U.S. Plunges to #46 in World Press Freedom Index, Below Romania and Just Above Haiti

One of my most popular posts of 2013 highlighted the decline of America’s once large and enviable middle class. It was titled: How Does America’s Middle Class Rank Globally? #27, and it helped to dispel many myths Americans (particularly the mainstream propaganda media) continue to tell to themselves.

As you might expect, the economic decline of a nation into rule by a handful of corrupt oligarchs will have many other negative repercussions. One of these is a loss of civil rights and freedoms that many of us have taken for granted. Reporters Without Borders puts out their Press Freedom Index every year, and the 2014 ranking came out today. It was not a good showing for the USSA. Specifically, the U.S. registered one of the steepest falls of all nations, down 13 slots to the #46 position. As the screen shot shows, just above Haiti and just below Romania.

Screen Shot 2014-02-12 at 9.39.13 AM

More coverage from the AFP:

Paris (AFP) – Conflicts continued to weigh heavily on the media last year but press freedom was also under increasing threat from abuses by democracies like the United States, Reporters Without Borders said Wednesday.

In its annual World Press Freedom Index, the Paris-based media rights watchdog warned of the “growing threat worldwide” from the “tendency to interpret national security needs in an overly broad and abusive manner”.

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Doomed If We Do, Doomed If We Don’t

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The point to understanding the Status Quo financial system is doomed is not to revel in the doom but to understand why we have to look past the current corrupt, predatory, parasitic system to a better arrangement. That's positive.

Longtime correspondent Harun I. submitted this quote from John Ing and a commentary on simple arithmetic. In “We Are Nowhere Near The Chaos That I Expect", John Ing observes the consequences of deleveraging a highly leveraged system:

"We have already had $3 trillion in stock market capitalization wiped out. It is amazing that just a $20 billion tapering has been enough to cause all of this chaos around the globe.”

Harun then explained why it isn't amazing at all–it's entirely predictable:

Simple arithmetic will do. The Fed is leveraged 72:1. For every dollar it removes, it actually removes 72. The product of 72 and 20 is 1,440. The Fed has actually removed nearly $1.5 trillion of liquidity with its $20 billion tapering.

It is a mathematical certainty that this geometric progression of debt growth will end (remember, for everything that is growing geometrically, that upon which the growth is dependent is contracting at the same rate). The contraction (deleveraging) must necessarily be as geometric as the expansion (leveraging).

The Fed can try to keep interest rates at zero but there will be dire consequences. The Fed can try to “taper” but there will be dire consequences.

What I find amazing is that even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The World Economic Forum reported in 2011 that $100 trillion in new credit would be needed for world growth going forward. How long does anyone think tapering will last?

Over US$ 100 Trillion Additional Credit Needed to Support Global Growth (World Economic Forum)

Trying to force simplistic results out of complex systems inevitably generates unintended consequences. Liquidity and credit expansion act like pressure in a closed system; central planners look at the site of the last financial break and see no leaks, so they assume they've got the system under control.

But the next failure in the system will occur where no one is looking–the points in the system that everyone assumes are "safe."

The system is doomed if central banks continue creating trillions of dollars in new leveraged credit and liquidity to keep the system from imploding, and it is also doomed if they cease creating new leveraged credit (i.e. taper their geometric expansion of credit). Doomed if you do taper, doomed if you don't taper.

Here's the Fed balance sheet. If you get a magnifying glass, you might discern some tapering.

Geometric expansion of credit is visible throughout the system. Never mind the infamous shadow banking system–look at the insane expansion of credit/debt in student loans:

Of related interest:

Resolution #1: Let's Call Things What They Really Are in 2014 (January 15, 2014)

The Federal Reserve's Nuclear Option: A One-Way Street to Oblivion (February 5, 2014)

Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve (January 28, 2014)


    



via Zero Hedge http://ift.tt/1okYwwh Tyler Durden

Doomed If We Do, Doomed If We Don't

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The point to understanding the Status Quo financial system is doomed is not to revel in the doom but to understand why we have to look past the current corrupt, predatory, parasitic system to a better arrangement. That's positive.

Longtime correspondent Harun I. submitted this quote from John Ing and a commentary on simple arithmetic. In “We Are Nowhere Near The Chaos That I Expect", John Ing observes the consequences of deleveraging a highly leveraged system:

"We have already had $3 trillion in stock market capitalization wiped out. It is amazing that just a $20 billion tapering has been enough to cause all of this chaos around the globe.”

Harun then explained why it isn't amazing at all–it's entirely predictable:

Simple arithmetic will do. The Fed is leveraged 72:1. For every dollar it removes, it actually removes 72. The product of 72 and 20 is 1,440. The Fed has actually removed nearly $1.5 trillion of liquidity with its $20 billion tapering.

It is a mathematical certainty that this geometric progression of debt growth will end (remember, for everything that is growing geometrically, that upon which the growth is dependent is contracting at the same rate). The contraction (deleveraging) must necessarily be as geometric as the expansion (leveraging).

The Fed can try to keep interest rates at zero but there will be dire consequences. The Fed can try to “taper” but there will be dire consequences.

What I find amazing is that even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The World Economic Forum reported in 2011 that $100 trillion in new credit would be needed for world growth going forward. How long does anyone think tapering will last?

Over US$ 100 Trillion Additional Credit Needed to Support Global Growth (World Economic Forum)

Trying to force simplistic results out of complex systems inevitably generates unintended consequences. Liquidity and credit expansion act like pressure in a closed system; central planners look at the site of the last financial break and see no leaks, so they assume they've got the system under control.

But the next failure in the system will occur where no one is looking–the points in the system that everyone assumes are "safe."

The system is doomed if central banks continue creating trillions of dollars in new leveraged credit and liquidity to keep the system from imploding, and it is also doomed if they cease creating new leveraged credit (i.e. taper their geometric expansion of credit). Doomed if you do taper, doomed if you don't taper.

Here's the Fed balance sheet. If you get a magnifying glass, you might discern some tapering.

Geometric expansion of credit is visible throughout the system. Never mind the infamous shadow banking system–look at the insane expansion of credit/debt in student loans:

Of related interest:

Resolution #1: Let's Call Things What They Really Are in 2014 (January 15, 2014)

The Federal Reserve's Nuclear Option: A One-Way Street to Oblivion (February 5, 2014)

Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve (January 28, 2014)


    



via Zero Hedge http://ift.tt/1okYwwh Tyler Durden

Another JPMorgan Banker Dies, 37 Year Old Executive Director Of Program Trading

Ordinarily we would ignore the news of another banker’s death – after all these sad events happen all the time – if it wasn’t for several contextual aspects of this most recent passage. First, the death in question, as reported by the Stamford Daily Voice is that of Ryan Henry Crane, a Harvard graduate, who is survived by his wife, son and parents at the very young age of 37. Second, Ryan Henry Crane was formerly employed by JPMorgan – a bank which was featured prominently in the news as recently as two weeks ago when another of its London-based employees committed suicide by jumping from the top floor of its Canary Wharf building. Third: Crane was an Executive Director in JPM’s Global Program Trading desk, founded in 1999 by an ex-DE Shaw‘er, a function of the firm which is instrumental to preserving JPM’s impeccable and (so far in 2013) flawless trading record of zero trading losses.

There was little detail surrounding the death:

Ryan Henry Crane of Stamford died Monday, Feb. 3. He was 37.

 

Crane was born Jan. 8, 1977, and grew up in Long Valley, N.J. He graduated from The Delbarton School in Morristown in 1995. He graduated from Harvard University in 1999, after which he spent the next 14 years at J.P. Morgan in New York. He was an executive director in the Global Equities Group.

 

Crane is survived by his wife, Lauren (nee Pizzotti); son, Harry; parents Mary Jo and Lex of Long Valley, N.J.; brother, Lex of Denver, Colo.; sister, Allison; brother-in-law, John Archard of Arvada, Colo.; parents-in-law, Steve and Carol Pizzotti of Reading, Mass.; brothers- and sisters-in-law, David and Heather Pizzotti of Upper Arlington, Ohio, Stephen and Kristin Pizzotti and Chris and Felicia Pizzotti of Reading, Mass.; five nephews, three nieces; aunts, uncles; and cousins.

 

Calling hours are Sunday, Feb. 9 from 3 to 7 p.m. at the Leo P. Gallagher Funeral Home, 31 Arch St., Greenwich. A Mass of Christian Burial will be held at 11 a.m. Monday, Feb. 10 at St. Catherine of Siena Church, Riverside. Interment will be held at 1 p.m. Tuesday, Feb. 11 at Puritan Lawn Memorial Park in Peabody, Mass.

Crane’s LinkedIn profile confirming his senior position at one of JPM’s most important market-facing verticals:

 

Below is his Finra BrokerCheck profile. Aside from having a license to trade virtually anything and anywhere as someone with his skillset would be expected to, his history was spotless:

 

The circumstances surrounding his death are scarce, but what is most notable is that not only is Crane the second very young JPMorgan banker to pass in recent days, but is also the fourth banker death in under a month. We can only hope this disturbing chain of deaths within the financial industry – one of which involved a nail-gun induced suicide – is purely accidental.

h/t SGT Report


    



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Mortgage Applications Drop – Hover Near 19 Year Lows

Despite being told by Bullard, Yellen (and numerous other Federal Reserve thinkers) that quantitative easing was aimed at improving the housing market, the data suggests that – somewhat predictably – it did very little for mom-and-pop organic real home-buyer but stoked speculation and fervor among fast-money cheap-funding investors (and as Marc Faber noted actually hurt the average homebuyer via un-affordability). The week-to-week ebbs and and flows in mortgage applications are notable  (this week saw purchase applications drop 5% and back near recent lows) but a bigger picture glance at just where this “recovery” has been tells a very different story about confidence among home-buyers.

 

Mortgage applications for home purchases have basically flatlined since the Fed began QE and hover now just above their lowest levels since 1995…

 

Charts: Bloomberg


    



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Market Update: Gold Surges As Bond Bulls Purge

UPDATE: Trannies and Industrials are now red…

Gold has pressed up to almost $1,295 this morning – fresh 3-month highs – as silver and WTI crude also rise notably. The S&P 500 continues its inexorable USDJPY-inspired levitation (and is set for 1,900 by Monday morning at this rate) though remains negative year-to-date (for now) and a small roll-over in JPY is dragging stocks off their highs for now. US Treasuries are offered with the belly underperforming as 5Y reached 2-week highs at 1.56%.

 

The SPJPY 500

 

Gold is at fresh 3-month highs…

 

And Treasuries are worsening…

 

 

It seems Laszlo Birinyi was "off" with his timing call for 1,900 by end of June – at this rate we'll be there by 4am Monday morning…

 

Charts: Bloomberg


    



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Deutsche Bank Explains How, And Why, Germany Opened The OMT Pandora’s Box

In a surprising, and to the ECB very disappointing decisions, we reported last week that the German Constitutional Court (GCC) stunned the world when it announced, in a nutshell, that the “ECB’s Outright Monetary Transactions program likely exceeded the central bank’s powers.” In other words, finally someone dared to point out that the Deus Ex Machina that had kept the Eurozone together since Draghi’s “Whatever it takes” speech in July 2012, was an emperor without clothes. The Karlsruhe Court added that “there are important reasons to assume that [the OMT] exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget,” the German court said Friday. “Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law.”

At that point the GCC punted the final decision to the European Court of Justice, which, because it has traditionally sided with European Union institutions, the market assumed would overturn the German objection and let the lie continue indefinitely. After all why would the “European” Court threaten its very existence by confirming that the emperor is indeed naked. Which is also why there was barely a blip in peripheral bond yields: after all the party was sure to continue.

Maybe not. As Deutsche Bank revealed in a note overnight, the GCC may have, quite deliberately, opened a Pandora’s Box with its decision which according to Europe’s largest bank, and the one whose derivatives exposure makes that of JPM pale by comparison, (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) would not consider itself bound by a positive ruling of the European Court of Justice. And while in DB’s opinion this action does not have any immediate market consequences, the report’s authors think that it “alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil.”

In other words so much for the “whatever it takes” backstop of an ECB whose mandate was just clipped resoundingly by Germany.

There is good news: DB also points out that the OMT – which was the biggest bluff in central bank history – had one main purpose: to give the European periphery enough time to get its act in order, and according to the cheerful European pundits and press, this is precisely what has happened. In other words, by the time the OMT would have to be used (and when the bluff is called), it wouldn’t have to be used. Or so the tortured circular logic goes. Sadly, when one strips away the fake veneer of the European recovery, what one finds is month after month of record low private sector loan creation: the lifeblood of all Keynesian growth, and the reason why Europe is now flooded with deflation (a largely portion of which is exported by Japan). In other words, if and when the time to pull the curtain comes, all that will be revealed is further deflationary devastation for the depressed European continent.

Hence why the escalation in the timing of the OMT decision is suddenly so acute, but also explains why the GCC did not ask the European Court of Justice to fast-track its decision, a process which would have led to a decision in as little as 4 months, instead granting Europe another 16 or so months to get its house in order. Which, this being Europe, it won’t.

Which takes us back to the Deutsche Bank report, and its take on how it sees the “Monetary union after the German constitutional court ruling.” In a word: troubling.

From Deutsche:

That the German Constitutional Court (GCC) (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) it would not consider itself bound by a positive ruling of the European Court of Justice does not have, in our view, any immediate market consequences. However, we think that it alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil.

 

Indeed, the revision in OMT which would be needed to comply with the German Court’s requests – assuming the central bank would be ready to yield to a national Supreme Court which has no jurisdiction over it – would significantly weaken the mechanism.

 

More fundamentally, we think that the GCC’s decision opens the door to two very different routes for the monetary union, either a continuation of an intergovernmental approach, this time without the direct support of the ECB, which we think would be fragile, or a shift towards a more genuinely federal framework under a new treaty, which would be more solid in the long run but probably quite noisy and uncertain in the short run.

Here is how the ECB is once again faced with yet another head on German collision:

Technically, we do not see why the central bank would actually accept to revise its framework along the lines set by the GCC. This would run against the fact – repeatedly highlighted by ECB board members – that the ECB is not under the GCC jurisdiction. This would also create an uncomfortable precedent, opening the possibility that the ECB could be led to modify its policy and practices under pressure from other national judicial authorities.

 

This would be different, however, if the ECJ – to which the GCC asked a “preliminary ruling” on a number of questions – ruled along the same lines as the GCC. We note however that from a political point of view the Euro area would find itself in a quite interesting position, with the ECJ – which by the way also comprises judges from outside monetary union – issuing a preliminary ruling on questions raised by a national Supreme Court which already stated that it would not consider itself bound by it. The ruling opens the door to a conflict between the ECJ and the GCC.

The result: “a lower level of insurance in case of sovereign crisis”

Provided the ECJ did not endorse the GCC’s reservations, we think that the ECB could decide to ignore the GCC decision. This would however trigger a direct confrontation with the German government – which would have to explain to its public opinion why it is ignoring its own Supreme Court. Since OMT is conditional on granting ESM support (and we need to check if the forthcoming ruling of the GCC on 18 March on ESM does not create additional conditions), in the end Berlin could block the entire mechanism. True, one can think of a dramatic situation in the periphery where the German government, supported by its parliamentary majority, would consent to “let things happen”, but at least the bar would be much higher than what the market thought before the GCC ruling.

 

If the ECB cannot trigger OMT, then a possible substitute would be a capped rate LTRO, the central bank counting on banks to act as lenders of last resort to the struggling sovereigns. The experience of 2012 shows however that this is not necessarily sufficient in case of acute crisis (this is why OMT was created in the first place, after the LTROs). Still, this would actually leave moral hazard issues unaddressed (with OMT comes conditionality), and this would run counter to the current push at the ECB to wean banks off government bonds).

 

All this means that the level of insurance – from the ECB – against protracted market turmoil, is lower than a lot of market participants thought. In truth, we always believed the market was too positive on OMT and underestimated the complexities of such an operation, but the “re-set” of perceptions could be significant.

That’s the bad news. The good news is that the OMT may have already served its purpose.

Still, what matters is whether the market feels the need to be able to count on OMT insurance. This depends on whether or not we can consider that from a macro/political point of view the peripherals have turned a corner. Judging by recent market developments, this is the case. After all, the Euro area is in a recovery. Italy – the laggard so far – is likely to print a positive figure for GDP in Q4. The political situation in Rome is not as dramatic as feared when former PM Berlusconi was expelled from parliament. Spanish banks are being recapitalised. As such, the GCC ruling is unlikely to be a catalyst for market events. It is only if the intrinsic situation of the periphery materially deteriorates that the limitations to OMT will be in focus again.

Here we disagree and summarize the reason for our skepticism in one simple chart: European lending (both supply and demand) is dead. As in dead and buried and as a result any hope of even a glimmer of inflation returning to Europe has been thoroughly crushed (and you can thank Japan and its open-ended QE: after all that’s the deflation Europea is importing on top of everything else).

 

However, most of the above should have been intuitive. What the punchline in DB’s report, however, is is that Germany may have had a far more insidious intention with the GCC decision: namely to accelerate the Federalsation of a Europe that still refuses to hand over its sovereignty to Germany.

More fundamentally, the GCC exposes a gaping flaw in the Euro area as an institutional construct. If national courts have precedence over federal courts in interpreting the “federal constitution”, i.e. the EU treaty, this proclaims that Europe is definitely not a federation, but a hybrid, loose construct. This configuration is actually similar to some of the travails of the United States in the late 18th century and most of the 19th century, when state legislatures (starting with Kentucky and Virginia) considered they could themselves rule on the conformity of federal decisions with the federal constitution. The issue that the US had to solve was whether they were a “league of states” or if they were born out of the direct consent of the people.

 

The preferred path so far is inter-governmental. The ESM is the epitome of this approach, where money is put together by the various member states but where large states can de facto veto any decision of support. However, the inter-governmental approach demonstrated its financial limit since member states were reluctant to impose on their taxpayers contingent liabilities which would have been seen as credible by the market to stem attacks on any large sovereigns. The ECB offered an “easy way out”, a “monetary way out”, to the national governments. Logically, if now we take the central bank out of the equation, then the “common pot” needs to grow. Leaving the ESM as it is today would not offer sufficient protection if the crisis was rekindled.

 

Genuine federalism is the other path. In a way, in our view the sub-text of the GCC’s decision, which has always had the democratic principles at heart when looking into the technicalities of EU law, is that the democratic legitimacy of the monetary union as it functions today is too weak. The monetary union as it was agreed by democratic consent in 1992 has materially changed. In a way, the GCC ruling is consistent with Angela Merkel’s call for a revision in the treaty, the current one having been “stretched to its limits”. The problem is that, given the political configuration in the Euro area, very few leaders are ready to follow Germany on that path. Francois Hollande, for instance, stated upon visiting the UK earlier this month that revising the treaty was not, in his view, a matter of urgency.

And there you have it: all the GCC really did was remind Europe that while the Eurozone is alive and well – for now – the clock is ticking on the transition of Europe to a “genuinely federal” union: one headed by none other than Germany. So enjoy your propaganda “things are getting better” but remember: once you emerge, it is the German way, or the highway. And Germany now demands that Europe finally make its choice.


    



via Zero Hedge http://ift.tt/1fgpZb5 Tyler Durden

Deutsche Bank Explains How, And Why, Germany Opened The OMT Pandora's Box

In a surprising, and to the ECB very disappointing decisions, we reported last week that the German Constitutional Court (GCC) stunned the world when it announced, in a nutshell, that the “ECB’s Outright Monetary Transactions program likely exceeded the central bank’s powers.” In other words, finally someone dared to point out that the Deus Ex Machina that had kept the Eurozone together since Draghi’s “Whatever it takes” speech in July 2012, was an emperor without clothes. The Karlsruhe Court added that “there are important reasons to assume that [the OMT] exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget,” the German court said Friday. “Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law.”

At that point the GCC punted the final decision to the European Court of Justice, which, because it has traditionally sided with European Union institutions, the market assumed would overturn the German objection and let the lie continue indefinitely. After all why would the “European” Court threaten its very existence by confirming that the emperor is indeed naked. Which is also why there was barely a blip in peripheral bond yields: after all the party was sure to continue.

Maybe not. As Deutsche Bank revealed in a note overnight, the GCC may have, quite deliberately, opened a Pandora’s Box with its decision which according to Europe’s largest bank, and the one whose derivatives exposure makes that of JPM pale by comparison, (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) would not consider itself bound by a positive ruling of the European Court of Justice. And while in DB’s opinion this action does not have any immediate market consequences, the report’s authors think that it “alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil.”

In other words so much for the “whatever it takes” backstop of an ECB whose mandate was just clipped resoundingly by Germany.

There is good news: DB also points out that the OMT – which was the biggest bluff in central bank history – had one main purpose: to give the European periphery enough time to get its act in order, and according to the cheerful European pundits and press, this is precisely what has happened. In other words, by the time the OMT would have to be used (and when the bluff is called), it wouldn’t have to be used. Or so the tortured circular logic goes. Sadly, when one strips away the fake veneer of the European recovery, what one finds is month after month of record low private sector loan creation: the lifeblood of all Keynesian growth, and the reason why Europe is now flooded with deflation (a largely portion of which is exported by Japan). In other words, if and when the time to pull the curtain comes, all that will be revealed is further deflationary devastation for the depressed European continent.

Hence why the escalation in the timing of the OMT decision is suddenly so acute, but also explains why the GCC did not ask the European Court of Justice to fast-track its decision, a process which would have led to a decision in as little as 4 months, instead granting Europe another 16 or so months to get its house in order. Which, this being Europe, it won’t.

Which takes us back to the Deutsche Bank report, and its take on how it sees the “Monetary union after the German constitutional court ruling.” In a word: troubling.

From Deutsche:

That the German Constitutional Court (GCC) (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) it would not consider itself bound by a positive ruling of the European Court of Justice does not have, in our view, any immediate market consequences. However, we think that it alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil.

 

Indeed, the revision in OMT which would be needed to comply with the German Court’s requests – assuming the central bank would be ready to yield to a national Supreme Court which has no jurisdiction over it – would significantly weaken the mechanism.

 

More fundamentally, we think that the GCC’s decision opens the door to two very different routes for the monetary union, either a continuation of an intergovernmental approach, this time without the direct support of the ECB, which we think would be fragile, or a shift towards a more genuinely federal framework under a new treaty, which would be more solid in the long run but probably quite noisy and uncertain in the short run.

Here is how the ECB is once again faced with yet another head on German collision:

Technically, we do not see why the central bank would actually accept to revise its framework along the lines set by the GCC. This would run against the fact – repeatedly highlighted by ECB board members – that the ECB is not under the GCC jurisdiction. This would also create an uncomfortable precedent, opening the possibility that the ECB could be led to modify its policy and practices under pressure from other national judicial authorities.

 

This would be different, however, if the ECJ – to which the GCC asked a “preliminary ruling” on a number of questions – ruled along the same lines as the GCC. We note however that from a political point of view the Euro area would find itself in a quite interesting position, with the ECJ – which by the way also comprises judges from outside monetary union – issuing a preliminary ruling on questions raised by a national Supreme Court which already stated that it would not consider itself bound by it. The ruling opens the door to a conflict between the ECJ and the GCC.

The result: “a lower level of insurance in case of sovereign crisis”

Provided the ECJ did not endorse the GCC’s reservations, we think that the ECB could decide to ignore the GCC decision. This would however trigger a direct confrontation with the German government – which would have to explain to its public opinion why it is ignoring its own Supreme Court. Since OMT is conditional on granting ESM support (and we need to check if the forthcoming ruling of the GCC on 18 March on ESM does not create additional conditions), in the end Berlin could block the entire mechanism. True, one can think of a dramatic situation in the periphery where the German government, supported by its parliamentary majority, would consent to “let things happen”, but at least the bar would be much higher than what the market thought before the GCC ruling.

 

If the ECB cannot trigger OMT, then a possible substitute would be a capped rate LTRO, the central bank counting on banks to act as lenders of last resort to the struggling sovereigns. The experience of 2012 shows however that this is not necessarily sufficient in case of acute crisis (this is why OMT was created in the first place, after the LTROs). Still, this would actually leave moral hazard issues unaddressed (with OMT comes conditionality), and this would run counter to the current push at the ECB to wean banks off government bonds).

 

All this means that the level of insurance – from the ECB – against protracted market turmoil, is lower than a lot of market participants thought. In truth, we a
lways believed the market was too positive on OMT and underestimated the complexities of such an operation, but the “re-set” of perceptions could be significant.

That’s the bad news. The good news is that the OMT may have already served its purpose.

Still, what matters is whether the market feels the need to be able to count on OMT insurance. This depends on whether or not we can consider that from a macro/political point of view the peripherals have turned a corner. Judging by recent market developments, this is the case. After all, the Euro area is in a recovery. Italy – the laggard so far – is likely to print a positive figure for GDP in Q4. The political situation in Rome is not as dramatic as feared when former PM Berlusconi was expelled from parliament. Spanish banks are being recapitalised. As such, the GCC ruling is unlikely to be a catalyst for market events. It is only if the intrinsic situation of the periphery materially deteriorates that the limitations to OMT will be in focus again.

Here we disagree and summarize the reason for our skepticism in one simple chart: European lending (both supply and demand) is dead. As in dead and buried and as a result any hope of even a glimmer of inflation returning to Europe has been thoroughly crushed (and you can thank Japan and its open-ended QE: after all that’s the deflation Europea is importing on top of everything else).

 

However, most of the above should have been intuitive. What the punchline in DB’s report, however, is is that Germany may have had a far more insidious intention with the GCC decision: namely to accelerate the Federalsation of a Europe that still refuses to hand over its sovereignty to Germany.

More fundamentally, the GCC exposes a gaping flaw in the Euro area as an institutional construct. If national courts have precedence over federal courts in interpreting the “federal constitution”, i.e. the EU treaty, this proclaims that Europe is definitely not a federation, but a hybrid, loose construct. This configuration is actually similar to some of the travails of the United States in the late 18th century and most of the 19th century, when state legislatures (starting with Kentucky and Virginia) considered they could themselves rule on the conformity of federal decisions with the federal constitution. The issue that the US had to solve was whether they were a “league of states” or if they were born out of the direct consent of the people.

 

The preferred path so far is inter-governmental. The ESM is the epitome of this approach, where money is put together by the various member states but where large states can de facto veto any decision of support. However, the inter-governmental approach demonstrated its financial limit since member states were reluctant to impose on their taxpayers contingent liabilities which would have been seen as credible by the market to stem attacks on any large sovereigns. The ECB offered an “easy way out”, a “monetary way out”, to the national governments. Logically, if now we take the central bank out of the equation, then the “common pot” needs to grow. Leaving the ESM as it is today would not offer sufficient protection if the crisis was rekindled.

 

Genuine federalism is the other path. In a way, in our view the sub-text of the GCC’s decision, which has always had the democratic principles at heart when looking into the technicalities of EU law, is that the democratic legitimacy of the monetary union as it functions today is too weak. The monetary union as it was agreed by democratic consent in 1992 has materially changed. In a way, the GCC ruling is consistent with Angela Merkel’s call for a revision in the treaty, the current one having been “stretched to its limits”. The problem is that, given the political configuration in the Euro area, very few leaders are ready to follow Germany on that path. Francois Hollande, for instance, stated upon visiting the UK earlier this month that revising the treaty was not, in his view, a matter of urgency.

And there you have it: all the GCC really did was remind Europe that while the Eurozone is alive and well – for now – the clock is ticking on the transition of Europe to a “genuinely federal” union: one headed by none other than Germany. So enjoy your propaganda “things are getting better” but remember: once you emerge, it is the German way, or the highway. And Germany now demands that Europe finally make its choice.


    



via Zero Hedge http://ift.tt/1fgpZb5 Tyler Durden

Goldman On Gold – “This Is A Very Important Level To Watch”

Yesterday’s apparent Yellen un-taper-driven strength in gold broke some key technical levels and Goldman Sachs sees upside.

 

Via Goldman Sachs,

Gold has finally spiked higher above notable pivot resistance 1,268-1,279 where the market had stalled since late-January.

The area encompasses a number of previous highs/lows since Aug. ’13 as well as the 100-dma. This has opened up risks to the 200-dma at 1,306).

To put things into context, the market has not been above this particular moving average since Feb. 8th last year (just over a year ago).

 

In short, it will be a very important level to watch how price action develops around it.


    



via Zero Hedge http://ift.tt/1kBJKRw Tyler Durden

Goldman On Gold – "This Is A Very Important Level To Watch"

Yesterday’s apparent Yellen un-taper-driven strength in gold broke some key technical levels and Goldman Sachs sees upside.

 

Via Goldman Sachs,

Gold has finally spiked higher above notable pivot resistance 1,268-1,279 where the market had stalled since late-January.

The area encompasses a number of previous highs/lows since Aug. ’13 as well as the 100-dma. This has opened up risks to the 200-dma at 1,306).

To put things into context, the market has not been above this particular moving average since Feb. 8th last year (just over a year ago).

 

In short, it will be a very important level to watch how price action develops around it.


    



via Zero Hedge http://ift.tt/1kBJKRw Tyler Durden