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Last week I posed the question "Is The Cypriot Government Crazy Or Do They Really Fear Bankers That Much?" The country even considering imposing loses on bank depositors over creditors seemed absurd at best. Even the faux consolation of compensating holders of pure liquidity (or at least what was formerly believed to be pure liquidity - banks have been closed for a week now and ATM withdrawals have been limited to 100 euro per day due to the capital controls I clearly warned of last year) was a scheme born out of lunacy, and unlikely to compensate anyone for anything. Well, this is the latest from Bloomberg:

The revised accord spares bank accounts below the insured limit of 100,000 euros.

I was curious to see how they could impose losses on insured accounts in the first place, after all the accounts were insured basically (through implied backstop) by the same entities (EU/EC/ECB) that were attempting to force the loss, no?

It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Losses of 40% are outrageous, particularly considering this is the most liquid and presumably the most sacrosanct tier of the capital structure. How can one assume that this will not have extremely negative repercussions?

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

Here we see the bondholders, both junior and senior taking losses. This is interesting, like in Ireland, all of the market risk takers are assuming losses, many of these losses are absolute. Of even greater interest is what happens when the depositors are added into the fray. Now, junior and senior bondholders, as well as depositors are on guard. The ONLY likely scenario to occur when these banks re-open is capital flight, capital controls or not!

Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen. “This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel.

Yeah, they can try to prevent the run on deposits, and even with some limited success, but now that you have wiped out (or nearly wiped out) junior and senior creditors as well as depositors, you have a lot more holes to plug in that liquidity dam, don't you? Again, from The Anatomy of a European Bank Run!

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Using this European bank as a proxy for Bear Stearns in January of 2008, another bank collapse situation that I warned of months in advance (see Is this the Breaking of the Bear?). The tall stalk represents the liabilities behind the bank's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk posed by capital flight through a depositor run, which Cypriot officials feel they have controlled through capital controls, still there is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? Well, with the bondholders getting fully wiped out and the primary rung on the capital structure remaining simply because it is forcibly locked in against its will - at least whats remained if it since uninsured depositors face losses of up to 40%, if it were your money opposing Cypriot banks as counterparty, wouldn't it be pretty much guaranteed. This was clearly demarcated in my piece last week,Liar, Liar Banking System On Fire! Watch As I Spit Fact That Burns Down The Sham Formerly Know As The EU Banking System.

And back to that Bloomberg article...

On the creditors’ side, parliaments in Germany, Finland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.

Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.

This is interesting. The first payments are due out in early May, and the capital will flee from these banks early TUESDAY morning, or as soon as the bank holiday is over and the banks reopen. Damn, that was a good plan if I ever heard one!!!

Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said.

And on top of it, the IMF hasn't even guaranteed a loan amount. The Cyprus banks gutted the confidence of its banking system and robbed its wealthiest depositors for an IOU of an unspecified amount and time frame. Damn, that was a good plan if I ever heard one!!!

The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to the Bank of Cyprus “in line with applicable rules.”

... The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

No shit, Sherlock! And it is uncanny insight such as this that has spawned documentaries such as this....

In closing, I will also like to add that the 100k euro limit will likely hit the small businesses and middle class ex-pat community considerably harder than it hits the Russian oligarchs 0who are wealthy enough to have some geographic diversification. The small businesses are the ones who employ the vast amount of the population (them, and the now extra broke government, that is). Wiping out 40% of a small to medium business's liquid assets over 100k is tantamount to corporate genocide. Add to that the extreme taxation to come from attempting to pay back the Troika and the guaranteed spike in unemployment stemming from all of those broken companies, the breakdown economic activity from those missing businesses and the near guaranteed counterparty run whenever those banks open up again (if ever), and you have a austerity-imposed depression on your hands. This is a depression that's currently occurring in Greece and was forecast 3 years ago, see The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! That's actually good news compared to what's likely to happen to those other countries' bank depositors who feel that their liquid assets, at one time thought to be actually liquid and sacrosanct, are at risk like those of the Cyrprians. 

Ready! Set! Bank Run!!!

Cyprus contagion raw

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On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

 On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

Make no mistake - modern day bank runs are now caused by institutions!

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

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picsay-1363698572Following yesterday's highly analytical rant on Cypriotic bank nonsense, I present an interesting analysis on the value of the gas assets pledged to those who's bank accounts may be clipped by the Cypriotic government/ECB. For those who don't know, the proposal was to compensate those who were subject to the tax/levy on their bank accounts with bonds linked to the output of Cyprus natural gas mines. Of course, the first question anyone should ask is "Why not simply pledge the gas assets directly to the ECB vs stealing from the bank depositors?" I think we can all ascertain the answer to that question. I was tweeted an analyst by Anthony Alfidi wherein he delved into the fundamental value of the exchange. I would like to reproduce a portion of it here. The balance can be found on his site.

Cyprus Bank Deposit Levy and Natural Gas Bonds

Reading a Bloomberg article on the topic of ass-backwards EU area government moves this morning caused me to query, "What is the extent of the fear the European (and US) governments have of the financiers?" In Cyprus, we have a case of a government that would actually rape the depositors of a bank rather than the investors who voluntarily, directly and explicitly accepted the risk of bank failure through speculative investment (ex., the bondholders). 

The bank tax was the alternative to imposing losses on investors in a so-called bail-in, a step opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

So, you will bend the mom and pop depositors over, but leave the monies of the institutional guys who should have known better sacrosanct?

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Bullocks! The taxpayer should be hit before the depositor to maintain the confidence in the banking system, but they should all stand behind the bondholders who accepted the investment risk in the first place. Yes, I'm aware that the banking system of Cyprus is about 9 times the size of its real economy, but that's pretty much the case with much, if not all of the EU, as clearly delineated 3 years ago in Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

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Of course, this boneheaded move will backfire tremendously because it appears as if the members of the Cyprus government are not aware of the true financing structure of the banking system. DEPOSITORS SHOULD REMAIN SACROSACNT! They are the most important source of funding, not to mention the most liquid (as in potential for capital flight) in the entire banking ecosystem! I reviewed this structure and the inevitability of European bank runs two years ago in The Anatomey of a European Bank Run!

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Using this European bank as a proxy for Bear Stearns in January of 2008, the tall stalk represents the liabilities behind Bear's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk displayed in the first chart in this missive, and that is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

image006image006

I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence.

I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

The following is a guest post by a very bright individual whom I've had the pleasure of building with on several occasions, Mr. Mordechai Grun. This is what he's had to say on the topic of Europe, with ample commentary from me along the way.

_______________________________________________________

Human behavior predications usually follow the ‘least resistance, least painful, and self serving’ path in spite of its being harmful in the long run. This disposition is even more truly said of politicians and bureaucrats. "Will is the origin of all thought." Flowing from such will we have the intellectual analysis and arguments to justify those behaviors. We will therefore look at Europe through this lens and see where it takes us.

The next major crisis in Europe is lurking just beyond the bend.

Reggie’s note: the last crisis has actually never left, so this is not the next one, just a continuation of the same. I called this exactly three years ago, in explicit detail (The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one)

It will take form as either the comeback of Bond vigilantes or as a political calamity, where some peripheral country finally votes for a party that is seriously proposing to forsake the Euro.

Reggie’s Note: The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Or… As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

Some smart politician will certainly test the ECB’s resolve and do away with austerity and call their bluff. The consensus of the population can only be subjected to so much strain before it turns on itself and they vote for radical (read: costly) change. While the case can be made that the government bond-funding crisis has subdued, the economic pain of the general public has not.

Reggie’s note: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

The likeliest scenario is that both of these crises will play out at the same time, thus creating a Lehman-type crisis.

Faced with this crisis, only two options will present themselves:

1. Massive sovereign debt defaults, bank runs and bankruptcies as many banks’ liabilities are larger than the GDP of the countries that are guaranteeing them – and a potentially resulting currency crisis

Reggie’s note: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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1. A truly massive QE Program that not only bails out the banks and the existing governments debt and deficit, but also sponsors an enormous stimulus program for anything that can be thought of, e.g. infrastructure, education, green energy, etc.

Following scenario B, the challenge will be this: Why would the Germans and Fins want to debase their currency to send their monies elsewhere? The answer will be a mix of ‘candy and stick’, so to speak. The QE stimulus program will be structured upon some European formula – per capita or otherwise – that sends significant amounts of newly printed money to them too, while, in the alternative, if the Euro disintegrates, Germany will have to recapitalize the Bundasbank and resort to either massive stimuli or quantitative easing so to cheapen their currency and rescue their own economy. Those countries that leave the Euro will, nevertheless, default on any external bondholders, as they are restructured and recapitalized in the new currency, their banks will default as well. Why wouldn’t Germany be gracious and monetarily benevolent with funds they would lose either way? This would blend in with the fact that even the new Mark will be too expensive for their export-driven economy, and they would be pressed to cheapen it. They also won’t have destination countries to export to in Europe, as each country will turn to hyper-protectionism, safeguarding the jobs they have from disappearing in an effort to stabilize their home currency in order to avoid hyper inflation (Argentina, anyone?).

Reggie's Note: A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina - Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get... Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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This turmoil will, obviously, generate widespread economic malaise as well. As a politician faced with this decision the answer is obvious. I can already picture the smiling politicians announcing their courageous decisions and courses of action, claiming that they have saved the Euro from certain demise while helping the people and creating new projects and job opportunities that will launch Europe into the future. It is possible that they will punish the instigator (Greece, presumably) and cut them out of the money party aka Lehman.

Is this feasible for Europe? I believe the answer is yes, as one significant minutia is overlooked. The Euro is way too high, even for Germany. This will become ever clearer as time clambers on. Europe can survive – even thrive – at 0.65 Euro to the dollar. I recall this precise scenario in Canada during the early 90s. The resulting inflation at the consumer level was much milder than expected, as taxes, services, rents, salaries and many consumer goods and products (including cars) are priced in the local currency. Of course, energy costs would rise. In Europe, though, lowering the high taxes on fuel can mitigate this. On the positive side, manufacturing and tourism in Canada flourished, generating a strong trade surplus (this was prior to the commodity boom). Europe can probably afford 6-8 trillion in QE over a 3-year period without hyperinflation, especially as this will be taking place while many other major currencies are orchestrating their own QE. If, as they do this, the peripherals restructure their own economies and bring down or solve their structural or primary deficits, the Euro may actually increase eventually, as they will have significantly lowered their debt to GDP ratios and positioned themselves on a financially sustainable path.

Reggie's note: This is code language for DEFAULT! The defaults will codify, quantify and solidify the capital destruction that we all know is there in the first place. I don't think the ride will be quite that easy. Greece has defaulted (exactly as I anticipated and clearly called) and is about to default again, and it's still f#@ked. For more on this, reference This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! ... and then there's the contagion effect! Subscribers, see

• •  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
  •  Sovereign Contagion Model - Pro & Institutional

All others, reference: 

1. 1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
   2. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
   3. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
   4. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

The sad reality, though, is that they will promise such changes and not deliver on their word.

Reggie's Note: WHAAAT???!!! You mean you can't trust the European oligarchs??? 

• Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
• Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
• Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
• Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…

This will turn the crisis into only a short- to medium-term solution while eventually creating a fundamental currency crisis that will give way to no solutions.

Can the Euro handle that much QE? I believe the answer is yes. The ECB can forgive all the bonds they either own or collected as collateral for loans. Does anyone believe the principal on these loans will ever be paid down? The only stimulus from such a move will be the miniscule interest being saved.

Reggie's note: Moral hazard be damned, eh? What's to prevent other market participants from pushing to get a similar deal of borrowing money and not paying it back, expecting not to get punished. Massive forgiveness on this scale will fracture the market mechanism and destroy market pricing (as if it's not already wrecked as it is, does anybody really think core European bonds should yield what they do now?)

However, from a public confidence perspective, it would be huge, as it would drastically lower debt to GDP ratios.

Reggie's note: It will also bring about massively more stringent underwriting the next time around, effectively driving up rates anyway - you know, just as rates would have been driven up had the borrowers defaulted. Who in they're right mind would voluntarily make the same mistake twice in so short a period of time. As a reminder from my seminal link Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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It is important to note that Europe will be faced with a stark choice: either deflate assets and wages or deflate the currency. And, since as discussed, the Euro needs a significant reduction anyway, why not milk it and bring it down through QE?  The crisis created by a country like Spain leaving the Euro will harm the Euro by much more than a giant QE would. There exists capacity for Europe to kick this one down a really long road and, with some discipline, actually solve it along the way.

Reggie's note: Possible, yes! Probable, Nah!!!

The challenge will be that, unlike the US, Europe has multiple players and can't turn on a dime. The crisis, when it comes, will be overwhelming, and will require solutions over a weekend or short bank holiday. Can so many politicians and central bankers on opposing sides of the language barrier figure out that their collective interests are far more in harmony than their differences? Prejudice, ego and vindictiveness – combined with an overly sensationalist media and so many involved players – stage the scene for things to easily get out of hand. If history is any guide, the answer is not very encouraging. However, Europe now shares a bureaucracy and central bank as well as a mostly shared corporate interest. So let's hope this time around is a bit different.

Reggie's note: I really liked this piece, and Mordechai is bright fellow. Of course I like it better with my commentary, which sort of... well.. Keeps it real!

In closing...

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On Thursday, 17 November 2011 I penned "When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!", basically detailing the upcoming rift between the French and German governments, led by the burgoening chasm in their respective economic performances. As excertpted:

The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

• • Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding
  • Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

Well, today, Reuters reports...

Chasm opening between weak French and strong German economies

The schism dividing the euro zone's strong and weak economies deepened to include its core pairing in February as French firms suffered their worst month in four years in stark contrast to prospering Germany.

The gap between the two biggest economies in the euro zone is now at its widest since purchasing manager surveys (PMIs) started in 1998, the latest sounding showed. It dealt a blow to hopes the euro zone might emerge from recession soon, showing the downturn across the region's businesses worsened unexpectedly this month.

 I think we can start to see how this may end...

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

grade_a_bullshit_alert_transgrade_a_bullshit_alert_trans

If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

"Harvard reported a 0.05 percent loss and a drop in its endowment of over $1 billion in the same period, even as a simple Standard & Poor’s 500-stock index fund gained about 5.5 percent. Harvard’s endowment decline is more than the entire endowments of roughly 90 percent of all colleges and universities." 

Ironically enough, if one were to calculate the ROI of a Harvard undergraduate diploma, the number is remarkably similar at about 0.05%. See the graph below...

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These returns have been calculated by our proprietary College/University ROI Analysis Engine. At the bottom of this post you can find a link to a simplified beta of this engine, which will be freely available to blog subscribers, and will be available via smart phone app and over the web as well.  This app has morphed into an incredibly comprehensive and capable piece of knowledge kit - so much so that it had to be materially simplified just to post a portion of it on the web! 

There are many concepts used in the model that may be new to the Sheeple type. For instance...

Economic Return on Investment (eROI)

Introducing a reality-based method of valuing an education - the "Economic Return on Investment". You see, unlike many  other investments, the education is  a completely hands on, active experience. You cannot simply dump money into a fund and walk away. You must manage it, and  your labor (or how the market actually values your labor) is actually part and parcel of the return on investment .

Thus, it would be highly unrealistic to exclude the economic cash flows stemming from your attempts to pay debt service (assuming debt was used) in calculating  ROI. Since said debt is truly full recourse, its service must be factored in, and as such so should all of the practical variables that affect said servicing. Think of the net return on stock investments.

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This episode of the Keiser Report was one of the (if not the) most viral episodes ever. What was so interesting and controversial? A topic that damn sure hit home, that's what. Click here for the full episode.

When factoring in reality, many diplomas really don't look so appetizing considering the time, labor, effort, risk and expense in attaining them and fruitful employment related to the diploma afterward. Let's mark some top ivy league (remember, this is the so-called creme de la creme) diplomas to market, as well as the lowly disrespected for-profit online schools, trade schools and city universities. Oh yeah! I forgot to mention that I threw in an internship with a tech company for good measure. Let's add this quip in for the sake of argument (Yahoo Finance):

A few reports circulating this week have pointed to some fortunate Facebook software engineering interns who are set to bring home an average monthly salary of $6,225, according to Glassdoor.com, a careers site that provides data on salaries (based on employee generated content). That works out to a yearly salary of $74,700. For comparison, median household income from 2006 to 2010 was nearly $52,000, according to the latest Census data. (The average monthly pay for all Facebook interns, according to the site, is around $5,800.)

Jealous yet? There’s more. A few anonymous Facebook interns posted further details, with one second-year student saying he/she was offered $5,400 a month and a $1,000 housing stipend. Another computer science graduate student said they got $6,800 a month with a $1,000 housing stipend, negotiated up from $6,600. (Some Quora commenters noted intern salaries correspond to the number of years of college you’ve completed.) Facebook software engineers make an average of $111,452 a year, according to Glassdoor.

... So how do interns at the social-networking giant fare compared with their counterparts at other firms? Glassdoor released a report last month listing intern salaries at 20 top-rated companies (rated by current and former interns). Here are some highlights (figures are average monthly salary):

Software engineering intern, Google: $6,463 
Research intern, Microsoft: $6,746
Software development engineer intern, Microsoft: $5,539
Intern, Cisco: $4,017
Software development engineer intern, Amazon: $5,552
Graduate technical intern, Intel: $5,681
Intern, IBM: $3,935

As we know, majoring in computer science is a smart move. Finance and accounting offers lucrative job opportunities as well:

Tax intern, Ernst & Young: $4,136
Advisory intern, PricewaterhouseCoopers: $4,702
Audit intern, Deloitte: $3,822
Business analyst intern, Target: $2,785

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As you can see, a 2yr unpaid internship that yields a nominal salary growing at 3% per annum beats a levered ivy league diploma (salaries were sourced from the respective schools graduate statements and surveys). Debt can be a bitch, as can the time value of money and opportunity costs. For those who may not understand how this works, just think about starting school today with student loans and not breaking even until 2045 - that's right, the year 2045! Debt slaves - one and all!!!

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Of course, the major that you are pursuing has an awful lot to do with the value of the diploma, as does the current business environment and the point in the economic cycle. We will explore that in detail in my next post on this topic.

In 2009, Max Keiser warned interviewed the Bundesbank and uncovered the fact that much of (if not most) Germany's gold resided in NYC. Well, now as this information has become mainstream, the Bundesbank has announced that it is repatriating much of their gold to national lands, under a stated "storage plan", aka potential currency war.

Guest post - This is a contribution from the Boom Bust Blog community. While I value the contributors input, I do not endorse or necessarily agree with the opinions, finding, conclusions or data herein. This is supplied to the BoomBustBlog community as an OpEd piece only.

Traditionally, gold (NYSE:GLD) and copper (NYSE: JJC) had an inverse trading relationship.  Like all things in finance over the long term, that made sense due to the efficiency of the market.  Gold is an asset that is bought almost entirely for speculative purposes as it has very little industrial usage.  Copper, by contrast, is deployed almost entirely for building and commercial purposes such as piping, cable, and wiring, among others.  When economic conditions are bearish, gold soars and copper struggles.  When economic conditions are bullish, it is The Red Metal that surges in value.

But as the chart below reveals, the JJC and the GLD have been following in a co-relationship.   The Yellow Metal should be soaring due to global economic weakness and recent economic stimulus measures from central bankers.   Europe is in a recession, Japan is in the 23rd year of its “Lost Decade,” recovery from The Great Recession is anemic in the United States, and economic growth is declining in China, India and other emerging market countries.

To counter that economic environment, global central bankers have been running the printing presses in overdrive with economic stimulus measures.  Fiat currencies have been issued in massive amounts without any corresponding economic growth.  This combination of a low economic growth and high massive quantities of paper money should have the GLD soaring.  As the chart below shows, however, it has been declining since it peaked in early October, shortly after Federal Reserve Chairman Ben Bernanke initiated Quantitative Easing III.

Gold vs Copper

What has fallen from its high from the same period is the JJC.  The exchange traded fund peaked in late September, after China initiated its $156 billion stimulus program.  As with so many other commodities, China is the world’s largest consumer of copper (about 40%).  Since its stimulus program is concentrated on infrastructure projects, the demand for copper is expected to soar.  As a result, traders piled into The Red Metal after Beijing’s announcement.

Both gold and copper are up again, but for different reasons.  Bullish economic data from China has The Red Metal more in demand.  Naturally, the price rose.  Due to the incredibly irresponsible response by Washington, DC to The Fiscal Cliff, gold jumped in price.  There are now reports of another downgrade ahead for the United States, which makes The Yellow Metal more attractive to traders.  Leading gold broker, Bullionvault.com is also bullish on the long term prospect of gold along with many other analysts such as Cardwell RSI Edge, which expects the run to last way into 2013.

While that explains the short term movements in gold and copper that have mirrored each other, the long term trajectory that is the same moves to the beat of a different drummer.  Due to the flood of liquidity from central bankers in the United States, Europe, Japan and China, the traditional trading patterns for copper and gold have been destroyed.

In the initial rounds of economic stimulus, known as “quantitative easing,” gold and copper moved as before.  After the announcements by Bernanke for Quantitative Easing I and II, gold, copper, oil, and silver would soar as the US Dollar fell.  But the trillions of dollars and other currencies unleashed eventually overwhelmed what the financial markets could deploy to counter the onslaught of paper money by gobbling up commodities.

As a result, the only financial instruments with the depth to absorb all the newly created capital were the government bond markets, particularly those for US Treasuries.  That is why the interest rates are so low for US Government debt even though Washington has failed in economic leadership again, is in danger of being downgraded, and will be adding trillions more to its national debt well into the future with tremendous unfunded liabilities for social programs.

The easy money in trading gold and copper has been made.  Many speculators have lost heavily due to the breakdown in the traditional relationships.  Paradoxically, the future for both gold and copper is bullish.  For The Red Metal, it is positive as China has been registering better economic data, and has over $3 trillion in foreign reserves to engender domestic growth.  The Yellow Metal will surge in the future due to the inability and/or refusal of the world’s central bankers to responsibly deal with the dire economic situations at home.

This article was written by Marcus Holland from FinancialTrading.com.

Here are the most popular articles on BoomBustBlog over the last 364 days as we close out the 2012 year. As those who have been reading my work and following for the last 6 years know, I tend to call out trends early relative to the the pop pundits and sell side analysts. Unfortunately, these days, relatively early means before markets collapse or companies utterly dominate their industries.  Without further adieu... 

The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

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Last January, while oil price shocks, Israeli military tensions and beef with Iran dominated the headlines, I turned my focus on the single most overrated economy in the developed world - Germany! While not poised for utter collapse like you know who, many portfolios, bank balance sheets, insurance company actuarial analyses, etc. assumed this country can bailout out its own profligate banks, insolvent peripheral EU countries, and itself as its economy enters recession surrounded by trading partners who also are re-entering a recession (which they truly never left). To say the least, somebody is likely to be proven to be severely mistaken.

How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery

This is a lengthy, highly provocative article illustrating in explicit detail my thoughts on how America's inferior education system made the Great Recession not only a foregone conclusion of indoctrinated GroupThink, but prevents a true recovery from recovery due to the abject fear of price clearing. You may need to put your thinking caps on and exercise some patience and restraint with this one. I am going to follow it up with an explicit example of said groupthink by going against the conventional grain (yet again) and pointing out what many in the mainstream consider to be the most likely threat to economic prosperity in 2012 (and no, Iran is not even in the running on this one). I blame indoctrinated GroupThink for the inability of Wall Street to see the excessive coniferous expanse due to tree bark blindness! Until the next post, though...

The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media

A clear example of how simple math on a web-based spreadsheet unequivocally demonstrated that Greece HAD TO DEFAULT in 2012, and said default was arithmetically obvious as far back as 2010! 6th grade math, made easy (for everybody outside of the EC!).

Trading Physical Gold: Is Gold In A Bubble?

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This is the 4th installment (of 5) of my interview of the CEO of GBI (Gold Bullion International), a small firm located on Wall Street that allows investors (retail & institutional) to actually buy, sell, trade and store physical gold in the investor's own name. The previous installments (listed below) feature some very tough questions. BoomBustBlog interviews are not pushovers or advertisements. You must be able to hold your own.

Bernanke's Lying Through His Teeth and Not A Single Pundit/Analyst/Banker Has Called Him On It!!!

As the Fed Chairman continues to bedazzle them with the Bullsh1t, I point out a multitude of nonsensical statements culminating with the obvious, another concerted bank bailout at the expense of Joe Sixpack. The video (published shortly after the story was penned) tells the story with pictures instead of prose...

Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High

Oh, this one may not have been the most well-liked, but it was damn sure well viewed. I literally had thousands of comments knocking the analysis until it proved absolutely correct, then all that can be heard was crickets.... Let's not forget the follow-up posts a quarter or so later...

 Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!

Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! 

... and going into detail with Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

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The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

Illustrating the farce that was the most anticipated IPO in the history of the US equity markets, the Facebook story was told well in advance on BoomBustBlog, actually over a year in advance. I warned that this company's shares were drastically overpriced while it was still trading as a private company on websites over the Internet. Through all of the froth and broth brought out by the highest paid, high pressure salesmen in the world (sell side bankers), the stock IPO'd at $38, rose to forty something that day, then fell to just over $17, to settle at around $27 or so today. Here is the analysis, released in large part to the public.