Market Now Pricing In $770 Billion Increase In Fed Balance SheetAs we have pointed out previously, the primary if not only driver of relative risk returns (because in a world of relative fiat value destruction, it is all relative, except for gold which is revalued relative to all on a pro rata basis), will be who of the big two - the Fed and the ECB - can print more. And up until now, at least since the end of December when the market "suddenly" realized that the ECB's balance sheet has soared to unseen records, the consensus was that it was the ECB that would be the primary source of easing. Especially when considering that there is another ~€500 billion LTRO due on February 29.
Yet today's rapid reversal in the EURUSD, driven by Bernanke's uber-dovish comments suggest that something has changed and that the Fed is now expected to ease substantially. How much? For that we look to the latest balance sheet cross-correlation, where if we go by simple correlation, the market is now pricing in (based on the EURUSD cross ratio) that the relationship of the two balance sheets will rise from a multi year low of 1.08 as of a few days ago to 1.15, at least based on the rapid move in the EURUSD higher as can be seen in the chart below. Indicatively, the actual value of the two balance sheets is €2.706 trillion for the ECB and $2.92 trillion for the Fed (or a 1.08 ratio).
So now that the EURUSD has risen as high as it has, it implies that the pro forma "priced in" ratio is about 1.15. But wait: one should also factor in the fact that the ECB's balance sheet will rise by at least another €500 billion in just over a month, which will bring the ECB's balance sheet to €3.2 trillion. Which means that to retain the 1.15 cross balance sheet relationship, the Fed's own balance sheet will have to rise to $3,687 billion, or a whopping $767 billion increase!"
Naturally, that's a simple heuristic based on only what the EURUSD pair is implying. Of course, this is not a scientific way of predicting where Bernanke will go, but that is at least what the market seems to be telling us.
So at the end of the day, the balance sheets of the world's two biggest central banks will increase by about €500 billion for the ECB and ~$770 for the Fed and $655 billion for the ECB.
Incidentally, this analysis assumes all else equal which, with Greece on the verge of default and Portugal potentially in its footsteps, isn't...
Thus our question is: gold is not on its way to $2000 yet why again?
Has Bernanke Become A Gold Bug's Best Friend?Below we present the indexed return of ES (or stocks) and of gold over the past 24 hours since the Bernanke announcement of virtually infinite ZIRP, and the latent threat of QE3 any time the Russell 2000 has a downtick. It is unnecessary to point out just when Bernanke made it all too clear that the Fed has nothing left up its sleeve, expect to directly compete with the ECB over "whose (balance sheet) is bigger," as it is quite obvious.
What is not so obvious, is that for all intents and purposes, Bernanke may have unwillingly, become a gold bug's best friend, as gold (and implicitly silver) has benefited substantially more than general risk. Much more. So for the sake of all gold bugs out there, could the Fed perhaps add a few more FOMC statements and press conferences? At this rate gold should be at well over $2000 by the June 20 FOMC meeting.
Tim Geithner Added To List Of Gold Bugs' Best FriendsToday we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today's GDP (which we don't see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling.
Which means that per yesterday's Senate 52-44 vote authorizing Timmy to go hog wild (which in turn means that Bernanke will have to step in and monetize much of this new debt issuance), the price of gold just got a green light for at least $250 in upside - the implied price just got raised to $1960. Of course, anyone who thinks the US will stop issuing debt there needs a brain MRI stat. Thank you Senate. And thank you Timmy. And, of course, thank you Ben.
Germany wants Greece to give up budget controlGermany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.
"There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said.
The source added that under the proposals European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy. "This could be carried out even more stringently through external expertise," the source said.
The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone "budget commissioner" to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders.
"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the document said. Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.
Investors fear mounting losses in Portugal as second rescue loomsPortugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50pc on private creditors, according to a top German institute.
A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth.
"Portugal's debt is unsustainable. That is the only possible conclusion," said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. "We won't know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago."
Yields on Portugal's five-year bonds surged on Thursday to a record 18.9pc, reflecting fears that the country will need a second rescue from the EU-ECB-IMF Troika. Three-year yields hit 21pc.
Chart of the Day: The Baltic Dry IndexStatistics from the Office of National Statistics this morning showed that the UK went into reverse in the last quarter of 2011, when the economy shrank by 0.2% – but as the Baltic Dry Index shows, the global economy is looking even more worrying.
The index – often used as a proxy for the health of the global economy as it reflects the prices charged for shipping commodities such as metals, coal or grain around the world – has fallen by 61% since October. The index was at 842 at yesterday’s close – down from its 12-month high of 2173 last October.
Nick Bullman, managing partner at risk consultant Check Risks, said the index is a good way of looking at the risks to the global economy, "as it tends to be where they hit first".
According to Bullman, its initial collapse in October was driven primarily by a fall-off in demand from China, where declining housing prices pushed purchasing managers to cut back on orders for the raw materials whose transport the Baltic Dry Index reflects.
He said: "This collapse looks similar to the falls we saw in the Baltic Dry ahead of the recessions of the late 1970s and early 1990s – but this drop is actually steeper."
Bullman added that it was also a more direct indicator of global economic health than government-produced statistics. "Personally, I’m not interested in employment data and GDP figures because they’re manipulated," he said. [..]
Bullman said that shipping companies have also been deliberately slowing down their journeys to save fuel, with trips from China to the US going now taking around 50% longer than they were early in 2011.
Instead, he said he was surprised by how long the Baltic Dry took to fall. The NewContex index – an indicator of prices for transporting products in container ships – started falling in April last year. Bullman said: "When we saw that happening in April, we realised that risks had returned to pre-2008 levels. We thought the Baltic Dry would start falling too, but it was actually relatively resilient."
"What this is signalling is that the world economy is slowing down much more quickly than people have been thinking."
Why Germans and Dutch will exit 'suicide pact' eurozoneGermany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of 'unrequited transfers' to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research.
Speaking at an event in central London, he said that before joining the single currency, German incomes had stayed level but their purchasing power had increased as the Deutschmark appreciated. With the weaker euro, the economist said, they have seen 'tremendous' wage restraint, leading to huge growth in German firms’ market share but ‘no serious growth of the economy’ and a squeeze on disposable incomes. Meanwhile, consumption rose elsewhere in the eurozone, he said.
'So what you’re actually dealing with here... is a German population which has had a rotten deal – and that’s why they’re all so angry' noted Dumas, who is also chairman of the macroeconomic forecasting consultancy. Branding the monetary union a 'suicide pact', he continued: 'So what this exercise in uniting Europe has achieved is to divide Europe.'
Dumas [noted that] the 'Club Med' nations needed about 5% of gross domestic product in annual debt refinancing 'more or less indefinitely'.
This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.
The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its 'core' unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: 'The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.'
Dumas also warned that austerity was only worsening Greece’s budget deficit, and that it was 'difficult to imagine' the deeply indebted state receiving the four quarterly batches of financing it is due this year. ‘It’s almost impossible to imagine people continuing to stump up the money, because they simply have not actually gone into this thing with the intention of unrequited transfers to Greece ad infinitum,’ he said as the country resumed talks with its creditors over a planned debt swap.
Calling the one-off damage of splitting up the eurozone 'seriously exaggerated', Dumas warned that as the crisis deepens, he believes 'Germany and the Netherlands will actually realise that they had better call it a day and jump out.'
"The Dutch people have lost thousands of euros in purchasing power per year since the currency was introduced."
Time To Concede Home 'Ownership' Is A FraudI have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery.
The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down.
It's time to concede that "homeownership" is a fraud.
When there is $16 trillion in mortgage and consumer debt outstanding and an estimated $16 trillion in residential unreal estate value, with the risk of another 20% decline in prices, there is no "ownership".
Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a "dead pledge" in the value of the debt owed, not an "asset". The lenders and taxing authorities are the "owners" of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity.
George Soros on the Coming U.S. Class War"We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system."
Soros draws on his past to argue that the global economic crisis is as significant, and unpredictable, as the end of communism. "The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what’s happening."
To Soros, the spectacular debunking of the credo of efficient markets—the notion that markets are rational and can regulate themselves to avert disaster—"is comparable to the collapse of Marxism as a political system. The prevailing interpretation has turned out to be very misleading. It assumes perfect knowledge, which is very far removed from reality. We need to move from the Age of Reason to the Age of Fallibility in order to have a proper understanding of the problems."
Take Europe. He’s now convinced that "if you have a disorderly collapse of the euro, you have the danger of a revival of the political conflicts that have torn Europe apart over the centuries—an extreme form of nationalism, which manifests itself in xenophobia, the exclusion of foreigners and ethnic groups. In Hitler’s time, that was focused on the Jews. Today, you have that with the Gypsies, the Roma, which is a small minority, and also, of course, Muslim immigrants."
As anger rises, riots on the streets of American cities are inevitable. "Yes, yes, yes," he says, almost gleefully. The response to the unrest could be more damaging than the violence itself. "It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States."
Time has stopped before usSmashing Pumpkins, The Beginning is the End is the Beginning
The sky cannot ignore us
No one can separate us
For we are all that is left
The echo bounces off me
The shadow lost beside me
There's no more need to pretend
Cause now I can begin again."
A framework of the deal -- the basic structure of the bond swap that the Greek finance minister Evangelos Venizelos wants to present at Monday's eurogroup meeting -- has been accepted by both sides, "put in place" and I understand committed to paper.
But it would also seem that other aspects of the agreement - be them legal, technical or matters of substance -- remain unresolved and will be discussed at negotiations that resume at 7:30pm local time [6.30 GMT] and look set to continue over the weekend.
If Greece's massive €360 bn debt load is to be made manageable much will depend "on the inter-related role of all the interests at stake" insiders say. Even if a decisive agreement is reached, the proposal will have to be put to technocrats -- given the complexity of the deal -- and they could very likely change it again.
"The outline won't be the end of the beginning but the beginning of the end," said another source again requesting blanket anonymity because of the delicacy of the talks.
"At the risk of just adding to the confusion over what is or is not happening with the discussions between Greece and the private bondholders, CNBC is reporting no deal has been reached on the terms of a debt swap. Nor is there apparently a press conference planned for tonight.
However that does not rule out the idea that a framework has been agreed, and further details will be hammered out over the weekend, as we reported earlier."
Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.
Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released.
Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.
"Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.
Charles Dallara, managing director of the Institute of International Finance (IIF), a lobby group representing private creditors who have lent €47bn (£39bn) to the Greek government, has so-far failed to reach agreement on the key interest rate of the new bonds Greece will issue.
Athens was anxious to strike a deal ahead of a meeting of eurozone finance ministers on Monday, which could have set in motion the paperwork and approvals necessary to give Greece its next tranche of aid, worth about €130bn.
This will prevent a disorderly debt default when €14.5bn of Greek bonds mature in March. However, Greek government officials said on Saturday that the crisis talks had now been postponed for a few days.
A spokesman for the IIF said that Mr Dallara had travelled to Paris for a long-standing social arrangement and his departure was "in no way a reflection on the talks". The talks have made "substantial" progress, the spokesman said, noting that Mr Dallara was in phone contact with the Greek prime minister and could return to Athens at any point.
International private creditors have already accepted a 50pc "haircut" or loss of their investments in Greek bonds, a move that would cut €100bn from Greece's €360bn debt pile. However, the sticking points appear to be the term to maturity of the new replacement bonds and the rate of interest, or coupon, that they will pay.
"We are now expecting a solution in a few days," the Greek government official said. "Nobody expects a failure, as that could raise the spectre of a default. But it would have been convenient to have wrapped things up this weekend, because of the simultaneous presence in Athens of the Troika.
Before we, like Reuters and like JP Morgan, accept that even the local-law debt can be crammed down, we point readers to a seminal paper by none other than Lee Buchheit, the same one who is currently advising Greece on its bankruptcy negotiations (to call a spade a spade), called How To Restructure Greek Debt from May 2010, in which he says the following:
[Buchheit] 'No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy.
• If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments.
• A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board.
• The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments.
• The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge.
Talks between Athens and the steering committee of private creditors concerning the Private Sector Involvement plan (PSI+) will resume by telephone on Sunday as the committee’s head, Charles Dallara, left Greece unexpectedly on Saturday.
According to reports on Skai radio the International Monetary Fund, the European Commission and the European Central Bank are not happy with the provisional agreement between the Greek government and its private creditors, as they believe it does not secure the sustainability of the Greek debt.
As a result Dallara, who is also the head of the Institute of International Finance flew to Paris on Saturday to discuss developments with lenders and funds which hold the bulk of the privately-held Greek bonds worth 206 billion euros.
Finance Minister Evangelos Venizelos told reporters on Saturday that negotiations would continue on Sunday by phone.
Both the IIF and the government have leaked that there is progress in the talks but any agreement would require the approval of Brussels, Berlin and the IMF.
Sources suggest that the Greek side proposed to private creditors a 3.5 percent interest rate for bonds maturing by 2014, 3.9 percent for those maturing by 2020 and 4.6 percent for those expiring after 2021. There will be a 10-year grace period and the new bonds will be under British law.
Reuters cited an unnamed source saying that "things are complicated, we are getting closer on the numbers but there is still quite some work ahead. An agreement is unlikely before next week, if there is an agreement at all.
6) Does the PSI in its current form make the Greek debt sustainable?
The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020.
First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic (c.3.8% average nominal growth and average 4% primary balance).
If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse. As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika.
Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%.
Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.
"So it looks like we should get an announcement sometime today about the proposed Greek PSI deal. Yes, proposed, not finalized. Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what.
As far as I can tell, no one has given the IIF negotiators any binding power. Obviously some of the institutions that the IIF negotiators are associated would have trouble not approving the "deal", but how many bonds do they really represent?
I think this will be a relatively small portion of bondholders and then the real game begins. The carrot and stick that the EU and ECB can use with other holders and the desire to maximize profits (or minimize losses) on the other side. So far, this news seems to be acting inversely to the "downgrades" price action, as early front-running is meeting sell the news.
If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do. Not only will Greece receive a 50% notional reduction (except from the ECB and other "public" holders), but they will get very long dated money at very low rates. Who wouldn't want that?
Why should Spain be going through semi-legitimate auctions when Greece can get longer dated money at lower rates? Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?"
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Nicole explains what she means when she describes cash as a pile of unmade choices and why she cannot offer her uncomplicated support for political movements like the Tea Party or Occupy Wall Street. She does voice her strong support for permaculture and for restoring soil fertility.
S&P cuts ratings of nine eurozone countries: reactionFabrice Seiman, head of Lutetia Capital, said:
"S&P is absolutely right. France is paying the price of 30 years of irresponsibility in public finances. French politicians on the right and on the left fell short of the job by not taking measures to reduce spending."
I think this is already priced in. There should not be any sizable reaction, but there could be a technical reaction on the Franco-German spread. It should be limited to the long-term and if there is a reduction in spending."
Bill O'Grady, chief market strategist at Confluence Investment Management, said:
"If France had been downgraded more than one level it would have precipitated a crisis. This is not good but it was anticipated, baked in. For oil it is probably a neutral event. If it raises concerns about a worsening economic environment it would be bearish."
Bob Prechter's socionomics model combines Elliott's observed fractal patterns with an understanding of human herding behaviour, comprising a comprehensive challenge to prevailing notions such as the Efficient Market Hypothesis by reversing causation and recognizing the role of emotional/irrational behaviour as the prime market driver. While the real economy demonstrates negative feedback loops, finance is thoroughly grounded in positive feedback.
Cherry Picking Timeframes on Alleged Leading Indicators; Big Change In LEI on January 26"The stock market is not a leading indicator of the economy. Rather, the stock market is a coincident indicator of sentiment towards equities.
...
Far from being a leading indicator, on an absolute basis the S&P has a perfect track record of peaking right before or just as a recession starts. This is just as one might expect from a gauge of equity sentiment which tends to peak right before a downturn in the economy (with everyone extrapolating good times forever into the future).
...
On a percentage change basis, the S&P 500 is not leading, not lagging, and not coincident. Instead it is completely useless mush."
UBS Explains Why AAA-Loss Is Actually Relevant"France has not only lost its AAA status. Critically, France has lost AAA status at a time when Germany has not. France also retains a negative outlook against a stable outlook for Germany, compounding the distinction. The relative decline of France’s credit rating is something that has potential political implications.
There are parallels here to the relative positions of the UK and the US in 1949, in the wake of sterling’s devaluation against the dollar. The devaluation was simply a confirmation of economic reality, but the visible confirmation of that shift in relative economic reality served as a defining moment in the shift of the bilateral relationship in political terms.
Since the foundation of the Coal and Steel Community in 1951, the history of (continental) European politics has been essentially a story of France and Germany holding each other in check. Indeed, this was the explicit aim of the ECSC’s founders. With the downgrading of France relative to Germany, there is now a de jure as well as a de facto inequality between the two states. The ability of France to act as a counterbalance to Germany in economic decision-making has been compromised.
In the wake of the downgrade of the EFSF, it is clear that the actions of S&P have elevated the role of Germany (and perhaps, to a lesser degree, the Netherlands) in any collective economic decisions within the Euro area. Any economic decision that requires money to be spent will require wholehearted German endorsement if rating agency determined credit credibility is to be maintained. The bargaining power of Germany in the economic councils of Europe has been correspondingly increased."
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