Paulson Sells Gold ETF, Buys Physical Bullion? Soros Not Gold Bearish

Commodities / Gold and Silver 2011 Nov 16, 2011 – 09:58 PM

Gold is trading at USD 1,768.20, EUR 1,305.30, GBP 1,113.30, CHF 1,620.20 , JPY 136,076 and CNY 11,223 per ounce.
Gold’s London AM fix this morning was USD 1,765.00, GBP 1,113.99, and EUR 1,302.39 per ounce.

Gold has fallen 0.6% in US dollars to $1,768/oz but is flat in the beleaguered euro at €1,306/oz. Volatility and sell offs in equity and European bond markets appears to be contributing to gold’s failure to rise through the $1,800 level. Europe’s ability to tackle its growing debt crisis is in serious doubt which is leading to renewed risk off sentiment and short term gold weakness.
Gold will be supported by its proven safe haven status, but is prone to short term weakness due to sell offs in the wider financial markets. Sentiment remains very fragile which will lead to continuing safe haven demand which shall support gold in the medium and long term. Especially as the official policy response is inflation and the currency debasement.
The gold ETF SEC filings were released overnight and make for interesting reading.
Known Gold Holdings by Exchange Traded Funds/ Trusts Worldwide

Paulson & Co., the hedge fund founded by billionaire John Paulson, cut its stake in the SPDR Gold Trust to 20.3 million shares in the third quarter from 31.5 million as of June 30. The firm remained the largest holder.
Paulson & Co. sold a third of their SPDR holding which is quite a large liquidation. However, Paulson remains bullish on gold as was seen in positive comments he made recently so it would seem likely that this sale may have been an effort to raise cash after his fund suffered sharp losses in the last quarter. Some hedge funds sold the ETF to cover losses during a rout that erased $7.8 trillion from the value of global equities since May.
Given Paulson’s expressed bullishness on gold, his fund may have opted for allocated accounts as was done by David Einhorn.
The SEC filings also show that billionaire investor George Soros increased his stake in the SPDR Gold Trust. Soros’ gold ETF sale was latched onto by gold bears and some advisers to warn that gold was a risky bubble.
Soros Fund Management LLC held 48,350 in the SPDR Gold Trust as of Sept. 30, compared with 42,800 shares at the end of the second quarter.
The increase in Soros gold holdings are meager at some $10 million worth but suggest that Soros is not as bearish on gold as the multitude of news headlines, regarding his comments regarding gold being “the ultimate asset bubble”, would suggest.
Soros added 145,000 call options and 120,000 puts in SPDR Gold in the third quarter. This confirms that Soros is not as bearish on gold as some would have us believe.
There is also the real possibility that Soros’ fund, like other hedge funds, may have opted to own allocated bullion rather than a gold trust. Some hedge funds have opted for allocated gold bullion due to it being more discreet with a lack of disclosure (no quarterly filings), due to the lower long term costs and due to allocated accounts having less counter party risk than a trust with many indemnifications.
Steven Cohen’s SAC Capital Advisors LP and New York- based Touradji Capital Management LP established gold positions in the third quarter. SAC Capital, which manages $14 billion and is based in Stamford, Connecticut, held 184,601 shares in the SPDR Gold Trust as of Sept. 30. Paul Touradji had 45,000 shares compared with none on June 30, the filings show.
Total holdings in exchange-traded products backed by gold reached a record 2,330 metric tons on Aug. 18 and stood at 2,312.3 tons yesterday.
Many hedge funds are likely increasing allocations to gold but are opting to do it through safer means, such as allocated accounts, rather than the gold trusts.
This has important implications for the gold market as it means that some of the allocations of the massively powerful hedge fund industry to gold may not be realized or accounted for.
The Paulson redemptions also show up the ridiculous notion that selling by any one individual or institution, no matter how large or wealthy, could bring an end to gold’s bull market today.
In other gold news, Venezuelan Central Bank President Nelson Merentes said his country will receive its first gold shipment within 15 days as part of President Hugo Chavez’s decision to repatriate its gold reserves held abroad.
“Tomorrow we sign the contract and we’ll have the first shipment of our gold in the country within 15 days,” Merentes said at an event with Chavez broadcast on state television.

How Do we Solve the Eurozone Crisis, Where Is the ECB Printing Press?

Interest-Rates / Global Debt Crisis Nov 16, 2011 – 09:55 PM

Europe remains the focus of markets, and rightly so. But the picture is not as clear as one would like. Different analysts point to different problems – if only this one problem could be solved, then all this would go away, they tend to say. Sadly, it is not one problem but three that must be solved, and none of them is easy. In today’s letter I try and offer a basic primer on the problems facing Europe. My challenge to myself is to do it in a short piece rather than the book-length tome it could easily become. Thus, in the pursuit of brevity, we will not be as in-depth as usual, but I think it helps us to step back a few feet and look at the larger picture before we focus on minutiae.

Where Can I Find €3 Trillion?
First, for the record, the European issue is not a crisis of confidence, as Merkel and Sarkozy, et al., keep telling us. It is structural. And until the structural issues are dealt with, the problems will not be solved.
The first problem facing Europe is the glaring sore thumb: there is simply too much sovereign debt in Greece, Ireland, Spain, Italy, Portugal, and Belgium. That is not news. What has yet to be absorbed by the markets is that the cost of bailouts, present and potential, is likely to be in the €3 trillion range, talking an average of the estimates I have seen (with the Boston Consulting Group suggesting €6 trillion). €3 trillion is not pocket change. Indeed, it is a number that is inconceivable in scope.
Greece has been told that they can write off 50% of their debt held by private entities, but not that owed to the IMF, ECB, or other public entities. This means something more like a 20-30% haircut on total debt. Sean Egan suggests that eventually Greece will write off closer to 90%. That is a number that cannot be contemplated in polite European circles, as it is plenty enough to cause a serious banking crisis.
And that is before we get to the rest of the problem children. Portugal will need at least a 40% write-off (probably more!). The Irish are going to walk away from the bank debt they assumed in the banking crisis. While on paper Spain looks like it may survive, in reality it has significant problems in its banking sector. If they move to insure the solvency of their banks, their debts become unmanageable, not to mention that their debt grows each and every month from the rather large deficits they run and seem totally unwilling to try to reduce. The Spanish government deficit is likely to be at least 7% next year, well above their target of 6%. The “semi-autonomous regions” are in deep trouble, and their citizens are leveraged due to excessive real estate exuberance. Unemployment across Spain is 21%, and for the young it is over 40%.
The Spanish government has adopted the rather novel idea that if it doesn’t pay its bills then its deficit will not be as large and therefore they can get closer to meeting their targets. Yields on Spanish debt are about 1% lower than on Italian debt, but give them time.
And then there is Italy. Italy is simply too big to save. Yes, it looks like Berlusconi is leaving, but he is not the real problem. The problem is a 10-year bond yield at 7%, when your debt is 120% of GDP and growing. Italy is likely to be in recession soon, which will only make the problem worse. A drop in GDP while deficits rise means that debt-to-GDP rises faster. That means interest-rate costs are rising faster than (the lack of) growth in the economy. The deficit is a reported 4.6%. By contrast, Germany’s is 4.3%. But the difference is the debt. The market realizes that if you grow debt by 5% a year, it will not be but a few years until Italy is at 150%. There is no retreat without default from such a number, and the markets are saying, “We’ve seen this movie before and the ending is not a happy one. We think we’ll leave at intermission.”
The ONLY reason that Italian yields have dropped below 7% is that the European Central Bank has been buying Italian debt “in size.” Any retreat by the ECB from buying Italian debt and Italian yields shoot to the moon. Italy will need to raise close to €350 this year, including new debt and rollover debt. The higher rates will put even more pressure on the deficit.
Debt, whether it is with an individual, a family, a city, or a country, always has a limit. Debt cannot grow beyond the ability to service the debt. That is the clear lesson of Rogoff and Reinhardt’s epic work, This Time Is Different. When that limit is reached, the debt must be restructured in some way, either with better terms or through some sort of default.
Mediterranean Europe simply borrowed more than it could pay, given the cash flows of the various countries. And now we are at the Endgame. How can one deal with the debt?
The best solution is to figure out how to grow your economy faster than the growth of debt. Over time, debt service becomes a smaller part of the economy. But Southern Europe does not seemingly have that option. Certainly not Greece, Portugal, or Spain; and this week we learned that Italian production was off 4.8%. Europe, even Germany, is slipping into recession.
Germany is in the position of wanting the problem countries to cut their deficits through something called austerity. And living within your means is hardly a novel idea. It makes a great deal of sense. But when you are a country in recession and have to cut back, it only makes the recession worse for a period of time. Asking Greece to cuts its deficit by 4% a year for 4 years to get to something closer to balance means that the Greek economy will shrink by at least 10%, if not more. Tax revenues, never on solid footing, will shrink, making the deficit worse. How do you ask people to willingly enter into a pepression for a rather long time in order to pay back the banks, even if the debts were freely taken on by the government and the money spent on the populace, and even if the haircuts are 50%?
Yes, if Greece leaves the euro that means they will also have a depression. No one will lend them money for at least three years. Their banks will be insolvent, their pension funds destroyed. Their ability to buy needed materials (like oil, medicines, etc.) will be limited to the amount of goods they can produce and sell. Government employees will be forced to leave jobs, as there will be no money to pay them. Those on government pensions will get a fraction of what they were promised. Going back to the drachma will be painful in the extreme. Just as staying in the euro will be painful. Greece has no good choices.
There are those who suggest that Europe is demonstrating the failure of the socialist welfare state. And there is some reason to say that. But I don’t think the socialist welfare state is the cause of the debt crisis. One can have a welfare state without debt, if you are willing to run a sensible budget. Think of the Scandinavian countries.
And you can have countries without much social welfare get into debt problems. There are plenty of examples in history. Amassing large amounts of debt is a national problem that has as much to do with character as anything else. That is true for families or for countries. It is wanting to spend for goods and services today and pay for them in the future.
Debt has its uses. Properly used, it can be of great benefit to societies and families. People can buy homes and tools that can be used for the production of goods, build roads and other infrastructure, etc. But debt cannot be allowed to become the master of the budget or the source for current spending, again whether for families or countries. And Greece and its fellow countries have used debt to fund current spending and now have run up against the inability to borrow more at sustainable levels.
The easy answer is to cut spending. But when you cut back spending, even borrowed spending, it is going to affect GDP. It is something that may have to be done, but it is not without consequence. Ireland, a small country of 4.2 million people, just paid close to €1 billion to service debt that it owes for taking on the debts of its banks that went bankrupt. That is hugely unpopular in Ireland, and it will not be long before the Irish government simply says no. If the current one does not, then there will be a new one that does. Unless the Irish renegotiate their debt, they will be paying on it for decades. Debt that was private debt and paid to European banks (who lent to Irish banks) is now public debt. And it is a punitive and crushing debt.
We can go to each problem country and home in on its own particular situation, and the answer almost always seems to be that the debt must be dealt with in some manner that either directly or indirectly amounts to default. (Even if the Eurozone leaders say that a 50% haircut by a bank is “voluntary.” Yeah, right. European leaders have a different understanding of voluntary than I learned in school.)
But that is the problem. The European Commission is trying to figure out how to find €1 trillion to use to bail out southern Europe and Ireland. They so far cannot, and the market recognizes that fact and that the needs are actually much higher. European leaders cannot (at least publicly) fathom how to find €3 trillion. But whether or not they can “find” another few trillion, that debt will have to be restructured or defaulted. Once you go down that path, as they have with Greece, it is just a matter of time before you have to do the same for Portugal and Ireland; and are Spain and Italy close on their heels?
When Leverage Comes Back to Haunt You
European regulators allowed their banks to leverage up to 450 to 1 on their capital, on the theory that sovereign nations in an enlightened Europe could not default, and therefore no reserves need to be kept for “investing” in government debt. And with those rules, banks borrowed massively and invested it in government debt, making the spread. It was an awesome free profit machine. Until Greece became a road bump. Now it is a nightmare. Even if you only invested 4% of your bank’s assets in Greek debt, if that is more than your capital then you are bankrupt.
Irish banks were foolish and invested in Irish real estate that was in a bubble. They went bankrupt. Spanish banks were even more heavily leveraged to real estate, but have yet to write down their debt. They assume that houses will only lose about 15%, rather than the 50% that the real world is suggesting. And you can get away with that for a time if you own the agencies that rate the real estate debt, as the Spanish banks do. But most of the rest of European banks are going to go bankrupt the old-fashioned, tried-and-true, proven-over-the-centuries way: by buying government debt. Somehow they want to be seen as rational in leveraging up government debt.
As I told the Irish crowd last week, don’t worry about your bank debt; all you have to do is wait a little while. When French and Italian banks (and most of the other banks in Europe) are publicly insolvent and have to go to their respective countries and the ECB for capital, the relatively small amount (by comparison) of Irish bank debt will not even be noticed when you default. I was trying for a little humor, but there is a core of truth in that glib remark.
France cannot afford to bail out its banks. As we have seen this week, they are already in danger of losing their AAA rating, as a false (premature?) press release from S&P suggested. (Someone is in trouble for that one! Seriously, you think S&P is not ready for this? There is reason to believe, I hear, that this was a draft for use later. We’ll see.) France will want the Eurozone to bail out their banks, and that means the ECB. If France gets such a deal, Ireland will certainly demand – and get – one, too.
The German Dilemma
And that brings us to the third problem, which has two parts: (1) the massive trade imbalances in Europe, where Germany and a few others export and the rest of Europe buys, And (2) the fact that German labor is far cheaper on a relative basis than Greek or Portugal labor (or that of most of the rest of the Eurozone). German workers have seen very little rise in their incomes, while Southern Europe labor costs have risen to over 30% higher.
I won’t go into the details (I have written about this before), but there is a basic rule in economics. You can reduce private debt and you can reduce public debt and you can run a trade deficit. But you can only do two of the three at the same time. The total of the three must balance.
Greece runs a massive trade deficit. They are also attempting to reduce their government debt, and private debt (that borrowed by business and consumers) is being forcibly reduced, as the banks are in full retreat.
Greece must therefore endure a large reduction in its labor costs if it wants to reduce its government deficit. Sell that one to the unions. (By the way, Irish public unions took a large reduction, as did pensioners. Different political climate and country.) Germany seemingly wants the rest of Europe to behave like Germans, except that they also want them to continue to buy German products and run trade deficits, while Germany exports its way to prosperity.
In the “old days” of a decade ago, a European country could simply devalue its currency and adjust the relative value of labor that way. But with a fixed currency there is no adjustment mechanism other than reduced pay or large unemployment numbers, which eventually translates into lower wages.
Essentially, the southern part of Europe is on an odd sort of “gold standard,” with the euro being the fixed standard. And the adjustments are painful. There are no easy answers if you stay with the euro. And leaving is its own nightmare.
So How Do We Solve the Eurozone Problem?
Let’s quickly look at options for solving this.
1. The Germans (and the Dutch and Finns, et al.) can simply take their export surplus and taxes and savings and pay for the deficits in the southern zone until such time as they can be brought under control. Or they can bail out all the banks. Not just their own but throughout Europe, as a customer without a banking system cannot buy your products. That seems to be a political non-starter.
2. The problem countries can make the extremely painful adjustments, cut their deficits, and enter into a lengthy pepression. That also seems to be a political non-starter.
3. The Eurozone can forgive enough debt to get the various countries back to a place where they can function, nationalizing the banks that hold the debt, which would lead to a Europe-wide deep recession. Possible if the Eurozone leaders can sell it, but it is a tough sell.
4. A few countries (2? 3? 4?) can leave the Eurozone. If this is not done in an orderly fashion, the chaos will reverberate around the world.
All of the above paths (or some combination of them) mean a banking crisis and chaos and long-term recessions. These are not pretty paths. But the above options assume that the ECB remains true to its Bundesbank core. Which brings us to the next “solution.”
Where Is the ECB Printing Press?
It is hard for us in the US to understand, but the commitment of European leaders to a united Europe is amazingly strong. They will do whatever they think they must do (and/or can sell to the voters) to maintain the European Union.
As a way to think about it, the US fought its most bloody war over the question of whether or not to remain a union. I think you have to call that commitment. While I am not suggesting that Europe is getting ready to start a civil war, I think it is helpful to remember that commitments to an ideal can drive people into situations that others have a hard time understanding.
Let’s summarize. There is too much debt in many southern countries; and while I have not yet mentioned it, France is not far from having its own crisis if they do not get back into balance. And if they lose their AAA rating, then any EFSF solution is just so much bad paper.
The banks and banking system are effectively insolvent. There are large trade imbalances that make it almost impossible for the weaker Eurozone countries to grow their way out of the problem.
The path of least resistance, and I use that term guardedly, is for the ECB to find its printing press. Perhaps they can borrow one from Bernanke. Yes, I know they are buying sovereign debt now, but they are “sterilizing” it, meaning they sell euro paper to offset the monetary base effects (large oversimplification, I know).
But the money to solve the crisis does not exist. The only way to find it is for the ECB to print money and print in size, enough to lower the value of the euro and make exports cheaper (which gives southern Europe a chance to grow out of its problems). Which is of course something the Germans vehemently oppose, as it goes against their core DNA coding.
But the choice is print or let the euro perish. I see no other realistic solution, aside from massive austerity, willingly accepted by Europeans everywhere, along with the nationalization of their banks, etc., as described above. I think there is even less willingness to endure all that.
It is a hard choice, I know. If you held a gun to my head and asked, “What do you think they will do?” I would have to say, “I think the ECB prints.” But not without a lot of rancor and solemn pledges and maybe a rewriting of the treaty in order to get Germany to go along.
The choice is between a much lower euro or one that is far different from today’s, with a number of countries having left it. There are no good or easy choices.
As a closing aside, a lower euro means lower US and emerging-market exports (Europe is China’s biggest customer!) to Europe and more competition from Europeans in what the rest of the world sells to each other. It will be the beginning of serious trade issues and when coupled with the collapse of the Japanese yen, circa 2013, will usher in currency wars and protectionism. This will be a decade we will be glad to leave in 2020.

Europe’s Debt Crisis Spirals out of Control Europe is an accident waiting to happen

Politics / Global Debt Crisis Nov 13, 2011 – 05:39 AM

As Chancellor Merkel and PM Sarkozy search for a solution that doesn’t exist they continue to lose credibility. Nothing of substance has been agreed upon that is legal and can be implemented. At the IMF Christina LeGarde is frantically waving her arms like a cheerleader telling anyone that will listen that if the six sovereigns in financial trouble are not aided the euro will fail and peace in Europe will disappear.

The elitists are frantic because they cannot find a solution. LeGarde says without help there will be ten years of depression. She obviously hasn’t done her homework. Try 30 or more years. Sarkozy, Merkel and Jans Weidmann council member of the ECB has said the ECB cannot bail out governments by printing money. He is also head of the Bundesbank and said a key lesson of what is being proposed is the hyperinflation in Weimer Republic, which followed WWI. Over in Italy PM Berlusconi, who looks and acts like Benito Mussolini has been unseated and as a result the Italian bond market is on the edge of collapse. There is big pressure downward in stock and bond markets as a result and the US Treasury again attacks gold and silver hoping they can keep gold from breaking about $1,800. The PPT’s ability to achieve this is more than questionable.
At Cannes PM Sarkozy and President Obama discuss what a liar Israel’s PM Netanyahu is. Their candor was accidentally picked up by a supposedly muted speaker. What is now realized is that euro zone government bonds contain unexpected credit risks. All the European politicians and bureaucrats want to save the euro, but their promises and solutions are not worth the paper they are written on. They are so believable that China won’t lend them money. These characters have been kicking the can down the road since last spring with little or no long-term solutions, and no solutions to affect a recovery and create jobs. Austerity has replaced growth and that is expediting a failing economy, even in Germany. If economies don’t grow tax receipts fall and the ability to service debt is impaired. Big euro zone banks are broke just as their counterparts in NYC are. As this proceeds we ask how long can the ECB buy Italian and Spanish bonds?
In Greece a coalition has been made and Mr. Samaras has shown his true colors by backing Trilateral-Bilderberg Lucas Papademos, as interim PM. We hope Greek citizens realize that Papademos will sell them out. It is only a matter of when. The debt deal will probably be ratified, but at what price? Will it bring revolution or a coup? Who knows, but under the circumstances anything goes. 60% to 65% of Greeks oppose the bailout, but 71% want to stay in the euro, which is impossible.
If further austerity measures are taken in Italy there will be demonstrations and violence. In the meantime bond market yields climb; Italy’s access to the bond market lessens and as a result stock markets fall. There is no coordination between the ECB and its members. The French banks and others are selling bonds, which the ECB is being forced to buy. All of these factors lend to political, financial and economic uncertainty. This is a major full-blown crisis and the US realizes that. Why else would they be strongly trying to suppress gold and silver prices? Europe is in disarray and Germany has to come to terms with cutting loose the six loser countries. That means leaving the euro and perhaps the EU. We see no other choice in this unnatural association.
Europe’s banks are leveraged 26 to 1, whereas 9 to 1 is normal. A 4% fall in asset prices will wipe out equity. Debt to equity for corporations is 145% in Portugal, 135% in Italy; 113% in Ireland, Greece 218%, Spain 152% and 89% in the UK. In Germany it is 105% and in France 76%. EU financial problems are endemic not just in the six countries in trouble. Europe is an accident waiting to happen, which we have pointed out for some time. We are now seeing failed bond auctions even in Germany. The sale of EFSF bonds had to be put off due to lack of interest. If it hadn’t been for the ECB buying the bonds of Italy, Spain and Portugal the bond market would have already collapsed. Europe is the catalyst and eventually it probably will take the financial system down. The ECB probably has already bought close to $300 billion in just these countries alone.
European banks are howling that they have to increase capital reserves to 9% by June 30, 2012. In the wings we see $610 billion allocated to bailout by sovereigns, which they believe will be stretched to $1.4 trillion via the use of derivatives. That may never happen if the German Federal Court disallows it. On the other hand more savings would allow further business expansion but are we going to see that in a falling economy?
This last recovery as an example in Germany was caused in great part by an increase in government debt from 74% in 2009 to 83% in 2010, in France 79% to 82% and in Greece and Italy 130% to 160% versus 116%. Thus, it is fair to assume that the recent recovery came from an extension of money and credit. This leveraging now leads to de-leveraging, which may bring balance, but is not good for growing an economy. It diminishes the ability of the economy to generate capital. That means the economies statuses are going to worsen. This results in lower manufacturing activity, which we already see falling. Year-on-year the PMI has already fallen from 54.6 to 47.3 in Germany. The service index is 47.2. Both have been and will continue to fall in tandem. At the same time the ECB has monetized $300 billion by purchasing bonds and that is inflationary. Worse yet the ECB has lifted monetary growth from 9.5% in June to 23% in October. Loose monetary policies cause these problems, but debt is so onerous that they have to continue or they will fall into a deflationary depression. In the meantime inflation grows. There can be no real healthy growth until de-leveraging has ended. The banks and the governments won’t do that for fear of losing control. That means more debt and higher inflation and perhaps even hyperinflation.
In Italy Silvio Berlusconi is off again, on again, as to whether to resign as PM. His closest coalition ally Umberto Bossi of the Northern League, has told him he should resign.
There is no question that Europe’s debt crisis has spiraled out of control. That is something we predicted would happen long ago. Finally, Germany and France are discussing a breakup of the euro zone to allow the six weak countries to exit the euro, but stay in the EU. Italy and Spain show signs of serious trouble and they are simply too big to rescue, because that would bankrupt the solvent countries.
Italy’s 10-year T-notes traded as high as 7.5% and are now back below 7%, but the ECB and other countries, plus perhaps the Fed, were buyers.
We have to laugh as all these bureaucrats and politicians try to save six countries, as their own countries are in serious trouble. Mrs. Merkel, German Chancellor, says it is all so unpleasant. Lady, it is a lot worse than unpleasant. Europe is in a defining moment as they face collapse.
As the world economy slows the EU is focusing on growth, because if it doesn’t it will fall behind in a very competitive world. Europe, England and the US, as well as others are facing inflationary depression and then deflationary depression.
There is not from our viewpoint at this time, enough time to make treaty changes. All efforts have to be pointed toward immediate financial solutions and to allow those six nations to exit the euro zone, but allow them to stay in the EU. Recession is fast closing in on the world, just not Europe. If they have to increase money and credit on the short term so be it.

The Beginning of the End of Fiat Money

Currencies / Fiat Currency Nov 16, 2011 – 09:50 AM

Last week, the G-20 meetings did not produce an expanded bailout fund for the eurozone. While this may bode well for the long-term solvency of the member-states (moral hazard and all), it has also triggered a market reaction that I expect to help destabilize the common currency. Yesterday’s market moves suggested that this development is good for the dollar and bad for gold. Allow me to step back from the stampeding herd to evaluate whether they are, in fact, moving in the right direction.

The argument for the dollar and against gold is simplistic, and I will evaluate it against the four-stage collapse I see ahead for the Western currencies.
Arguing that gold is a hedge only against inflation, and taking current inflation figures at face value, mainstream analysts have concluded that gold is grossly overvalued – that it may, in fact, be the latest asset bubble to arise. However, these analysts fail to account for why gold is a hedge against inflation: it is ultimately an insurance policy against runaway currency collapse. In other words, it’s intended as a longer-term, wealth-preserving purchase. Yes, some pit traders may be trying to make a quick buck shorting gold and going long on dollars, but for individual investors, following suit would leave them vulnerable to what may prove to be ahead. That is, a phased destabilization of the euro, leading to a possible collapse of the US dollar. In such circumstances, even today’s volatile prices for gold and silver would look attractive.
Phase One of the threatened catastrophe is sovereign debt crisis, which is effectively camouflaging a currency crisis. The Greek default is significant as the first crack in the dam. But Greece is a relatively small problem. The bigger threat is Italy, with its $2.4 trillion of debt and a 10-year bond yield having just surpassed the critical 7 percent level. This is the ruinous milestone at which the cost of new debt money surpasses the economic growth rate plus inflation. Italy faces massive debt refunding, falling buyer interest, and no hope of a bailout. If Italy were to default, it could threaten rapid contagion to Portugal, Ireland, Spain, and other larger eurozone countries, including perhaps France. In such an event, most international banks and institutional investors, including those in the US, could suffer severe, possibly total, losses on their holding of certain sovereign bonds. MFGlobal is but one speculative example of a looming secular trend. Worse still, the writers of credit default swap (CDS) derivatives, including many German Landesbanks (state-level banks) and major US banks, could suffer crippling losses.
This would lead to Phase Two of the collapse: a renewed and far larger banking crisis. This, in turn, could bring stock markets tumbling and threaten major institutional investors, including politically sensitive pension and insurance companies. In addition, banks would become extremely wary of lending to each other. Likely, the interbank market would freeze, but far more severely than in 2008. It could result in curtailed lending and even the recall of short-term corporate funding and call-loans. This could cause a dramatic spike in US bank failures. Unwary depositors who have failed to watch their banks closely could find their insured funds frozen, perhaps for months, as the FDIC reorganizes the problem banks – and perhaps even waits for its own bailout. This would add further downward pressure to economic growth.
Meanwhile, the cascading banking crisis would likely push Europe into a severe recession, even a depression. As the EU accounts for some 22 percent of world trade, a European depression would no doubt drag down the US even further. In response, the price of precious metals may face severe selling pressure as liquidity becomes paramount.
This would present an opportunity for long-term gold and silver investors.
Phase Three would be a restructuring or dissolution of the euro and possibly a stampede into the US dollar, sending its price and US Treasuries temporarily upwards. With a far stronger dollar, the price of most commodities, including precious metals, may fall temporarily in dollar terms. We are seeing a preview of this dynamic with today’s news on Italy.
However, to reallocate one’s portfolio in reaction to such a move could put an investor in jeopardy. That is because Phase Four, the most alarming, would be investors’ realization that the US dollar lies at the root of the international currency collapse and is itself vulnerable. Likely, this panic flight from the dollar would develop suddenly, and perhaps in undreamed of volumes. Doubtless, the speed and size of a stampede out of paper currencies and into precious metals will take many investors by surprise – just as the Credit Crunch in 2008 did. As the realization of currency catastrophe spreads, the price of silver may start to rise faster than even gold.
There’s an old saying that “the higher you fly, the harder you fall.” The US government is, by any measure, the luckiest government in centuries. It has risen to unforeseen heights of monetary excess – and has been rewarded for doing so. But it looks like lower flying planes are starting to stall out, and one can only imagine – from this height – how fast and how far the US may fall.
My humble advice is not to try to time it, but rather to use your golden parachute before it’s too late.

Gold Thoughts on Bursting Sovereign Debt Bubble and Keynesian Super Recession

Gold Thoughts on Bursting Sovereign Debt Bubble and Keynesian Super Recession
Economics / Great Depression II Nov 16, 2011 – 09:48 AM

Rarely does one live through great events. Mostly we read about them in history books. But, we are today witnessing the bursting of the greatest bubble of all time. This is the big one. More than 70 years in the making, it was inevitable. Was it popular alchemy or just another case of junk science from academia? To prepare your thinking for surviving this momentous event consider the following headlines from tomorrow¹:

SOVEREIGN DEBT BUBBLE BURSTS
TRILLIONS LOST IN GOVERNMENT DEBT
KEYNESIAN SUPER RECESSION ARRIVES
Sovereign debt was to be the super investment, without credit risk. Sovereign debt was to allow for unbridled prosperity. It is now a massive financial anchor around the economic neck of almost every nation in the world gullible enough to adopt Keynesian ideology. Rather, as Greece, Italy, et al have vividly demonstrated, sovereign debt is the road to poverty. Today, only the unborn grandchildren of Greece have any hope of a better life.
Keynesianism was never to be a path to prosperity. Keynesianism, pure and simple, was, and is, a means for the government to ultimately control all income and wealth in a nation. People were to become the wards of the state, fed and cared for by money from selling Keynesian sovereign debt. It remains today nothing more than a means of destroying wealth and freedom, and a myth perpetuated in the great halls of academia.
We ask the purveyors of Keynesian drivel one simple question:
Name one nation in the world that is prosperous because it borrowed money?
Until that question is answered, we should assume that Keynesianism has been another massive failure! It should be tossed on the junk pile of history along with other myths from academia, like global warming from cow flatulence. For those interested in learning of the evolution of economics, and in particular the Keynesian myth, we recommend reading Grand Pursuit: The Story of Economic Genius by Silvia Nasar(2011).
A consequence of the Keynesian Super Recession is that nations, and peoples, around the world are scrambling to find funds to pay their bills. In the following graph, which we have put forth before, is plotted the holdings of U.S. government debt by official foreign institutions at the U.S. Federal Reserve, black line using left axis. Rate of change in those holdings is the red line, using right axis.

Liquidation of U.S. government debt by official foreign institutions continues. Why these investments are being liquidated is not readily known. That acknowledged, two real possibilities exist. One, the countries need the money to finance their consumption. Trivial matters such as eating come to mind.
Two, these investors understand the lurking dangers in U.S. government debt. As of yet, absolutely no serious effort has been made to solve the deficit problem of the U.S. The minority government of the U.S. continues to stonewall any effort to reign in spending. Development in the above graph may indicate that the market is about to impose discipline on the greatest experiment in Keynesian alchemy, the greatest of all failed policies of the past.
Over time, investors have turned to two investments as safe havens for wealth. One of those is Gold, which possesses the only long-term investment record. Second has been sovereign debt. Or, should we now refer to it as fiat debt? The latter no longer qualifies as a safe haven, but rather has become simply another risky asset. For that reason alone, investors should retain their Gold.
Despite the risk in the currently elevated price, perhaps to well below $1,500, Gold may be the only safe haven during this period of sovereign debt restructuring and the Keynesian Super Recession. But, it is Gold that investors should own. Now is not the time for pseudo Gold in the form of Silver or paper Gold stocks. In short, when at Wendy’s go for the beef, not a veggie burger.
¹These future headlines were provided, in confidence, by a prognosticator with a record far exceeding that of those on any of the cable business media, our favorite cab driver at the airport.
By Ned W Schmidt CFA, CEBS

The Coming Global Systemic Collapse and its Implications

Interest-Rates / Global Debt Crisis Nov 16, 2011 – 09:42 AM

The European Union’s failure to solved Greeks and now Italy’s debt crisis is sending shockwaves through the financial, currencies, equities and derivatives markets.
Europe needs to increase its bailout fund in the EFSF to more than €1 trillion by next year when waves of Eurozone debts matures. Among them are Italy €307 billion (19.3% of GDP, Germany €273 billion (10.6% of GDP), France €240 billion (12% of GDP) and Spain €132 billion (12.2% of GDP). This is excluding new debts to be issued to fund its deficits spending and bank bailouts. Europe is now in between a rock and a hard place because it can start printing money but the ECB treaty prevented it from doing so.
To add salt to injury, in a recent capital raising exercise the EFSF failed to raise the required €3 billion and had to resort to buying up a few hundred million euros of its own bonds. In other words there are not enough interested parties out there.
In addition, European banks are also quietly dumping €300 billion in Italian debts. IFR reports that ‘European banks are planning to dump more than the €300 billion they own in Italian government debts as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling write downs – a move that could scupper the European Central bank’s effort to bring down soaring yields’
Karma at work?
Last week, a European delegation was in Beijing trying to secure loans for their bailout, returned empty handed mainly because they cannot concede to the Chinese list of demands. Chinese Premier Wen Jiabao, in his speech at the opening of the World Economic Forum in Dalian on September, said that “China is willing to extend its help to Europe but at a price.”
Among the Chinese demands include:
– EU support for China in the World Trade Organization.
– Removal of the arms embargo that the EU imposed after the Tiananmen Square
– More favorable trading terms like subsidies, import tax, duties and etc .
– Greater influence at the IMF, through inclusion of the yuan in the IMF’s currency basket that underlies the Special Drawing Rights (SDR).
– Fire sale of European assets in sensitive industries like defense and high technologies.
Unfortunately, Europe will not be able to resist for too long, as time is running out for them to rollover their debts due next year. The Chinese on the other side have all the time it needed to wait for the Europeans to concede to its demand. Eventually the Europeans will have to give in, when the next stage of the crisis takes hold where now France and Hungary are facing possible downgrade from Rating agencies as soon as before year end. France is expected to be downgraded by one notch from AAA, while Hungary to Junk status. When the downgrade begins, yields will soar and it will be difficult to raise capital in the international markets.
Probably this is what most viewed as the Revenge or Vengeance for the Boxer protocol or Unequal Treaties signed during 1901 after China failed in its intervention of the Boxer Rebellion. In Karma sense, the Chinese are back to collect its dues.
The Ching Dynasty signed the treaty with notably eight nations namely Austria-Hungary, France, Germany, Italy, United Kingdom, Japan, Russia and the United States.
In the Treaty, China is required to pay a total of 450 million taels of silver as indemnity over a course of 39 years to the above eight nations. The 450 million taels of silver which is worth about £67 million at that time and it is equivalent to today’s value of more than US$ 7 billions.
The distributed amounts in percentage are as follows :
Russia – 28.97 %
Germany – 20.25 %
France – 15.75 %
United Kingdom – 11.25 %
Japan – 7.73 %
United States – 7.32 %
Italy – 7.32 %
Austria-Hungary – 0.89 %
On top of that a total of 17 local provinces are required to pay an additional 16.88 million taels. By 1938, a total of 652.37 million taels was paid which included an interest rate of 4% per annum.
More Downgrades
S & P after applying its stress test with scenario 1 (being in a double dip recession) and scenario 2 (being in a double dip recession and an interest rate shock) issued the following projections for Eurozone.
• Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios.
• Speculative-grade corporate defaults would likely increase to between 9% and 13% .
• Covered bond programs in Italy, Portugal, and Spain could be lowered by several notches under our criteria, reflecting the potential downgrades of issuing banks.
• The deterioration of collateral securing structured finance transactions in Italy, Portugal, and Spain could contribute to a downgrade rate of at least 25%-30%
• Rated insurers in Italy, Spain, and Portugal, or with significant operations in or exposures to these countries, or large U.S. equity portfolios in their life operations, potentially could see rating actions limited to between one and two notches on average.
Chinese Dagong Global Ratings Agency, last Friday, November 11th, is warning that it will not hesitate to downgrade the US Sovereign debt rating again because of its failure to tackle the federal budget deficit. The head of the Agency said ‘The measure available to them cannot be effective so they have another way out which is to depreciate the UD dollar, to print more money’. This has negatively affecting their credit prospects so their overall ability to pay back continue to go down.
The Chinese Agency concludes that more “devastating credit rating cuts and global economic turmoil” will be around the corner, if Washington do not live within its means,
In also cautioned that “the good old days where the US is able to borrow its way out of the messes is finally over.”
Greece has erupted into a full scale disaster with violent protests and riots daily and this could lead to a total SHUTDOWN of its government. The only thing that have maintained investor confidence is that there is always the Central Bank to bailout and intervene in the financial system. However due to the bailouts by Central Banks the actual problem of the Debt crisis is never solved. They are just kicking the can down the road since 2008 and never took the hit that are needed in 2008. Total bets on global derivatives of more than US $ 600 trillion are still open in the financial markets. What Central banks did was print more money and lends it to the insolvent big banks. In other words the Central Banks assume all the risk of the private sector and transfer it to the public sector. No wonder the Fed’s balance sheet is over US $ 2 trillion.
So what can we derive from here? When the next crisis strikes, this time not only banks and the private sector is going down but entire countries are going under as we are seeing it in Greece and Italy. Once the bailout bandwagon stops in Greece, the collapse will spread like wildfire because Greece is the Bear Stearns of Sovereign Debt Default. Given the leverage and interconnectivity of the global financial system it won’t be long this crisis will reach our shores and the latest by next year.
Social Implications
So what are the social implications of the collapse?
• Rising crime, when people devoid of jobs and are unable to support their families they will turn to crime out of desperation
• Corruption, High and low level government officials will look to supplement their income from kickbacks and bribery.
• Police state conditions, government will send police out to show the people on who’s really in charge and they will use unnecessary force to disperse crowds.
• Censorship, government medias will be censored and they will create events to distract the people from the real problems of the economy.
• Lower standard of living due to the effects of inflation. People will be more hard squeezed and desperate.
• There will be more protest and riots due to the dissatisfaction of the population with the ruling government. Expect more bloody street protests.
• Global financial markets meltdown. There will be blood on the streets.
• Massive unemployment in the economy will force countries to use ‘beggar thy neighbor’ policy (already happening now) through devaluation of their currencies. Every country will try to outsell each other in order to sustain their employment level.
So how bad things can it be when economies starting to disintegrate? As a rule of thumb on economic collapse, the larger the economic distortion the harder the collapse! Massive distortions in economies around the world are happening because governments are printing massive amount of money in order to prop up (stimuli) their economies.
IMF’s Painful Pill Menu
Just to give you a rundown of what EXTRA conditions the IMF put on Greece in June, when it failed to fulfill all the conditions on their previous austerity measures.
The plan involve cutting 14.32 billion euros in public spending while at the same time raising 14.09 billion euros from various taxation over the next five years. For those who are interested to know how tough IMF austerity measures are, the following are some of the latest measures being planned. Courtesy of BBC.
Various Taxation Increased
• Taxes will increase by 2.32bn euros this year, with additional taxes of 3.38bn euros in 2012, 152m euros in 2013 and 699m euros in 2014.
• A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros.
• The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros.
• There will be higher property taxes
• VAT rates are to rise: the 19% rate will increase to 23%, 11% becomes 13%, and 5.5% will increase to 6.5%.
• The VAT rate for restaurants and bars will rise to 23% from 13%.
• Luxury levies will be introduced on yachts, pools and cars.
• Some tax exemptions will be scrapped
• Excise taxes on fuel, cigarettes and alcohol will rise by one third.
• Special levies on profitable firms, high-value properties and people with high incomes will be introduced.
Public Sector Cuts
• The public sector wage bill will be cut by 770m euros in 2011, 600m euros in 2012, 448m euros in 2013, 300m euros in 2014 and 71m euros in 2015.
• Nominal public sector wages will be cut by 15%.
• Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.
• All temporary contracts for public sector workers will be terminated.
• Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.
Spending Cuts
• Defense spending will be cut by 200m euros in 2012, and by 333m euros each year from 2013 to 2015.
• Health spending will be cut by 310m euros this year and a further 1.81bn euros in 2012-2015, mainly by lowering regulated prices for drugs.
• Public investment will be cut by 850m euros this year.
• Subsidies for local government will be reduced.
• Education spending will be cut by closing or merging 1,976 schools.
Benefit Cuts
• Social security will be cut by 1.09bn euros this year, 1.28bn euros in 2012, 1.03bn euros in 2013, 1.01bn euros in 2014 and 700m euros in 2015.
• There will be more means-testing and some benefits will be cut.
• The government hopes to collect more social security contributions by cracking down on evasion and undeclared work.
• The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.
Public Sector Privatizations
• The government aims to raise 50bn euros from privatizations by 2015, including:
• Selling stakes this year in the betting monopoly OPAP, the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water.
• It has agreed to sell 10% of Hellenic Telecom to Deutsche Telekom for about 400m euros.
• Next year, the government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATE bank as well as ports, airports, motorway concessions, state land and mining rights.
• It plans further sales to raise 7bn euros in 2013, 13bn euros in 2014 and 15bn euros in 2015.
As you can see from the above measures, if implemented it will reduce the standard of living of ordinary Greeks by at least 30% given the various increase in taxes and wage cuts .In addition, the approval of the plan means more fire sale of Public Assets to other European (especially German Banks) and American Bankers will be on the way.
Another measure not mentioned is that the EuroStat monitoring will be shortened from 3 months to monthly. Compliance will be as strict as the first austerity package. Failure to comply will result in even stricter austerity measures. Some of these measures are
going to squeeze the Greek economy even more, for example VAT rates will be increase to 23% from 13% in restaurants and bars which means you can say goodbye to Greek tourism and this sector contributes the most to the economy.
In the olden days, you need a standing army to take over a country, nowadays all you need to do is to enslave the country with debts and you will be able to get it on the cheap. With the above austerity measures, just wonder how the ordinary Greeks be able to withstand the hardship.
Iceland Solution
One of the better solution to the current crisis will be for Europe to “do an Iceland on Europe” and basically this means defaulting. Forget about IMF, forget about Rating Agencies and forget about all those austerity measures. Just look at Iceland, they have been saying no to bankers, no to austerity, no to pressure from UK government to reimburse more than 600,000 depositors of the failed Internet IceBank, no to bailout from EFSF and etc.
Conceding to them means they will be harming innocent taxpayers while protecting the bankers (bond holders) from taking a haircut.
Changing of puppets will yield to nothing for Greece and Italy. It is just the same old game of ponzi musical chairs with different players. They need to get to the core of the problem which is the bankers, corporate fraudsters and corrupt politicians.
Another piece of advise for investors is to avoid anything that that has connection with ‘EURO’. Euro tunnel, Euro Zone, Euro Disney and what you get at the end is Euro Trouble.
But why Main Street is dislocating from Wall Street? Despite continuous outflow of bad news from Europe and elsewhere, why are global stock markets still maintaining its level or continue going up? The market might be sending a message that something big is brewing over the horizon. Are the markets already discounting the fact that the Americans and Europeans are about to MASSIVELY print their way out of this mess again? Hyperinflation down the road.

China Contemplates More Investment…

Good day… And a Tom Terrific Tuesday to you! Well… the death watch for Greek debt continues… I saw one pundit say yesterday that a Greek default wasn’t a question of if, but when… The markets are convinced that Greece and the European Union have no way out of this but to default. The Eurozone leaders are still trying hang on to the 10% chance that Greece won’t default, and good for them… it would do no one any good for them to throw in the towel when there’s still a chance… Unfortunately, the chances are slim and none… and Slim left town!

The Greek drama has really weighed on the currencies this past week, and as I kept telling you last week, the perfect storm was brewing for a period of dollar strength… There’s no need to panic… We’ve seen these periods of dollar strength before folks… Some last longer than others, but not once have they indicated that the weak dollar trend was over… And as long as the U.S. debt continues to grow, and I saw something the other day that showed the U.S. Gov’t had added $500 Million in debt since the debt debacle… Well, as long as that continues, and I don’t see any sign of it not continuing, we don’t have an election until next year… the dollar will remain in the weak dollar trend… Remember… the trend is not a ONE-WAY Street… there can be volatility, and this would qualify for volatility!

A reader asked me to talk about the hits that Norway and Sweden have been taking since their one day of glory last week, when it seemed the world finally discovered that Norway and Sweden aren’t a part of the euro! Well… I think I touched on all this last week, so let me go back and see what I said… Yes, there it is… from the Pfennig, Sept 6, 2011… “The recent data from Sweden isn’t exactly giving me a warm and fuzzy feeling about more rate hikes from the Riksbank… Most recently, Consumer and Industrial Confidence were down sharply… So… unless the euro is going to push higher, the krona will have a difficult time finding terra firma, going forward… Things have turned on a dime here… pretty amazing…

Next door, Norway continues to be the best fiscal / monetary balance sheet country in the world… They’ve recently discovered a new source of oil, so their future looks so bright they have to wear shades… The krone though, continues to get tarred with the same brush as the euro… One of these days that will break, when the markets figure out that the krone isn’t the euro or anything like the euro, but instead what I’ve always called it the euro alternative! But for now… that’s not what goes on… “

I love it when I can go back and find something I said… because… in my humble opinion, I’ve said a lot over the years, that eventually came to fruition… and I love it when I can actually point to the day in the Pfennig, instead of being like most other pundits that claim they “called something long before it happened”… I won’t name names, but I find it all pretty funny most of the time, when I hear someone say, “I told you that was going to happen, for I saw this coming a long time ago”…

OK… back to the currencies and metals… Gold really saw the rug pulled out from under it last week. Recall that I told you that I thought, and all signs pointed to price manipulation… Well that (in my opinion) manipulation was so strong, that it triggered “automatic sells”… you know the computer or box generated trades… Well, one sell has brought on another, and before you know it, Gold is barely hanging on to $1,800… The way I look at this is simply that the price manipulation should be looked at by those looking to buy Gold at cheaper prices, as a good thing… for it does provide cheaper prices!

The Chinese renminbi got back on its rally horse last night, and gained VS the dollar… I didn’t think for one minute that the renminbi was going to get caught up in this dollar strength, but you never know! Speaking of the Chinese, I would think that the current level of Gold is just about right for them to come in and begin buying again…

There are a couple of random currencies that are gaining VS the dollar this morning, preventing an all-out rout by the buck… The South African rand and Russian ruble… now there are some strange bedfellows, and then add in the Japanese yen, which isn’t really gaining per se, but more holding its ground VS the dollar this morning.

In New Zealand… Reserve Bank of New Zealand (RBNZ) Gov. Bollard, was up to his old tricks again yesterday, when he was dissing his own currency… We’ve seen Bollard do this many times over the years, and it just ticks me off to no end to hear him trash his own currency! When Don Brash was the Gov. of the RBNZ, you never heard him trash the currency… that’s because Don Brash understood that a strong currency is a reflection on the country, for a currency IS the stock of that country! He understood that a strong currency helps combat inflation pressures… and attracts foreign investment… here’s what I think is going on in Bollard’s head… The recent data from New Zealand has been strong… and the Monetary Policy Committee will meet in a few days to discuss a rate hike… you may recall that I thought the RBNZ would hike in September, so that would be this upcoming meeting… Well, if the RBNZ decides to wait, they will have some ‘xplainin’ to do, Lucy style, when the Monetary Policy Statement is printed a few days after the meeting, which will contain the minutes of the meeting…

So… Bollard is simply trying to trash the currency ahead of the meeting, for he already knows that rates will have to lifted to bring them back to levels before the emergency cuts were made to help the economy after the earthquakes. And it indicates to me that a rate hike is in the cards…

The selling in the Aussie dollar (A$) continued overnight, with the A$ losing another 1/2-cent… Even the strong data from China over the past two weekends hasn’t been enough to wrap a tourniquet around the A$… The A$ weakness hasn’t been a deterrent to Aussie bond buyers… According to a story on the Bloomie this morning… Australian government bonds are poised for their biggest quarterly rally in more than two years as investors seeking alternatives to the U.S. dollar and euro buy the so-called Aussie.

So… I hear that the Italians are talking to the Chinese about buying some of Italy’s debt… Hmmm… I’m not sure the Chinese are feeling good about their investments in Greece & Portugal right now, so right now might not be a good time to go back and ask them for more investment… But then, why not? The Chinese keep coming to the U.S. debt auctions don’t they?

The Singapore dollar has run into a road block, which is strange considering the Chinese renminbi, and the Japanese yen are holding ground VS the dollar. Normally these currencies from the same region, tend to move in like directions, for they all compete when it comes to exports… The Sing $ has gained 3.3% VS the U.S. dollar this year, and gained nearly 10% VS the dollar in 2010… So, to see it lose ground is a little strange…

I think the Asian countries are trying to break the habit of depending on exports and become domestic driven economies… reminds me of one of my all-time fave Chicago songs… Now being without you, takes a lot of getting used to, Should learn to live without it, but I don’t want to. Being without you is all a big mistake, instead of getting easier, it’s the hardest thing to take, I’m addicted to you babe, You’re A Hard Habit To Break!

I saw a news flash go across one the screens yesterday, and the flash read… Bank of America to cut 30,000 jobs! OUCH! Did they check with the President first though? Because he’s doing what he knows to do to create jobs… I’m not being funny here folks… This is serious stuff… BofA is cutting 30,000 jobs… I was talking to Jen, and said, we have about 2200 employees at EverBank now, and I thought that was a lot! But 30,000 that can be let go? Can you imagine how many total they have?

Well… Italy survived another auction this morning… And PM Berlusconi announced that the Italian Parliament will begin to draw up more austerity measures that will pass. Austerity measures are tough, but they have to be implemented sooner or later… the sooner the better, the later may be too late!

The news of a successful auction in Italy has brought the euro up a bit in early morning trading. But the ranges are so tight, Tupperware would be proud!

Then there was this… from Bloomberg… first, though… I want to make certain, that everyone knows that I first brought this thought to the public’s attention last year, and laid out all the steps that China was taking to bring about a change in the dollar’s reserve currency status… OK… here’s the Bloomie…

“China’s renminbi may displace the dollar as the world’s main reserve currency within a decade, according to Arvind Subramanian, a senior fellow at the Peterson Institute of International Economics. “China has almost caught up with the U.S. as an economic power, with an economy about as large in terms of purchasing power and much greater exports and overseas assets. China still has to carry wide – ranging policy reforms, but the internationalization of the renminbi is being pursued in a characteristically Chinese way… micromanaged, interventionalist and enclave-based.”

Chuck again… yes… and I could add tons of more stuff to his thoughts, but it would be better for you to come see me the next time I’m on the road and have this talk on my docket… to get the “rest of the story”!

To recap… The perfect storm that was brewing last week for a period of dollar strength continues to build and has begun to rain on the currencies’ parade. There are a few currencies mustering a rally VS the dollar, the rand, yen, and renminbi… Gold continues to be weak, from last week’s assault on the shiny metal. Greece continues to have a pulse, and a slim chance of avoiding default, and Italy lives through another auction this morning.

Currencies today 9/13/11… American Style: A$ $1.0325, kiwi .8240, C$ $1.0060, euro 1.3675, sterling 1.5820, Swiss $1.1365, … European Style: rand 7.3660, krone 5.6440, SEK 6.6765, forint 207.10, zloty 3.1760, koruna 17.9260, RUB 30.21, yen 77, sing 1.2430, HKD 7.8030, INR 47.57, China 6.3985, pesos 12.82, BRL 1.7020, dollar index 77.27, Oil $88.92, 10-year 1.95, Silver $40.21, and Gold…. $1,815.30

That’s it for today… They are drilling in the office this morning, as we expanded our space, and the furniture gets anchored to the floor… It’s all modular stuff… So, I’ve got that going on trying to drown out my I-Pod! UGH! Cardinals can’t stand prosperity, as they fail to pick up another game on the Braves last night… And Monday Night Football started… I was thinking about how as a young adult I used to think that Monday Night Football (MNF) was the “end-all”… We used to go to drinking establishments to watch the games, or have everyone over to watch it… But somewhere along the way, that didn’t seem so important any longer… But man did we have some fun! (and on the I-Pod, it’s playing the song Kicks!, how funny is that?) Time to get to work… I had to leave before I was ready yesterday, so I have to get caught up… I hope you have a Tom Terrific Tuesday!

China Contemplates More Investment…

Good day… And a Tom Terrific Tuesday to you! Well… the death watch for Greek debt continues… I saw one pundit say yesterday that a Greek default wasn’t a question of if, but when… The markets are convinced that Greece and the European Union have no way out of this but to default. The Eurozone leaders are still trying hang on to the 10% chance that Greece won’t default, and good for them… it would do no one any good for them to throw in the towel when there’s still a chance… Unfortunately, the chances are slim and none… and Slim left town!

The Greek drama has really weighed on the currencies this past week, and as I kept telling you last week, the perfect storm was brewing for a period of dollar strength… There’s no need to panic… We’ve seen these periods of dollar strength before folks… Some last longer than others, but not once have they indicated that the weak dollar trend was over… And as long as the U.S. debt continues to grow, and I saw something the other day that showed the U.S. Gov’t had added $500 Million in debt since the debt debacle… Well, as long as that continues, and I don’t see any sign of it not continuing, we don’t have an election until next year… the dollar will remain in the weak dollar trend… Remember… the trend is not a ONE-WAY Street… there can be volatility, and this would qualify for volatility!

A reader asked me to talk about the hits that Norway and Sweden have been taking since their one day of glory last week, when it seemed the world finally discovered that Norway and Sweden aren’t a part of the euro! Well… I think I touched on all this last week, so let me go back and see what I said… Yes, there it is… from the Pfennig, Sept 6, 2011… “The recent data from Sweden isn’t exactly giving me a warm and fuzzy feeling about more rate hikes from the Riksbank… Most recently, Consumer and Industrial Confidence were down sharply… So… unless the euro is going to push higher, the krona will have a difficult time finding terra firma, going forward… Things have turned on a dime here… pretty amazing…

Next door, Norway continues to be the best fiscal / monetary balance sheet country in the world… They’ve recently discovered a new source of oil, so their future looks so bright they have to wear shades… The krone though, continues to get tarred with the same brush as the euro… One of these days that will break, when the markets figure out that the krone isn’t the euro or anything like the euro, but instead what I’ve always called it the euro alternative! But for now… that’s not what goes on… “

I love it when I can go back and find something I said… because… in my humble opinion, I’ve said a lot over the years, that eventually came to fruition… and I love it when I can actually point to the day in the Pfennig, instead of being like most other pundits that claim they “called something long before it happened”… I won’t name names, but I find it all pretty funny most of the time, when I hear someone say, “I told you that was going to happen, for I saw this coming a long time ago”…

OK… back to the currencies and metals… Gold really saw the rug pulled out from under it last week. Recall that I told you that I thought, and all signs pointed to price manipulation… Well that (in my opinion) manipulation was so strong, that it triggered “automatic sells”… you know the computer or box generated trades… Well, one sell has brought on another, and before you know it, Gold is barely hanging on to $1,800… The way I look at this is simply that the price manipulation should be looked at by those looking to buy Gold at cheaper prices, as a good thing… for it does provide cheaper prices!

The Chinese renminbi got back on its rally horse last night, and gained VS the dollar… I didn’t think for one minute that the renminbi was going to get caught up in this dollar strength, but you never know! Speaking of the Chinese, I would think that the current level of Gold is just about right for them to come in and begin buying again…

There are a couple of random currencies that are gaining VS the dollar this morning, preventing an all-out rout by the buck… The South African rand and Russian ruble… now there are some strange bedfellows, and then add in the Japanese yen, which isn’t really gaining per se, but more holding its ground VS the dollar this morning.

In New Zealand… Reserve Bank of New Zealand (RBNZ) Gov. Bollard, was up to his old tricks again yesterday, when he was dissing his own currency… We’ve seen Bollard do this many times over the years, and it just ticks me off to no end to hear him trash his own currency! When Don Brash was the Gov. of the RBNZ, you never heard him trash the currency… that’s because Don Brash understood that a strong currency is a reflection on the country, for a currency IS the stock of that country! He understood that a strong currency helps combat inflation pressures… and attracts foreign investment… here’s what I think is going on in Bollard’s head… The recent data from New Zealand has been strong… and the Monetary Policy Committee will meet in a few days to discuss a rate hike… you may recall that I thought the RBNZ would hike in September, so that would be this upcoming meeting… Well, if the RBNZ decides to wait, they will have some ‘xplainin’ to do, Lucy style, when the Monetary Policy Statement is printed a few days after the meeting, which will contain the minutes of the meeting…

So… Bollard is simply trying to trash the currency ahead of the meeting, for he already knows that rates will have to lifted to bring them back to levels before the emergency cuts were made to help the economy after the earthquakes. And it indicates to me that a rate hike is in the cards…

The selling in the Aussie dollar (A$) continued overnight, with the A$ losing another 1/2-cent… Even the strong data from China over the past two weekends hasn’t been enough to wrap a tourniquet around the A$… The A$ weakness hasn’t been a deterrent to Aussie bond buyers… According to a story on the Bloomie this morning… Australian government bonds are poised for their biggest quarterly rally in more than two years as investors seeking alternatives to the U.S. dollar and euro buy the so-called Aussie.

So… I hear that the Italians are talking to the Chinese about buying some of Italy’s debt… Hmmm… I’m not sure the Chinese are feeling good about their investments in Greece & Portugal right now, so right now might not be a good time to go back and ask them for more investment… But then, why not? The Chinese keep coming to the U.S. debt auctions don’t they?

The Singapore dollar has run into a road block, which is strange considering the Chinese renminbi, and the Japanese yen are holding ground VS the dollar. Normally these currencies from the same region, tend to move in like directions, for they all compete when it comes to exports… The Sing $ has gained 3.3% VS the U.S. dollar this year, and gained nearly 10% VS the dollar in 2010… So, to see it lose ground is a little strange…

I think the Asian countries are trying to break the habit of depending on exports and become domestic driven economies… reminds me of one of my all-time fave Chicago songs… Now being without you, takes a lot of getting used to, Should learn to live without it, but I don’t want to. Being without you is all a big mistake, instead of getting easier, it’s the hardest thing to take, I’m addicted to you babe, You’re A Hard Habit To Break!

I saw a news flash go across one the screens yesterday, and the flash read… Bank of America to cut 30,000 jobs! OUCH! Did they check with the President first though? Because he’s doing what he knows to do to create jobs… I’m not being funny here folks… This is serious stuff… BofA is cutting 30,000 jobs… I was talking to Jen, and said, we have about 2200 employees at EverBank now, and I thought that was a lot! But 30,000 that can be let go? Can you imagine how many total they have?

Well… Italy survived another auction this morning… And PM Berlusconi announced that the Italian Parliament will begin to draw up more austerity measures that will pass. Austerity measures are tough, but they have to be implemented sooner or later… the sooner the better, the later may be too late!

The news of a successful auction in Italy has brought the euro up a bit in early morning trading. But the ranges are so tight, Tupperware would be proud!

Then there was this… from Bloomberg… first, though… I want to make certain, that everyone knows that I first brought this thought to the public’s attention last year, and laid out all the steps that China was taking to bring about a change in the dollar’s reserve currency status… OK… here’s the Bloomie…

“China’s renminbi may displace the dollar as the world’s main reserve currency within a decade, according to Arvind Subramanian, a senior fellow at the Peterson Institute of International Economics. “China has almost caught up with the U.S. as an economic power, with an economy about as large in terms of purchasing power and much greater exports and overseas assets. China still has to carry wide – ranging policy reforms, but the internationalization of the renminbi is being pursued in a characteristically Chinese way… micromanaged, interventionalist and enclave-based.”

Chuck again… yes… and I could add tons of more stuff to his thoughts, but it would be better for you to come see me the next time I’m on the road and have this talk on my docket… to get the “rest of the story”!

To recap… The perfect storm that was brewing last week for a period of dollar strength continues to build and has begun to rain on the currencies’ parade. There are a few currencies mustering a rally VS the dollar, the rand, yen, and renminbi… Gold continues to be weak, from last week’s assault on the shiny metal. Greece continues to have a pulse, and a slim chance of avoiding default, and Italy lives through another auction this morning.

Currencies today 9/13/11… American Style: A$ $1.0325, kiwi .8240, C$ $1.0060, euro 1.3675, sterling 1.5820, Swiss $1.1365, … European Style: rand 7.3660, krone 5.6440, SEK 6.6765, forint 207.10, zloty 3.1760, koruna 17.9260, RUB 30.21, yen 77, sing 1.2430, HKD 7.8030, INR 47.57, China 6.3985, pesos 12.82, BRL 1.7020, dollar index 77.27, Oil $88.92, 10-year 1.95, Silver $40.21, and Gold…. $1,815.30

That’s it for today… They are drilling in the office this morning, as we expanded our space, and the furniture gets anchored to the floor… It’s all modular stuff… So, I’ve got that going on trying to drown out my I-Pod! UGH! Cardinals can’t stand prosperity, as they fail to pick up another game on the Braves last night… And Monday Night Football started… I was thinking about how as a young adult I used to think that Monday Night Football (MNF) was the “end-all”… We used to go to drinking establishments to watch the games, or have everyone over to watch it… But somewhere along the way, that didn’t seem so important any longer… But man did we have some fun! (and on the I-Pod, it’s playing the song Kicks!, how funny is that?) Time to get to work… I had to leave before I was ready yesterday, so I have to get caught up… I hope you have a Tom Terrific Tuesday!

The Swiss Franc Abdicates the Crown – Gold and Silver are King!

On Tuesday, Switzerland abdicated the crown as the safe haven currency and pegged itself to the Euro – 1.2 Swiss Francs to the Euro. This left a void. Who would step in as the safe haven currency? Everyone thought it would be gold and silver. Last night as we slept the Central Bank sold of about a billion dollars in gold to force the price of gold down. This caused the dollar to rise and sent money running to the stock market. This is blatant manipulation of the precious metals market because the Central Bank does not want the middle class having any safe harbor. They want them tied to the fiat paper currencies. In the end it won’t work because China will stabilize the PM market but it worked yesterday as the Dow rose 275 and the S&P rose 33.38 points.

Before I begin my essay let me begin with a rousing cheer of “Long Live the King.” The Japanese don’t want it, the U.S. doesn’t want it, and now the Swiss don’t want it either. Gold on the other hand is happy to take the reins.

On Tuesday, Switzerland’s National Bank sent shock waves through the market sending a clear and deliberate message to the world that it doesn’t want to be the de facto safe haven currency.

For months and months, traders have been running to the Swiss franc amid the worldwide turmoil. With the Swiss stepping down as the world’s safe haven currency, gold is now the de facto safe haven currency.

Lest there be any confusion there is now one king – gold. So I say “Long Live the King.”

There has always been a strong correlation between the price of gold and the price of silver. There has also always been a concept that silver, like gold was currency. Indeed, when I was a child growing up silver was currency. I never knew until I went to college that silver had a strong base in industrial usage and industrial use was responsible for a large demand for the supply of silver. Be that as it may, any negative news regarding the industrial use of silver has always been eclipsed by its role as a precious metal.

As gold prices rise, whether in the paper market or the physical market, silver surely benefits. This is because silver offers a greater exposure to the rising demand for a safe haven asset and does so at a cheaper price. Sadly, it has had to wear the thorny crown of being called “poor man’s gold.” I feel while this is a catchy phrase that allows gold to wear the crown of the king it, like most clichés, is untrue. Silver is the perfect currency for bartering. I can’t imagine using a gold double eagle as a medium of barter unless I was trading for a house.

Silver does have a high degree of volatility due to the health of the industrial sector. There a minute traces of silver in almost every electronic device that is made. Computers, IPads, IPods’, are a few examples of devices that use silver and when they are worn out or broken they end up in the landfill. At this time it is too labor intensive to make recycling the silver profitable but the day will come when that is not so.

Investing in silver brings many risks but in spite of these risks many investors still find silver a profitable investment. Indeed many investors say the return on investment (ROI) can far surpass gold exponentially as movements in the price over the last tear has shown. Over the next few years I expect gold to continue to rise in price and continue to reach new highs. I also expect silver to continue to outperform gold on a percentage basis. As gold has enjoyed a parabolic run in the last several months, when I look at the ratio of gold to silver I expect silver to continue to outperform gold and expect silver to be priced at about $80.00 by the middle of next year. Silver is the perfect alternative to gold.

According to the World Silver Survey 2011 world investment in silver rose 40% in 2010 to a new record of 279.3 million ounces. What I found fascinating was that the major demand came from the silver backed ETFs SLV, PSLV, SIVR, SIL, DBS and AGQ.. Physical markets also contributed to the demand.

Strong demand from Asian Markets was a large factor in the growth of import levels reaching record highs. I believe that it is purely human as silver’s allure is especially attractive to the growing middle class of China and India as silver is seen as a cheaper alternative to the safe haven of gold.

In conclusion, demand for silver in China grew by 67% between 2008 and 2010, according to the Hong Kong Mercantile Exchange, which recently began trading silver future contracts due to the amazing growth in the demand for silver. Growth in China and India in the physical markets alone is expected to grow another 30% this year. Physical bar and coin hoarding will continue to gain popularity amongst the Chinese investors as they prefer physical rather than future contracts. Silver demand from India is also expected to do well as the healthy monsoon seasons are increasing the purchasing power of rural Indian farmers who account for 60% 0f India’s total silver demand.

Europe Runs Out of Time, Impossible to Untangle, Breakup Inevitable

One of the many interesting aspects of the Eurozone crisis is how many key political and central bank leaders fail see (or at least admit) that Europe is out of time.

Even more peculiar are statements by ECB president Jean-Claude Trichet who finally does realize time is of the essence, yet Trichet “solution” is a set of measures that must be passed by all 17 nations when those nations cannot agree on EFSF funding, on Eurobonds, on collateral for Greece, or even on whether a fiscal union or transfer union must take place.

In some instances the differences boil down to big country vs. small country concerns. In other instances it is Southern “club-med” states vs. Northern states. Some countries refuse to give up sovereignty, while others welcome giving up sovereignty.

It does not help matters when German chancellor Angela Merkel seems to change her mind on something every other week.

German Court OK’s Bailouts, But “No Blank Check”

On Wednesday the German court ruled that bailouts were legal. However, chief judge Andreas Vosskuhle also stated “This was a very tight decision. It should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures”, adding that parliament was “forbidden from setting up permanent legal mechanisms resulting in the assumption of liabilities based on the voluntary decisions of other states.”

Finally, the court ruled government must get approval from parliament’s budget committee before granting aid.

Those rulings went pretty much as expected but parliamentary approval of any kind is yet a further restriction and will slow things downs, even if just a bit.

Incredibly Messy Politics

Italy’s prime minister has a voter approval rating of 22% (see Italy austerity plan dents Berlusconi govt support)

Merkel’s Christian Democrat party (CDU), only managed to pull in 24% of the vote in her home state in an election September 4th (See Merkel’s Credibility Shattered; CDU Party Defeated in Regional Election, Merkel Coalition at Risk)

Spanish Prime Minister Zapatero’s Socialist Party suffered a massive defeat over his austerity programs in May. It was the worst rout in 30 years for Zapatero’s Socialist party. (See Prime Minister Zapatero’s Socialist Party Routed in Spanish Elections; Antinuclear Greens Surpass Merkel’s Party in Local German Vote)

In Finland, True Finns party chairman, Timo Soini launched a scathing and accurate attack against Jean-Claude Trichet, Jean-Claude Junker, and the ECB for its policy raping taxpayers of various countries to pay back German, French, UK, and US banks that made stupid loans for stupid reasons. (See True Finns Party Chairman: Greece, Ireland and Portugal Ruined; Gangrene Spreads; Enron Looks Simple; Spain Next Zombie)

German Chancellor and French President oppose Eurobonds (see Merkel, Sarkozy Reject Euro Bonds and Expansion of Rescue Fund; What Does it Mean? Middle of the End for Merkel)

89% of the German population oppose the expansion of the EFSF and doubt that ever larger amounts will solve the debt crisis. 80% demand that parliament must agree each time before Germany can take on additional burdens and risks. 85% demand that financial institutions, rather than taxpayer, take the first losses when a country defaults. (see 90% do not want bigger bailout).

Marine Le Pen, a top French candidate who wants to “let the Euro die” is polling ahead of French President Sarkozy (see articles below)
The last two bullet points are from Bailout Rebellion in Germany, on ZeroHedge. Here are expanded excerpts from the original articles.

French President Nicholas Sarkozy May Be Ousted in Preliminary Voting

In French elections, the top two candidates face a runoff in the national elections. France 24 reports New poll shows far right could squeeze out Sarkozy

Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year’s all important 2012 presidential election, the French daily Le Parisien’s revealed on Thursday.

The poll confirmed a previous Le Parisien survey conducted in early March that gave Le Pen a considerable head start over Sarkozy, and even a small edge on IMF boss Strauss-Kahn. The March survey said Le Pen would gather 24% of French votes, beating Strauss-Kahn’s 23% and Sarkozy’s 20%.

In Thursday’s survey Strauss-Kahn climbed to 30% and Le Pen dipped down to 21%. Either way, the figures makes Le Pen a credible candidate in the 2012 race. Those polls were conducted in April before the Strauss-Kahn affair and I have not been able to find a more recent poll.

Marine Le Pen Says “Let the Euro Die”

The results for Le Pen are very interesting because of her stance on the Euro. Via Google Translate, please consider M. Le Pen says “let the euro die”.

We must “let the euro die a natural death,” means of reassuring the markets and revive the economy, said the president of the Front National Le Pen Marine, interviewed this morning on France Info.

Asked about the remedies it proposes to end the economic crisis, she said that we must “first stop bailouts repeat: there was Greece, now there will be Cyprus, Italy, the Spain … ” “There are masses of savings to do,” she said, particularly expenses related to immigration. “The cost of the AME (State medical assistance for undocumented) explodes, there are 20 billion euros of social fraud against which nothing is done,” she added, saying that “of 60 Vitale million cards, 10 million are false, that qualify for benefits unjustified “.

The market clearly says “Time’s Up”, yet politicians cannot agree on one major thing, and to top it off, voters are fed-up with austerity measures, bailouts, and politicians.
Clearly Le Pen is an anti-Euro, anti-immigration candidate and that is just the kind of message that can easily catch fire in this environment.

Merkel Proposes “Two Speed Europe” in Divide and Rescue Plan

Given that 17 countries cannot agree on anything, and voters are in open revolt of current leaders, it is preposterous to believe a “Two-Speed” Europe is the answer.

Merkel discarded “Two Speed Europe” long ago, but the plan is back in play as noted in Berlin Lays Groundwork for a Two-Speed Europe

The chancellor is planning her next political policy reversal . Until very recently, she has insisted that she was firmly opposed to creating divisions within Europe. But under the pressure of the euro crisis , Merkel has recently been thinking about abandoning the concept of a unified EU — and assigning a key role to [Belgian politician and president of the European Council] Herman Van Rompuy in the process.

A New Power Center?

Today, it is primarily Great Britain that is preventing the EU from growing closer together.

Merkel, though, has had enough — and is now planning a two-speed Europe. It would mean tightly interlocking the countries of the euro zone, possibly by means of a separate treaty that would apply in parallel to the EU Treaty of Lisbon. This was the concept German Finance Minister Wolfgang Schäuble proposed last week to the leadership of his party, the center-right Christian Democratic Union (CDU). Merkel sees Van Rompuy, who already chairs the council of the 27 EU leaders, as the head of the new power center.

In addition to the club of 27 nations that primarily manages the common domestic market as it has done until now, Merkel envisions a tight alliance of the 17 euro-zone members — one which would unify their fiscal, budgetary and social policies. This would create a two-class club, raising questions like: What happens to the European Commission? Will it still be responsible for economic matters in the euro zone, or will there be a new organization? The same questions apply to the European Parliament and the European Court of Justice in Luxembourg. Would all of these institutions have to be duplicated, meaning even more bureaucracy, effort and expense?

There are no answers yet to these questions, and there is already plenty of skepticism. The European Commission is just as opposed to Merkel’s plans as most members of the European Parliament and many smaller EU countries are. They also have some within Merkel’s own ranks raising their eyebrows. “We will not rescue the euro by creating more and more committees and instruments,” says Horst Seehofer, the chairman of the CDU’s Bavarian sister party, the Christian Social Union (CSU).

That is precisely what Merkel has in mind. She can draw on a concept known as “Core Europe,” which was developed in the 1990s by the then-chairman of the CDU/CSU parliamentary group, a certain Wolfgang Schäuble, who now serves under Merkel as finance minister. Both have established various measures to rescue the euro in recent months, some for the EU as a whole and others exclusively for the 17 euro-zone member states.

For starters, blaming this on the UK is absurd. The UK was smart to stay out of this mess.

The article continues …

Giving Up Sovereignty

The scope of a joint corporate tax proposed by Merkel and Sarkozy at their meeting in mid-August is also likely to be expanded beyond the two largest member states. “This is much more broadly conceived,” says a source within the German government. The two leaders envision a largely uniform tax for corporations within the euro zone.

Ireland refused to give up its tax advantages, and why should it? Indeed Ireland ought to tell the EU to stuff it right now and leave. Tax advantages are the only way Ireland has to grow out of this mess.

Part 2: A New Shadow Government for the EU

But that isn’t enough for Merkel and Sarkozy. They want the 17 leaders of the euro zone countries to convene for a summit twice a year, with Van Rompuy serving as its permanent chairman.

The Belgian would also receive a bureaucratic structure for his new responsibilities, giving the Euro Group its own secretariat. According to initial ideas, the new agency would be appended to an existing European Council secretariat, so that the separation doesn’t seem too obvious.

The group of finance ministers of the euro zone, which prepares the groundwork prior to meetings of heads of state and government, may also be strengthened. An idea being considered is to provide it with a full-time chairman, who would serve as a contact for Van Rompuy. Luxembourg Prime Minister Jean-Claude Juncker has taken care of the duties until now. The new chairman would be a former finance minister, making him more acceptable to a group of his peers.

While that is still in the planning stages, it has already been resolved that the working group of finance state secretaries will have a full-time chairman with his own team of employees. The body, with the cumbersome title Eurogroup Working Group, does the detail-oriented heavy lifting ahead of finance minister meetings.

In short, a kind of shadow government is currently taking shape in Brussels. But officials in Berlin have begun considering ideas which go even further. Merkel, for example, is thinking about introducing a right to file complaints before the European Court of Justice against euro-zone member states that violate the Stability Pact. Such a move would require an amendment to the Lisbon Treaty.

Merkel’s Mind is Fried

Merkel’s mind is clearly fried. How many years would it take to get agreement on something like that? Even two years is too long. She will be long gone.

It’s time to start asking serious questions like …

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The current set of politicians all want to “save the Euro”. But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder it bought them.

Eurozone Breakup Inevitable

Merkel’s half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.