Tuesday, June 12, 2012

More On Greece And More QE

One of the biggest issues in Europe at the moment is whether or not Greece will exit, or be allowed to exit, the EU.  My view is that the massive bailouts that have been going on globally since 2008, starting with the massive taxpayer bailout of the big U.S. banks, are about saving the banks and not about saving countries. Because of this, I would argue that Greece will be kept in the EU family and the financial systems in Spain/Italy/France/England/U.S. will be re-monetized, likely in that order.

But let's look just at Greece for a moment.  It has been estimated that the big banks have around $60-70 billion in derivatives exposure to Greece.  The "net" exposure is supposedly around $3 billion.  Of course, we are now seeing with the JP Morgan derivatives meltdown going on that the "net" number reported by banks and widely accepted by regulators and institutional investors is not to be trusted.

I think it's probably fair to estimate that, in a chaos, "2-sigma" scenario, that the likely "net" exposure to Greece via derivatives is at least 50% of the notional.   Mind you, this estimate rests on the viability of the counterparties who have issued payment guarantees in the event of default being able to stand up their side of contract.  This is not a given.  But let's go with 50% for the sake of running a "stress test" (note:  a realistic stress test as opposed to the Fed's fraudulent version of a stress test - see JP Morgan for more proof the Fed is full of shit).

Now let's run through the math if Greece leaves the euro.  If this happens, Greece would reinstate the drachma as its currency, which would then start trading against all other fiat currencies (plus gold) in the world forex market.  It has been estimated that a new drachma would likely trade at about 30-40 cents vs. euro, so roughly 38-50 cents vs the dollar.  Now,  what happens to the value of a credit default swap on Greek debt that was denominated in euros but is now denominated in drachmas, because Greece would now be paying those debt claims back in devalued drachmas? 

For the sake of argument, let's say banks which are the largest underwriters of credit default swaps have 90% of the exposure to Greek credit default swaps.  This is actually a quite realistic assumption per the quarterly BIS report on OTC derivatives, with JP Morgan by far the largest underwriter of these instruments.  This would mean that U.S. banks likely have gross derivatives exposure $45-63 billion in Greek credit default swaps.  If Greece were to revalue and repay its debt claims using drachmas, it would mean that the big banks like JP Morgan would potentially be on the hook for their ratable share of $22-32 billion in credit losses.

I personally do not believe that the big banks/central banks will allow this happen and will therefore engage in some kind of coordinated money printing, bailout operation.  It's already being done in the "disguised" form of the massive dollar/euro swap facility that has been put in place by Bernanke.  We would love to see the details of this swap facility - like how much is used, by whom is it being used and what's the current market value of the swap - but the Fed has spent a considerable amount of money to legally keep these details undisclosed (so much for the new Fed transparency policy).

Now take the Greece scenario and multiply it out by roughly 4-5 multiples for the potential Spain problem, and so on for Italy and France.  And make no mistake about it, Germany/Merkel understands this, as Deutsche Bank is probably the largest credit default swap underwriter after JP Morgan.  This is why Merkel and has been backing down from her "no more bailouts" stance is starting to issue statements of support for some kind of structured bailout for Spain.

The liquidity in the entire western financial system is starting to dry up and it will require a lot more printing in order to avoid a massive banking system collapse.  We are starting to see all of the Fed officials - even the liquidity hawks - make statements in recent speeches with allude to "all options are still on the table" with regard to more QE.  See speeches yesterday from Lockhart and Evans, for example.  And just yesterday one of the chief policymakers for the Bank of England made the statement that Bank of England should consider buying more than just Government debt to facilitate QE:  LINK

I would also argue that this is the reason we are seeing the eastern hemisphere Central Banks ramp up their purchases of physical gold:  LINK  Gold is starting to shift into view as a primary store of value.  In fact the Central Bank of Turkey - Turkey being one of the largest importers of gold in the world - is now allowing commercial banks to count gold as part of their capital reserve calculation:  LINK

Several people asked me why, in the absence of any specific news, gold and silver spiked up this morning about 30 minutes into Comex trading.  The only explanation I can think of - again, in the absence of any specific news - is that the smart, wealthy pools of capital around the world are finally starting to move a lot of capital into physical gold and silver in response to the "print or collapse" corner into which Europe and the U.S. have painted themselves.

The only way to protect your wealth against what is coming our way is to own a lot physical gold and silver.  This would unequivocally not include any ETFs like GLD (although it would for sure include PHYS and PSLV if you own enough shares to convert your shares into delivered bullion).


  1. Thanks Dave. So if the real impact to US banks over a Greece exit is $20-30 billion, and Spain is 5 times that and a little over a $100 billion, isn't that still a relatively small impact to the banks considering the amount of money that government's are printing/papering over?

  2. JPM's stated book value is something like $180 billion. The true market to market book value is likely negative. And you're just looking at Greece + Spain. Toss in Italy, France, England, U.S. etc. We're just looking at CDS. The big gorilla in OTC derivatives is JPM's interest rate swaps...

  3. "The big gorilla in OTC derivatives is JPM's interest rate swaps..."

    Exactly !!

    You know Dave, I will leave you with this. In 2008 when Paulson tested the public's reaction to the 700 billion dollar taxpayer bailout, amidst a 23 trillion dollar "business as usual" reality, many people remarked that governments bailed out the banking system.

    Likewise, many people today ask, who will bail out the governments ??

    There is only one thing that can "bail-out" the sovereigns. GOLD.

    "Gold can be used to revalue any asset, and not be destroyed in the process!"

    A central bank's "good name", just like the good name of a sovereign, is an asset. It's derivative - confidence (and trust). The USD of course was the original derivative, becoming a derivative of itself in 1971, and becoming the inspiration for all financial derivatives to follow.

    No, an alien race from another planet will not come down from the heavens and bail out the sovereigns, gold will do just fine, as it has so many times before.

    You could try to lead the "Blondie worshipper's" over at the FOFOA comments to that conclusion, but they will immediately be afronted and defend the length of the intellectual penises of their idols (I mean really, Clint Eastwodd dressed as Jesus??) in a measuring contest against yours, so there is no use in trying to stimulate any real discussion there.

    No I think global support mechanisms are eroding more rapidly than the USG-FED-TBTF-ESF-TReasury-LBMA IRSWap complex alliance can orderly manage.


    Turnover in interest rate derivatives was concentrated in a small number of financial centres, with more than two thirds of turnover taking place in only two countries (Table 9). The United Kingdom continued to be the most active location with a share of 46% of worldwide trading, followed by the United States with a share of 24% ...

    Much of the increase in the trading of OTC interest rate derivatives was due to the growth of FRAs, which more than doubled to $601 billion in April 2010 from $258 billion in April 2007 (Table 6). The significant rise in FRAs is mainly due to a tripling of euro and US dollar-denominated contracts and a surge in turnover for currencies such as the Swiss franc and the Canadian dollar (Table 8).

    This is from 2010, with the next triennial report due 2013. I doubt the current system will survive that long.

    Interesting times ...

    1. LOL at "You could try to lead the "Blondie worshipper's" over at the FOFOA comments to that conclusion, but they will immediately be afronted and defend the length of the intellectual penises of their idols (I mean really, Clint Eastwodd dressed as Jesus??) in a measuring contest against yours, so there is no use in trying to stimulate any real discussion there."

      I became really annoyed when Victor the Cleaner was "moderated" because (I think) he brought up the theory that the US attacked itself on 9/11 to invade the Middle East for the oil because a)the Euro was becoming the new petro-currency and b)the US dollar was about to implode/hyperinflate.

      Personally, I haven't really been back to FOFOA message board since. But I may stop by there tonight, hopefully the discussions have improved.

      -Sicilian Gold

  4. So tonight Italy is the first of the "insolvereigns" to do a large bond auction. If this auction goes poorly, the implications are that those 100 billion entries (of which you speak) will start to become reality. It's my guess the Fed Euro swap door was wide open today. Dollar down, euro up in the face of the Greek vote and the Italian insolvereign auction. Makes sense. Every facet of real price discovery is just obliterated by Bennie and the central banks... total distortion.

    1. Italy will price 100 Billions in bonds at 6%-7% and then be expected to provide $20 billion in loans to Spain at 3%. Am I awake. From my Sofa, I can't tell anymore.

  5. Hi Dave,

    If you dont mind an EU(ro) (European Union and Euro are the same if u ask me) perspective I like to share these thoughts. The Greek elite will like to keep on plundering wealth. There is a reason they were in default modus over 50% of the last 200 or so years. So they know the tricks in the book. Now they know they have the EU(ro) by the balls. The only thing for Greece elite that matters is gaining more wealth, period.

    That elite should think, we can always get out the public gold, say 75% and issue Draghma on that combined with a floating gold/dragma price. They know the price will be supressed thanks to London et al (sorry I see Comex as a sideshow). So They can issue tons of Draghma with gold thats most likely not there anymore. This will put huge pressure on our bullion bankers they love to avoid..... So they get more free money. Great play by the Greek elite if u ask me. (ofc sad for the population but they dont count anywhere anymore). So great way to use of non existent gold to get more money in short. Hope I made sense.

    1. Hugo,
      I think this explains (and confirms) your perspective on Greece:



  6. "The only explanation I can think of - again, in the absence of any specific news - is that the smart, wealthy pools of capital around the world are finally starting to move a lot of capital into physical gold and silver"

    not saying this isn't partly true but I doubt it. One small move doesn't mean anything.

    1. Then what are the Chinese, Russians, and Turks doing? If you do your research, you know that about 6 countries purchased 140 tonnes of gold in April. The production run-rate monthly is 175 tonnes. We are going to run into a supply/demand issue. In the absence of this buying, the paper market selling would have driven the price of gold and silver a LOT lower, which is exactly what the western Governments and Central Banks are trying to accomplish.

      We don't know how much gold the wealthy elite individuals/families are buying, but based on publicly identifiable actions by guys like Soros, I would bet my left nut that the global wealthy elite are hooving gold like there's no tomorrow. Soros doesnt' operate in a a vacuum and these guys hang out in places like NYC, Monaco and Portofino and share ideas.

    2. "We are going to run into a supply/demand issue"

      been hearing this for 2 years as if it was about to happen tomorrow and I'm still waiting. Soros was selling Gold not too long ago and while it's true they've added to their position recently you're talking a position size of like .2% of their AUM. You could arguably say that's good because there's alot of room for him to keep buying or it could just mean he's making an opportunistic trade for a few months here. I tend to think the latter until further notice of a sizable increase in his position.

    3. @ Dave:

      Most of the super wealthy are already positioned in gold.

      Wed Feb 04 1998, ANOTHER (THOUGHTS!):

      Consider, can they all buy silver?

      The most important thing to observe is that Mr. Buffett did NOT use any form of paper to represent his silver. No options on silver, no futures, no options on silver futures, no silver mining stocks, no leased silver deals from mining stocks and no MARGIN! Most of the large buyers of metals are buying the physical, outright.

      Mr. Buffett had Berkshire Hathaway purchase silver as part of it’s long term "economic investment outlook". Not to be confused with a leveraged, quick profits bet. Understand, that Berkshire plays within the "world paper economy parameters", they are not looking for a currency replacement. What is not seen, are the personal holdings of Mr. Buffett, Mr. Soros and countless other "world wealthy". In those accounts you will indeed find silver, but also, much more gold!

      Note, that he was buying thru much of last year. So were a number of others. The one common thought from them all is that, "the real wealth will be held in PHYSICAL form"!

      "you may also follow in the footsteps of giants"

      -Sicilian Gold

  7. Deflation is not an option, nor is austerity. Printing with its attendant inflation is the ONLY way out for now. They had better act quickly and decisively.

  8. @Wil Martindale

    Thank you for that great vid.

    regards Hugo