Mish's Global Economic Trend Analysis |
- Multi-Trillion Euro Bailout Plan Allegedly in the Works; Plan Has Failed Already
- EU Synopsis: No Method, No Strategy, No Calendar; Blatant Lies by French Finance Minister
- Why did Gold and Silver Plunge? No, It's Not CME Margin Hikes; What will the Fed do Next?
| Multi-Trillion Euro Bailout Plan Allegedly in the Works; Plan Has Failed Already Posted: 24 Sep 2011 08:17 PM PDT The rumor mills are flying this Saturday regarding a Multi-trillion plan to save the eurozone. Telegraph: European officials are working on a grand plan to restore confidence in the single currency area that would involve a massive bank recapitalisation, giving the bail-out fund several trillion euros of firepower, and a possible Greek default. German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone's sovereign debt crisis is spiralling out of control. Their aim is to build a "firebreak" around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered "too big to bail". Mish: If that's the plan it, it has failed already. The crisis has already spread to Spain and Italy. In fact, one look at European bank stocks says it has spread to France and Germany as well. Telegraph: Sources said the plan would have to be released as a whole, as the elements would not work in isolation. Mish: Lovely. In a typical bicycle wheel if one spoke gets broken the wheel still works fine. In the proposed wheel, if a spoke breaks, the bicycle crashes. Telegraph: First, Europe's banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders. Mish: Will French leaders and French banks go along? Just last week they were insistent that French banks were well capitalized. Telegraph: Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) – the eurozone's €440bn bail-out scheme. Mish: Recapitalized "by the state" means taxpayers. Will Germany, Finland, Austria, and the Netherlands go along? Telegraph:The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain's financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target. The complex deal would see the EFSF provide a loss-bearing "equity" tranche of any bail-out fund and the ECB the rest in protected "debt". If the EFSF bore the first 20pc of any loss, the fund's warchest would effectively be bolstered to Eu 2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion. Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic. Mish: This leveraged proposal with the ECB backing it up has already been rejected by the ECB. Moreover, such a proposal with the ECB taking leveraged risk would be in violation of the Maastricht Treaty. Telegraph: Gathering turmoil in financial markets has convinced Germany to begin work of some kind of variant of the US plan, despite having initially rejected the notion as unworkable as threatening to compromise ECB independence. The proposal would be hugely sensitive in Germany as its parliament has yet to ratify the July 21 agreement to allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring programme. The vote is due on September 29. Mish: The current EFSF proposal is sketchy enough already. It will likely pass. However, Merkel may go down in flames because of it. The Guardian notes "Merkel looks sure to win the Sept. 29 vote on the European Financial Stability Facility because opposition parties support the bill, designed to give the EFSF more powers after an agreement by EU leaders in July. However, her job could be on the line if she has to rely on the opposition and fails to persuade rebels from her conservative camp and the Free Democrats (FDP), her junior coalition partners. Opposition parties have said Merkel would be finished politically if that were the case and have threatened to call for fresh elections. If that happened, the ensuing uncertainty would send shockwaves through the euro zone as it tries to tackle its debt crisis." Bear in mind the above mess pertains to the existing proposal for 440 billion Euros. What would the vote be for a €2.5 billion proposal? Telegraph: As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece. Mish: Will the ECB, IMF, and France go along with that? What about the German parliament? Telegraph: Officials would hope the plan would stem the panic in the markets and stop bond vigilantes targeting Italy and Spain, which European and IMF figures believe should not be in any immediate distress but are in need of longer-term structural reform. Mish: So here we are, with a half-baked 2+ trillion Euro proposal, highly likely in violation of the Maastricht Treaty, that all 17 nations in the Eurozone would have to approve. Finland, Austria, the Netherlands, and Germany are already balking over various proposals and Finland in particular wants collateral. This multi-trillion idea is "in hope the plan would stem the panic in the markets and stop bond vigilantes targeting Italy and Spain". The plan is supposed to pass by November? Really? And the aim is to spend 2 trillion to stop something from happening that has already happened. Hope springs eternal. http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| EU Synopsis: No Method, No Strategy, No Calendar; Blatant Lies by French Finance Minister Posted: 24 Sep 2011 09:29 AM PDT The number of arrogant, unbelievable lies from the EU and ECB are flying so fast I do not have time to report on them all. Please check out these lies by French finance minister, François Baroin as reported by the New York Times in Amid Warning Signs, Hints That Europeans May Step Up Action Rising alarm that Europe is not addressing its economic problems with sufficient speed or force pervaded and soured the annual gatherings here on Friday of economists and policy makers from around the world.No Method, No Strategy, No Calendar François Baroin would not repeat the communiqué for the simple reason there was not a damn thing in it. I commented on the communiqué in Asia Pacific Equities Slump Following Ridiculous Pledge by G-20 Check out this statement by the G-20 following the recent multi-day plunge in global equities and commodities: "We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required"OK François...
No Strategy, No Method There is no method, and there is no strategy. There is only talk of producing a strategy by November. Good luck with that given all the EU infighting. At this juncture I doubt the market will wait until November even if the EU could come up with a viable alternative to default (which it can't). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Why did Gold and Silver Plunge? No, It's Not CME Margin Hikes; What will the Fed do Next? Posted: 24 Sep 2011 01:17 AM PDT Many people have asked me to comment on the plunge in gold and silver. First let's take a look at the wrong answer: Case Closed: CME Hikes Gold, Silver, Copper Margins And there you have it: CME just hiked gold margins by 21%, silver by 16% and copper by 18%. Mystery solved.Sorry Tyler, wrong answer. Four Reasons for Metals Plunge
1. Fed Did Far Less than Expected The Fed did not do what everyone thought, which is to say something far more than "Operation Twist". As noted in advance, I explained why the Fed wouldn't do more than Operation Twist, in Six Things the Fed May Announce Tomorrow (But Likely Won't); Would Any of Them Matter? Gaming the Reaction. In short, the Fed did not print, or even threaten to print. Moreover the Fed committed to a strategy not through the end of this year, but all the way through June of 2012. Perhaps the Fed does more in the interim, perhaps not. For those expecting drama, the Fed's non-action was decidedly bearish for commodities in general, even gold. 2. Mutual Fund Redemptions Mutual fund cash levels are at or near record lows. In general, mutual funds were not prepared for the market selloff and sell orders came in. Rather than sell garbage like Bank of America at $6, mutual funds unloaded stuff like gold, taking profits. 3. Margin Calls at Hedge Funds Hedge funds unloaded gold and silver for the same reasons as mutual funds, but also because they mistimed the play and what Bernanke would do. Leverage works both ways. 4. China Growth Story Fading Commodities in general have been clobbered along with currencies of commodity producing countries because the global economy is slowing rapidly. As in 2008 there will be no decoupling. China is not a growth engine in any real sense of the word. Instead, China desperately needs demand from the US and Europe. Moreover, China is overheating and has a huge property bubble to boot, at precisely the wrong time. Commodities were set to plunge on the China story alone. Metals Volatility In the wake of increased volatility related to the above, the CME hiked margins. That likely added to the volatility but was not a fundamental "cause" of the plunge in precious metals. What will the Fed do Next? "Bay of Pigs" asks ... Mish, Any thoughts on what the FED will do next? I doubt they sit there and do nothing. Thanks Bay. That was a good question. This is why: 1. It is a single question, not five questions 2. It is a question on topic 3. It is a question I have not explained 10 times already 4. It is macro-based, not stock specific 5. It seeks an honest opinion rather than asking for something that may take hours of research Problems for Bernanke Market expectations were clearly for the Fed to do more. Goldman Sachs was shocked at the market reaction, I was not. See Goldman Surprised by Reaction to "Operation Twist" for details. The problem for Bernanke is every action he may take now has serious negative ramifications. Fort example, take Operation Twist: The flattening of the yield curve may (I doubt it) help mortgages by lowering mortgage rates. However, the flattening of the yield curve will without a doubt hurt banks struggling to make profits on spreads. The flattening of the yield curve also hurts those on fixed income as well as pension plans with 8.5% or so yield assumptions. The irony is pension plans might have gotten big returns had they been in treasuries, but they weren't because treasury yields were "too low". Instead, pension plans all plowed into foreign bonds, commodities, currencies, and global equities to make their 8.5% assumptions. So what is Bernanke to do? See Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending" for more on how the self-proclaimed student of the great depression is clueless about the current depression. Bottom line: The Fed is more or less out of bullets. Moreover, Bernanke admitted he does not know why his policies are not working even though it is perfectly obvious. When backed in a corner, Bernanke may conceivably try nearly anything. However, Bernanke is just not that desperate yet. Right now, European banks are at far greater risk than US banks so Bernanke may easily bide his time. Silver Daily Chart Silver, once again, is acting more like a leveraged commodities plaything than a currency.  I traded all my silver for gold on April 27, as noted in Taking Silver Profits - Swapping Silver for Gold. Gold is still higher than my swap point. At the time, I commented "I believe the price of silver is highly likely to revisit the low $20's at some point. Thus, I see no point in chasing silver higher here. Moreover, except for pure speculation, I see little reason to even hold silver in this spike." I really do not know if silver hits the low 20's or not, but I was not tempted by that previous decline to near $32. Had I bought it there, I made a mental sell at $40. Silver got all the way to $44 and to be honest I was wondering if it would take out my swap point. Silver breached $30 today. As I have commented many times, silver is a far riskier play than gold. I believe this volatility proves my point. CME margin hikes are not a cause of 40% collapse in silver from the top. No Hiding Places On September 19th I wrote No Hiding Spots Except Despised US Dollar: Equities Red, Metals Red, Energy Red, Grains Red No Hiding Spots Except Despised US DollarShort-term, I have been wrong about gold holding up. Then again, I really do not concern myself with short-term action. Moreover, gold is higher than it was the day I swapped it. The equity markets in general sure are not. Bernanke Will React It's a safe bet Bernanke will react, we just do not know when. Things may (or may not) get ugly for miners (especially silver) in the meantime. Those with cash, should be rooting for a selloff in gold and miners. In the meantime, hold a core position in gold. Take profits on big spikes and buy big dips. At some point that advice will stop working, I just do not think this is the time. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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