US Treasuries, Gold, And Gold Stocks Turn Lower As Merkel And Sarkozy Announce Support For Next Trench Of Seigniorage Aid For Greece

Euro report for September 15, 2011

US Treasuries, TMF, ZROZ, EDV, TLT, Gold, GLD, and gold stocks, NUGT, GDX, traded lower and European stocks, VGK, rose, as Open Europe reports Merkel’s and Sarkozy’s backing for Greece signals likelihood of next tranche of aid being paid out and that Greece will remain in the EU.

Following yesterday’s phone conference with Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a joint statement that they were “convinced that the future of Greece is in the euro area”, in a further bid to dismiss talk of Greece being forced to leave the eurozone.

On BBC Newsnight, Open Europe’s Director Mats Persson argued that, while the statement did not contain any new measures, it was “simply a commitment by Angela Merkel and Nicolas Sarkozy that even though Greece will not meet its austerity targets…[in reality] we will still give them the money.”

And Open Europe reports Eurozone banks lend US dollars from the ECB amid credit crunch fears. The ECB has been forced to provide US dollar loans to euro-zone banks for only the second time in six months, while new data has shown that bank deposits in eurozone periphery nations are falling, intensifying fears that Europe’s debt woes may generate a credit crisis. ECB President Jean Claude Trichet said recently, “There is no liquidity issue for the banking sector of the euro area as a whole,” but the WSJ quotes Open Europe’s Raoul Ruparel warning, “At the start of euro-zone crisis a lot of people paid attention to averages, now it’s almost a worthless tool. It’s the details that count.” Meanwhile, Reuters reports that an internal report drafted for tomorrow’s informal meeting of eurozone finance ministers in Poland warns of the danger of a new credit crunch, stressing the “risk of a vicious circle between sovereign debt, bank funding and negative growth.” WSJ FT Reuters Le Monde

MarketWatch reports Euro jumps after ECB offers loans to banks

Returers reports Cameron, in Tripoli, says UK will help hunt Gaddafi

Wall Street Journal reports A Blue State bailout in disguise. Our new study shows that under the Obama jobs bill, debt-ridden states will get another big handout. Last Thursday, the president urged Congress to pony up roughly $200 billion in taxpayer money to “provide more jobs for teachers [and] more jobs for construction workers” and more money to carry out other state and local activities. He urges Congress to spend this money even after handing out hundreds of billions of dollars for similar purposes as part of the 2009 stimulus package, as well as a score and more billion dollars again in 2010. These vast contributions to the coffers of state and local governments, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments. They are of special benefit to states in the blue regions of the country where the president’s most fervent supporters reside.

Tyler Durden reports World Liquidity Operation now underway as the ECB announced a strong dollar liquidity operation in conjunction with the world Central Banks. The European Central Bank announced reintroduction of  three month dollar liquidity operations in the fourth quarter. The ECB said it would hold three separate operations between October and December. “The European Central Bank has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year.” The ECB’s operations will be conducted on a fixed rate, full allotment basis, and will be held on Oct.12, Nov.9 and Dec.7.

Calculated Risk reports Weekly Initial Unemployment Claims increased to 428,000

Aaron Task of Daily Ticker reports “Things are going to get much worse, society is breaking down”  and Ready Nutrition reports The 13 signs of a societal collapse.  And Tyler Durden relates US “Misery” At Fresh 28 Year High,

Abe Raymond of Benzinga reports French banks, European debt and turmoil

Irvine Renter writes Desperate for cash: BofA cuts 30,000 jobs, ramps up foreclosures to obtain capital tied up in delinquent mortgages. Who is more desperate, the lenders who aren’t getting repaid, or the debtors trying to hang on to their houses?

The stories in the mainstream media focus on the sensational stories of loan owners, but it looks like BofA is even more desperate than those who owe the bank money. Today’s post examines two apparently unrelated news events and postulates they are from the same cause: Bank of America has a cash problem. For those waiting for lenders to foreclose on homes and release inventory in California and Nevada (that would be me), this is good news. If Bank of America becomes more concerned with survival than it is with managing inventory and prices in the housing market, they may foreclose and sell larger numbers of homes to generate much needed cash. More foreclosures and sales means more inventory and lower prices.

Delays from Robo-signer only impacts judicial foreclosure states. Here in California, the delays have been purely due to lenders not wanting to take losses.

Why would BofA double their rate of foreclosure processing now? The economy is not doing well. They have no reason to believe an abundance of buyers will be ready to buy these homes. For the last three years, they have consistently accumulated shadow inventory to avoid recognizing losses. So why now? It has to be a desperate need for cash.

In other words, the foreclosure pipeline is filling again with delinquent mortgage squatters in shadow inventory. If this assessment is accurate, we may be entering a new phase in the cleanup. I have long maintained the problems with housing will not be resolved until the shadow inventory is cleared out through foreclosure. If BofA is going to begin this process in earnest, the other banks will be forced to take notice and react.

I think many at the banks truly believed they would not have to foreclose on the delinquent mortgage squatters. Many held out hope that loan modifications would succeed, and many others hoped borrowers would make more money and make their debts current through making up the missed payments. Denial is preferable to recognizing losses — at least for a while.

Cartel arrangements work because each member of the cartel withholds supply from the market so the collective can enjoy higher prices. Cartel arrangements fail when the members of the cartel cheat in order to sell more inventory at higher prices. In truth, the lending cartel is likely more of a happenstance caused by the limited write-downs banks can take each quarter. If lenders are limiting their supply because they can’t afford to release any more, their behavior will have the cartel effect without a direct collusion among the members. This is most likely what is really going on Regardless of the reasons the cartel has been working, Prices in many markets have not deflated due to lenders either withholding supply or failing to foreclose on delinquent mortgage squatters. If one of the biggest players in the cartel, Bank of America, has now decided they are going to dramatically ramp up their foreclosure processing, the cartel is going to collapse. The other members of the cartel will be forced to react to BofA’s actions. The last banks to liquidate will be the ones who obtain the lowest prices. What may happen to many of the most capital-constrained banks is they will maintain their denial until the FDIC finally shuts them down. Several banks will pull back processing loans because they cannot afford the write downs yet. The longer they wait, the more painful the losses, so they will wait and wait until they are forced to act. Regardless of what happens to the banks, increasing foreclosure processing and subsequent resale will weigh on prices. Lenders may still meter out their REO in order to prevent MLS saturation, or they risk a repeat of Las Vegas in every housing market in the country. Foreclosure and resale is a two-step process. BofA and other banks may ramp up their foreclosures, but they may decide not to sell the REO. Perhaps they will rent some out. In all likelihood, the banks desperate for cash will sell on the MLS to get whatever they can. With so many banks being desperate for cash, the possibility of a price-crushing stampede is very real. We have already seen the results of this in Las Vegas.

Associated Press reports Rogue trader Kweku Adoboli caused $2 billion loss at UBS while trying to exit a naked silver short, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades.  Shares of UBS fell more than 11% amter  news emerged that a trader at its investment bank unit has caused a loss of around USD 2bln.

Chart of VGK
Chart of ACWI
Chart of VSS
Chart of FXE
Chart of BAC


One Response to “US Treasuries, Gold, And Gold Stocks Turn Lower As Merkel And Sarkozy Announce Support For Next Trench Of Seigniorage Aid For Greece”

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