Latest On The European Fiscal Adventureland Ride

melodramaLike a bad mini-series, the European non-events events just keep rolling on in. Here are the latest ones.

From the Financial Times, leaders failed to create a new treaty.

Leaders of the European Union’s 27 countries failed to agree to change the EU’s treaties in order to implement tighter fiscal rules and instead chose to create a new intergovernmental treaty which will likely have less teeth and be negotiated only among 23 of the bloc’s members.

Despite the division – which will leave Britain and Hungary out of the new pact, with the Czech Republic and Sweden still weighing participation – Mario Draghi, the European Central Bank president, signalled his approval, a key vote of confidence that could allow the ECB to move more aggressively in eurozone bond markets.

The U.K. was a major veto and the reason for the failure. Reuters:

"This is a summit that will go down in history," said Sarkozy. "We would have preferred a reform of the treaties among 27. That wasn't possible given the position of our British friends. And so it will be through an intergovernmental treaty of 17, but open to others."

What they came up with instead is some sort of vague fiscal compact, which seems to imply the oversight over national budgets but it''s pretty mealy mouthed. Supposedly it's an international treaty among 23 countries. If annual budgets exceed 3% of GDP, potential sanctions can come rolling it. Looks like austerity on steroids. Below is Reuters Summary of the agreement:

  • Euro zone states' budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5 percent of GDP.
  • Such a rule will also be introduced in euro zone member states' own national legal systems; they must report national debt issuance plans in advance.
  • As soon as a euro member state is in breach of the three percent deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of euro states is opposed.
  • The European Stability Mechanism (ESM), the euro zone's permanent bailout fund, is aimed to enter into force in July 2012; the existing European Financial Stability Facility (EFSF) will remain active until mid-2013. The overall ceiling of the EFSF/ESM of 500 billion euros will be reviewed in March 2012.
  • Euro area and other EU states will confirm within 10 days the provision of funds to the IMF of up to 200 billion euros in the form of bilateral loans to help it deal with the crisis.
  • Voting rules in the ESM will be changed to allow decisions by qualified majority of 85 percent in emergencies, although that remains subject to confirmation by the Finnish parliament.

Additionally the EU added €200 billion to their bail out fund.

As Naked Capitalism notes, the European bank stress tests came out smelling just a little too rosy and now the ECB says banks need to raise €113 billion.

One result of the EU summit is to make sure private investors are protected:

The leaders also agreed that private sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.

So, it looks like the Eurozone, at least is going to have some sort of say in national budgets, making sure austerity happens, in spite of the people revolting, plus they are making sure no banks or super rich have to take a hair cut on any sovereign debt. As a result, odds are we're going to see TARP and ECB loans, aka the Fed loans, European style.

Lovely. Yeah, the markets yawned or opened down.



"Unthinkable poised to happen"

"Unthinkable Poised to Happen..." ("Prophetic Economist Issues Warning") -- that's from a banner ad seen recently and yesterday (14 October 2011) at the top of the KITCO Gold Index web page.

But the unthinkable had already happened! Indeed, it seems like the unthinkable happens regularly these days!

In particular, one of yesterday's unthinkables concerned the price of gold. KITCO asked "Did gold really go down $56.90?" (BTW: the figure could have been higher based on yesterday's London close ... and gold continued falling in Asian markets after the NY close, although gold appears to have found a floor today around $1575.)

KITCO is the leading authority on what PM prices really are, after factoring out for value of currency in which prices are quoted. And the KITCO answer is ... 

"YES! The stronger US Dollar was responsible for $5.20 of that drop."

According to KITCO, $51.70 of the $56.90 drop (14 December 2011) was due to predominance of sellers. (KITCO Gold Index web page, 14 December 2011)


Robert Oak recently replied to miasmo's question -- "does it make any sense to have any money in the stock market right now?"

"It [the stock market] is extremely volatile, but if you get caught with your pants down, let it ride. Although I'd put auto triggers if you're buying GLD since Gold is extremely confusing to predict." -- reply by Robert Oak (at 00:27, 13 December 2011).

Who has been selling gold?

I foolishly published a prediction three weeks ago in a comment titled My 2¢ on gold, etc. on Robert Oak's brief review of a Bloomberg story about record gold hoarding. (See, Saturday Reads Around the Internet, 26 November 2011).

I knew at the time that I would regret making a prediction, but that's the nature of the slippery slope that you find yourself on when you "talk gold." Here's my 2¢ as of November 27 (before the November 30 rally on what was interpreted as good news from the Fed and other trilateral central banks) --

IMO, what goldbugs are waxing enthusiastic about is possibility of runs on French banks due to collapse of Italian bonds due to a default by Greece. [See, FMN featuring videos of professors' analyses of Euro zone crisis.]

And of course, gold may well be a good bet for professional PM speculators right now, but for people who are looking to hedge against a future USD collapse, this may not be a particularly great time to buy. [However, the market now in mid-December might present some opportunities.] ... it's entirely possible that gold will finally hit it's long-anticipated 2011 highs above $2000. (A couple of months back, a JPMorganChase economist predicted $2100 before end of 2011, after that bank's depository reported increased holding of physical gold.)

My opinion back in August or so (published in a comment here at EP) that the gold bull was a bubble, and that gold would likely decline although not below $1500 was good enough that I should have let that stand. Oh well. As of the last days of November, although not quite climbing on the gold bandwagon, I clearly did not foresee gold dropping substantially before the end of 2011!

So what's happening, other than the new normal of 'the unthinkable'?

In particular, who are the gold sellers?

At times like this, goldbugs generally resort to CT about an arch-conspiracy of central bankers, while reassuring themselves that in the long run they will outlast the anti-gold forces of evil.

My approach to this is that I should have paid more attention to my own remark on November 25, just two days before I made my unfortunate prediction. In comment titled Solution to Germany's dilemma?, here's what I noted (at FMN blog featuring videos of professors' analyses of Euro zone crisis) --

Another factor that is regularly overlooked, in the news about Europe's prospective demise, is that Italy's central bank (Banca d'Itaglia) is still functional (as a part of the European system of central banks) and is said to retain very large holdings of gold bullion.

So, what may be happening currently with gold is that central banks like the Banca d'Itaglia are transitioning into a more rigorously regulated Euro-world where gold held by national central banks will be irrelevant. These banks may be selling off their gold, driving the price of gold down.

If true, is that a conspiracy of central bankers, setting out to rule the world? Hmmm. I guess it is, if that's how you like to look at it.

bubble betting gold, dot con, and hyped du jour

When I know a bubble is happening, the hardest thing is calling a ceiling and timing. I made a HUGE mistake on dot con, I knew it was hyped, empty, bubble, fraud but thought it would crash, Jan 2000 and so March 2001 went in again and did get caught. My own fault, I didn't have the ability to ride the wave to the top, so best to catch a few small side waves and make much less money than get caught in the downturn.

Stocks are rigged, something like 75% trades are flash trades, institutions know way before the little guy what's going to happen....

The wizard proclaimed it was all beyond him

I forget what year it was, but in the mid-1990s sometime, Warren Buffet announced that he was backing Berkshire Hathaway out of the dotcoms, because he just couldn't make sense of it. I think he said what bothered him was that all the airlines with all their airplanes and other equipment plus intangibles were worth less than one dotcom that had pioneered the internet sales of tickets, with just a small leased physical office and a few servers.

Anyway, I think that Robert Oak calls things pretty close to accurate, on those rare occasions when venturing to introduce a little sanity into the current world of finance from an individual investor's point of view. (And those rare occasions are only when responding to readers' questions.)

Of course, I surely hope and believe that all readers of EP understand that there's nothing here intended or that should ever be taken as investment advice.

What's especially scary is the view expressed by Martenson that this is a lousy time for any investment, but a very good time for speculation. frown

That reminds me of the way that in London, they call stocks a 'gamble' but a wager on the ponies is an 'investment'!

From the point of view of economics, I think that savings and investment are absolutely necessary or civilization is doomed, but people today are driven by fear to believe (rightly or wrongly) that the only way to conserve their savings is by gambling with them.

That's one heckuva note!


The record from back in August

Should any reader be interested, here infra for the record is my 'prediction' (with numbers) back in August in a comment titled Ya sure agreeing with Robert Oak that "gold stops its ugly fall for now".

This was at the truly great Paul Craig Roberts blog or article (republished at EP on 21 August 2011), Can Financial Globalism Reverse?

Here's the range for gold prices that I predicted in my comment back on 24 August 2011 --

" ... gold could still end the year at $2000. I doubt that it will fall much below $1500, for sure not below $1000."

So, maybe I wasn't so far off after all. It has run down close to $1500 this week.

By The Way --

At that great blog by Paul Craig Roberts -- for a wonderful insight into how monetarist policies at the national level play out in our crazy world of US unilateral surrender in the neo-mercantilist war-for-world-domination -- check out Mo's comment, Outsourcing is a monetary phenomenon. Also, under Mo's comment, see two replies (by Robert Oak and by Windchaser).

Getting back to the specific topic of gold, there are my comments at the Roberts article (24 August 2011), Even King Gold is subject to fundamentals and Gold becoming rational?

See also, my comment back on 11/12 August 2011, CME raised Gold margins by 22%, projecting drop in gold after Merc cutting margin requirements. Also, from 18/19 August 2011, comments Rule 48 'regulation'? and Bounded rationality.

Personally, I prefer silver. Gold can be so crazy-making that owning it makes it difficult to fully enjoy the political circus and cultural spectacle that constantly whirls around it.

Future of the Euro

In earlier post at this blog, I reviewed my unimpressive prediction from last November 27.

Compounding my folly, I made some other predictions at that time, along with the one about gold.

In particular --

The Euro will survive and there will be no great "printing" by the ECB -- neither in 2011 nor in 2012.

I just did not think that there would be renewed confidence in the Euro within the next two or three days! That seemed, at the time, to be "unthinkable"!

However, despite the bumpy road, this is the way I see things trending in the long run: the EU, the Euro zone and the ECB will pursue and have already initiated path toward a classical monetarist policy -- to the fullest extent that such is possible. That is to say, there will be no great "printing" by the ECB, although there will eventually be Euro bonds to amortize Italian and other debt.

What goldbugs regularly ignore is that the most successful currency in the world today is the renminbi, which is backed only by the industrial, technological, commercial and military strength of China (without an ounce of gold) -- despite substantial and probably excessive 'printing' during the last three years or so.

To be perfectly clear about this, success of the renminbi can be linked to the phrase "full faith and credit" ... of the People's Republic of China. (However, this doesn't necessarily mean that the People's Bank of China either is or isn't planning on tying the renminbi into some kind of gold standard in the future.)

IMO, what we will probably be seeing in Europe is increasing control of capital flows and of the finance sector, along with increasingly effective systems of taxation. It's a complicated situation, what with Swiss involvement and all ... but that's the way I see it. The Euro will survive, like the renminbi, as living proof of classical monetarist theory.

But what do I know? My predictions could be wrong ... again. Who knows?

BTW: About UK in all this, see US-UK special relationship

at Saturday Reads (10 December 2011) 'Financial Sector Grows'.

Yuan? No way

There are all sorts of problems with the Chinese banking system. Additionally, the Chinese currency is fixed, it's manipulated, it does not even float.

A host of Europe downgrades came today and the Euro/USD exchange is expected to drop, i.e. the Euro is less valued.

I don't know about the Euro demise, I look at weird signs like pulling out national currency trading equipment from basements.

Seems we have a lull in the never ending European crisis at the moment.

Rumors greatly exaggerated

The question is no longer about political will -- that's become evident. It's whether it's too late for the Euro ... but what comes to mind is Mark Twain's famous "rumors of my death have been greatly exaggerated."

I don't know how they will do it, but somehow I think the EU will be successful in finding a way to amortize the PIGS debt -- despite the nay-sayers. Of course, I could be dead wrong, and Europe may have no choice but to accept 'Gloom Boom and Doom' Marc Faber's recommendation that EU should dissolve and get it over with (14 December 2011).


Robert Oak writes, in comment, supra --

There are all sorts of problems with the Chinese banking system. Additionally, the Chinese currency is fixed, it's manipulated, it does not even float.

A host of Europe downgrades came today and the Euro/USD exchange is expected to drop, i.e. the Euro is less valued.

I don't know about the Euro demise, I look at weird signs like pulling out national currency trading equipment from basements.

Seems we have a lull in the never ending European crisis at the moment.

Rumors of bank runs in Paris are now sounding hollow. There may yet be nationalization of some banks, as you have suggested. It's still possible that Greece will return to the drachma, for example, but that seems less likely with each passing day.

I'm focusing on currencies as backed by fundamentals, in particular, industrial/technological infrastructure of participating nation(s). Another important factor is whether investment within a currency area is made into that currency area ... as opposed to invested somewhere else. China, like Singapore, invests in itself. That kind of savings system is built into their economies. By contrast, USA investors have been very happy in recent years to invest in China -- that is, in yuan-based assets. Of course, there are problems everywhere, but can we deny that the PBoC is doing a much better job of monetary management than our Fed?

I'm trying to be objective, and maybe I am leaning too far against my natural inclinations for that reason. Of course, I would like to see the USD remain the world's reserve currency. Of course, I would like to see China progress out of its authoritarian system. Of course, I support the USA in the on-going struggle with China, up to and including nuclear Armageddon. But I am trying to avoid being influenced by my pro-USA views in evaluating the question of whether the Euro really is destined to self-destruct (along with dissolution of the EU). In that regard, I cite the yuan mainly as proof of basic classical monetarist theory, that "full faith and credit" need not equate to hyperinflation, when the banking system and money-creation are reasonably (if imperfectly) regulated.

It's been popular of late to talk of the EU's leaders as delusional and to play up recent inflationary trend in China and likely marginal decline in China's rate of industrial growth. But I am asking myself, who are we (USA) to be talking about delusional leaders and unacknowledged inflationary trends?

What I see with the Euro isn't so much the financial problems, but fundamentals for the economy. I am thinking about what is absent, by comparison with the USD, like they don't seem to have out-of-control costs for maintaining satisfactory medical systems or huge and growing military costs -- such as, costs of maintaining 1100 or 1200 foreign military bases, non-vested expenses related to growing costs of military pensions, etc.. I don't think we should abandon any of these commitments -- I'm just noting that Europe generally is much more free of these encumbrances going forward.  Same story with Japan, Singapore and others. The main problem in Europe is the financial sector, of course ... but their governments now appear to be focused on fixing that, probably including increased capital controls, whereas our government continues smiling while skewered on the banksters' pike.


BTW: About fixing value of currency, let's consider this:

"The Congress shall have Power ...To coin Money, regulate the Value thereof, and of foreign Coin ... "  U.S. Const., Art. I, Sect. 8