February 2012 - Posts
Click on the link to read this article in pdf format: February 19 2012
Today, we want to follow up on the dynamics of the Euro. We go back to our comments since the beginning of 2012, when we suggested that the logical result of the monetary policy the ECB is embarking on is an increase in the velocity of circulation of the Euro.
We also wrote that: “…in the short-term, the demand for Euros does not wane, because sovereign debt is denominated in that currency and the refinancing operations of the European Central Bank facilitate the purchase of that debt. This suggests to us that shorting the Euro will be a painful trade, with very high volatility…” Indeed, anyone with a short position in the Euro knows what we are talking about…
Can we better understand where the Euro is heading? In the past week, some analysts have posited the notion that a default by Greece could have consequences far worse than the Lehman’s default, in 2008. But as we will seek to prove, that may not be the case: A run for liquidity, post Fed UDS swaps (extended in Dec/11) and ECB LTROs (long-term refinancing operations) has left the market less levered in USD terms, which is bullish of risk and bearish of US Treasuries and the US dollar.
We prepared some graphs, adapting for the Eurozone, but based on an excellent paper called “The causes of price inflation and deflation: Fundamental economic principles deflationists have ignored”, by Laura Davidson, 2011. Figure 1 below shows the stocks of the Euro financial system, focusing on the balance sheets of the European Central Bank, the Euro banks and the Euro corporates/citizens (creditors), before the crisis started, in 2010.
Figure 1
As you can see, the ECB holds sovereign debt in its assets, foreign exchange and gold. The Euro banks leverage on their demand deposits, term deposits and unsecured debt (in USD) to sustain long-term loans to both the EU governments and corporations.
At the beginning of the Greek crisis, in 2010, the public in the periphery began to withdraw deposits. The reduction in the deposit base forced the ECB to start extending liquidity lines against collateral. It was the beginning of what would be later called the “Separation Principle”. This principle, conceived by M. Trichet, consists in relaxing monetary policy by influencing the price and the quantity of liquidity separately, without increasing the monetary base. Indeed, the ECB lowered interest rates and at the same time, bought and sterilized sovereign debt (with its own debt). This is represented by Figures 2.a and 2.b below:
Figure 2a
Figure 2b
It is visible from Figure 2.b that the higher demand for Euro liquidity reduced the leverage of the financial system. And, as the ECB extended Euros against sovereign debt, the crowding out of private demand for savings began.
Simultaneously (but shown in different graphs), the market began to sense a contagion in the financial system from sovereigns, and unsecured USD denominated debt began to be called, triggering a further drop (losses) to the equity/hybrid part of the capital structure of the banks. Capital left the Eurozone, as represented in Figure 3 by the increase in USD holdings of corporates/citizens. The demand for USD was so strong that the Fed had to extend swaps to the ECB, to provide USD liquidity to the market. As we said before, these swaps are the equivalent of vendor financing in favour of the counterparties of the global banks (the reader knows who we’re talking about), who saw a sharp increase in the default risk of their trading counterparties. Figure 3 below shows how, steady but slowly, the balance sheet of the ECB grew, while that of the EU banks shrank. Not only did the balance sheet of Euro banks shrink, it also became seriously dependant on monetary policy, both to finance itself and to remain profitable, as an increasing portion of its assets remained invested in sovereign or central bank liabilities. These displaced investments in the private sector, further fuelling the recession.
It is also visible in Figure 3 below, how the size of the balance sheet of the ECB is now impacted by the swaps extended by the Fed. This is why, contrary to popular opinion, we say that since December, the US are coupled to Europe. Yes, this latest rally was based on the coupling (not decoupling) of the balance sheet of the ECB on to the Fed.
Figure 3
By now, it should be easier to see why we began these comments stating that we thing the current context is bullish of risk and bearish of US Treasuries and the US dollar. The Fed is tied to the fate of the Eurozone. And as that fate looks increasingly ugly, it will involve itself more.
There is another effect here that comes into play. On one hand, as banks saw the portion of their funding from equity and unsecured debts shrink, they also saw the dependence on USD denominated debt shrink. The collateralized, long-term (3 yrs) liquidity extended by the ECB, in Euros, replaced it. Therefore, the impact of sovereign defaults on the demand for US dollars, all other things equal, should be lower than before. But not all other things are equal: Given the reduction in the demand of USD denominated debt, the suppliers of the same were forced to invest their USD holdings into loans, bonds, stocks and commodities. It was a virtuous cycle, seen since the end of December, where as the USD funding rates fell, asset prices rose.
Therefore, we find ourselves at higher price levels, with lower rates, less demand for leverage and sovereign defaults fairly priced in. What could go wrong?
In the case of a default that triggers the break up of the Eurozone, we would see a generalized run against the EU banks. This would activate the demand for US dollars (and gold?), which we believe (big assumption of ours here!) would force the Fed to extend more and more swaps, in an effort to save the Eurozone. After all, are we not facing Greece’s default and are we not seeing the ECB holding Greek debt until the last minute? Why would we not see the Fed holding its USD swap loans to the ECB…to the last minute? Precisely this action, in light of the serious set backs to global banks (and the reader knows who we are talking about) would seriously devalue not just the USD, but all currencies against gold, while at the same time, it would be negative for stock prices and, likely, for US Treasuries.
Figure 4 shows, in extremis, the what the financial system of the Eurozone would look like, moments before its break up. There would still be a minimal transactional demand of Euros and the Euro banks would be totally nationalized and heavily dependant of the Fed. The link between the financial and non-financial sector would have been broken, generating a serious crisis, possibly, with high inflation. If that high inflation does not come in then, it would come in later, as the Fed keeps pumping liquidity to the system.
Figure 4
What we just described is the logical consequence of ongoing policies, and it would be very misleading to think of them as “tail risk”. This is no tail risk. If any, the tail risk here is that we see a strong recovery, driven by an increase in productivity. We may be wrong in our assumptions, but we believe that if we are not, our logic is correct (readers’ feedback is very welcome!).
As a consequence, we have been buyers of weakness in gold, believe there is a point in starting to sell strength in US Treasuries and are neutral in stocks.
Martin Sibileau
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.
Please, click here to read this article in pdf format: February 6 2012
When we last wrote two weeks ago, we took the time to lay out an analytical framework that would act as our guide. We invest following the approach of the Austrian School, which is deductive, logical, consistent and aprioristic. We reproduce below the chart we posted then.
During the last half of 2011, the world saw a run for USD liquidity that caused a general sell-off. This sell-off lasted until the Fed first reinstated and then lowered the cost of USD swaps and the European Central Bank offered refinancing operations for a term of 3 years and lowered the requirements for the corresponding collateral. This triggered the rally we witnessed in January. But now, we can see clearly that the time has come, when markets realize that the results of austerity, intervention and higher taxes are not working and that the social unrest they bring could, once again, derail the efforts of the European Monetary Union.
In particular, the role of the European Central Bank in the negotiations on Greece’s debt, in our opinion, has been horrible. We can mince no words here. The world needs leadership and what does it get in instead?…
The authorities of the central bank are going to wait and see what results from the negotiations between the Greek government and private debt holders. They are not going to come first and show they are willing to take a haircut. If they did so, they would:
1.-Show their willingness to solve this problem, with an unequivocal devaluation (because the value of the assets backing their liabilities, the Euro, would fall), as well as
2.-Provide the capital markets with a clear signal of what the floor value of sovereign debt is. Most likely, if they did so, markets would embrace the news with a minimal correction in the value of the rest of the sovereign spectrum and the “orbiting” bank capital sucked into it.
However, it appears we will not get good news. Since our last letter, we have seen the opposite: A European Union trying to flagrantly and openly seeking to eliminate the sovereignty of Greece and to manage their public finances! Have these people lost their minds? Can they not see that they are adding insult to injury? Don’t they realize what a fine line they are walking?
Our chart is very clear: If social unrest gets out of control in Europe, the whole status quo in Europe will decouple from that of the rest of the world. The markets sense this and, consequently, gold sold off on Friday, as wise money sold on the strong employment data print and looked for cover before the party is over. As we said at the end of December, in our “Recap of 2011 and thoughts for 2012 ”: “…We think 2012 will see a rebellion of the people. On the economic front, they will likely repudiate the financial status quo, with an increasing run on deposits, perhaps even at a worldwide scale. On the political front, we will see a fight to retake democracy…”
The leaders of the European Union still have time to ensure Greece and its debt holders reach a reasonable agreement. Somehow, we are optimistic on this point and want to believe that the can will be kicked down the road, once again. Therefore, we have bought and will continue to buy weakness in gold. But we may be wrong here…
We think everyone is also very aware of the future consequences of the policies of the Fed and the ECB. The latest rally is not only delaying the necessary corrections but also, by distorting the price of capital, it is guaranteeing that when these corrections inevitably appear, they will be many, many times more painful. Personally, we have no doubts that the global financial system is set on a course to collapse and we fear that the strength behind gold is very much related to this view. This is the reason why in this rally, we have preferred not to chase stocks. The long-term trend, in our view, is negative for those who produce and innovate: the entrepreneurs. Here, we disagree, for instance, with Marc Faber, who has been advising to be long equities (and also gold). Long term, we see gold and real estate as the only places to store value. We lived in Argentina under high inflation and cannot recall how inflation can either yield employment or allow entrepreneurs to conserve the value of their capital.
Lastly, when we wrote two weeks ago, we had concluded that, in extremis, the velocity of circulation of the Euro would spiral, a common feature of high inflation. However, in the short-term, the demand for Euros does not wane, because sovereign debt is denominated in that currency and the refinancing operations of the European Central Bank facilitate the purchase of that debt. This suggests to us that shorting the Euro will be a painful trade, with very high volatility.
Martin Sibileau
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.
This is our first letter of 2012. The year started with a mini rally that every analyst out there attributes to something called “decoupling”. Why? Because the strength in asset inflation, although global in nature, is particularly more solid in the US.
The oddity appears to be higher asset prices, in spite of a weaker Euro, in a Eurozone whose main problems remain unsolved. Correlations are breaking! say analysts, at every opportunity they have to speak to the media.
We want to start the year tackling this issue, which we feel is very important to understand. Without mincing words, we will say that the concept of “decoupling” is completely wrong and if followed, it will lead to wrong conclusions and horrible investment decisions.
The fall in asset prices during the last quarter of 2011 was triggered by a run for liquidity, typical of fiat currency systems or systems with leverage. Euro zone banks had to sell USD denominated assets to raise liquidity, lifting the price of the USD and putting pressure on the rest of the risk asset spectrum. This was addressed in November, when the Fed confirmed its commitment to continue extending USD swaps to other central banks, at a reduced price of 50bps. At “A View from the Trenches”, not only have we dealt extensively with the mechanics and implications of currency swaps but also, we believe we would not be mistaken if we said that we were the first and only ones to point to its relevance, way before anyone else in the market. For instance, in February 2010 (almost two years ago!), we warned:
“…that France did the same (in the 1920s) that we suspect the US would do in case the Euro plunged: Providing Europe with USD currency swaps is the same as having France in the late 1920’s not withdrawing their gold deposits from London. Think about it. I know it sounds counter intuitive at first sight, but ask yourselves what was backing the sterling pound then, and what would the Euro be exchanged for if it plunged? If the USDs are there for the Euro as gold was for the pound, we will be only delaying a painful adjustment…” (refer: www.sibileau.com/martin/2010/02/26 )
How relevant was this action taken in November? The chart below (source: Bloomberg) shows us how the price of the 3-month EURUSD swap reverted after November 30th:
How consequential was the amount of swaps extended by the Fed? The next chart (source: Bloomberg)gives some perspective, showing what the Fed extended in 2008, vs. what occurred last November:
The spike is certainly visible. Back in 2008, the deleveraging was just starting, so it would seem unlikely to us to see those levels again. However, we must not underestimate the magnitudes seen in November and the sovereign problem ahead, particularly if it threatens to break the Euro zone. In light of all this, it is clear to us (and not to the rest, apparently) that rather than a decoupling, we are seeing a huge coupling. In fact, we are witnessing the mother of all couplings! As we explained on December 12th, the Fed is bailing out the European Central Bank, because without US dollars, the run for liquidity in Europe would result in a general run against the ECB. But since December, the ECB is now also financing on a 3-yr basis, the liquidity, in Euros, of the Eurozone banks. There is plenty of speculation as to what the Euro zone banks do with that money but we think it is safe to say that at least, they are not forced to liquidate assets. On the accounting analysis of the 3-yr financing, we found a very interesting article, by Izabella Kaminska, at FT Alphaville, named “The curious case of ECB deposits”.
In summary, the mother of all couplings consists in linking the balance sheet of Euro zone banks indirectly with the Fed: The Euro zone banks get cheap liquidity from the ECB in Euros, supported by the US dollars provided by the Fed to the ECB. Asset are not sold now and in fact, they could actually be purchased later, if the sovereign crisis in Europe was to be addressed.
What does this all mean? Well, as we explained on December 12th, this printing of billions of US dollars by the Fed to back the ECB means that Americans need not to save any extra, to bail out Europe. This is what puzzles mainstream economists, who refer to this “oddity” as a “break in correlations”. The big mistake is to call this a decoupling, because it is precisely the opposite: The problems of the Euro zone are now really coupled to the Fed’s balance sheet! A decoupling would consist actually in letting the Euro zone banks collapse, together with the ECB, without any swaps. Such a sell off would bring down the price of every single asset vs. the US dollar.
Now that we have clarified this point, we must ask ourselves how this should impact gold. On this point, we must say we are now in uncharted waters. Yes, the swaps are nothing new, but the context in which they unfold is. With this in mind, we think that the rhythm in 2012 will be marked the evolution of the fiscal situation in the Euro zone. On Friday, we saw a massive downgrade in sovereign risk by S&P that was fairly priced in by the market. Going forward, further deterioration or default surprises will accelerate the pressure on Euro banks, which in turn will force the Fed to become more coupled and to print more US dollars. We think that in this context the volatility and the bull trend in gold should both increase.
Why would we not also want to buy stocks? Because we follow the view of Friedrich Von Hayek: We believe that this process is also affecting relative prices everywhere and when relative prices are distorted, in the long term, production falls and we end with a higher amount of money in circulation, available to purchase a smaller amount of goods. Inflation, in the long term, always bankrupts producers and benefits the holder of products. If you don’t believe us, ask gold miners how they feel about the performance of their stocks vs. that of gold bullion.
Martin Sibileau
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.
Please, click here to read this article in pdf format:december-22-2011
In the absence of further meaningful events, this will probably be our last letter of the year. Reflecting on our main macro thesis, things have played out the way we thought they would. Not from the beginning of 2011, but from the beginning of 2010. That’s right, already back in 2010 (refer for instance our letter from May 3rd 2010: www.sibileau.com/martin/2010/05/03 ) we envisaged a scenario exactly like the one we’re facing today. Back then we wrote:
“….It has become clear and public that European sovereign debt is being and will continue to be bought by European banks backed by the ECB, making the sovereign risk contagion back to the financial system a done deal. Therefore, how safe are those who bought sovereign credit default swaps (“cds”) from banks that are now exposed by the sovereigns?…We have mentioned this ignored side of sovereign cds in previous letters (for instance, refer: www.sibileau.com/martin/2010/03/01 ). How this issue is not discussed while every regulator in the world is still looking for ways to reduce systemic risk is beyond our understanding.
If sovereign jump-to-default risk increased, the ECB would most likely monetize sovereign debt (actually, the ECB is already doing it), further devaluing the Euro. But as long as no sovereign defaults, things will be under control. However, if a Eurozone sovereign ended in a credit event triggering the cds contract…How bad would the run for liquidity to the USD be? CDS contracts on European sovereigns trade in USD.
How much would counterparty risk (=risk between the banks that traded the cds) jump? Is the size of outstanding sovereign debt and that of the cds net notial useful to assess the impact? We think not and we guess that anyone downplaying this issue based on the size of Greece’s cds net notional outstanding doesn’t understand the leveraged nature of capital markets. Are Greece’s funding needs in 2010 not minimal compared to the impact they are causing?
The next question is whether gold would rally or fall. To answer it, we have to speculate on whether the Fed would or not extend currency swaps to the ECB to avoid the collapse of the Euro. The Fed did so in Sep/Oct-08, upon the Lehman event, and we believe the Fed would so again, which brings us to the another point… What is riskier?:
a)To have the Fed extend currency swaps to the ECB to provide liquidity to the financial system for clearing purposes (as in post-Lehman) or…..
b)to have the Fed extend currency swaps to the ECB,as a ultimate back-up on liquidity on sovereign debt?
In the first scenario, should gold not sell? (It did). In the second, should gold not rally, as a sovereign default causes the collapse of the Euro (our base case assumption here)? Would American taxpayers ever get their monies back if the Fed extended those swaps to the ECB under the second scenario?...”
What we did not anticipate is that it was possible to start in scenario (a) above, and as we think will occur during 2012, transition to scenario (b). It may now be possible that these scenarios be not mutually exclusive, as we imagined then 19 months ago, but linked with one preceding the other.
Recapping the year, we should say we had a bit of cautious optimism, back in January, when we thought there would be agreement to use the EFSF to purchase sovereign debt in the secondary market. In perspective, we realize that the refusal to go this path by Germany in March, marked the death sentence of the Euro as we know it.
The debt ceiling negotiations in the US, including its sovereign risk downgrade by S&P, and the latest drop in reserve requirements in China are symbolic of what we will see in 2012.
The view from the rest of the world is also murky. In 2011, we witnessed the fall of dictatorships in the Arab world, without any clarity on what will follow. The same applies to North Korea. South America is divided into a right-leaning block (Chile, Perú, Colombia) and a left-leaning one (Venezuela, Ecuador, Bolivia, Argentina), with Brazil still trying to figure out which way it will go. We believe it will go left. It’s the path of least resistance.
Overall, there has been disintegration in global trade, with the irony of a convergence in risk, between the developed and the emerging world. The first are being downgraded, while the second have been upgraded.
What next?
We think 2012 will see a rebellion of the people. On the economic front, they will likely repudiate the financial status quo, with an increasing run on deposits, perhaps even at a worldwide scale. On the political front, we will see a fight to retake democracy. In Europe, that may mean not just the fall of the Euro but also of the European Union. In the US, the rise of Ron Paul and if not him, his ideas, may create a serious schism in the Republican Party, in favour of Obama’s re-election. In China, the rebellion should proceed at a slower pace, but steady nonetheless, as prices increase.
Back to a shorter term view, as the reader is already aware, yesterday the long term (3 year) refinancing operation resulted in almost Eur489 billion being borrowed by 523 banks. A lot has been said and written. All we want to add here today is this: We must keep in mind that all this does is to prevent the further sale of assets (sovereign) by Euro banks. Nothing else. If sovereign ratings are further downgraded, the respective losses will still have an impact. If fiscal deficits persist in the Eurozone, the value of the sovereign debt will fall and will still have an impact. If investors are further affected by the Greek situation, the value of sovereign debt will fall and will still have an impact. As you see, the substance of the problem remains alive. All eyes will be on the Fed, which will have no alternative but to remain financing the rest of the world via currency swaps.
This situation however leaves us with uncertainty and uncertainty breeds volatility. Gold and the rest of the risky assets will have a hard time.
We wish you all a prosperous 2012!
All the best,
Martin Sibileau
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.
Click here to read this article in pdf format: december-12-2011
By now, we assume our readers are acquainted with the tragicomic nature of the political events last week. Mario Draghi, the head of the European Central Bank (ECB), during the press conference on Thursday, said that he had been misinterpreted: The ECB was not going to monetize EU sovereign debt. And if he ever was to, it was going to be only after a consistent fiscal pact was agreed upon by the Euro-zone members. Of course, he raised the bar to impossible heights. With that, gold dropped like a stone, markets sold off and 24 hours later, the EU summit ended up with the United Kingdom taking the first steps to abandon the European Union. The rest of the members, agreed that they will agree to very strict fiscal rules, approved or disapproved by a European bureaucracy, which nobody voted for nor has the ability to remove from power. In other words, democracy in the European Union, as we know it, formally died last Friday.
How will the markets react to this? We don’t know and the action in what remains of this year is not a good indicator. We suspect (and hope) that time has been bought till the bond auctions of 2012 take place, in January.
But this is not what we want to discuss today. Today, we want to graphically show the macroeconomic impact of the US dollar swaps extended by the Fed. They are indeed a form of quantitative easing. The action taken two weeks ago to bring from OIS+100bps to OIS+50bps (OIS = overnight index swap) the rate charged on US dollar liquidity lines resulted in over $52BNtaken by Eurozone banks from the ECB, last week. This, friends, is Quantitative Easing 3. And below, we explain why.
Let’s first begin by looking at what occurs if there is no intervention from the Fed:
As the figure above shows, we see that in step 1, given the default risk of sovereign debt held by Eurozone banks, capital leaves the Eurozone, appreciating the US dollar. Because these banks have liabilities in US dollars and take deposits in Euros, this mismatch and the devaluation of the Euro deteriorates the risk profile of the Eurozone banks.
Eurozone banks are forced to sell US dollar loans, shown on step 2. As they sell them below par, these banks have to book losses. The non-Eurozone banks that purchase these loans cannot book immediate gains. After all, we live in a fiat currency world, and banks simply let their loans amortize. There’s no mark to market! With these purchases, capital re-enters the Eurozone, depreciating the US dollar. In the end, there is no credit crunch. Borrowers don’t suffer, because ownership of the loans is only transferred. This is neutral to sovereign risk. Going forward, if the sovereigns don’t improve their risk profile, lending capacity will be constrained.
In the end, an adjustment took place: In the FX market, in the value of the bank capital of Eurozone banks and in the amount of capital being transferred from outside the Eurozone to the Eurozone.
Now, let’s look at what occurs when the Fed extends US dollar liquidity lines. As you will see, the adjustment is delayed.
In the figure 2 above, we can see that when the Fed intervenes, it indirectly lends to Eurozone banks, through the ECB. Capital does not leave the US. Dollars are printed instead and the US dollar depreciates. On November 30th, upon the Fed’s announcement at 8am, the Euro gained two cents vs. the US dollar. As no capital is transferred, no further savings are required to sustain the Eurozone and the misallocation of resources continues, because no loans are sold. This is bullish of sovereign risk.
As we wrote before and can be seen from step 2, the Fed is now a creditor of the Eurozone. As sovereign risk deteriorates in the Eurozone, the Fed will be forced to first keep reducing the cost of these swaps and later indefinitely roll them, to avoid an increase in interest rates in the US dollar funding market. Long term, this can only be bullish of gold. In the short term, the volatility in risk assets will continue to be horribly painful.
Martin Sibileau
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.