the odds of QE3 could increase considerably to the extent that Europe’s debt crisis reintensifies and threatens to worsen U.S. financial conditions and undermine economic growth, officials say.

The Fed has been watching anxiously as political rebellion against austerity in Greece and elsewhere has aggravated European financial strains and heightened speculation about an eventual crack-up of Europe’s single-currency system.

…David Altig, director of research for the Atlanta Fed, told MNI Monday that the European crisis is already dimming U.S. growth prospects and said that if it further damages the economy while also increasing deflation risks, it could contribute to the launching of QE3.

Another senior official, who did not wish to be identified, was even more emphatic in saying that the European mess could necessitate QE3, depending on how the domestic economic picture evolves.

[source]

14-May (WSJblogs) — German Chancellor Angela Merkel is currently having a hard time in Europe with her austerity course.

But matters have suddenly got more uncomfortable at home too. Some German newspapers Monday have interpreted Sunday’s election defeat for her party as the beginning of her own political end.

The devastating loss of her conservative Christian Democrats in German state elections will make her life more difficult because the stronger center-left opposition will demand more concessions from Germany’s austerity policy.

[source]

14-May (Derp Spiegel) — After Greek voters rejected austerity in last week’s election, plunging the country into a political crisis, Europe has been searching for a Plan B for Greece. It’s time to admit that the EU/IMF rescue plan has failed. Greece’s best hopes now lie in a return to the drachma.

…Two years after the government in Athens requested the first emergency loans in Brussels, the European debt crisis is reaching a turning point. Europe and the international community pumped about €240 billion ($312 billion) into the Balkan nation, government employees were let go, pensions were slashed and a series of restructuring programs were approved.

But even though the country is virtually being governed by the European Commission and the IMF, Greece’s debts are higher than ever and the recession is worsening. As the political situation becomes increasingly chaotic, new elections seem all the more likely.

[source]

14-May (Der Spiegel) — Last week Chancellor Angela Merkel’s austerity policy suffered twin blows in Europe when Socialist Francois Hollande, a critic of her strict approach, won the French presidency and Greek voters firmly rejected the painful reforms imposed on them.

On Sunday came a further major setback for Merkel when her conservative Christian Democrats suffered a big defeat in an election in the country’s most populous state, North Rhine-Westphalia (NRW). It weakens her at home at a time when opposition to her crisis strategy is mounting across Europe.

The CDU saw their support plunge to just 26.3 percent, down from nearly 35 percent in 2010, and the worst result in the state since World War II. The center-left Social Democrats (SPD) won 39.1 percent of the vote and will have enough seats to form a stable majority with the Greens.

[source]

Heightened Greek Woes Boost Dollar, Weigh on Gold

14-May (USAGOLD) — The euro fell to new 4-month lows below 1.2900 as a last ditch effort by Greek President Papoulias to forge a coalition government also seem destined for failure. New elections are looking increasingly likely; and as we discussed last week, the anti-austerity Syriza is expected to garner even more support the next time around. Discussions of Greece exiting the EMU are now being conducted in the open…and by just about everyone.

Nonetheless, I think all the parties involved are frightened of the implications of a Greek default and abandonment of the euro. This may give Alexis Tsipras, the leader of Syriza the upper-hand in any negotiations. Certainly he is negotiating from a position of weakness, and truth be told, Greece has much to lose. However, if Tsipras can make the troika believe he’s just desperate (or crazy) enough to bail-out of the single currency, he just may be able to wring additional concessions out of them.

In fact, I think the die has been cast in recent years: Policymakers around the world seem prepared to do whatever it takes to hold the global financial system together at all-cost. They’ve done this by papering over excessive debt with even more debt and currency, in some instances in exchange for austerity. But I’m not entirely convinced that the austerity is an absolutely necessary prerequisite.

The Bundesbank and the German Finance Ministry suggesting last week that they would be willing to “tolerate” above target inflation is perhaps an initial indication that Greece and the rest of the periphery need not necessarily make all the concessions moving forward. In forcing the troika to bend somewhat to his will, Tsipras will likely garner considerable political capital in Greece.

Not that living conditions are going to materially improve if Greece becomes a permanent ward of the EU, but neither will living standards plunge as they would if Greece tried to go it alone without access to global funding markets. In the latter scenario, the only alternative would be for Greece to severely devalue the new drachma. Under the first scenario, Greece would likely go into a protracted, albeit more gradual period of decline; begging for scraps from core-Europe’s table. But at least the Greek people would have a common enemy — greater-Europe and perhaps Germany more specifically — to unite against, which just might be enough to hold a government together.

I imagine though, that the best and brightest of Greece won’t wait around to see how it all plays out. They’ll take their money, their talent and the future of Greece with them as they flee.

The decline in the euro buoyed the dollar, which in turn weighed on stocks, commodities and pushed gold deeper into its range. Gold not participating — at least initially — in this global flight to safety seems counter-intuitive, but I think our very own Michael J Kosares did a pretty good job of explaining the mechanics of the inverse gold/risk correlation that has emerged in recent years. When paper gold drives the price down in deleveraging scenarios, it may be prudent to view physical gold as being ‘on sale’.

14-May (NASDAQ) — Commodity prices are trading broadly lower in European hours as Greece-linked jitters continue to weigh on risk sentiment trends. Growth-sensitive crude oil and copper prices following stocks lower while safe-haven flow buoy the US Dollar , applying de-facto downward pressure on gold and silver .

Lawmakers in Athens once again failed to come to terms on the structure of a ruling coalition at a meeting over the weekend. Markets are becoming increasingly concerned that a lingering impasse will push Athens to fall short of its obligations under the terms of the EU/IMF bailout, paving the way for Greece’s ejection from the Eurozone and possibly even the overall EU. This would be an unprecedented development with effectively unpredictable practical implications for financial markets, fueling a broadly defensive tone

[source]

Link Bloomberg-Donahue-5/13/12

MK comment: This post hearkens back to the interview of Robert Rubin immediately below in which he tries to elucidate on the potential effects of the crisis in Europe. There is the short interview I linked, then there is a longer, hour-long interview (that you can access by going there) wherein he outlines the problem in Europe and what it might mean to the markets and the banking system. I suggest your taking in that longer interview. Rubin is at his best and the interviewer, Chrystia Freeland, challenges him just enough to move him out of his comfort zone. There are also a few humorous exchanges between the two worth catching. The link is in the previous post.

“Former Treasury Secretary Robert Rubin states that the country’s deficit will lead to some form of major duress like high inflation, a long period of very slow economic growth and, most likely, a serious financial and economic crisis.”

Link-Reuters-Freeland File-5/10/12

MK comment: The word Rubin uses is “mega-crisis.” He talks directly about monetizing the debt and the possibility of high inflation and says “that’s why gold is where it is.” But he doesn’t stop there. This video is well worth your time for a big picture outlook from someone who’s been there, done that. “Markets,” he says, “can continue relatively benign until all of a sudden they are not. The changes can be unexpected and hugely dramatic.”

“But global stress levels are not particularly high at present – certainly not compared to what they will be if the euro situation continues to spiral out of control. We are not at the end of a big global credit boom – we are still trying to recover from the last calamity. For JP Morgan to have incurred such losses at such a relatively mild part of the credit cycle is simply stunning.

The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control what is going on. The breakdown in internal governance is profound. The breakdown in external corporate governance is also complete — in any other industry, when faced with large losses incurred in such a haphazard way and under his direct personal supervision, the CEO would resign. No doubt Jamie Dimon will remain in place.”

Link – Simon Johnson – Baseline Scenario – 5/11/12

MK Comment: I looked up JPM’s total derivative exposure. According to the Comptroller of the Currency, it is $70.1 trillion, and the largest among the big banks. Just JPM, Citibank, BoA and Goldman’s derivative’s exposure runs over $200 trillion — a sum that makes the government’s $15 trillion debt exposure look downright trivial. Some estimate the total notional value of derivatives globally at between $600 trillion and $1.4 quadrillion! A few years back I wondered if I would ever have cause to use the word “quadrillion” in writing about the financial system. I just did.

“In just breezing through a few of the key charts, it appears that, yes, Monday may be a mess.”

Link-Forex Pros-Abigail Doolittle-5/13/12

MK comment: Abigail Doolittle’s analysis is based on the technical picture for the S&P index. Nary a word about the JP Morgan exposure, the euro-tangle, etc.

11-May (Bloomberg) — As German Finance Minister Wolfgang Schaeuble dares Greece to quit the euro, investors and economists are mapping out what he and fellow policy makers need to do to save the single currency if his bluff is called.

Emergency lending and bond buying from the European Central Bank coupled with recapitalizations and deposit insurance for lenders and broader powers for the region’s rescue fund are among the prescriptions for insulating Spain and other cash- strained nations from what Citigroup Inc. calls a “Grexit.”

Pressure for contingency plans is mounting as Greece’s electoral quagmire forces euro-area officials to publicly revive the once forbidden topic of whether a nation can leave the single currency. Schaeuble told today’s Rheinische Post newspaper that the euro area could handle a Greek departure as “the risks of contagion for other countries of the euro zone have been reduced.”

[source]

“It’s a system that by now is so obviously out of control that you have to wonder if we should just call off the charade of regulation. Credit-default swaps, interest-rate swaps, massive derivative hedging bets, dark pools all run by algorithms — the markets are so run amok, they’re humiliating the smartest guys on Wall Street. And there is none smarter than Jamie Dimon at the top of an institution.”

And. . . .

“Volcker is too dignified to say ‘I told you so,’ but I’m not. Volcker knows more about the markets, not because he’s astute to the daily gyrations, but because he recognizes that the system is so far beyond the ability of any individual or institution to understand or manage.

Link: Weidner article

Link: J.P. Morgan and the Volcker rule.”

MK comment: As a coincidence, at the beginning of this week, I released an essay on the subject of algorithms running amuck in our financial system, and how it might ultimately affect the gold market. It is titled “Extraordinary popular delusions or the madness of machines” and it is available here. This incident involving JP Morgan and the so-called “London Whale” is of particular interest in that, as the above-linked article points out, it is not the act of a rogue trader, or even a rogue computer, but a madness of machines, in general, or perhaps misplaced belief in software. Just as the the buyer of tulip bulbs in the early 17th century was carried away by the mania to a disastrous end, so unbridled software can create a new kind of mania with the very same results. That is where, for the attuned investor, gold enters the picture. . . . .

11-May (Reuters) — Banks are quietly readying themselves to start trading a new Greek currency. Some banks never erased the drachma from their systems after Greece adopted the euro more than a decade ago and would be ready at the flick of a switch if its debt problems forced it to bring back national banknotes and coins.

From the end of the Soviet Union – which spawned currencies such as the Estonian Kroon and the Kazakh Tenge – to the introduction of the euro, they have had plenty of practice in preparing their systems to cope with change.

Planning behind the scenes has been underway since Europe’s debt crisis erupted in Greece in 2009, said U.S.-based Hartmut Grossman of ICS Risk Advisors who works with Wall Street banks.

“A lot of the firms, particularly in Europe and also here, have been looking at that for a long time,” said Grossman, who added that the latest Greek political crisis had brought matters “to a little bit of a head”.

[source]

This is a follow-up to yesterday’s two JP Morgan bullet posts for those with an interest. There was, as I suspected, a connection between the “large positions” in London (the “London Whale,” as he is being called around the trader blogs this morning) and the $2 billion loss. Jamie Dimon said that JP Morgan’s loss “plays right into the hands of a whole bunch of pundits out there. We will have to deal with that—that’s life.” He did not appear happy with the situation in a hastily called telephone conference late yesterday afternoon. Initial reports put JP Morgan’s exposure to this trade at $100 billion (this morning’s Wall Street Journal), and a good many are asking how deep this thing might go.

Here’s what one of the “pundits” said this morning. He happens to be an ex-trader at an “internal hedge fund” (read within a major investment bank), so he knows what he’s talking about, and I thought it worth passing along to the readers of this page. My apologies for the colorful language.

“Is this apocalyptic? Well, my first email to two colleagues when I read this story was ‘This is exactly the kinda story that could crash the market.’ Why? Well, if people were starting to trust that the banks knew what they were doing – and that’s a big IF – this story puts all sorts of doubt into that ‘trust.’ JP Morgan is supposed to be the biggest, best bank on the block – the one who f*cked up the least in the financial crisis, and the strongest one. Although this loss is small in the grand scheme of things, 2008 is not so far buried in our memories that we’re not thinking ‘Oh yeah, I remember when Merrill Lynch started with a $ 2B writedown too…’ Having said all of that, I think that the story is still more likely to be blown out of proportion than it is to be indicative of the imminent demise of the US Financial System. However, fear matters sometimes, and there is fear in the air.”

So You Wanna Talk About JPM’s Trading Loss and The London Whale

11-May (MarketWatch) — Gold futures fell Friday, but prices for the precious metal pared earlier losses as data showing that U.S. consumer sentiment hit its highest level in more than 4 years prompted the dollar to turn lower.

…“Gold extended to new 4-month lows in overseas trading, as risk aversion associated with last weekend’s elections in Europe prevails,” said Peter Grant, chief market analyst at USAGOLD.

“This seems counter-intuitive to many, as the absence of counter-party risk makes physical gold one of the safest asset an investor can own,” he said. “However, the proliferation of gold derivatives in recent years has resulted in paper driving at least the initial moves in risk-off scenarios.”

[source]