November, Wednesday 09, 2011

Europe Falling Down  

DOW –389=11780
SPX  - 46 = 1229
NAS – 105 = 2621
10 YR YLD -.11 = 1.95%
OIL un = 96.80
GOLD – 16.50 = 1769.60
SILV - .86 = 34.04
PLAT – 31.00 = 1631

O.K., let’s start with some good news – you know that asteroid that was hurtling toward earth – missed us by that much. Bruce Willis is still alive and the asteroid just went sailing past. That’s the good news.

At some time or another we have all lost our balance; there is a precise point in time where you lose control and gravity takes control, and in that instant you realize there is nothing that can be done; you will fall; the laws of nature win and the certainty that you will fall becomes inevitable.

The perceived tipping point was 7% yields on Italian bonds. Today, Italy smashed through the 7% barrier. Now we will watch the spectacle unfold, quickly or in slow motion, and try to measure or contain the carnage. But make no mistake, Italy is collapsing. Late yesterday Barclay’s issued a report on the European sovereign debt problem and the conclusion is that "Italy is now mathematically beyond point of no return."

The European Central Bank, the ECB, said today that they were not the lender of last resort. The ECB intervened to buy Italian bonds in large amounts but remained reluctant to go further.  Like I told you yesterday, the reason for this is because they still don’t know who is in charge in Italy and they don’t know if the Italians will cut back enough to be able to repay the debt – that is the official explanation – the unofficial explanation is they realize that they have hit a tipping point. Any money they throw at Italy is just money that will disappear in a big black hole.

There will be money thrown at this problem, but it won’t be real money. The Germans have already said they won’t touch their gold reserves. The German people don’t want the bailout to happen because they know that they will get stuck with the tab.  Germany’s public debt would rise to 135% of gross domestic product if Italy and Spain were to tap the EFSF financial backstop. The Italians are trying to hang onto their gold reserves. France still thinks it can tighten its belt by about $25 billion. They will institute a 5% temporary company tax and VAT will rise from 5.5% to 7% in an effort to hold onto its Triple-A rating. Euro zone finance ministers hope to have an expanded EFSF by the end of November, even though there is as yet no IMF Commitment. The bankers want to leverage the bailout fund by a ratio of 5 to 1

European banking has gone too far this time. The debt created cannot be paid and the only thing governments can do is to continue to increase money and credit resulting in higher inflation. At the same time economies receive no relief and unemployment rises. Projections show a much slower economic climate in the year ahead and nothing to help the situation. The only consideration is saving the euro, pound, the US dollar and banking. At some point we can expect the central banks to crank up the printing press – understand that the printing press is really just electronic transfers of money to banks; the money doesn’t go to the Greek or Italian people who are trying to figure out how to get their next meal.

Let’s talk about what this looks like on the ground. Greece has gone into default. Business has stopped in Greece and the situation is worse than ever. The next step is for the official default to be acknowledged, then Greece will go about the process of exiting the euro, they will have to return to the Drachma at about 50% of the value of the euro, and over a five year period phase in austerity to avoid future debt. The majority of Greeks want to do this, but surely the bankers do not, because they’ll be irretrievably insolvent with a big probability their Credit Default Swap Insurance won’t pay off.  The banksters would rather put Greeks into servitude for the next 50 years and if possible confiscate Greece’s state assets through privatization.

So, right now Greece has just come to a grinding halt; soup kitchens are forming to feed the people; the nursing homes are begging for donations; shipping firms are trying to figure out how to bring in relief supplies; there is no orderly transition of Greek government. The EU has been hanging Greece out to dry.

A couple of days ago it looked like Prime Minister George Papandreou was handing over control of the government to a coalition government but now there is no coalition. Nobody wants the mess.

The situation in Italy is almost the same, just lagging by a couple of weeks or days; and of course, Italy is much bigger than Greece. Italy is the eighth largest economy in the world.

We now learn that German Chancellor Angela Merkel and French President Sarkozy have been having discussions about overhauling the European Union, making plans for a smaller Union, which would not include Greece, and probably would not include Italy and Spain and Portugal. And Spain's Socialist government, which implemented tax rises, pay and pension cuts and labor market reforms to try to escape a similar fate, is set to be trounced this month in an early general election.

Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."

This news gives credence to rumors that Germany has started printing Deutsche marks.

Now, let’s look at the breakdown of the Euro on the USSA. We start by looking at the Euro banks, we’ll look past the Greek and Italian banks – what’s the point.

DB – 4.42 = 36.13 (10.9%)
BNP
ING – 1.12 = 7.49 (13.01)
RBS - .81 = 6.59 (10.9%)

And then let’s see how they affected U.S. banks:
BAC -.37 = 6.16 (5.6%)
JPM – 2.48 – 32.54 (7.1%)

C – 2.57 = 28.85 (8.2%)
MS –1.56 = 15.76 (9%)
GS –8.91 = 99.67 (8.2%)

Goldman Sachs just released their 10-Q, the bank has revealed that it has $56 billion in pure exposure to European banks and governments, of which the most is to France, followed by Germany and the UK. There is also a category they list as “other” – with no explanation.

Now, remember how we’ve been talking about the derivatives, billions and billions of dollars in derivatives.

Bonus Notes:

From Zero Hedge:

Switch attention back to the US, and the fact that absent lots and lots of fiscal stimulus, Q4 GDP is rolling over. Treasury SecretaryTim Geithner, who visited Chandler yesterday and didn’t even stop by for a cup of coffee; Timmy provides the perfect segue, having said earlier that "the supercommittee holds "the key" to rebuild confidence." This brings us to the supercommittee itself. And for that we go to Politico: "Congressional Democrats and Republicans are trillions of dollars apart on a deficit reduction deal as the supercommittee nears its Nov. 23 deadline."  It continues: "The most recent Republican offer, according to Democratic and Republican sources, includes roughly $770 billion in spending cuts and between $550 billion and $600 billion in new revenue from a variety of sources, including selling public lands, increasing the price tag on postage stamps and new energy leases. Republicans also say they’d be willing to limit deductions and certain tax breaks – sure to anger their conservative base – in order to reach nearly $300 billion in new tax revenues. In exchange, Republicans want to change the rate of inflation for Social Security, cut Medicaid and increase Medicare premiums for the wealthy." Needless to say this is going to go nowhere in a hurry. And all of this is happening as the second interim debt ceiling target is about to be breached

Also:

Early last year, 75 percent of America’s unemployed were receiving checks. The figure is now 48 percent -- a shift that points to a growing crisis of long-term unemployment. Nearly one-third of America's 14 million unemployed have had no job for a year or more. Congress is expected to decide by year's end whether to continue providing emergency unemployment benefits for up to 99 weeks in the hardest-hit states. If the emergency benefits expire, the proportion of the unemployed receiving aid would fall further.

the Bank of England has refused information regarding their gold holdings. The comment is that gold swap and leasing information is market sensitive and its disclosure would allow others to find out what the bank is doing. This would impair the interests of its private customers. This tells us that the bank is active in the gold market and that it is of no interest to others what the bank is up too. Nearly 50% of daily trade volume of nine major gold and silver producers are shorts. We wonder what the SEC makes of all this? Sooner or later they will have to cover as the losses run into the multi-billions. Chinese gold imports reached a record high in September, when monthly purchases matched almost half that for all of 2010. This surge is expected until at least the end of the year. 56.9 tons of gold were imported in September a 6-fold year-on-year increase. Gold jewelry demand is up 13% this year.

You may not realize it but gold is sneaking higher. There are no announcements to cause these surges, just persistent buying.