spotfxtrader

taken from a post on zerohedge here

The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks–deposits, capital and collateral.

BNP-Paribas is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage; it has only $730 billion of deposits or just 29% of its asset footings compared to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates; and all the rest of its funding is from the wholesale money market , which is fast drying up, and from repo where it is obviously running out of collateral.

Looked at another way, the three big French banks have combined footings of about $6 trillion compared to France’s GDP of $2.2 trillion. So the Big Three french banks are 3X their dirigisme-ridden GDP. Good luck with that! No wonder Sarkozy is retreating on France’s AAA and was trying so hard to get Euro bonds. He already knows he is going to be the French Nixon, and be forced to nationalize the French banks in order to save his re-election.

By contrast, the top three U.S. banks which are no paragon of financial virtue–JPM, BAC, and C–have combined footings of $6 trillion or 40% of GDP. The French equivalent of that number would be $45 trillion. Can you say train wreck!

It is only a matter of time before these French and other European banks, which are stuffed with sovereign debt backed by no capital due to the zero risk weighting of the Basel lunacy, topple into the abyss of the shadow banking system where they have funded their elephantine balance sheets. And that includes Germany, too. The German banks are as bad or worse than the French. Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis, and that its Basel “risk-weighted” assets are only $450 billion, but actual balance sheet assets are $3 trillion? In other words, due to the Basel standards, which count sovereign and other AAA assets as risk free, DB has $2.5 trillion of assets with zero capital backing!

This is all a product of the deformation of central banking and monetary policy over the last four decades and the destruction of honest capital markets by the monetary central planners who run the printing presses. Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost.

This is an excellent piece posted at : http://charleshughsmith.blogspot.com/2011/11/whats-lost-with-demise-of-euro-only.html?

Buy his book here

Tuesday, November 22, 2011
What’s Lost With the Demise of the Euro? Only What Was Unsustainable

Scaremongering aside, the demise of the euro does not end European integration. It only means that which is unsustainable has been relinquished and a return to stability is finally possible.

So the euro is doomed. Toast. History. This will lead to:

1. the end of civilization

2. the end of European integration

3. the start of new Dark Ages

4. the return to a sustainable reality

The correct answer is 4. The euro was an unsustainable, self-destructing extension of the integration that has long simplified trade, travel and work throughout the EU (European Union).

At the risk of over-saturating you with more euro-related material, here are the basics we need to keep in mind as the third act plays out.

A common currency seemed like a good way to simplify trade and lower transaction costs. As I noted yesterday in Some Heretical Thoughts on the U.S. Dollar, such “folk” convictions rest on “sole-source causation”: in this case, that a single currency would only offer more benefits of integration because it lowered complexity and transaction costs.

The euro supporters forgot or ignored the primary purpose of national currencies:to account for differences in transparency, productivity, trust, money creation and risk between nations’ economies and their Central Banks/States.

If you remove this means of accounting for these fundamental differences, then you have removed a feedback loop from a dynamic system, and thus removed an absolutely essential flow of information and transparency.

What you’re left with is a system of lies, officially sanctioned opacity, misinformation, disinformation, cooked books, artifice and propaganda, i.e. exactly what Europe has become. With the euro, there was no way for the system to account for thr vast differences in debt loads, credit risks, transparency, productivity and a dozen other fundamentals that are expressed in foreign exchange rates.

By all accounts, Greece and Italy have painfully dysfunctional national finances and political Elites resistant to admitting the dysfunction is unsustainable. Once those nations revert to national currencies, then their currencies will reflect the market’s assessment of their economy and their national/Central Bank policies.

The same will hold true for all the other EU member states: the market will shift through the various metrics and feedback loops and reach an equilibrium around the value of each nation’s currency.

Profligate, over-indebted nations with dysfunctional Elites and systems plagued by political corruption and gridlock will see their currencies devalued and the interest rates they must pay to borrow money raise to the point that borrowing will no longer be an option to escape the consequences of profligacy, and the devalued currency will preclude buying imports from strong-currency nations.

These feedback loops are essential to providing the citizenry and their economy with the transparency and information they need to adapt to reality. The euro has erased all that vital information, leaving only interest rates as the sole expression of differences between economies.

Interest rates are simply not a rich enough source of information and market feedback to express the differences between national economies; the global markets need the information and feedback loop provided by currencies.

As I attempted to describe yesterday, currencies are not explicable with “sole-source causality” or “folk” understandings; they are distillations of numerous information feeds and feedback loops that only a transparent market can generate.

I have little doubt the euro is being held aloft by cloaked Central Bank intervention; the Elites are desperately attempting to cloak the system’s intrinsic dysfunction and stop the market from repricing the euro based on the inevitable return to national currencies.

Rather than fear this return to transparent feedback, we should welcome it and hurry it along. Systems which cut off feedback and choke transparency with artifice and lies are doomed to implode. If Europe ditches the failed “folk” experiment called the euro, then the process of recognizing and pricing dysfunction can begin, and the stability that only transparency and feedback can provide will soon return to the EU.

This may sound counter-intuitive, but it’s the only way forward to a sustainable, stable reality. The immense hubris of Europe’s dysfunctional Elites precludes their recognition that reality eventually trumps artifice and intervention. Their feeble, addled cries cannot turn back the tide, even if their bloated self-importance is infinite.

After the most awful piece that was published in Bloomberg last week [not linked] I was very glad to come across this clip and strongly recommend you listen to it. It’s about 27 minutes long.

Martin Armstrong Interview

Read all his stuff at http://www.martinarmstrong.org/economic_projections.htm

http://graphics.thomsonreuters.com/11/07/EZ_BNKEXP0711_SB.html

1.3693 being respected from below…

this from zerohedge .

written by Brian Rogers of Fator Securities

http://www.zerohedge.com/news/guest-post-welcome-currency-wars

Wither the Euro

Which brings us to Europe and the highly imperfect Euro. The only solution for Europe is a consolidation of fiscal authority at the national level, something like a United States of Europe. This will allow for the issuance of a Eurobond and allow the proverbial debt can to be kicked down the road a bit further. However, even this imperfect solution will never fly. There were times in the mid-2000s where the powers that be in Europe tried to pass a unifying constitution and they were soundly rejected. And this was when the economy was strong, jobs plentiful and the cost of integration viewed to be relatively light. In the current economic situation, however, integration seems unthinkable. All of the recent local and regional elections in Germany, Finland and elsewhere seem to verify this viewpoint as voters continue to elect politicians who will not support more bailouts or further losses of national sovereignty. Europeans are voting for less integration rather than more so this is a non-starter in my opinion. Which means more EUR weakness and eventually an unwind of the currency union. As investors exit the EUR, some will buy CHF and test the SNB. They lost billions earlier in the year on market interventions. They will lose billions more on this one until they eventually capitulate.

The currency union will fail not because the current political leadership wants it to, quite the opposite, it will fail because the people of Germany are Germans and don’t want to be equal members of a broader European concept called United Europe. Same thing for the Dutch, French, Belgians and others. This will ultimately kill the hope some hold out for the Eurobond concept. No fiscal union.

Print More Euros? Nein!

So the other option is massive printing, aka the preferred option of one Ben S. Bernanke. In my opinion, the ECB is really a proxy for the Bundesbank. The Germans, having a particular history with money printing to solve debt problems, will be loath to support much more printing and the polls in Germany so little support for this “solution.” Trichet will continue to print as the banking crisis worsens but at some point he will simply have to pull the plug and allow the chips to fall where they may. The Germans will not repeat the mistakes of the Weimar Republic, even if it means the breakup of the decade or so experiment called the Euro.

This means a banking crisis is coming. The major European are all under-reporting their exposure to the PIIGS because they are reporting net, not total exposure. They have hedged some of their PIIGS risk in the CDS market but in a modern-day banking crisis, the value of those hedges will approach zero as counterparty risk will surge once one of the main banks begins its death spiral. Redemptions will hit the hedge funds, forcing them to liquidate and further rendering the value of any protection they wrote worthless. A hedge only has value if your counterparty is financially able to deliver on the contract. With Greek paper implying at least a 40% haircut, the big banks in Europe are toast. And that’s only discussing Greece. If Italy comes under further pressure, forget it, game over. Italy is way Too Big To Bailout.

Could the US Fed end up purchasing European sovereign debt in an attempt to prevent a collapse of the Euro? Although it doesn’t seem too likely today, I wouldn’t bet against it completely. If buying more PIIGS debt helps keep the banks alive another day, then buy they will. Don’t be too surprised if it happens. As the Swiss and Brazilians just showed, all options are on the table.

This will affect the US banks as well, particularly the large derivative players. Counterparty risk will surge, funding will dry up and capital levels will be questioned in detail. And this particular leg of weakness doesn’t even consider the capital that may need to be raised from the FHFA lawsuits announced last week.

This will force the US government to enact the bank nationalizing powers of the Dodd-Frank Act to ring fence the good assets (assuming there are some) of the major US banks that come under fire. In turn, this will put significant pressure on the US government as the FDIC is forced to make good on billions of dollars of deposits. In addition to the billions being lost on the GSEs, the government will be forced to spend billions on the banking sector while teachers lose their jobs to austerity. This will further roil US politics as both major parties will want to bailout the banking sector but neither will want to move first! You think we had gridlock over the debt ceiling debate, you ain’t seen nothin’ yet!

He touches on the possibility of the Fed bailing out Europe..
I think the last throw of the dice will be concerted central bank intervention by all the major central banks, but this too will probably ‘fail’, since the whole system is gangrenous and what is needed is not that it be preserved but that the gangrene be excised.

Watch 1.3837.

If Chinabot doesn’t show up right beneath there then look for 1.3693

quite an interesting juncture…

A break of this uptrend would quickly target 1.3693…

The business daily Handelsblatt writes:

“The problem (with the decision to peg the franc to the euro) is that its ultimate success is not, in the end, under the control of the Swiss National Bank. For a long time now, the franc’s exchange rate has had little to do with fundamental economic indicators and a lot to do with fear: the fear that the euro zone will not get its debt problems under control. Some investors have even been willing to accept negative interest for Swiss franc investments just so they could own francs.”

“But even the Swiss central bank would be powerless against a renewed wave of panic. Should doubt crop up once again as to Italy’s solvency — or even that of France — the franc exchange rate could no longer be controlled.”

“By pegging the franc to the euro, the Swiss central bank gave up independent control over monetary policy. Yet according to Swiss law, it can only do so for a limited amount of time. The markets know that too — and they likely have more patience in this game.”

On the Swiss move
Bruce Krasting

I have repeatedly said in these pages [zerohedge — your homepage ?] that for currency intervention to be successful it has to be done in conjunction with other big central banks. The Go it Alone policy has not worked over the past 20 years. I have no reason to expect that it will work this time either.

I think the most important press announcement this AM is not from the SNB; it is from the ECB. There is little doubt from this that the SNB is in this all alone:

The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility.

I think that the SNB has just committed suicide. They did the one thing they should never have done. Draw a line in the sand.

Events far outside of the control of the SNB will determine the consequences of the policy to put a floor under the CHF. While I don’t doubt their short-term resolve to defend the 1.20 level for the EURCHF I am already questioning how long this can continue. Some thoughts on where this may go.

Stay away from the CHF. There is only one trade to make as of this morning. That would be long the EURCHF. To me that is like shorting gold. Don’t do it, is my advice.

This has been tried before by the SNB way back in the late 70’s. As a currency matter the policy was a success. The Franc stabilized against the weak German Mark. But three years later the Swiss were suffering a massive hangover. Inflation went from a negligible number to over 7%. There can be no doubt but that the same results will happen again. It’s just a matter of time.

Stay away from Swiss stocks for the time being. Yes, a cheaper Franc is good for translated earnings. So if you believe that multiples are the only driver of stock prices you might conclude that the move by the SNB makes the SMI (stock index) a buy. Think again. A government that falls back on currency controls as the only measure of policy options left, is a place that you don’t want to put your money. The big jump in Swiss stocks this AM is a logical knee jerk response. But the SNB move is also the kiss of death for the equity markets in Switzerland.

Europe is falling apart. That reality has not changed as a result of the SNB action. Over the next few weeks we will get more bad news from the EU. In the past the ‘go to’ response has been to buy the Yen and CHF as a safe haven knee jerk reaction. Now that trade is dead (both of them in my opinion). So where will the hot money go the next time the headlines scare capital? There is only one choice left now. That would be gold.

I believe that the amount of intervention required to drive the EURCHF from 1.14 to 1.20 this AM was quite small. The market immediately re-priced the currency to the level the SNB said it was prepared to defend. But that is not going to be the result at some time in the near future. At some point the SNB will be tested. I have no doubt but that they will step up and intervene like mad the next time the CHF is in demand. But at what cost? How many Euros will they be forced to absorb? E100b? E300b? Could it go as high as E1 trillion? There is no number that can’t be achieved. The question of, “How much can they do?” has not been asked or answered as yet. The market is going to both ask and answer that question. I think the time frame for this is before the end of this year.

Do the Swiss have the will to take this fight to the bitter end? There is nothing in history that says that they can or will. What if this begins to backfire sometime this fall? Does the SNB just stand there and print Francs? That is what they have said they will do. I wonder what they will be thinking when the money supply first doubles, then triples then just goes vertical. Are they really so stupid to think that the floor on the Franc has no risk attached to it?

In 2010 the SNB reported a loss of CHF 21b as a result of their failed interventions against the Euro that left them holding the bag. There was political hell to pay for these losses. The annual gains of the SNB are paid back to the Cantons. There will be no gains (only losses) as a result of the new policy. The Swiss exporters, farmers, tourist industry may hail the move today, but just wait till the policy fails. Before this is over the SNB will hold an extra 500b Euros. The losses could easily exceed E50b. This will sink the SNB forever.

What will the SNB do with all the Euros they have promised to buy? That’s easy to answer. Only German and French debt will be allowed. This will just result in a widening of credit spreads between the North and the South. As this happens more capital will seek a safe haven. What the Swiss have done will add to the instability within the EU. As a result, the ECB will hate the SNB.

To some extent the strong CHF was a dollar phenomenon. The CHF got stronger and stronger against the Euro. Through the markets this acted as a support for the Euro versus the dollar. What might it mean now that this relief valve has been broken? One possible response is that the dollar gets stronger in a significant way. That has not been the reaction so far this morning, but I consider this to be a reasonable outcome. Just a question for those who are looking at this from a global perspective:

What is the number one worst thing that could happen to the US economy over the next six months?

I would put a “too strong” dollar at the top of my list. Should the result of the SNB action be a 10-15% up move in the dollar versus Euro it will be the kiss of death for US GDP. I think there is a very good case for this to occur. Bernanke must be very upset this AM. What the Swiss have done runs very counter to his plan to “export” US deflation. The Swiss are now going to be the exporters of deflation. The bulk of this will stay in the EU, but some of it surely will come to our shores. If your odds for a USA double dip were 50-50 on Friday, they just went to 70-30.

How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.

I suppose there is a soft landing scenario to the steps taken today by the SNB. The liquidity problems in the credit markets of Europe could somehow magically stabilize. It’s possible that the debt woes of the PIIGS could also disappear from the market’s radar. It’s conceivable that US growth could perk up and a crisis is avoided.

I don’t see any of those things happening any time soon. I say the SNB move will fail at some point. If/when that happens it will be an important point in history. If we see the headline, “Swiss cave to market – Franc soars” that will be the day that marks the end game of “extend and pretend” policies and market manipulation. That will be the day that the Great Depression of the new millennium begins. What we went through in 2008 will be a walk in the park compared to that turning point.

I wrote about the prospects of a CHF Peg a few times in the past month or two. I think the steps taken today represent a huge gamble by the SNB. I said of the prospects for this to happen:
The Swiss like to “Double Down”

The SNB has, in fact, doubled down as of this morning. This is the biggest financial bet in the country’s long history. They are “All In” on this bet. Not only are they betting Switzerland’s economic future, they have also placed a bet for the other 7 billion people living on the planet. I would give a “zero’ possibility for this to work. Get your seat belts on. Volatility is about to take another monstrous leap.