Eurocrisis Roundup

If I understood how to fix all this, I'd be the prime minister of the European Union (if such a job exists), king of Latveria, or secret chieftain of the Gnomes of Zurich, or some such prestige gig.

Though, libertarian ideologue that I am, I somehow suspect lessons involving not letting governments go all nutso-crazy with borrowed made-up money are to be found in and around this crisis. That's one of those unrealistic libertarian suggestions that involves government having not done the horrible thing libertarians told them not to do in the first place, and thus proves how libertarians are unrealistic and not worth listening to when it comes to a real crisis--you know, the kind of real crisis only not listening to libertarians can create. It's a dilemma.

But here's some bits of pieces to help you wallow in the gloom:

*The debt-swap bail out seemed to momentarily delight Wall Street!

The world’s major central banks unveiled a new strategy Wednesday to keep Europe’s debt crisis from choking off global lending, a dramatic step that comes as the availability of credit for businesses and consumers has shown signs of freezing up.

In an action that recalls the depths of the U.S. financial crisis three years ago, when global central bankers took coordinated steps to stem a worldwide panic, the U.S. Federal Reserve and five of its sister institutions agreed to supply one another with unlimited amounts of each country’s money at a reduced cost. Most immediately, this initiative means the European Central Bank can pump dollars into banks in the troubled euro zone at low interest rates.

The announcement, coupled with a separate move by China’s central bank to loosen bank lending, sent stocks soaring on Wall Street and in other financial capitals. The Dow Jones industrial average rose 490 points, or 4.2 percent, the strongest gain in more than two years.

*....which made supporters of "Occupy Wall Street" very suspicious and kind of bummed:

Every major bank in the world is insolvent, whether it be in the U.S., Europe or China. These Central Banks are owned and controlled by the very banks they are bailing out. They are telling you they have it under control. They do not. They have lost control. The debt is too great and will destroy the economic system of the world.

This is a last ditch effort by those in power to grab the last vestiges of middle class wealth. The stock market will soar today, benefitting bankers, politicians, and the 1%. They have solved nothing. The debt remains. The debt will not be paid.

Oil, food and commodity prices immediately soared on this announcement. Again, the wealthy will get richer and the average American will be destroyed by inflation on the things they need to live. The game goes on.

*The always-ornery folk at Zerohedge try to explain what's actually happening. It's long but worth reading in its entirety, especially given that I'm not at all sure I could paraphrase it with rigorous technical accuracy. Key political economy points (hint, and always a good hint: It's about the Goldman Sachs):

There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing.....Rating agency, Moody’s  announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman, making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.

Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to  $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )

Breaking that down:  JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government.....

Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital  it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure. 

Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.

But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.

In other words, moral hazard continues to crush the world, and, uh, End the Fed!

*Tyler Cowen defends the German position of "don't make us pay for everyone else's goddamn problem" as an intellectual exercise (that is, he's speaking for that perspective without openly claiming to agree):

When it comes to debt, the periphery countries simply don’t want to pay up.  Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece.  It’s amazing how many people won’t come out and utter or recognize this simple truth.  Italy for instance doesn’t have to make a huge fiscal adjustment.....Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.....

One clear warning sign of trouble is when you see “trade imbalances” put at the center of the argument, as if “being very productive” and “not being productive enough” were somehow the same kind of disease.....

 Another doozy is to think the problem is due to some weird German obsession with Weimar-era inflation, as if there is a need to apologize for an elderly uncle who went bonkers.  I would instead start with the simpler point that Germany does not want to transfer resources to countries which do not wish to pay back their creditors, and which will not commit to good economic policy in the future.

Gold and silver going not quite as crazy as I might have thought this week.

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  • ||

    Gold and silver going not quite as crazy as I might have thought this week.

    Which means either:

    (a) the central bank(s) are monkeying with their gold supplies;

    (b) investors think that the governments are finally ready to set their fiscal house in order to stave off the threat of inflation; or

    (c) investors think deflation is a worse threat because the economy is not improving the way the radio pundits and politicians claim it is.


  • ||

    I think the reason is that most of the speculative money that moves the precious metals market is now managed by hedge funds, which are in turn controlled by day-trading algorithms, which in turn seem to be pretty simplistic "risk on/risk off" things.

    Precious metals get thrown in with all the other "risk" commodities. So, when its "risk off", it doesn't really matter much that investments that hedge specific risks (inflation, currency instability) should be getting some action. The hedgies just dump it all.

  • ||

    Oh, yeah, plus the central banks continue their decade long manipulation of gold.

    Over the last ten years of the secular gold bull market, hundreds of billions have been lost on gold short positions, the kind of money that only a central bank can throw away.

  • ||

    The conspiracy theory I've heard is that they're shoveling their gold into the market, or at least promising their bank buddies that they'll "help" cover their deliveries, in the hopes of depressing the price.

    Audit Fort Knox!

  • ||

    I'm thinking about cashing in all my stocks and buying precious metal bullion. Which should I go for: Gold, silver, bronze, copper or palladium? I think gold is the most overhyped and the least useful of the above, but I'm just getting into metals trading so I don't know what I'm talking about. It would seem using a metal that has industrial demands and applications would be more in demand in coming years. I'm leaning palladium, but what do others here with more experience think?

  • ||

    gold and silver. Because they also act like money. copper is more like oil, which means it should do good, but not as good as gold and silver.

    also, oil is a good bet.

  • ||

    In that case, isn't silver a better bet than gold? I'm worried that gold has become something of a bubble and it seems like silver has more growth potential.

  • ||

    Silver has actually tripled in the past 3 years, and that's after falling almost 40% since April. That screams bubble too, unless you think something is fundamentally changing in the fiscal universe that would make such a spurt legit rather than bubbleicious.

  • Bam!||

    It's far easier to manipulate the silver market than the gold market, making it a more dangerous position.

  • wayne||

    Gold and silver are monetary metals, i.e. they have each functioned as money since the dawn of trading. Holding silver is not for the feint of heart, but it has done VERY well over the last decade. Silver also has many industrial (non-money) applications. Gold is less volatile and has done pretty darn well over the same time frame.

    Bronze, copper, palladium: all industrial metals and should rise and fall with inductrial demand, but none of them are "monetary".

    To my mind, the best hedge against monetary madness is gold.

  • ||

    Yeah, I know that's true re: traditional monetary metals. But what really matters more would be preserving value vs. the dollar, especially as gold and silver aren't really accepted as legal tender currently. That's why I was wondering if palladium or something would be a better investment, as it will grow scarcer with both investment demand against inflation and industrial demand.

  • ||

    Be very, very careful. Precious metals are volatile as hell. Rule number 1: no leverage. I don't speculate on precious metals (any more).

    I have some physical SHTF coins at home, and some paper positions and mining stocks that are very much long-term holdings.

    Silver, platinum group, base metals, etc. have industrial uses, which means they tend to track industrial demand/cycles.

    Even silver, the "poor man's specie", doesn't track gold consistently because of industrial demand.

    Gold is insurance, in my book, against currency mismanagement and devaluation.

  • ||

    One more thing:

    I'm pretty much a goldbug, I guess, because I think the current fiat currencies are pretty much doomed in the medium term. Even so, my total gold exposure is 10-15% of my net worth. The mining stocks are another 25%, and that is about as heavy as I am willing to go.

  • Cliché Bandit||

    I agree mostly. Gold, like a house you live in, is not an investment it is a hedge. When you lay a 5$ come bet and also a 3$ C/E bet you have hedged to place youself as close to even as possible so that you dont LOSE money (can still happen). the 3$ is there to make up for all the 5$ losses. Gold is the same thing against inflation. You can speculate if you like, just like buying a house in Las Vegas...but I wouldnt suggest it. Also, gold stocks (not etfs but mines) are investments but only cause you think their product will be in demand. Gold specie it the hedge (fuck etfs).

  • Cliché Bandit||

    Also, silver is great for "alternative" currency due to the fact it is lower value and easily recognized while buying some gum with 1/1800th OZ of gold can be difficult.

  • ||

    Unfortunately, silver is also easier to counterfeit. Gold counterfeiting is made infeasible by gold's high density which only tungsten and platinum exceed.

  • ||

    Depends on what you're planning to use it for. RC's analysis is pretty much spot-on as one would expect from someone with more experience in this stuff than I.

    All I can add is that if you're looking at speculation platinum might be attractive because its price is unusually depressed right now. It's significantly cheaper than gold which never happens historically speaking (probably due to the industrial use, primarily in catalytic converters, that RC mentions).

    If you're looking for a store of value in anticipation of a currency devaluation, silver and gold are probably better. Gold's obviously higher in value per ounce, which is an advantage for storage and transportation purposes, but also a disadvantage for transactional purposes. It's fairly hard to find anything smaller than 1/2 oz gold coins right now, and $850 is a pretty high minimum transaction amount. Yes, there will be money changers in such scenarios, but the change you get is certainly not going to be gold and might not be metals at all. Whereas an ounce of silver now is worth $30 which is a much more reasonable "minimum transaction". Junk silver (ie pre-1964 dimes and quarters) can be gotten for below spot sometimes, and the dimes are worth about $2 - $2.50 right now, which is even more manageable.

    If you're prepping for SHTF-type total societal collapse, I'm not even sure that metals are going to help much. Water purification supplies, antibiotics, guns and ammo are probably better "investments" in that scenario.

  • ||

    I want to sit out investing until the economy's more stable. I think with the coming Euro crash and monopoly printing presses I'd do better jumping out of the market after its nice but irrational recent run. I'd like to preserve my monetary value at least until that situation gets sorted out and true optimism returns, or until the economy crashes badly in a double dip and try to find the bottom.

  • ||

    OK, if you're planning on buying now and selling later in pretty much the same world we live in now, platinum is probably a good deal. If the economy recovers so will the auto manufacturing industry. Personally I'm not invested in it at all because I have strong doubts about the world returning to its former state.

    And of course I'm not an investment advisor, only a peanut butter entertainer. So take my pronouncements with crackers and milk.

  • ||

    I don't know much about the palladium market dynamics; it's been down somewhat this year after quadrupling from 12/2008 to 12/2010. Which could be good or bad, obviously.

  • ||

    I guess it's probably best to do a little more research and get a little of each.

  • cynical||

    Gold is good, but buy it in the form of pimp cups and chains.

    I'd like to see someone write a near future short story where the economy is ruled by former rappers and pimps because they had the largest supplies of gold once the SHTF.

  • ||

    The title is Timtebowister.

  • ||

    Tyler Cowan, the liberal's libertarian.

  • GHRTSY||

    Why do you think that the phrase "notional derivatives exposure" means what ZeroHedge wants you to believe it means?

  • Brian Doherty||

    While I certainly don't understand all or most or half of what one needs to know to play in the world of derivatives, I did have the impression that the size of the loss-risk in derivatives at least tended to rise with the notional size of the exposure, since the bets generally are based on some percentage of that exposure. If that's mistaken, then I misunderstood their implication.

  • cynical||

    " Every major bank in the world is insolvent, whether it be in the U.S., Europe or China. These Central Banks are owned and controlled by the very banks they are bailing out. They are telling you they have it under control. They do not. They have lost control. The debt is too great and will destroy the economic system of the world.

    This is a last ditch effort by those in power to grab the last vestiges of middle class wealth. The stock market will soar today, benefitting bankers, politicians, and the 1%. They have solved nothing. The debt remains. The debt will not be paid.

    Oil, food and commodity prices immediately soared on this announcement. Again, the wealthy will get richer and the average American will be destroyed by inflation on the things they need to live. The game goes on."

    Feeling some degree of agreement with something an OWSer said makes me :(

  • ||

    The problem with OWS is that even in the rare case when they correctly identify a problem, they don't have a coherent solution.

    I mean, the Tea Party wasn't great at hitting on fully coherent solutions either -- "get your government hands off my Medicare", anyone? -- but at least they had an inkling of what could be done to solve the problem.

  • ||

    what was that inkling?
    The Tea Party got co-opted by the republican establishment to the detriment of both TP and GOP.

    Here's one step that everyone should be able to agree on, a strictly non-partisan issue:
    prosecute fraud.

    It stands to reason that any group claiming to be "for the 99%" will have tremendous difficulty articulating a policy platform. A tent that big does not lend itself to the necessary consensus.
    But that is exactly the point. Things have (almost) devolved politically to the point where partisans will be forced to put aside temporarily their respective policy prescriptions for the purpose of demanding restoration of essentially non-partisan, common sense action.

  • Sevo||

    "Here's one step that everyone should be able to agree on, a strictly non-partisan issue:
    prosecute fraud."

    Unless that includes, oh, social security, it won't do a thing to help.

  • ||

    restoration of essentially non-partisan, common sense action.

    "common sense" means vastly different things to people coming from different perspectives. I don't think mass forgiveness of student loans is common sense at all, but it seems to be one of the few basic premises of OWS (gee, I wonder why? it's almost like a gathering of dogs would support banning leashes first and foremost).

  • explain plz||

    How can the global derivatives market be worth 700+ trillion, when global GDP is only around 60 trillion? WTF

  • ||

    does it even make sense to talk about global GDP?

    if the whole globe is "domestic" does this make martians our international partners?

  • Bam!||

    Notational value.

  • ||

    Ha! I read about 3 paragraphs before thinking "Geez! What's gold doing?!" and typing out into the address bar.

    So the last line of the story struck me as kind of funny.

  • Nike Dunk Shoes||



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