Jul 06

Today’s News July 6, 2015

  • Silver Market Change Report 5 July, 2015

    The prices of the metals drooped further this shortened week (Friday was a holiday in the US, as the Fourth of July, Independence Day, occurred on Saturday). The S&P 500 index also fell this week, as did crude oil.

    Markets all over the world are beginning to feel shocks from Greece. As we write this, on Sunday evening Arizona time, the Greeks voted “No” to the terms of the bailouts offered them. The simple fact is that Greece cannot pay. What they cannot pay, they will not. What they don’t pay, has to be written off by whomever holds it as an asset. Some of these write-offs will obligate European governments to pay in more euros to recapitalize the now-insolvent entities. For example, countries like Spain that need bailouts themselves will have to contribute to the European Central Bank.

    A Greek default is not about the size of its GDP, but about the size of the holes blown out of various balance sheets, where Greek debts used to be marked as their assets. We don’t know precisely how much the Greek government, Greek central bank, Greek commercial banks, and other Greek debtors owe. According to Demonocracy, the total is €360 billion (and they have a very cool infographic to illustrate it). We suspect that, at the end of the day, the number turns out to be greater than that.

    The Greek default is a forcible contraction of credit (Keith’s definition of deflation), and bound to be negative for the prices of ordinary assets. That said, something extraordinary has occurred in the silver market this week.

    Read on, for the only accurate picture of the supply and demand conditions in the gold and silver markets, based on the basis and cobasis.

    First, here is the graph of the metals’ prices.

           The Prices of Gold and Silver
    Prices of gold and silver

    We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

    One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

    Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

    With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

    Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It ended unchanged this week.

    The Ratio of the Gold Price to the Silver Price
    Gold to silver ratio

    For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

    Here is the gold graph.

           The Gold Basis and Cobasis and the Dollar Price
    Dollar price and gold basis

    The dollar rose (i.e. the price of gold, measured in dollars, fell). Scarcity (i.e. the cobasis, the red line) rose with the move. This is the pattern that repeats time and again. When speculators buy futures contracts, the price of the dollar falls and the scarcity of gold falls with it. This week, speculators sold gold, driving up the price of the dollar (to 26.67mg) and the scarcity of gold rose as well.

    The fundamental price of gold did not change at all. It’s still 30 bucks over the market price.

    Now let’s look at silver.

    The Silver Basis and Cobasis and the Dollar Price
    Dollar price and silver basis

    Last week, we said:

    “The fundamental price of silver rose a nickel this week. It’s $17.39. [thanks to a reader who caught the typo—the correct number was $15.39.]”

    And the price this week dipped several times to about $15.46. That is pretty darned close, and closer than it had gotten in years.

    In the big picture, the price did not move much on the week. However, look at that red cobasis line go. It was a mere 7 basis points last Friday. It ended this week at 100 bps. The cobasis of farther-out contracts also rose proportionally.

    Suddenly, the silver market is firm.

    Think like an arbitrager for a minute. It’s possible to earn 1% annualized, on a simple trade with no risk (as conventionally understood). Just sell a bar of silver and buy a contract for
    September delivery—called     decarrying the metal. The trade matures in no more than 3 months, and you end where you started (plus the free 1% profit). Show us any other investment that pays so much for so little duration, and it will have “risk” written all over it.

    And yet, that trade is now offered in silver.

    We can name two reasons why the cobasis might skyrocket. One is that there is a risk. If your counterparty defaults, then you don’t get your metal back. You may get dollars. The exchange will insist the dollars are equivalent to the metal, but that’s small consolation.

    We do not believe this is the main problem now, because it’s not occurring in gold. If the banks were in imminent danger, the gold basis would not be quiescent.

    The other possible reason is that there’s a growing shortage of silver. Of course, in order to decarry silver, you have to have the metal. If it’s not available, you can just wistfully watch the rising cobasis.

    So now, for the first time in about two years, the fundamental price of silver is above the market price, about $0.35 over.

    We’re reminded of a dancing bear. It’s not a particular good dancer. What’s interesting is that it’s a bear. And it’s dancing. This is not a particularly big fundamental price premium over market. What’s interesting is that the fundamental price of silver is above the market.

    Unless you really like to trade the bleeding edge of a signal change, you may not want to jump in here. Silver’s newfound scarcity could disappear as rapidly as it appeared. And even if it’s stable, it does not mean that the fundamental price must necessarily skyrocket.

    We would recommend waiting to see what the markets bring us, not to mention the near-term fallout from Greece this week.

     

    Keith is speaking at FreedomFest this week in Las Vegas.

     

    © 2015 Monetary Metals

  • EuRo ACHiLLeS…

  • Volatility, Confusion Reign As PBoC Intervenes: Chinese Stocks Surge Then Tumble

    “Rainbows always appear after rains,” China’s state media said over the weekend, in a blatant attempt to create the conditions for a self-fulfilling prophecy when the country’s battered equity markets opened for trading on Monday. 

    China’s brokers and mutual funds each took steps on Saturday to help stabilize the market which has collapsed 30% in just three weeks, thanks in part to a massive unwind in the shadowy world of backdoor margin lending.

    On Sunday, the China Securities Regulatory Commission announced that China’s central bank is set to inject capital into China Securities Finance Corp which will in turn use the funds to help brokerages expand their businesses and reinvigorate stocks. Translation: China’s central bank is now underwriting brokers’ margin lending businesses. 

    Now, the trading week is officially underway and the above-cited “rainbow” thesis is being put to the test early and often as panicked housewives and banana vendors looking to sell the rips battle the PBoC for control of an insanely volatile market.

    As we noted earlier, it may now be too late to resurrect the bubble because the psychology has changed irreparably: “I didn’t sell at the peak because people all say the market will rise beyond 6,000 points,” Shao Qinglong, a public service worker who has already lost over a quarter of his capital investing in stocks, told Reuters, adding that all he is waiting for is for the market to recover enough for him to break even. “I’m now waiting for the market to rebound so that I can get out.”

    True to form, the SHCOMP opened sharply higher in a bout of post-PBoC euphoria before diving just seconds later, stabilizing, and then proceeding to crash anew, erasing most of the opening gains in a matter of minutes.

    One might have expected this. After all, the fact that the central bank was effectively forced to intervene over the weekend is precisely the opposite of something that would inspires confidence: a simple fact that not one central bank has grasped in the past 7 years.

    After all, the more backstops and interventions are required, the more fragile and less “fundamental” any given market is.

    Of course, the fact that throwing the kitchen sink at the problem has so far resulted in only a feeble rebound, one which most are taking as an opportunity to sell into, will hardly help. And keep in mind, even if stocks closed green today, there is a long way to go to recover the recent bubble highs, highs which everyone now knows are well, bubbly.

    With millions of shell-shocked, over-leveraged retail investors looking to cut their losses just as the PBoC funnels money to brokers to ramp up margin trading, expect the wild swings investors have seen over the course of the last two months to continue and indeed to become even more exaggerated as the battle between Politburo plunge protection and frantic farmer selling heats up.

  • Greferendum Caption Contest: Two For The Price Of One

    We were conflicted about today’s choice of a caption contest to summarize what was the most surreal day in modern European history: a day in which one nation voluntarily made the choice to take steps toward a severance of its ties with some 18 other nations through what was recently seen as an “irreversible” currency.

    So here are the two choices for today’s caption contest: we leave it up to readers to decide which is more appropriate.

     

    And:

  • Hillary Ropes Off "Everyday" Reporters, Creates Media Spectacle

    In case anyone forgot, Hillary Clinton — whose demands for a keynote speech appearance include a quarter of a million dollars, a private jet (“a Gulfstream 450 or larger), and $1,000 for a stenographer — is running for “everyday Americans.” 

    Presumably, these are the “folks” who make up the 83% of American workers classified by the BLS as “non supervisory” and probably include those whose job it is to report the news, which is why we were surprised (not really) to see that when it comes to “everyday” reporters, covering a Clinton rally means being herded along like cattle inside a moving rope pen which looks to have been designed to separate the former First Lady from ‘the rest of us’:

    *  *  *

    The media has predictably had a field day with the images. It’s not yet clear what impact the debacle will have on Clinton’s ability to “rope in” voters so to speak.

  • IOUs It Is: Why Greece May Have A Problem Printing "Rogue" Euro Banknotes

    Previously we reported that in a heretofore unknown exchange, Varoufakis told Telegraph’s Evans-Pritchard that “if necessary we will issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago.” Shortly thereafter, SocGen released a note in which it confirmed largely what the Greek finmin may have said, namely that “Greece is likely to issue a form of parallel currency.”

    Here is SocGen’s argument:

    Greece is likely to issue a form of parallel currency:

    • Indeed, the Greek government is already running a primary budget deficit and no other form of funding will be available in the coming weeks. It is worth noting that if the ECB was to decide to reduce or stop allowing Greek banks to roll-over Greek TBills, the issuance of IOUs would become even more crucial for the government.
    • On top of that, we believe that the IOUs may also be used to help alleviate the financial stresses on Greek banks, such as the issuance of promissory notes in IOU terms in return for the redenomination in IOUs of part of banks’ liabilities (including time deposits above a specified amount). In this case, the IOUs would most likely end up as the new Greek currency. Indeed, living with closed banks and frozen deposits cannot last long. The government would eventually offer (with a discount) the chance to convert blocked time-deposits in euros into cash deposits in IOUs. The government would just have to print new banknotes and coins to allow free deposit withdrawals.

    The idea of a parallel currency is not uncommon. In particular, IOUs have been used during periods of financial and economic stress, with extreme examples as some US states and Argentina (the latter eventually ending up with a massive devaluation of the peso).

     

    The academic literature presents several forms of parallel currency, with some creating a new form of securities, backed by the government’s ability to pay back its debt (e.g. California in 2009) and others backed by future taxes (similar to a tax credit).

     

    Unlike the former, the second category would have the advantage of not increasing the amount of debt owed by the Greek government. For example, the Greek government could pay part (let’s say 30%) of civil servant wages, benefits and pensioners in IOUs and part in euros. The IOUs could become a sought after asset if they offered a discount on tax payments (let’s say 5%). The IOU would be used in the Greek territory only. It could be used to trade basic needs (food, health, education, public services). However, the implementation and legal risks implied by the introduction of IOUs are elevated:

    • The logistical organisation needs to be put in place swiftly and smoothly while social order needs to be maintained;
    • As seen in Argentina, introducing IOUs could risk backfiring into full force devaluation. In the case of Greece, creating a parallel currency could be seen as a first step to Grexit (even with a Yes vote) and not as a temporary solution as in California. Conversely, if the IOUs introduced fail to be seen as a credible means of exchange or do not offer attractive characteristics, they would rapidly disappear in the private sector (as was the case in the Canadian province of Alberta in 1936-37).
    • The IOUs would be at risk of breaching the EU Treaty. Indeed, Article 128 states that “the banknotes issues by the ECB and the NCBs shall be the only such notes to have the status of legal tender within the Union”. As long as Greece remains within the EU, the IOUs could be used as a medium of exchange but would not have the privilege of a legal currency (Regulation 974/98).

    In this light, Greek IOUs now seem almost inevitable, especially since the other, “more nuclear” option, going rogue and printing Euro banknotes without the ECB’s approval, appears quite limited even if purely logisically.

    This is what the ECB says on the topic:

    Since 2002, euro banknotes have been produced jointly by the national central banks (NCBs) of the euro area. Each NCB is responsible for, and bears the costs of, a proportion of the total annual production in one or more denominations.

    The annual production of euro banknotes needs to be sufficient to meet expected increases in demand, such as seasonal peaks, and to replace unfit banknotes. It also has to be able to cope with unexpected surges in demand. Production volumes for the years ahead are calculated on the basis of forecasts provided by the NCBs and a central forecast made by the ECB, thus combining national expertise with a euro area-wide perspective. The figures calculated need to be approved by the Governing Council of the ECB.

    And here is the biggest reason why if Greece relied on this plan it may have serious problems: per the ECB, the only dispensation the Greek currency printer has is for €10 bills.

    Sadly, filling up holes worth tens of billions with “rogue” €10 bills would be problematic logistically, and we believe, Greece would run out of printing supplies long before it got to printing anywhere close to the required and desired amount, leaving aside all other questions of propriety and legality.

    So IOUs it is. The only question is how these shall be named. Last time we checked (in June 2012), the New Drachma (aka XGD) was briefly taken…

    … but after the summer of 2012 when the ECB was doing “whatever it takes” to show that the EUR is “irreversible” (only to prove three years later just how reversible it truly is) the XGD is once again available. Go for it Greece.

  • China "Crosses Rubicon" With Stock Bailout; BofA Says PBoC Risks "Hurting Its Credibility"

    Earlier today in “Panic: China Central Bank Steps In To Bailout Stocks As Underwater Traders Pray For A Rebound,” we noted (without much surprise) that the PBoC has officially taken the plunge. Late on Sunday, the China Securities Regulatory Commission announced that China’s central bank is set to inject capital into China Securities Finance Corp which will in turn use the funds to help brokerages expand their businesses and reinvigorate stocks. Translation: China’s central bank is now underwriting brokers’ margin lending businesses. 

    Although Beijing will surely contend that this does not amount to Chinese QE because the central bank isn’t actually adding equities to its balance sheet (or at least as far as we know), it certainly sounds as though the PBoC is now set to directly fund leveraged stock purchases by retail clients and if that doesn’t count as using the central bank’s balance sheet to monetize risk assets then we don’t know what does. 

    The move came after a consortium of brokers agreed on Saturday to commit 15% of their collective net assets to propping up China’s flagging stock market. The amount of support sums to just $19 billion and will be allocated to blue chip stocks, meaning, in no uncertain terms, that the initiative will be woefully inadequate to combat the rapid unwind of hundreds of billions of off-the-books margin trading. 

    And so, the fate of the market now lies squarely in the hands of the PBoC who, as BofAML notes, may have just “crossed the Rubicon.” 

    As we argued before, the A-share market may not bottom until the government, possibly via the PBoC, becomes the buyer of the last resort. It seems that the government might have just taken the first step in that direction on Sunday night with PBoC’s promise to provide liquidity support to stabilize the market. We expect the A-share market to rebound somewhat in coming days, especially large cap names. If that happens, we suggest investors sell into the rally, especially brokers. Fundamentally, with SHCOMP ex. banks trading at 31x trailing 12-month earnings, the market appears very expensive to us. We assess that there is still a fairly high chance that market may fall sharply again at certain point over the next few months, unless the PBoC makes an open-ended commitment to support the market. 

     

    What the government did over the weekend 

    Among the many things announced over the weekend to support the market, three are meaningful, in our view: 1) a de facto suspension of IPOs in the A-share market; 2) the set-up of an Rmb120bn market stabilization fund (MSF) by 21 major domestic securities houses, coordinated by the CSRC; and 3) the

    PBoC’s promise to provide liquidity support to China Securities Finance Corporation (CSFC). CSFC is the clearing house for margin financing and stock lending businesses in China and it’s also the sole provider of margin financing loan services to securities houses. Among the three measures, the third is by far the most important in terms of potential impact on market psychology by our assessment – we doubt that the first two alone would be able to stop a potential market rout on Monday. 

     

    Has PBoC crossed the Rubicon? 

    CSRC’s announcement on the liquidity support does not spell out how the liquidity will be used by CSFC, nor does it say anything about the size of the potential support. We suspect that the initial PBoC loans to CSFC will be used on Monday morning to fund the MSF until brokers’ funds arrive (by 11am on Monday as ordered by the CSRC). Local media reported that CSRC is confident of Rmb1tr inflows into the A-share market in short order. So it’s also possible that PBoC might have committed to provide a few hundreds of billions of Rmb for the time being by our assessment, with the balance of the inflows potentially coming from pension funds, insurers etc. At this stage, it doesn’t appear to us that PBoC is prepared to buy stocks itself or make its commitment to provide support open-ended. 

    While we would certainly agree that the PBoC has indeed “taken the first step in the direction” of becoming the buyer of last resort, we’re not so sure the distinction between the central bank “buying stocks itself” and providing the funds for brokers to facilitate margin trading is very meaningful.

    The central bank is effectively monetizing risk assets — the fact that the buyers are one degree removed from the PBoC is largely just a matter of optics. Also, we’re not at all sure that the central bank will not move very quickly to make its support “open-ended” — as discussed here on any number of occasions, Beijing simply cannot afford a stock market crash and thus will not go down without a fight.

    All of that said, the market’s reaction to what the PBoC probably thought would be a potent one-two punch (the simultaneous cut to both the benchmark lending rate and the RRR rate) was met with still more selling, which is of course just another example of central banks losing control (see Sweden for further evidence). On that note, we’ll close with the following warning from BofAML:

     If PBoC becomes the main source of market-supporting liquidity, we expect the central bank’s credibility to be hurt.

  • More Sellside Reactions To The Greek Referendum

    Today, Greeks sent a resounding message to Brussels, Frankfurt, and Berlin that they are not willing to acquiesce to further humiliation at the hands of creditors and that, even if it means braving the economic abyss in the short-term, the country is determined to salvage a better tomorrow from what, after today’s referendum, are the smoldering ashes of Greece’s second bailout program.

    Now, a stunned sellside — which had, over the past three months, very carefully tweaked their base cases to reflect the growing risk of Grexit — is scrambling to explain to nervous clients what happens next.

    Having heard from JPM earlier, we bring you the latest from Barclays, Deutsche Bank, and RBC.

    * * *

    From Barclays:

    A “no” vote means EMU exit, most likely

    We argue that an EMU exit would become the more likely scenario, even if Greece remaining in the euro area cannot be ruled out. Agreeing on a programme with the current Greek government would be extremely difficult for EA leaders, given the Greek rejection of the last deal offered. EA leaders accepting all Greek proposals would be a difficult sell at home, especially at the Bundestag or in Spain ahead of the general elections.

    How will the crisis play out? The bank liquidity crisis is likely to turn into a solvency crisis once the ECB shuts down ELA, probably no later than 20 July (when a EUR4.2bn payment to the ECB becomes due). Fiscal problems would become more acute; the government may be forced to issue IOUs, which effectively become a parallel currency to the euro. A new currency by the central bank of Greece is likely to eventually become necessary to inject both liquidity and recapitalise banks. At this stage, we would expect IOUs to be converted into the new Greek drachma (NGD).

    The NGD would likely depreciate significantly and hence many local companies (clearly those in the non-tradable sector) and households would need to default on their foreign currency debt, now including euro-denominated liabilities. Many of the domestic contracts that are now denominated in euros would also become unviable and need to be restructured. Non-performing loans would surge because of: 1) the negative balance sheet effects for firms and households; and 2) the local currency needed to pay euro debts would increase with the devaluation, exceeding the increase in local currency revenue. Likewise, the government would also be forced to default on its euro-denominated liabilities.

    Redenomination away from the euro would also cause massive transfers between agents, adding to the above-mentioned transfers between debtors and creditors. A majority of households with local accounts and savings will suffer substantial losses while cash rich agents with accounts abroad will be the big winners and could take advantage of the chaos to seize capital and production capacities. Given the weak state of the government, these redistributions would likely benefit the already oversized unofficial sector.

    In short, the existing contracting framework and financial infrastructure would be broken and need to be rebuilt. Inflationary finance would likely be used, to some extent at least, to replace the official finance that now supports Greece. Politically difficult fiscal and structural reforms would still be required to make the country more competitive, and promote economic growth.

    * * *

    From RBC:

    In a normal referendum the next steps would be binary––something happens or it doesn’t. But this is no ordinary referendum.

    We argued last week that the next steps for a ‘no’ or a ‘yes’ vote look superficially similar. The government and creditors will have to start negotiations on a third programme (since the second one expired on Tuesday). Both sides indicated they were willing to do so even in the event of a ‘no’.

    What happens on Monday?

    Various European-level meetings are expected to take place. These include a EuroWorking Group meeting (i.e. top-level officials from euro area finance ministries). This may then be followed by a eurogroup teleconference (i.e. finance ministers-level) to take stock of the situation. At the Leaders’ level, German Chancellor Merkel will meet French President Hollande for a bilateral in Paris, with both calling for a European Council summit to follow on Tuesday. Separate from the political proceedings, the ECB’s Governing Council is also expected to meet to discuss Emergency Liquidity Assistance (ELA) for the Greek banking sector, though this meeting has not yet been confirmed.

    The first thing to watch is how Syriza responds

    On Thursday, Greek Prime Minister Tsipras claimed in the event of a ‘no’ outcome, he would be in Brussels within 48 hours signing a deal. In practice that is almost impossible––any new deal will need a lot of technical work so at best is a few weeks away. But in the first 48 hours there should be some sign of what willingness there is to compromise on both sides. If Tsipras takes a defiant tone (citing the democratic choice of the Greek people) we expect Europeans leaders to respond that they are also democratically elected (as they did after the January election). In that case we would expect the market reaction to worsen.

    The second thing to watch is how the ECB responds

    The Governing Council is expected to meet on Monday to take stock of the situation. A Greek government spokesperson revealed that the Central Bank of Greece would submit a request to the ECB for a further increase to the ELA facility limit, which currently stands at €89.4bn. This follows from various press reports, including Bloomberg, indicating that Greek banks were struggling to cope with deposit withdrawals even with the capital controls already in place. Note that prior to the weekend, the head of Greece’s banking association, Louka Katseli, said that ‘liquidity is assured until Monday, thereafter it will depend on the ECB decision.” She added that the liquidity cushion banks currently had stood at about EUR 1bn.

    We nevertheless consider there to be limited prospect of further extension to ELA at this stage, with the risks instead skewed towards the Governing Council restricting access to the facility, including by increasing collateral requirements further. An increase to the ELA limit was not a ‘given’ even if the referendum had yielded a ‘yes’ outcome, and as such a ‘no’ vote makes that decision even more difficult, in our view. Recall that ELA lending requires banks to post “adequate collateral”, and may only be provided to “illiquid but solvent” institutions. In the current environment, whether such conditions are satisfied is predicated in part on a judgment about the likelihood of a new financial assistance programme being agreed for the Greek sovereign.

    Does this mean euro exit?

    A ‘no’ outcome certainly increases the risk. This is particularly the case if the Greek government believes that it will have substantially more bargaining power with the institutions and brings more ‘red lines’ to the negotiating table. Much will depend on the tenor of discussions when they begin next week.

    *  *  *

    From Deutsche Bank

    There are three near-term implications of the results.

    First, the vote marks a big political victory for PM Tsipras. Today’s vote will allow the PM to maintain the political initiative within Greece, re-enforcing his leadership within the party as well as the government. It will be perceived by the government as a strong backing around its tough negotiating strategy.

    Second, the poll masks a deeply divided electoral body. The win to the “no” vote was decisive. But opinion polls over the last few days have continued to show an overwhelming support for euro membership. How this can be reconciled with the “no” vote and rising economic costs remains to be seen in coming days. Either way, the referendum process itself and the outcome has increased polarization in Greece. Political tension both within parliament and in potential political demonstrations will be ongoing and unpredictable.

    Third, the referendum result now requires Europe to more formally adopt a position on Greece, particularly given the size of the “no”. The European message on whether rejection is equivalent to Eurozone exit has not been consistent, with both Merkel and Schauble in particular not adopting this interpretation. A more clear reaction from Eurozone members should now be expected.

    Next steps

    In coming hours, the focus will shift back to the European response.

    Most imminently, Greek bank ELA liquidity is likely to be fully exhausted over the next few days, leading to an exhaustion of ATM cash reserves as well as an inability to finance imported goods via outgoing payments. The hit to the economy will be big. The Bank of Greece is holding a conference call with the Greek banks this evening to discuss the liquidity situation.

    The ECB is scheduled to meet tomorrow morning to decide on ELA policy. An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to Eurozone exit. All outstanding Greek bank ELA liquidity (and hence deposits) would become immediately due and payable to the Bank of Greece. The maintenance of ELA at the existing level is the most likely outcome, at least until the European political reaction has materialized. This will in any case materially increase the pressure on the economy in coming days.

    On the political front, focus will now shift to whether the damaged relationship between Greece and Europe’s creditors can be repaired and the immediate prospect of a resumption in negotiations. PM Tsipras last week officially applied for a 3rd ESM program, but the application was rejected pending the outcome of the referendum..

    The risk is that relationships between Europe and Greece have been damaged to such an extent, that additional conditions are set before negotiations around an ESM program can be initiated. The overall ESM process will in any case take time. An ESM program requires prior ECB/IMF assessment of financing needs/debt sustainability as well as Bundestag parliamentary approval before talks around a staff-level agreement can begin.

    In the meantime, political developments within Greece will be just as important. The PM’s commitment to re-start negotiations will be tested tonight and tomorrow morning..

    The opposition, in the meantime, has been weakened. Influential New Democracy party member Bakoyiannis is reported this evening to have asked for former PM Samaras’ resignation to allow the party to re-group. The prospect of ongoing and unpredictable shifts in politics cannot be ruled out over the course of the next few weeks given rising pressure on the economy.

  • Greferendum Results In Landslide "No" Victory

    Update 2: with virtually all polling completed, the final result is 61.3% No, 38.7% Yes – a whopping rejection of Troika hegemony which may also be the final nail in any negotiations between Greece and the Eurogroup.

    Update: The Greek interior ministry vendor Singular Logic projects that “No” vote will prevail with over 61% of vote in Greek referendum.

    It would seem that the Troika’s fearmongering campaign backfired:

     

    And:

    Earlier:

    It seems the early forecasts showing the No vote in the lead were right: according to the Ministry of the Interior, with over 90% of the vote counted, the “No’s” have it with well over 61% of the vote.

    Keep track of the votes as they come in live at the following page:

    Source: ekloges

  • S&P Futures Tumble 1.5% At Open: ES Down 33, Brent Under $60

    The number everyone’s been waiting for all afternoon is finally here: moments ago ES opened for trading after the holiday weekend and it’s not pretty, down 1.5% to 2035 in early illiquid trading. Expect many wild gyrations especially if China, which is set to open in three hours, is unable to halt its market crash having now thrown everything and the kitchen sink at the relentless selling.

     

    The SNB is already in place, ready to sell CHF and buy every EUR it can get its hands on to avoid another embarrassing incident:

     

    And here is Brent, sliding under $60 for the first time since April:

    We hope the NY Fed and its less than arms length Citadel ES spoofing relationship, or at least the SNB, will be up to the task of pushing futures higher as the overnight session progresses to preserve the artificial sense that “all is well” in a world that may never be the same again.

  • Eurogroup In Shock: Finance Ministers "Would Not Know What To Discuss" After Greferendum Stunner

    Just out from Reuters:

    • FINANCE MINISTERS “WOULD NOT KNOW WHAT TO DISCUSS” AFTER EMERGING GREEK ‘NO’ VOTE-EURO ZONE OFFICIAL

    More:

    There are no plans for an emergency meeting of euro zone finance ministers on Greece on Monday after Greeks voted overwhelmingly to reject the terms of a bailout deal with international creditors, a euro zone official said on Sunday.

     

    Asked whether a meeting of the Eurogroup was planned for Monday, the official, speaking on condition of anonymity, told Reuters: “No way. (The ministers) would not know what to discuss.”

    May we suggest containing the fallout, whether in capital markets or in the resurgent mood in the other PIIGS, as a primary topic?

    And meanwhile, while we symptahize with the Greeks officially telling the Troika to “fuck off”, they may have other liquidity problems of their own.

    Greeks cannot withdraw cash left in safe deposit boxes at Greek banks as long as capital restrictions remain in place, a deputy finance minister told Greek television on Sunday.

     

    Greece’s government shut banks and imposed capital controls a week ago to prevent the country’s banks from collapsing under the weight of mass withdrawals.

     

    Deputy Finance Minister Nadia Valavani told Alpha TV that, as part of those measures, the government and banks had agreed at the time that people would also not be allowed to withdraw cash from safe deposit boxes.

    Surely the Greeks bought enough gold and/or bittcoin ahead of this outcome. Surely

  • Greece Contemplates Nuclear Options: May Print Euros, Launch Parallel Currency, Nationalize Banks

    As we said earlier today, following today’s dramatic referendum result the Greeks may have burned all symbolic bridges with the Eurozone. However, there still is one key link: the insolvent Greek banks’ reliance on the ECB’s goodwill via the ELA. While we have explained countless times that even a modest ELA collateral haircut would lead to prompt depositor bail-ins, here is DB’s George Saravelos with a simplified version of the potential worst case for Greece in the coming days:

    The ECB is scheduled to meet tomorrow morning to decide on ELA policy. An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to Eurozone exit. All outstanding Greek bank ELA liquidity (and hence deposits) would become immediately due and payable to the Bank of Greece. The maintenance of ELA at the existing level is the most likely outcome, at least until the European political reaction has materialized. This will in any case materially increase the pressure on the economy in coming days.

    All of which of course, is meant to suggest that there is no formal way to expel Greece from the Euro and only a slow (or not so slow) economic and financial collapse of Greece is what the Troika and ECB have left as a negotiating card.

    However, this cuts both ways, because while Greece and the ECB may be on the verge of a terminal fall out, Greece still has something of great value: a Euro printing press.

    It may not get to there: according to Telegraph’s Ambrose Evans Pritchard who quotes what appears to be a direct quote to him from Yanis Varoufakis, Greece will, “If necessary… issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago.“

    California issued temporary coupons to pay bills to contractors when liquidity seized up after the Lehman crisis in 2008. Mr Varoufakis insists that this is not be a prelude to Grexit but a legal action within the inviolable sanctity of monetary union.

    In other words: part of the Eurozone… but not really using the Euro.

    That’s not all, because depending just how aggressively the ECB escalates events with Athens, Greece may take it two even more “nuclear” steps further, first in the form of nationalizing the banks and second, by engaging in the terminal taboo of “irreversibility” printing the currency of which it is no longer a member!

    Syriza sources say the Greek ministry of finance is examining options to take direct control of the banking system if need be rather than accept a draconian seizure of depositor savings – reportedly a ‘bail-in’ above a threshhold of €8,000 – and to prevent any banks being shut down on the orders of the ECB.

     

    Government officials recognize that this would lead to an unprecedented rift with the EU authorities. But Syriza’s attitude at this stage is that their only defence against a hegemonic power is to fight guerrilla warfare.

     

    Hardliners within the party – though not Mr Varoufakis – are demanding the head of governor Stournaras, a holdover appointee from the past conservative government.

     

    They want a new team installed, one that is willing to draw on the central bank’s secret reserves, and to take the provocative step in extremis of creating euros.

     

    “The first thing we must do is take away the keys to his office. We have to restore stability to the system, with or without the help of the ECB. We have the capacity to print €20 notes,” said one.

     

    Such action would require invoking national emergency powers – by decree – and “requisitioning” the Bank of Greece for several months. Officials say these steps would have to be accompanied by an appeal to the European Court: both to assert legality under crisis provisions of the Lisbon Treaty, and to sue the ECB for alleged “dereliction” of its treaty duty to maintain financial stability.

    And who “unwittingly” unleashed all of this?

     Mr Tsakalotos told the Telegraph that the creditors will find themselves be in a morally indefensible position if they refuse to listen to the voice of the Greek people, especially since the International Monetary Fund last week validated Syriza’s core claim that Greece’s debt cannot be repaid.

    Recall last week we asked “Did The IMF Just Open Pandora’s Box?” We just got the answer. Our advice to Mme Lagarde: avoid stays at the Sofitel NYC for the next few weeks.

    As for Europe: welcome to your own personal Lehman weekend. We hope you too enjoy making it all up as you go along, because you have officially entered the heart of monetary darkness.

  • The "Nightmare Of The Euro-Architects" Is Coming True: JPM Now Sees Grexit, Eurogroup "Split In Coming Days"

    Perhaps the best summary – or epitaph, some would say – of the shocking events that took place in Greece this afternoon, and the resultant falling dominoes that are about to be unleashed, was given by Slovakia’s finance minister Peter Kazimir, who summarized events as follows:

    He followed it up with a Dylan Thomas quote:

    We assume the next lines goes as follows:

    “Rage, rage against the dying of the “irreversible” currency”

    And while we laid out what Deutsche Bank’s 4 possible scenarios are in the case of the now confirmed “No” vote, here is JPM’s Malcom Barr with the bank’s latest take on Greece which is that at this point, a Grexit is JPM’s “base case”… and it only
    goes downhill from there.

    After the “big no”, euro exit is our base case

    • After the “big no” it is now a race between two forces: political pressure for a deal, versus the impact of banking dysfunction within Greece
    • Although the situation is fluid, at this point Greek exit from the euro appears more likely than not

    Early indications of the official result suggest the result is a “No” by a comfortable margin. What happens next?

    First, it will be important to see the tone of the immediate political responses both within Greece and outside. We would expect the tone to be somewhat more conciliatory on both sides. Hollande and Merkel are to meet tomorrow night to discuss the issue, and as we understand it, the Eurogroup is scheduled to meet on Tuesday. We expect that a split is likely to emerge in the coming days.  The Commission and France (and possibly others) will argue that negotiations should resume immediately with an aim of finding agreement. Others will find it more difficult to return to negotiations with a newly emboldened Tsipras in short order.

    In the German case, for example, the Bundestag has to be consulted before Mr Schauble can enter into discussions about a new program for Greece (as requested on 30th June). However, the Bundestag has just broken for summer recess, so any such vote will require a recall. We have seen reports that talks at a technical level between Greece and the creditors may restart tomorrow (Monday), but we can imagine that the Bundestag will express its displeasure if it feels those discussions are in-progress without their express consent.

    Second, there are reports of an emergency meeting between the ECB, Bank of Greece and Finance Ministry tonight, and at the latest the ECB will likely have to take a decision about ELA support tomorrow (if not tonight). Our base case is that the ELA total will simply be rolled on a day-to-day basis for now. It is extremely difficult for the ECB to justify increasing the region’s exposure to Greece at this point. That effectively means that the Greek banks are likely to run increasingly short of cash, and the acceptability of electronic forms of payments will diminish rapidly.

    The Bank of Greece and Finance Ministry has a joint committee working to prioritize payments out of Greece for essential imports. There are reports, however, that suggest the logistical problems arising from these procedures are biting. Importers are facing delays in seeing their requests to make purchases processed. And Greek exporters are finding it hard to get payment in euros from those they sell to, as their customers do not want to hold any euro balances within the Greek banking system. It is difficult to get a sense of the scale of these issues at this point. But our best guess is that these issues will multiply in the days ahead.

    This suggests that what we see next will be a race between two forces: political pressure to move toward an agreement despite resistance from a number of northern European parliaments, versus the increasingly unpleasant implications of a dysfunctional banking system on the other. This latter force is unpredictable: it may manifest itself in pressure on the government to stand down, or it may generate a more unified “siege mentality” within Greece. The July 20th payment of €3.5bn to the ECB as Greek bonds mature creates one possibly fixed point as we look forward, but our sense is that could be dealt with via a number of mechanisms if political talks are progressing (transfer of SMP profits, short-term ESM loan, for example).

    Our base case is that the pressures coming from a dysfunctional banking system in Greece will shorten the time horizon to negotiate a deal to a handful of weeks. As that pressure builds, there is likely to be a temptation to call a referendum in Greece on euro membership, and for the state to begin issuing I-O-Us or similar and giving these some status as legal tender. To the extent that pensioners and public sector employees find themselves being paid with such instruments, it takes the banks further away from solvency (they have liabilities in euros, but will have loans to individuals being paid or receiving “i-o-u” s which will be worth a lot less). Meanwhile, we expect at least some countries in the rest of the region (not least Germany) will not hurry over the design of a new program, and will find it difficult to get parliamentary assent for any such program.  

    This is a path that suggests to us that there is now a high likelihood of Greek exit from the euro, and possibly under chaotic circumstances. Perhaps the rest of the region will agree to a reasonably quick deal, or the ECB will raise ELA enough to retain minimal viability in the payments system. Perhaps the pressures of dysfunctional banks will force Mr Tsipras to stand down, and a deal is subsequently made. But for now, we would view a Greek exit from the euro as more likely than not.

  • Wall Street's Next Bonanza: Subprime Marriage-Backed Securities

    Submitted by Daniel Drew via Dark-Bid.com,


    The last crash was caused by reckless investments in subprime mortgage-backed securities, an ingenious way to repackage and redistribute staggering amounts of credit risk to unsuspecting investors. After losing their house and their money, some investors may take comfort in their enduring marital relationships. Unfortunately, marriage is one of the riskiest bets of all, which makes it a prime, or should I say “subprime” target for Wall Street’s masters of innovation.

    After watching oil titan Harold Hamm pay his ex-wife $1 billion, I couldn’t help but wonder where he went wrong in the relationship department. Then again, he’s not exactly a shining example of risk management; he lost $10 billion in the oil price collapse, or the equivalent of 10 ex-wives. Most Americans can’t afford to pay their spouse $1 billion or even $15,000, which is the average cost of a contested divorce. Where there’s risk, Wall Street is not far away.

    One of the remarkable features of modern society is the seemingly endless amount of ways to repackage risk and distribute it to those who have a demand for it. The wacky world of the insurance industry seems to know no bounds. From vanilla products like car insurance to the ultra-weird like Troy Polamalu’s $1 million hair insurance, you never really know what you’re going to see next. While there are certainly notable individual examples of insurance oddities, nothing has the potential to create widespread effects like marriage insurance.

    Provided by Safeguard Guaranty, marriage insurance is sold in units for $15.99 per month, which covers $1,250 in potential divorce costs. That’s $192 per year for one “unit,” which gives the insurance company a break-even point of 6.5 years, not including overhead. They even have a divorce probability calculator that is based on over 20,000 interviews. Supposedly, it has an accuracy rate of 87%. They don’t elaborate on their formula, but you can get an idea of their inputs by answering some of the questions.

    If marriage insurance sales take off, it’s only a matter of time before Wall Street repackages it and sells it to investors via subprime marriage-backed securities. A boom in marriage speculation would ensue. Did you see your neighbor with his mistress last night? Buy some MBS credit default swaps on him and tell his wife what you saw. Is your other neighbor away from home a lot? Buy some MBS insurance on his wife, seduce her, and when they get divorced, you can cash in. Consider it “inside her” trading. Does it sound preposterous? It’s not any crazier than buying credit default swaps on poor people’s mortgages and making $15 billion when they become homeless. Remember, everything is fair in the “free market.”

  • Marine Le Pen, Anti Euro French Presidential Frontrunner, Applauds Greek Victory Over "EU Oligarchy"

    Ten days ago, before Varoufakis even announced his stunning break of negotiations with the Troika and proceeded to engage in a referendum which perhaps more symbolically than anything else just said a resounding “No” to the status quo, we said to Forget Grexit, “Madame Frexit” Says France Is Next: French Presidential Frontrunner Wants Out Of “Failed” Euro.

    Because while the ECB could at least in theory contain the Grexit fallout with a few hundred billion in bond (and stock, since Europe is pretty much fresh out of bonds it can monetize) purchases, it will not be able to halt the contagion once it spreads to Italy, Spain and Portugal. But once it reaches France, and Marine Le Pen engages in the same type of negotiations with the Troika as Greece just did, it’s all over.

    Unfortunately for the ECB, that’s precisely where it is headed because as Reuters just reported, “French far-right leader Marine Le Pen welcomed the early results of the Greek referendum on terms for a bailout from Europe as initial tallies showed the ‘No’ camp leading with results still being counted.”

    Le Pen, the leader of the anti-immigration, anti-euro National Front party, said in a statement that the anticipated result was a victory against “the oligarchy of the European Union”.

    “This ‘No’ from the Greek people must pave the way for a healthy new approach,” said Le Pen.

    “European countries should take advantage of this event to gather around the negotiating table, take stock of the failure of the euro and austerity, and organize the dissolution of the single currency system, which is needed to get back to real growth, employment and debt reduction.”

    Here is why we suggest the ECB panic: Le Pen’s star has been on the rise in France and in Europe in the past year since her National Front party performed well in European parliamentary and French regional elections. Surveys suggest she could make the second-round run-off in the 2017 presidential election, if not win outright.

    She has sought to capitalize on discontent over Socialist President Francois Hollande’s handling of the economy and rising unemployment, and has made Europe’s management of the Greek crisis a particular target for critique.

    As a reminder, a recent Wikileaks NSA data dump showed that the French economy is in “Dire Straits”, and is “Worse Than Anyone Can Imagine” which just happens to be music to Le Pen’s ears.

    Finally, Le Pen’s platform supports the end of the common currency zone and a return to more national-based policies on everything from immigration to the economy.

    Greece just made it that much easier for Le Pen to achieve her goal.

  • Risk Off: FX Carry Trades Tumble, Euro Opens Under 1.10; USDJPY Under 121

    With nearly 60% of the Greek refrendum vote counted, and the No’s leading by a landslide 61%, it is clear that the Troika’s gambit failed, unless as Goldman wrote and we first noted, it was the ECB’s intention to force a Grexit all along, thus permitting the ECB to engage in more QE: QE which would in Goldman’s estimation, push the EURUSD down 7 big figures and further toward parity, sending global stocks soaring in one last central bank-inspired hurrah.

    For now, however, while the carry trades are in risk off mode, the drop is not nearly as dramatic, and the EURUSD is trading under 1.10…

     

    … while the USDJPY opened under 122.

    Should there be no official statement by the Eurozone fin mins or any support from the ECB, we anticipate the risk off mode will only accelerate overnight, especially if the PBOC fails to support Chinese markets tonight, which – with all due respect to Greece – is the far bigger catalyst to what happens in global stock markets tomorrow, because if the Chinese central banks has lost the market’s confidence all bets are off.

  • Greeks Flood Syntagma Square To Celebrate "No" Vote

    The Greek people have spoken and they said “OXI“! 

    So congratulations Greece: for the first time you had the chance to tell the Troika, the unelected eurocrats, and the entire status quo establishment, not to mention all the banks, how you really felt and based on the most recent results, some 61% of you told it to go fuck itself.

    Now, on the eve of a new era for Europe and what will likely be a turbulent stretch for financial markets across the globe, Greeks are celebrating in the streets of Athens. Here are the visuals:

    Broadcast live streaming video on Ustream

  • Greek PM Calls Emergency Meeting For Bank Liquidity: MNI

    Congratulations Greece: for the first time you had the chance to tell the Troika, the unelected eurocrats, and the entire status quo establishment, not to mention all the banks, how you really felt and based on the most recent results, some 61% of you told it to go fuck itself.

    Now comes the hard part.

    Because at this point, with Greek banks all of them effectively insolvent, it is all up to the ECB: should Mario Draghi now announce an increase in the ELA haircut or pull it altogether as the ECB did with Cyprus, then a Greek deposit haircut bloodbath ensues. And judging by the latest news out of Market News, this is precisely what Tsipras is focusing on.

    According to MNI, Greece’s Prime Minister, Alexis Tsipras has called an emergency meeting for Sunday evening, after the referendum vote result will be announced, to assess the situation in the banking sector and the liquidity shortage, a senior Greek official told MNI Sunday. 

    The source said that so far Tsipras has not had any communication with other EU leaders “but that could change in the coming hours.” Finance Minister Yiannis Varoufakis is currently meeting with the representatives of the Greek banking union to mull whether the banking holiday ,which expires Monday evening, should be prolonged and until when. 

     

    Greece’s government spokesman, Gavriel Sakellarides told Antenna TV that the Central Bank of Greece will submit Sunday evening a request to the European Central Bank for further Emergency Liquidity Assistance saying “there is no reason why we cannot get ELA” adding that “negotiations should start as soon as today with reasonable demands.” 

     

    The Greek source who spoke with MNI said that, according to his estimations, the No vote would be even higher than what the preliminary polls showed earlier. 

     

    The source also said that the EuroWorking Group, the aides of the Eurozone Finance Ministers, are expected to convene Monday and that the Eurogroup might also convene via teleconference to assess the situation. 

     

    A Banking source has told MNI that even when banks reopen capital controls are expected to be readjusted and imposed for a long period of time, until trust is restored and a deal with the creditors is being reached.

    The ball is now in the ECB’s court: will it let Greece keep the Greek ELA (or perhaps even raise it) to prevent an all out banking panic and allow Greek bank to reopen as Varoufakis promised, or will it cut the haircut or yank it altogether, starting the Greek depositor haircut as well as the falling dominoes we described yesterday…

     

    … Because as much as the ECB wants to deny it, the Euroarea is on the hook for more than 3% of its gross GDP, and perhaps far more once all the off balance sheet liabilities emerge…

    In other words, an uncontrolled Grexit at this point would surely lead to a Eurozone depression, one that not even an increase in the ECB’s massive bond (and perhaps stocks) buying would stem. Which, of course, was Varoufakis’ gamble all along.

  • The Central Bankers Dilemma: The Pendulum’s Back Swing

    Submitted by Mark St. Cyr

    The Central Bankers Dilemma: The Pendulum’s Back Swing

    Today, July 5th, a referendum is to be voted on in Greece as to whether they should vote “Yes” for the austerity measures demanded by the bankers of the Euro Zone (EZ.) Or, vote “No” against such demands. Where a “no” vote will in effect all but ensure an exit from it (whether voluntarily or not.) How this vote will come down no one knows. For when a populace is scared, many times they’ll vote blindly for what they perceive in the present as the lesser of two evils, and let longer term consequences be damned.

    On the other hand, when a populace is both scared and mad – what was at first thought to be implausible (i.e., against what many outsiders may perceive as in their best interest) within the confines and privacy of the voting booth. Anger, as well as a disgust for the present can over-rule. Where it’s the consequences of the moment that will be damned. Where an overwhelming affinity for the possible future suddenly reins supreme. Whether realistic or not.

    It is this latter point that catches most (i.e., outsiders looking in) flat-footed. Especially those that tend to think everything is based only in numbers, models, or rationality, and it’s ultimately controllable. This form of thinking implies: If you control the numbers, and can interpret the models – you can control the rationale, as well as an outcome.

    Not only is line of thinking rampant throughout academia. It is followed with a near religious zeal. However, there’s the inherent problem: Yes you can – till you can’t. And that’s where the most critical issue fails within Ivory Tower thinking. For they don’t ever contemplate, or anticipate the “till you can’t” part. For them it shouldn’t exist. Therefore – it mustn’t.

    Yet, anyone with just a modicum of business acumen knows all too well: More often than not what you’re convinced won’t happen; is exactly what will. Usually – at the most inopportune of times.

    Here is where we find many of the Central Bankers today. Suddenly their implied omnipotence is being turned on its head from “omnipotent” to “oppressive.” From “rescuer” of an economy to “destroyer.” And the distaste as well as grumblings against this Central authority is growing. Why? As I stated before: Central Banks are now perceived as “the body politic.” No-matter how much they rail against the inclusion. And the vitriol (as well as the impending implications) are just getting started in my opinion.

    Over the last week the IMF dropped what was for all intents and purposes a bombshell of a revelation. It stated (I’m paraphrasing) that Greece was indeed in need of a debt reduction (i.e., write-offs) just as much as it was in need of restructuring of those said debts. Otherwise, it would all be for naught because Greece would never be able to surmount them.

    This singular point has been at the heart of all Greece’s arguments. However, what has been argued back to Greece by the Troika has been nothing less than “Tough – deal with it. That’s your problem – not ours.” Well, it seems that’s not so much the case anymore. Regardless of which way the vote goes, it is the Troika itself that may find the problems are just beginning. And those problems are theirs.

    In a previous post I drew an analogy from the Iron Man 2 movie. The premise was: If one can make the gods bleed, no matter how small, people will not only will lose faith, but will turn on them. It seems Greece did in fact strike the first in what might be a mortal blow. Not so much with the degree of the initial cut, but with the ever-growing infectious nature to follow.  Even if Greece votes “yes” this Sunday – the damage has already been done to the EZ as well as the central banks within. While quite possibly to Central Banks everywhere.

    The revelation that the IMF concurred in secret with what Greece was proclaiming all along; while demanding the opposite; siding with the more austerity demands by their fellow members; as not only the people suffered but as the politicians themselves (i.e., ridiculed or voted out) will not be lost on Italy, Spain, Portugal, ____________ (fill in the blank.)

    Yet, as damaging as it is to have one of the three parts (e.g., Troika) acknowledging what Greece has been insisting was needed all along via a leaked document. To now have it leaked that all three were of the same conclusion yet: wouldn’t budge or acknowledge it? This is quite another, and will be used by any and all as an excuse (whether rightly or wrongly) to demand new terms. Or worse, like Greece – just refuse to pay until the bargaining table is reopened.

    Suddenly it’s not the borrowers that have a problem. Rather; it’s the other way around. And it’s only been days since these revelations. Yet, there’s now “blood” in this ever-growing pool. And that’s a problem no “bazooka” or “printing press” may be able to overcome. However, this is just Europe…

    In China the financial markets are tumbling faster than any other time in history since 2007. What many forget (and what the main stream financial media will not speak of) is that right before the financial crisis took hold here in the U.S., It was none other than China’s Shanghai Composite Index that was the harbinger of what lay ahead as it tumbled from that meteoric rise in ’07 to within a year – it would go on to lose some two-thirds of its value.

    Right before the crash the Chinese markets were assumed “unstoppable” (sound familiar?) as they went parabolic to near vertical assent when viewed on a chart. Then: they fell in spectacular fashion entering “bear market” statistical valuations in mere weeks (i.e., losing 20%.) This had never been seen since. That is – until now.

    Suddenly there are reports of extraordinary measures being allocated behind the scenes by China’s central banking authorities. The problem? So far, by all accounts – it ain’t working. The index continues to fall. Many of the components (I would like to say businesses however, there are far too many reports these “businesses” are in name only) that make up these composites are opening up daily to “limit down” selling pressures with no relief in sight.

    So much so it has been reported the only way for this rout to be reeled in is for the PBoC to directly “buy the market” in one form or another. Yet, the rout is so wide-spread, and so fierce (imagine 10’s of millions of first time traders all heading for the one and only exit door – all at the same time) that it is being openly questioned if the PBoC itself has the monetary firepower to overcome it. And just for perspective, China’s market isn’t some backwards market in size or scope those in the “general public” might think of when they first hear. For those not familiar: China’s market is number 2 in the world, right behind the U.S. And last time such a thing happened the contagion effects were here seemingly overnight – and the great financial meltdown of the U.S. markets were upon us.

    Is “this time it’s different?” Who knows, but one thing is for sure: The general public today is still enamored with the main stream media’s push that what ever “bad” happens in the world or markets: “The Fed. has their back,” or “The ECB” or “China’s growth will solve our malaise” or ______________(fill in the blank.)

    Today one thing is more certain than any other time before. With the Federal Reserve’s unwillingness to allow the markets to stand on their own feet, and not be so dependent on their interventionism with QE for years, and Zero interest rates for the same – the tool box may in fact be empty – at the most inopportune time.

    So here we are, once again, waiting or watching for what could possibly be the start of another contagion effect to ripple through the markets that has the potential of resembling 2008, or worse.  And the only thing to stand in its way will be the faith and/or belief in their omnipotence. For it seems – that’s all they have left. All while we watch the same crumble in the eyes of others across the waters as their Central Banks are being perceived daily more as villains or worse – inept.

    I’ve stated many times in what I’ve coined “the pendulum rule.” It’s not the first swing that can ruin you. It’s when you get up thinking you’ve dodged a one time fatal blow and act as if it can’t happen again. You don’t prepare. You don’t harden your resources. You act as if it were a one time only thing. And just when you’re at your most vulnerable – the back swing is what takes you out.

    It would seem the pendulum is indeed still swinging. What transpires from here once again – is anyone’s guess.

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