by Nouriel Roubini
19-Sep (Financial Times) — Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.

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13-Sep (CommodityOnline) — A newly enacted Gold policy in Austria that restricts the free purchase of gold by individuals may just be the start of a European policy shift that might border on infringing an individual’s financial freedom.

As per the new Austrian policies, individuals who wish to purchase gold will be restricted to purchase only 15000 Euros worth of gold at a time making gold an officially “restricted” commodity.

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PG View: The new restriction limits individual purchases to about 11 ounces of gold.

17-Sep (The Telegraph) — Back in April, the Financial Stability Board (FSB), an international super-regulator, wrote a prescient if less than catchily-titled paper “Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)”.

Its central warning – that ETFs are not the cheap and transparent vehicles the marketers would have us believe – was spot on. When UBS’s $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence.

…around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla “full replication” ETFs which do, 45pc of the market is in the form of so-called “swap-based” ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.

Derivative trades add a second layer of uncertainty to the unavoidable ups and downs of the market, the counterparty risk that the organisation on the other side of the contract might go bust. Even worse, the provider of the ETF might sometimes be a part of the same organisation as the derivatives desk carrying out the swap.

…For reasons which I’m not sure I could explain even if I had the space, it is possible for the number of shares sold short in an ETF to massively exceed the actual number of shares available.

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19-Sep (Financial Times) — European central banks have become net buyers of gold for the first time in more than two decades, the latest sign of how the turbulence in the currency and debt markets has revolutionised the bullion market.

The purchases are minuscule compared with the size of the global gold market, but highlight a remarkable turnround from a wave of heavy selling by European central banks.

…The switch from large selling to buying has helped propel the gold price more than 25 per cent higher so far this year, hitting a nominal record of $1,920 a troy ounce this month. The shift in Europe comes as central banks in emerging markets are also loading up on gold.

…“We’re going back to a time when gold is seen very much as money,” Jonathan Spall, director of precious metals sales at Barclays Capital, told FT.com in a video interview. “It has been a complete reversal of the attitudes we saw during the 1990s.”

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19-Sep (Bloomberg) — Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months.

…“There’s a hint of desperation here,” said Kochan, who helps manage $216 billion in Menomonee Falls, Wisconsin. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to.

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19-Sep (USAGOLD) — Gold has ticked back below the $1800 as the dollar is back on the rise. Resurgent worries about Greece have resulted in the euro retracing much of last week’s rebound into Friday’s meeting of European financial ministers in Poland. Despite the dire situation in Greece, not much came out of that meeting. In fact, the final decision on whether Greece will get their next tranche of bailout funds was forestalled until October.

As we noted on Friday, there is either no sense of urgency on Greece, or their is no consensus that they should get the additional funds. The former seems rather unlikely…

The lack of action on the part of the FinMins to avert a Greek default is weighing heavily on stocks once again. The DJIA is now down more than 200 points and every European index is lower as well. Funds coming out of stocks seem to initially be going into the dollar and low yielding bonds, such as US Treasuries and German bunds. We know from history, that such allocations tend not to be terribly sticky and that true safe-havens like gold tend to benefit in the long-run after initial bouts of deleveraging.

Quiet day data-wise today. Everyone is eagerly awaiting the results of the expanded 2-day FOMC meeting that commences tomorrow. Last month’s outlook downgrade and statement that Fed funds will be kept near 0% into mid-2013 has most analysts leaning toward the dovish side for Wednesday’s FOMC statement. Some version of Operation Twist, a flattening of the yield curve that would likely be accomplished by the Fed selling shorter-dated Treasuries and buying further out on the yield curve, seems to be the front-running expectation.

19-Sep (The Wall Street Journal) — U.S. stocks fell sharply in early trading Monday, following blue chips’ largest weekly gain in more than two months, as investors fretted that Greece’s debt crisis is coming to a head.

The Dow Jones Industrial Average dropped 172 points, or 1.5%, to 11337, with all 30 Dow components losing ground.

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19-Sep (Bloomberg) — Gold, platinum and Brent oil will lead gains in commodities as investors seek to protect their assets and shortages emerge, according to Tony Hall, the hedge- fund manager who earned 33 percent for his clients this year.

Gold may climb 21 percent to a record $2,200 an ounce by the end of 2011, platinum may gain 10 percent and Brent could rise 25 percent to $140 a barrel in six months, said the London- based chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets.

…“We still believe in the gold story. If you believe the world is in trouble or in further economic growth disruption, then gold is a good safe haven. If you believe that the world is going to come out okay, then it’s a good inflation hedge.”

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16-Sep (Bloomberg) — Household wealth in the U.S. dropped in the second quarter for the first time in a year, hurt by falling share prices and declining home values.

Net worth for households and non-profit groups decreased by $149 billion, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said today in its flow of funds report from Washington. It rose at a 7.4 percent rate in the previous three months. Housing wealth decreased for a fourth consecutive quarter from April to June.

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16-Sep (BusinessInsider) — Here’s a fascinating little nugget.

A recent Schwab survey of 911 registered investment advisors (RIAs) asked respondents what asset class they were likely to allocate more money to going forward.

As you can see, there’s almost no increase in enthusiasm for any area except… gold.

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PG View: This is a trend that we here at Centennial Precious Metals have been witnessing first hand. We have a marked increase in the number of inquiries from investment advisers and wealth managers that are looking to offer physical gold to their clients. The smart ones are looking to get out in front of the rising demand for physical metal, but for many that demand has already materialized and they are scrambling to react.

Yet still only 10% of survey respondents said they would likely allocate more to gold. Is that even remotely reflective of a bubble? I think not.

16-Sep (MSNBC) — The U.S. is coming to Europe’s financial rescue.

So far, America’s role is fairly limited. But if the crisis continues to grow and the U.S. takes on a wider role, U.S. consumers and taxpayers could feel a bigger impact. The biggest exposure could come from America’s status as the single largest source of money for the International Monetary Fund.

The latest round of American financial assistance came Thursday with a promise by the Federal Reserve to swap as many dollars for euros as European bankers need. In the short run, those transactions won’t have much impact because the central banks are simply swapping currencies of equal value. If the move helps avert a wider crisis, it could help spare the global economy from another recession.

But over the long term, consumers could feel the impact of central bankers flooding the financial system with cash, according to John Ryding, chief economist at RDQ Economics.

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16-Sep (papermoneycollapse.com) — This was another hectic week for financial markets, and nerves were calmed somewhat over the past 24 hours with another liquidity injection from the central banks – this time the provision of dollars from the U.S. Fed channelled through a few other central banks, most importantly the ECB. This is certainly not a solution but again the doctoring of symptoms. Pumping ever more fiat money into the system to avoid – or rather postpone – a much needed recalibration will not solve the underlying malaise. Four years into the crisis the banks still need emergency funding. That is a damning indictment that financial structures are far from sustainable.

…A default of Greece now appears very likely. This is a positive development. Positive as it points toward shrinkage – toward smaller debt, toward a smaller Greek state, toward an important lesson for banks: Don’t think that lending to the state is without risk!

…The biggest risk to the euro is not a Greek default but the markets waking up to the bleak long-term outlook for the solvency of the core, Germany and France.

…Thus, we will get some liquidation (Greek debt) but also some re-liquefying (big banks). It will not be the end of the euro – but not the end of the financial crisis either.

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PG View: I concur with this assessment. The contingency plan to protect the German banks is presumably in place. Liquidity lines have been established. Payment of the next bailout tranche for Greece has been forestalled until October. Seems like Greece is about to get pitched under the bus…

16-Sep (CNBC) — Consumer sentiment inched up in early September, but Americans remained gloomy about the future with a gauge of expectations falling to the lowest level since 1980, a survey released Friday showed.

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By Ambrose Evans-Pritchard
16-Sep (The Telegraph) — The debt markets have been warned.

A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.

“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.

“We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”

“Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,” he said.

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PG View: Out of US Treasuries and into more “physical assets.” Physical assets like gold perhaps?

16-Sep (Bloomberg) — European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank.

Clashing with U.S. Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

“We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing today’s trans-Atlantic finance meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”

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PG View: Basically, another meeting with no substantive moves to alter the course that Europe is on. There will be no fiscal stimulus. We’re going to defer any decision on Greece until next month, when the country will be once again on the precipice of default.

16-Sep (USAGOLD) — Gold extended modestly lower in overseas trading, as European FinMins met in Poland for the latest round of discussions on how to save the euro. Once again, nothing of real substance seems to have come out of the meeting, which has prompted the yellow metal to rebound back to the $1800 zone.

In fact, the attendees decided to put off until October the final call on whether Greece will get the next tranche of their bailout, all but assuring that Greece will be taken right to the edge of the precipice once again and the market will be on tenterhooks for the next couple of weeks. You can deduce from this decision that the FinMins simply have no sense of urgency with regard to Greece, or there is no consensus that the next tranche will or should be forthcoming. As I think the markets have made it pretty clear that the Greek situation is urgent — the upcoming dollar liquidity wave notwithstanding — it’s pretty clear what the probable reason for the delay is…

This renewed sense of concern has tempered risk appetite, which was boosted earlier in the week by more jawboning that France and Germany are prepared to do whatever is necessary to save Greece and the EU; along with a coordinated agreement by major central banks to flood the eurozone with dollars the staunch the developing liquidity crisis that is a byproduct of an anticipated Greek default.

• University of Michigan sentiment (prelim) rose to 57.8 in Sep, above market expectations, vs 55.7 Aug.
• US TIC net inflows $9.5 bln (ex-swap) in Jul, up from $3.4 bln Jun; Trsys +$16.2 bln.
• Eurozone current account (sa) -€12.9 bln in Jul, vs -€7.1 bln in Jun.
• Italy trade balance – Total €1.4 bln in Jul, vs -€1.8 bln in Jun.
• Eurozone trade balance (sa) -€2.5 bln in Jul, vs -€2.5 bln in Jun.

16-Sep (Reuters) — U.S. Treasury Secretary Timothy Geithner holds talks with European finance ministers on Friday on the possibility of leveraging the euro zone’s bailout fund to help resolve the debt crisis.

Washington set up an emergency fund to support U.S. lenders during the global credit crisis. With signs of stress in Europe now, the European Central Bank and those of Britain, Japan and Switzerland joined forces on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.

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PG View: More leverage? Really?! Excess leverage and mispriced risk pretty much caused the crisis. So by all means let’s gear-up and try and drive yields lower.

16-Sep (The New York Times) — European finance ministers struggled Friday to resolve hurdles that are holding up their latest rescue plan for the euro, as the United States Treasury Secretary Timothy Geithner warned that failure to act could leave “the fate of Europe” to outsiders.

The meeting comes at a time of continued anxiety in the financial markets, and ahead of a looming deadline for Greece’s foreign creditors to decide whether to release the next installment of its original bailout. If Greece does not get the €8 billion, or $11 billion, tranche, in October, it could be forced to default on its debts, with potentially catastrophic repercussions for global growth.

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15-Sep (Financial Times) — The promise of unlimited dollars from central banks has buoyed shares in Europe’s banks. However, as James Mackintosh, investment editor, warns, the liquidity worry may offer relief but the underlying solvency threat of sovereign default remains.

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16-Sep (Financial Times) — Eurozone finance ministers have put off until October a decision on whether to grant Greece an €8bn tranche of loans the country is relying on to pay its bills.

The decision sets up another nail-biting scenario in which Athens will be scrambling to convince fellow eurozone governments, as well as the International Monetary Fund and the European Central Bank, to release the loans before it runs out of cash in the middle of next month to pay the salaries of civil servants and other basic obligations.

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15-Sep (USAGOLD) — Gold has dipped back below the $1800 level on fresh reassurances from France and Germany that Greece will get the next tranche of bailout funds. For good measure, the ECB announced coordinated central bank dollar liquidity measures in an effort to quell the mounting liquidity crisis that has sprung from the European sovereign debt crisis.

The euro has rebounded to regain the 1.39 handle and European banking shares have gotten some relief on the news that the ECB, Fed, SNB, BoE and BoJ will all be pumping dollars into the system in three separate operations on 12-Oct, 09-Nov, and 07-Dec. The anticipated flood of dollars has heightened risk appetite once again, and while weighing on gold initially, the relentless expansion of ‘paper’ liquidity is a primary long-term driver of gold price appreciation relative to that paper.

• US Philly Fed index rose to -17.5 in Sep, below market expectations of -15.0, vs -30.7 in Aug.
• US industrial production +0.2% in Aug, in-line with expectations; cap use 77.4%.
• ECB will offer 3-mth dollar liquidity operations in conjunction with Fed, SNB, BoE, BoJ.
• US CPI +0.4% in Aug, above market expectations of +0.2%, vs +0.5% in Jul. Core +0.2%, in-line with expectations.
• US current account gap narrowed to -$118.0 bln in Q2, on top of market expectations, vs -$119.5 bln in Q1.
• US NY Empire State Index sank to -8.82 in Sep, well below market expectations of -2.3, vs -7.7 in Aug.
• US initial jobless claims surged 11k to 428k in week ended 10-Sep, well above market expectations of 412k. Prev week revised higher to 417k.
• SNB reaffirms it will buy unlimited amounts of currency to defend EUR-CHF peg, citing deflation risks; sees inflation at just 0.4% this year.
• SNB holds steady on monetary policy. 3-month Libor target rate 0.00%.
• UK retail sales -0.2% in Aug, above expectations, vs +0.2% in Jul; unch y/y.
• Eurozone CPI +0.2% in Aug, in-line with expectations, vs -0.6% in Jul; +2.5% y/y. Core 1.2% y/y.
• Singapore retail sales (nominal) 10.7% y/y in Jul, vs 10.9% in Jun.
• RBNZ holds steady on official cash rate at 2.50%, in-line with expectations.

15-Sep (The Wall Street Journal) — Five major central banks moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis.

The ECB said that it will be joined by U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three U.S. dollar liquidity-providing operations.

The action addresses an acute shortage of dollar availability as U.S. lenders withheld funds out of concern that the European banking system is over-exposed to the region’s government debt crisis.

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14-Sep (The Wall Street Journal) — As the expected end of Moody’s review to possibly downgrade Italy’s sovereign debt rating closes in, market participants are bracing for another hit to that country’s bond market.

Moody’s Investors Service says ratings decisions are historically made within 90 days of putting a country on review for possible downgrade. Italy’s 90-day period closes at the end of this week, as Moody’s warned it might downgrade the country June 17. Moody’s declined to comment on the status of the review.

A potential downgrade comes at a difficult time for Italy and potentially the entire euro zone. Italy, the euro zone’s third-largest economy, is already reeling from a disappointing debt auction earlier this week. And the overall region’s health continues to hinge on whether Italy and Spain will need bailouts similar to those of Greece, Portugal and Ireland.

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14-Sep (Financial Times) — European banks are rushing to use their gold to access much-needed dollar funding, in the latest sign of the growing liquidity crunch for the continent’s financial institutions.

Gold dealers and analysts said that there had been a strong move to lend gold in the market in exchange for dollars in the past week, accelerating in recent days.

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PG View: Maybe this morning’s announcement of a new coordinated central bank dollar liquidity scheme will end the European banks’ need to pledge their gold to get dollars.

15-Sep (Reuters) — World Bank President Robert Zoellick said on Wednesday the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy.

“Unless Europe, Japan, and the United states can also face up to responsibilities they will drag down not only themselves, but the global economy,” Zoellick said in speech at George Washington University.

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