The Big Picture

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• Eliot Spitzer: “In retrospect, I wish we had put more people in handcuffs.”
• Central Banks’ Latest Move Shows Desperation
• Intervention Rally: Good, Bad or Ugly?
• 10 Mid-Week PM Rally Reads
• Coordinated Central Bank Action on Currency Swaps
• Ritholtz Slams Paulson, Lauds Judge for Denying SEC-Citi Deal
• When Will Housing Hit Bottom?
• IPO: Go, No-Go?
• Case-Shiller Bubbliciousness
• China to maintain tight monetary policy into 2012 – oh yeah?

Eliot Spitzer: “In retrospect, I wish we had put more people in handcuffs.” Posted: 01 Dec 2011 01:30 AM PST Visit msnbc.com for breaking news, world news, and news about the economy FULL TRANSCRIPT: ELIOT SPITZER: There was an amazing piece of journalism that came out yesterday which analyzed the magnitude of the loans that have been made by the feds to the banks. The six big banks in particular got over $400 billion of secret loans, most of which we had not heard about. Now, at the time these banks were getting these loans, they were claiming to be in great financial shape. So why were the loans made? Is there a tension between the public statements being made by the CEO's of the banks– DYLAN: Let's stop there. It's very clear there's an anecdote, Bank of America, we can reference all these things, where those bank CEO's are saying explicitly, 'this is a sound financial institution,' at the exact moment that they are drawing against the U.S. taxpayer at its central bank, into the hundreds of billions of dollars, now we are learning, going into the trillions. What is the answer to that question? Which is, can I go out and say that and do this? ELIOT SPITZER: The answer is no. And if you or I did that, if you or I went to a bank – DYLAN: Or went to our shareholders. ELIOT SPITZER: Or made any public statement, knowing it to be false, we'd be in handcuffs. So the question I have is, look, we don't know a lot of these facts. Let's predicate — there are 100 uncertainties, but where is the inquiry right now about all the statements being made by the CEO's, CFO's none of which revealed these enormous loans. DYLAN: Let me ask you a question to play devil's advocate. Is there integrity in my saying, as the CEO of Bank of America that my financial institution is healthy, knowing that I've got, let's say $80 billion out to the Federal Reserve, because it is healthy, because I have $80 billion from this Federal Reserve? ELIOT SPITZER: It depends where and when and how those loans were made. If, at the moment you went to the Fed and said, we know we've got a mortgage overhang, because our mortgage exposure is $2 trillion, and therefore we're insolvent and we're illiquid, "help!" And at that very moment, you're saying, we're a stable, sound institution, yes, you're misrepresenting in a way that's fundamentally actionable and should be the subject of civil and perhaps criminal investigations. SUSAN DEL PERCIO: But when you talk about, for example, civil action, or even if you're looking to prosecute, as Attorney General, you went after a lot of these folks. And you settled a lot of cases. And some of them settled because they didn't even want to have the PR that you were investigating. But now maybe in retrospect or if you were giving an Attorney General advice now, would you look and say, maybe we should show that there are serious consequences. Because the fines were really just a matter or a cost of doing business. Would you look at it differently now? ELIOT SPITZER: Yes, well, we brought more cases and that's why I lost a few friends along the way on Wall Street, which was unfortunate, but the reality and so be it. The decision by Judge Rakov yesterday to throw out and reject the SEC settlement, because he said not enough facts were presented to the court, and this notion that banks will be permitted to say "neither admit nor deny," as though somehow, yeah, we'll pay the fine, but really we did nothing wrong, that should come to an end. SUSAN: But it's a settlement? ELIOT SPITZER: No, he rejected the settlement. Judge Rakov said, we're beyond the point where recidivist institutions that time and time again, and when I started doing this back in '98, we brought some big cases and said, "okay, you've got a problem, are you going to learn?" And they said yes. In retrospect, they haven't. No question about it. In retrospect, I wish we had put more people in handcuffs. I don't mind saying it, because the banks didn't learn the lesson. Judge Rakov, arguably the most important person in the capital markets right now, because he has set a new bar. He has done something critically important, to say, I won't let you just internalize as a cost of doing business through fines and other small reparations massive structural fraud. And I think what he is doing redefines the way the SEC will have to operate, justifies a lot of the aggressive stuff we did. I'm all for it. My hat goes off to Judge Rakov. He's a critically important guy. DYLAN: Were you to be Attorney General today, what would your view be of either prosecuting or investigating Jon Corzine or MF Global relative to the blending of firm assets and customer assets? ELIOT SPITZER: Let me be careful here for the following reasons. John has been a friend. I've always liked him. I want that to be out there, full disclosure, which is a critically important thing in every domain. I still have a hard time believing that John ever would have sanctioned using customer segregated money, the money that is in customer accounts to cover margin calls for MF Global. If that happened, people should go to jail. It is simply not acceptable. Now, there may be paperwork that permitted them to dip into those funds, if it was properly collateralized. This moment of crisis, it's hard to see how that happened. I think John is an honorable guy, he's an aggressive trader. I don't see how you can be leveraged 44 to 1 and be betting on sovereign debt in Europe. Leverage is great on the way up, not so good on the way down. I don't get it as a business model, but I think we have to wait and see how the facts come out. JIMMY WILLIAMS: So, all right. so we give these banks the money, right? and then we tell them, in TARP. — now, there's all this other new stuff. DYLAN RATIGAN: TARP was the tip. TARP is what we tossed them as the tip. It's what you tip them at the garage — that was a $700 billion — the was just the side money so you can go to a party. JIMMY WILLIAMS: So we gave them more. The whole point was, all right, you've got to go and go loan this money out. ELIOT SPITZER: Right. JIMMY WILLIAMS: I would be — I would be interested in knowing how much money was loaned out. DYLAN RATIGAN: We do know. The lending was off the cliff, down. JIMMY WILLIAMS: So why aren't we forcing them to do refinancing of mortgages? ELIOT SPITZER: you're asking — i know, behind that innocent question, right. You're asking the question that goes to the heart of my grievance with Tim Geithner from the very first moment. It was that night we needed to solve the institutions and the solvency of our nights, it was that we got nothing back. He never once said, we will save you if you agree to reform the system, solve the mortgage crisis, lend to small and medium-sized businesses that will create jobs. There was never any of the conditionality that we do. The IMF has done it for 30 years with every other country in the world. Tim knows that. He was there. I don't get this. KAREN FINNEY: So just quickly, speaking about the IMF, and it makes me think of Europe, and we know that, I guess my question would be, can you talk a little bit about what you see happening on the horizon with Europe? And what is the exposure of the American banks and should we expect that all over again, we're going to have a crisis should they go into crisis? ELIOT SPITZER: You're asking me? I have no idea. I'll be the first one to tell you, I don't have the foggiest idea what is going to happen in Europe. I see the stock market here gyrating up and down, 400 points either direction, because somebody makes an offhand comment and things are good, things are bad. DYLAN RATIGAN: Can I ask you a specific question to that end? I have not been able to find a single human being in the world who can tell us what the risk is in Europe, for the simple reason that the risk marketplace, which is the credit default swap market, exists in secret, and it is mathematically impossible for you or anybody else to define what the risk is! ELIOT SPITZER: Dylan, there was a great article by Gretchen Morgenson about two or three Sundays ago in The New York Times where she dug into the credit default swap market,and how the market is looking at these various sovereign debt issues, and what she found is that the committee that determines whether there's been a technical default that would trigger the obligation to pay has determined that the 50% write-down isn't a default. DYLAN RATIGAN: Oh, I know. ELIOT SPITZER: They said, oops, we don't want to pay. DYLAN RATIGAN: The point is the actual system by which we are managing our global risk, because it's done in secret – ELIOT SPITZER: Correct. DYLAN RATIGAN: It is impossible for the biggest and most powerful banker in the world to be able to know what the risk is, correct? ELIOT SPIZER: Yes, but here's another measure. Put credit default swaps aside for a moment. If you look at the actual interest rate that's now being paid by the Italian government, it is poking through 7%. That's not sustainable for a government. When you begin to see Italian Spanish debt hitting that level, crisis is afoot.

Central Banks’ Latest Move Shows Desperation Posted: 30 Nov 2011 10:00 PM PST Latest Move Shows Desperation The coordinated swap line bailout by the Federal Reserve Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank- and China's reduction of reserve requirements by .5% – shows desperation. (For background on swap lines, see this, this and this.) The Street notes: Don't get flustered by the terminology of "dollar swap lines" above. Here's a more simple explanation: Central banks around the globe have acted in desperation to boost liquidity in the system, which has sparked a rally in equities. In a separate article, The Street points out: What's great for the banks isn't so good for everyone else, though. Investment strategists already are noting the desperation of the move, adding that flooding the banking system with liquidity doesn't do anything to solve the real problem of ballooning, unmanageable debt levels. Ron Paul said today: The Fed's latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed's independence should reevaluate the Fed's supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis. Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing. The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending. Citizens the world over deserve better than this. They deserve sound money that cannot be manipulated and created out of thin air by central planners who promise printed prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure, we need real monetary reform. We need sound money. As I noted last year: Ron Paul points out that the Fed opening its swap lines to Europe violated its promise to Congress not to do so. Paul also says the bailout will help lead to the destruction of all fiat paper currencies, ensuring that "gold will rule the roost". *** Many have predicted that it is only a short-term measure to kick the can down the road. But the numbers themselves show that the bailout might not even be having a sufficient short-term effect. For example, as the following Euro to Dollar chart shows (courtesy of Finviz), the Euro rallied, and then sunk back almost all the way to it's pre-bailout level today: [And see this.] (The Euro's rally against the Japanese Yen didn't last very long, either. And Morgan Stanley's Stephen Hull thinks any rally in the Euro will be short-lived, anyway.) As Bloomberg notes, bank swap and libor rates show that the bailout might not be enough to stem the sovereign default crisis: Money markets and the cost of protecting bank bonds from losses show investors are concerned the almost $1 trillion rescue plan announced by European leaders may not be enough to contain the region's sovereign debt crisis. A credit-default swaps index linked to European banks that usually trades tighter than an investment-grade benchmark is 30 basis points higher, according to CMA DataVision. A measure of banks' reluctance to lend remained three times higher than it was in March. *** The difference between [libor] and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement. The rate advanced to 18.83 basis points, from 18.11 at the end of last week and 6 basis points March 15. Morgan Stanley emerging market strategist Rashique Rahman says that – even after the bailout – Europe's troubles are growing: Liquidity provision or not, sovereign credit risk has not gone away. Our work suggests ongoing deterioration of DM sovereign creditworthiness going forward, manifested by further downward credit rating pressure. Additionally, the transference of periphery Europe indebtedness to that of core Europe via the stabilization fund – and further, via ECB purchases – bears very close monitoring. Contamination to the core (of DM) lies at the heart of contagion for EM – which again is manifested through DM funding market stresses. Nouriel Roubini told Bloomberg that the bailout is not a cure-all: The implications of the plan require fiscal austerity and higher taxes, damping growth and possibly extending economic hardship, Roubini said. "In the short term, raising taxes and cutting spending is going to imply further recession and further deflationary pressures in the euro zone," Roubini said. Greece, Spain, Portugal, Italy, Ireland and other members of the euro zone may struggle to comply with the fiscal requirements and to restore competitiveness after years of an appreciating euro boosting growth, Roubini said. Euro zone countries' ability to act may be hindered by divided governments such as the U.K.'s hung parliament, German Chancellor Angela Merkel's weakened clout, and the continuing protests in Greece, he said. In the longer-term, Simon Johnson points out that the bailout creates huge moral hazard risks: This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit. The Europeans promise to unveil a mechanism this week that will "prevent abuse" by borrowing countries, but it is hard to see how this would really work in Europe today. *** The European Central Bank intervention and this package raise enormous moral hazard issues. The ECB's management was forced into this kicking and screaming. It was only when they realized that the whole euro zone financial system was at risk of collapse that they threw the kitchen sink at the problem. This can now go two ways: either they tighten fiscal policy across the eurozone, and introduce much more rigorous and enforced rules on deficits and profligate credit through banks, or, they let a system persist which is another "doomsday machine" that will live again to grow, and could one day topple them. And Johnson notes that the bailout might for even more painful decisions in the long-run: As Willem Buiter (formerly Bank of England, now at Citigroup) remarked last week, you have the greatest incentive to default when you are running a balanced primary budget (i.e., after substantial budget cuts) and still have a large government debt outstanding. His point is that the incentive structure of these programs means they will postpone a decision to default which would otherwise be rational now. *** The underlying fiscal problems in Europe could fester – and the "rules" designed to limit moral hazard may turn out to be a complete paper tiger. In that case, the Europeans again have to make a fateful decision: Do they try to inflate out of the debt burdens of their weakest member countries; or do they instead try to manage selective default, keeping in mind that most Greek debt at that stage will be held by other eurozone governments. As Yves Smith notes: The real problem is that there appears to be no impetus towards a longer term solution. How do solve imbalances within the eurozone? Without a plan to develop a plan on that front, this simply rearranging the deck chairs on the Titanic. Of course, the myriad fraudulent schemes (using derivatives and other means) to hide the problems of Greece, Italy and other countries are still continuing to some extent. And the size of the too big to fails means they can take down companies or nations using high-frequency trading, short-selling, credit default swaps and other means. Indeed, Jim Rickards argues that the bailout won't really help because "Goldman can create shorts faster than Europe can print money". Therefore, without fundamental reform of the financial system, there can be no true and lasting European recovery. Indeed, the fact that China coordinated its big cut in reserve requirements on the same day that the big Western central banks and Japan extended swap lines shows the magnitude of panic among world economic leaders. Is history repeating? But At Least a Handful of Insiders Will Make Out Like Bandits Jim Quinn writes: When you see such coordinated action by all the major Central Banks in the world, you know the situation is much worse than you are being told by the ruling oligarchy. The confidence and trust is gone. 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. Indeed, just as with Hank Paulson's little tip to the big boys – which is nothing new – some insiders probably made a killing by being tipped off about the swap lines. See this and this. This isn't a financial crisis … it's a bank robbery.

Intervention Rally: Good, Bad or Ugly? Posted: 30 Nov 2011 05:30 PM PST At times, I have described Good News as Bad — meaning that is could encourage the Fed withdrawing its accommodation, raising rates, pressuring margins, earnings and equity prices. Today’s coordinated central bank intervention is the opposite: A Euro-zone bank on the verge of collapse prompted this extraordinary action. So this a case where the news is so Bad it becomes Good for stocks: The financial system is so (choose 1 or more) vulnerable / compromised / inter-related / fragile that it required the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank to coordinate a joint liquidity event. So Bad News (near collapse) becomes Good News (equity rally). The volume was so-so, except for the end of month/quarter buy on close surge; Monday’s volume was light as well. So this runs to 1250, maybe even 1300. Does it have legs? Will the surge suck the traders in (or trade the suckers in?) Of course, these actions reflect the underlying weakness, and adds to the eventual bill to be paid (interest and penalties continue to accrue). But tonight, we drink !

10 Mid-Week PM Rally Reads Posted: 30 Nov 2011 01:45 PM PST My afternoon train reading on this day when stocks had their biggest rally since March 2009: • Central Bank Intervention Round Up: …..-Welcome to the Great Global Easing (Fortune) …..-Pain Killer, Not Cure (WSJ) …..-Bank Intervention Raises Questions (Forbes) • On Wall Street, Some Insiders Express Quiet Outrage (Dealbook) • For S.E.C., Court Ruling on Penalties Ties a Hand (NYT) • The Personal Computer Is Dead (Technology Review) • Stress kills, so try a new action-meditation (Market Watch) • Dallek: Kennedy, Reagan Loved for All the Wrong Reasons (Bloomberg) • Standup Comity (The Morning News) • Slice of Life: a Quest to Try All the Pizza in the Big Apple (WSJ) • When Apartment Rents Climb, Landlords Can Say 'The Computer Did It' (NYT) • The Math Changes on Bulbs (WSJ) What are you reading? > Masters of the Universe, Unite! End the occupation, free Bernie Madoff, and leave Wall Street alone. Source: Khalil Bendib

Coordinated Central Bank Action on Currency Swaps Posted: 30 Nov 2011 01:28 PM PST The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice. As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013. Federal Reserve Actions The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly. U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses. See also: Bank of Canada Bank of England Bank of Japan (PDF) European Central Bank Swiss National Bank (PDF) Frequently Asked Questions: Foreign Currency Liquidity Swaps

Ritholtz Slams Paulson, Lauds Judge for Denying SEC-Citi Deal Posted: 30 Nov 2011 01:00 PM PST Source: Crony Capitalism Report: Ritholtz Slams Paulson, Lauds Judge for Denying SEC-Citi Deal Aaron Task Daily Ticker, 11/30/11 http://finance.yahoo.com/blogs/daily-ticker/crony-capitalism-report-ritholtz-slams-paulson-lauds-judge-193542241.html

When Will Housing Hit Bottom? Posted: 30 Nov 2011 11:00 AM PST Source: Home Prices Fall to 2003 Levels; When Will Housing Hit Bottom? Morgan Korn Daily Ticker, 11/30/11

IPO: Go, No-Go? Posted: 30 Nov 2011 09:30 AM PST Interesting chart via the WSJ about IPOS — which often capture the public’s attention, despite their being less than reliable investment: A dollar invested in Amazon.com's 1997 IPO would today be worth about $140. A dollar invested in Webvan would be worthless. Here's a look at some of the high-fliers and flame-outs of the Internet era. Share prices are adjusted for splits and reverse splits. > Click for interactive chart: Source: Window for 2011 Deals Set to Close WSJ, November 28, 2011

Case-Shiller Bubbliciousness Posted: 30 Nov 2011 08:00 AM PST “It’s a little known fact,” as Cliff Clavin would tell us, “that the first city to have its housing bubble burst was Boston.”  How appropriate, eh? Since no one lives in either Composite10 or Composite20, below is a portion of a spreadsheet I maintain chronicling the popping of the bubble (this is on a NSA basis) in each of the 20 metro areas.  Boston kicked things off in September 2005 (peak cells shaded with green), and city after city crested and began its decline over the next two years, ending with Charlotte in August 2007.  (Green text signifies an uptick from the prior month, red text a downtick.) The last row — beneath the yellow line — is the most recent CS print.  It’s interesting, still, to see the most recent prints versus the peak values. (Click through for ginormous — necessary to really see the numbers) (Source: S&P Case-Shiller.  All cities indexed to 100 at January 2000)

China to maintain tight monetary policy into 2012 – oh yeah? Posted: 30 Nov 2011 07:55 AM PST Kiron Sarkar is an investor and advisor in London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets. ~~~ More grim news (with sharply lower equity markets) from China. My friend, Ari Merenstein (whose analysis is amongst the best I’ve seen) summarises it impeccably – the Chinese may have left it too late to embark on monetary easing – by the way, I would bet that monetary easing is inevitable, even though a Central Bank adviser suggested that tight monetary policy will continue next year. However, my friends at Brown Brothers Harriman suggest that Mr Xia Bin’s (the PBoC adviser) comments seem to have been misinterpreted. Just when the Euro Zone seems to be coming to a sort of conclusion (I’m still uber cautious – it’s the Euro Zone/ECB/EU after all), China pops up. Bad news for the A$ and the miners – my way of playing a short China strategy + global markets generally. Exports to Europe, from China, are collapsing, shipping sources report- no great surprise and don’t expect a recovery any time soon. The Shanghi markets closed down 3.3% today; The FT reports that Indian companies are facing difficulties, indeed a number of companies are defaulting on their forex loans – apparently they have mismatched forex borrowings with Rupee assets. Classic economics 101 is DON’T DO THAT – must not have been translated into Hindi. India’s GDP growth slipped to 6.9% (on an annualised basis) for the Q to September – the first time GDP has been below 7.0% since June 2009. I regret to say, I cant see the upside – unfortunately more downside – don’t forget, when my Indian friends get worried (as they are right now), watch out. Cant see the RBI maintaining its tight monetary policy, though inflation (currently, the fastest in the BRIC’s) is nowhere under control. Indian Rupee – not quite as bad as the (likely, soon to be introduced) Drachma, but……; Mr Noyer a French member of the ECB – soon to have a colleague appointed to the ECB board, reports that the economic situation in Europe has worsened significantly over the last year. Sacre Bleu – quelle surprise – I think not. However, the much more important issue is that Mr Noyer, his colleague and a host of other ECB voting members are going to vote for – you guessed it – ECB bond buying/QE and, in due course, assuming much tighter and verifiable fiscal controls within the Euro Zone (including penalties for non compliance), will be supportive of EURO BONDS; Greece is to get its next tranche of aid by mid December, reports Mr Junker. Well yes, but, as usual, expect the usual Greek dramatics the next time around. At some stage, the chances that the Euro Zone will pull the plug, is pretty high, I would have thought – and rightly so. Greece is simply not worth the trouble and will never play ball; Mr Regling, the head of the EFSF suggests that it is impossible to provide a number for the size of the (non bazooka) EFSF – not impossible, Mr Regling, just that it’s nowhere the amount initially suggested. The Dutch talk about 2 – 21/2 times leverage by the way – the trend is clearly that the “firepower” of the EFSF is heading southwards. The hottest telephone line is that between the Euro Zone as a Ms Lagarde at the IMF. Personally, I continue to believe that the IMF will become involved, in spite of a number of you being tres/uber (my linguistic skills end there) sceptical. By the way, check out Barry Ritholtz’s Big Picture site. Included is an article which sets out, in chart form, how the EFSF works. You will then understand why I am totally, absolutely, fundamentally….sceptical – reminds me of a Greek budget plan – OK hands up, totally uncalled for; Great article my Ambrose Evans-Pritchard in the Telegraph. To summarise, Euro Zone money supply is tanking – the 3 main indicators, M1, M2 and M3 are declining in absolute terms, particularly in Southern European countries. M3 is closely watched by the ECB – apparently it has contracted by E59bn to E9.78tr – banks are contracting their balance sheets, basically. M1 in Greece on an annualised basis (using the last 6 months data) is down 20.7%, 16.3% in Portugal, 11.8% in Ireland, 8.1% in Spain and 6.7% in Italy. Forcing banks to recapitalise (when they cant access equity capital) has its consequences in adverse market conditions. Deutsche Bank reports that deleveraging could reach E2tr over the next 18 months. For those loonies out there who worry about ECB QE raising inflation, look at these numbers. I repeat, follow guys like AE-P and James Ferguson whose article in the FT the other day, explained quite clearly why QE in the Euro Zone by the ECB would not be inflationary; Fantastic article by Martin Wolf in the FT today re the Euro Zone. He advocates a CREDIBLE commitment to halt contagion – Germany please note; the Euro Zone must have policies for economic growth and adjustment – Germany please note; and longer term reforms are necessary, though not if Germany insists on fiscal discipline, above all, in all that matters – Germany please note. He concludes that the Euro Zone has a “choice between bad and calamitous alternatives” – too true mate. To be fair, Germany seems to be getting it right now (I suspect because they can see that markets are and, unless they do something, beginning to target them – self interest is a powerful motivator). I for one, would suggest that Mrs Merkel hire Mr Wolf asap – she desperately needs advice. Having said that, recent actions by Mrs M suggests to me that she is getting it and, furthermore, is being practical – a number of informed individuals advise me that she is practical, clever and purposeful. Recent actions confirm that, I accept. As I have repeated, never underestimate the Germans when they get it and then pursue an agreed policy; Interestingly, German October retail sales rose by more than forecast in October (+0.7% from September, as opposed to the just +0.1% expected). Good news, but German consumers are notorious for being ultra cautious at the first sign of a slowdown – and boy oh boy, one’s coming; Have had time to review the UK Autumn Statement – bleak news – another 5 years of austerity – basically porridge, rather than strawberries and cream at Wimbledon. Growth just +0.7% next year (likely lower), from just +0.9% this year. 2014/5 budget deficit to be +4.5% (the first time its below 5.0%), whilst overall debt to GDP will rise to 94% – previously 87% (credit downgrade looks a near certainty). More than Sterling 111bn of additional debt, than forecast, will be incurred. Oops. The Government is to tighten further, though in future years. QE, currently at Sterling 275bn, will clearly be increased (my forecast Sterling 500bn) and has been well signalled by the BoE, though the BoE reported that it cannot buy more gilts than it does at present, given supply issues. As a result, the next increase in QE is in Feb/March next year – the current Sterling 75bn ends in February next year UK consumer confidence is at a 2 1/2 year low; Threats of downgrades to the whole Euro Zone, the US (Fitch), the UK etc, etc. A simple question, which counties will be AAA rated at the beginning of 2013?. Furthermore, numerous banks have been downgraded by S&P, both in the US and Europe – no great surprise. Moodys is warning as well. S&P has changed the basis it looks at ratings – it’s more downbeat on US and European banks, given Sovereign debt issues, and more optimistic on banks in Latin America and Asia; European markets have opened lower. The Euro, well its lower, below US$1.33 – basically, same old, same old. In spite of all the problems, Oil remains well supported. I appreciate that Saudi Arabia has advised that it will not increase production (Saudi Arabia needs high Oil price to pay for the bribes it has offered to its citizens to avoid social tensions). Internet playing up again. Better finish this off, before I get yet another power cut/total Internet failure here in Goa. However, still buying on dips !!!!!

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