Ambrose Evans Pritchard


By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, June 20, 2010

We already know that the eurozone money markets seized up violently in early May as incipient bank runs spread from Greece to Portugal and Spain, threatening the first big sovereign default of our era. Jean-ClaudeTrichet, the president of the European Central Bank (ECB), talked days later of “the most difficult situation since the Second World War, and perhaps the First.”
The ECB’s latest monthly bulletin gives us some startling details. It reveals that the bank’s “systemic risk indicator” surged suddenly to an all-time high on May 7 as measured by EURIBOR derivatives and stress in the EONIA swaps market, exceeding the strains at the height of the Lehman Brothers crisis in September 2008. “The probability of a simultaneous default of two or more euro-area large and complex banking groups rose sharply,” it said.
This is a unsettling admission. Which two “large and complex banking groups” were on the brink of collapse? We may find out in late July when the stress test results are published, a move described by Deutsche Bank chief Josef Ackermann as “very, very dangerous.”
And are we any safer now that the EU has failed to restore full confidence with
its E750 billion (L505 billion) “shock and awe” shield — that is to say after throwing everything it can credibly muster under the political constraints of monetary union? This is the deep angst that lies behind last week’s surge in gold to an all-time high of $1,258 an ounce.
The World Gold Council said on Friday that the central banks of Russia, the Philippines, Kazakhstan, and Venezuela have been buying gold, and Saudi Arabia’s monetary authority has “restated” its reserves upwards from 143 to 323 tonnes. If there is any theme to the bullion rush, it is fear that the global currency system is unravelling. Or, put another way, gold itself is reclaiming its historic role as the ultimate safe haven and benchmark currency.
It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.
Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6 percent. The yield on two-year Treasury notes is 0.71 percent. This is an economy in the grip of debt destruction.
Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation — that ninth Circle of Hell, “abandon all hope, ye who enter.” Such an accident may be coming. The ECRI leading indicator for the US economy has fallen at the most precipitous rate for half a century, dropping to a 45-week low. The latest reading is -5.70, the level it reached in late-2007 just as Wall Street began to roll over and crash. Neither the Fed nor the US Treasury were then aware that the US economy was already in recession. The official growth models were wildly wrong.
David Rosenberg from Gluskin Sheff said analysts are once again “asleep at the wheel” as the Baltic Dry Index measuring freight rate for bulk goods breaks down after a classic triple top. The recovery in US railroad car loadings appears to have stalled, with volume still down 10.5 percent from June 2008.
The National Association of Home Builders’ index of “future sales” fell in May to the lowest since the depths of slump in early 2009. RealtyTrac said home repossessions have reached a fresh record. A further 323,000 families were hit with foreclosure notices last month. “We ‘re nowhere near out of the woods,” said the firm.
It is an academic question whether the US slips into a double-dip recession or merely grinds along for the next 12 months in a “growth slump.” For Europe, nothing short of a sustained global boom can lift the eurozone out of the deflationary quicksand already swallowing up the South.
Spain had to pay a near-record spread of 220 basis points over German Bunds last week to clear away an auction of 10-year bonds, roughly what Greece was paying in March. Leaked transcripts of a closed-door briefing to the Cortes by a central bank official revealed that Spanish companies have been shut out of the capital markets since Easter. Given that the Spanish state, juntas, banks, and firms have together built up foreign debts of E1.5 trillion, or 147 percent of GDP, and must roll over E600 billion of these debts this year, this is a crisis unlikely to cure itself.
By their actions, investors show that they do believe the EU can be relied upon to back its rescue rhetoric with hard money, and for good reason. Germany’s coalition risks breaking up at any moment, fatally damaged by popular fury over the Greek bailout. Far-right populist Geert Wilders is suddenly the second force in the Dutch parliament. Flemish separatists have just won the Belgian elections in Flanders. The likelihood that an ever-reduced group of German-bloc creditors facing disorder and budget cuts at home will keep footing the bill for an ever-widening group of Latin-bloc debtors in distress is diminishing by the day.
Fitch Ratings said it will take “hundreds of billions” of bond purchases by the ECB to stop the crisis escalating. Since Bundesbank chief Axel Weber has already deemed the first tranche of purchases to be a “threat to stability,” it is a safe bet that Germany will fight tooth and nail to prevent such a move to full-blown quantitative easing. The bloodletting along the fault-line between Teutonic and Latin Europe will go on, as the crisis festers.
Yet the markets are already moving on in any case. They doubt whether the EU’s strategy of imposing of wage cuts on half of Europe without offsetting monetary and exchange stimulus can work. Such a policy crushes tax revenues and risks tipping states into a debt-deflation spiral, as if everbody had forgotten the lesson of the 1930s.
Greece’s public debt will rise from 120 percent to 150 percent of GDP under the IMF-EU plan. There is a futile cruelty to this. As Russia’s finance minister Alexei Kudrin acknowledges, a Greek “mini-default” has become inevitable.
EU president Herman Van Rompuy confessed that EMU lured countries into a fatal trap. “It was like some kind of sleeping pill, some kind of drug. We weren’t aware of the underlying problems,” he said.
What he has yet to admit is that the north-south imbalances built up since the euro was launched — indeed, because the euro was launched — cannot be corrected by further loans from the north or by pushing the south into depression. The political fuse will run out before this reactionary and self-defeating policy is tested to destruction.
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By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, November 18, 2009


Societe Generale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

In a report entitled “Worst-Case Debt Scenario,” the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350 percent in the US), whether public or private. It must be reduced by the hard slog of “deleveraging.” for years.

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105 percent of GDP in the UK, 125 percent in the US and the eurozone, and 270 percent in Japan. Worldwide state debt would reach $45 trillion, up 2 1/2 times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130 percent of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” the report said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7 percent and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral.” Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31 percent of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40 percent. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.

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Ambrose Evans-Pritchard, international business editor of The Telegraph in London, talks about gold with the Robert Miller of Telegraph TV.
Evans-Pritchard says gold has decoupled from commodities, has regained its position as an international currency, and likely will continue to do well as central banks strive to avert debt deflation. You can watch the interview here:
By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, January 8, 2009

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Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or “paper” proxies.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. “People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,” he said, referring to exchange trade funds listed in London, New York, and other bourses.

“They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands,” he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. “It’s win-win either way,” said Mr Dugan.

He added that deflation may prove the greater risk in coming months. “It’s very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait.”

Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3 percent will offer a real return of 4 percent a year, which is stellar in this grim climate. “Don’t start selling your government bonds,” Mr Dugan said, dismissing talk of a bond bubble as misguided.

He warned that the eurozone was likely to come under strain this year as slump deepens. “There is going to be friction as governments in the south start talking politically about coming out of the euro. I don’t see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness.”

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Citigroup says gold could rise above $2,000 next year as world unravels
By Ambrose Evans-Pritchard
Telegraph.co.uk
Last Updated: 4:48PM GMT 26 Nov 2008

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. “People have started to question the value of government debt,” he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

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N.B. You can read the 9-page Citigroup report on gold, cited above and written by CitiFX analysts Tom Fitzpatrick and Shyam Devani, HERE
Global Credit System Suffers Cardiac Arrest on U.S. Crash
By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, September 18, 2008

The global credit system came close to total seizure yesterday. Key parts of the derivatives market shut down and a panic flight to safety depressed the yield on three-month US Treasury bills to almost zero for the first since the Great Depression in 1934.

The closely-watched TED-spread measuring stress in the interbanking lending market rocketed to 238 as the share prices of Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, and Bank of America all went into a tailspin yesterday.

The collapse in investor confidence is a harsh verdict on the judgment of the US Federal Reserve, which chose to ignore market pleas for a rate cut to halt what amounts to a modern-era run on the banking system. Almost none of the current Fed governors have market experience. Most are academic theorists.

The Fed had hoped that a targeted $85 billion (L47 billion) bailout for insurance giant AIG — on onerous terms — would be enough to stabilize the banks after the weekend failure of Lehman Brothers. Instead it set off a cardiac arrest at the heart of the credit system.

Bernard Connolly, global strategist at Banque AIG, said the Fed and the Treasury were doing too little, too late, to stave off disaster. Interest rates need to be cut immediately and dramatically, while Washington must prepare for a wholesale takeover of large parts of the lending system along the lines of the Scandinavian bank rescues in the early 1990s.

“Unless there is a very rapid change of mind, depression — with all its horrors and consequences — will be inevitable. The judgment that letting Lehman’s go would not create systemic risk depended, if it was ever going to be anything other than ludicrous, on very rapid action to shore up the financial system. Instead, Hank Paulson seems to be adding to the risk in the system,” he said.

“We fear that a virtual nationalisation of the financial system will now be necessary,” he said.

America’s Reserve Primary Fund suspended withdrawals after shareholders pulled out almost $40 billion in two days on news of its heavy exposure to Lehman’s debt. The move came as the fallout from Lehman’s collapse spread worldwide. Japan’s Nikkei wire said Japanese banks would suffer almost $2 billion of losses on Lehman’s bond defaults.

Russia suspended trading the Moscow bourse after the Micex index crashed 24 percent in two days. Officials promised $44 billion to support the banking system.

As Washington bails out one financial institution after another, investors have begun to doubt the long-term credit-worthiness of the US itself.

The cost of insuring against default on 10-year US Treasuries jumped to an all-time high of 30 basis points yesterday, as measured by the credit default swaps (CDS) on the derivatives markets. Germany is at 13, and France is 20.

“This is historically significant because we have never seen anything like it before,” Daniel Pfaender, sovereign credit strategist at Dresdner Kleinwort.

“What we don’t know yet is whether this a liquidity issue or whether it reflects the credibility of the US financial system.”

The Treasury’s rescue of the mortgage giants Fannie Mae and Freddie Mac has added $5.3 trillion in liabilities to the US government. It almost doubles the national debt (under IMF definitions), at least on paper.

The Fed has now added a further $85 billion in debt for AIG. While the sums are manageable so far, what worries investors is the likely avalanche of insolvencies yet to come.

The Federal Deposit Insurance Corporation has already exhausted half its capital cleaning up after the collapse of IndyMac. It may need half a trillion dollars of fresh money to cope with the 120-odd lenders on its sick list. Professor Nouriel Roubini from New York University warns that several hundred banks will go under before this hurricane has exhausted its fury.

John Chambers, head of sovereign ratings at Standard & Poor’s, said America’s AAA grade is safe for now. The Fannie/Freddie bailout is not comparable to ordinary state debt. It is backed by housing collateral, mostly based on prime mortgages.

“In the worst-case scenario, the losses from Fannie and Freddie will be 2.5 percent of GDP. This is not to belittle the unprecedented actions of the last two weeks.

“For the US to lose its AAA we would have to see the sort of financial distress that occurred in the Nordic countries. It could get that bad. There’s no God-given gift of a AAA rating. The US has to earn it like everyone else,” he said.

Charles Dumas from Lombard Street Research said America’s dependence on foreign money would carry a high price. “The ultimate test will be whether this seriously jeopardizes the reserve currency role of the US dollar. China finances the US government. So as long as the Chinese are willing to accept an annual loss of 15 percent on their holdings of US bonds in real yuan terms, this can go on, but the decision lies in Beijing. What is clear is that it will take the US decades to pay this off,” he said.

Hans Redeker, currency chief at BNP Paribas, says the US debt scare is vastly overblown. America’s total government debt is 48 percent of GDP on IMF measures, compared to 57 percent for Germany, 94 percent for Japan, and 108 percent for Italy.

“The debt levels are nothing compared to Europe, even after Fannie and Freddie. America still has great leeway,” he said.

“We think the next phase of this crisis is going to be a repatriation story as American investors bring their money back from frontier markets. The US broker dealers were 60 times leveraged and now they need to take assets back onto dollar balance sheets.”

Albert Edwards, global strategist at Societe Generale, said Washington’s serial bailouts are the inevitable result of the credit bubble of preceding years. “This was all baked in the cake long ago. What we have seen so far is just a dress rehearsal for the deep recession that is coming. America is going to be losing 500,000 jobs a month. That is when we will see interest rates go to zero. The deficit will be covered with printed money as it was in Japan. The endgame will be helicopters full of cash dropped by Ben Bernanke,” he said.

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By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, March 13, 2008

The US Federal Reserve has taken the boldest action since the 1930s, accepting $200 billion (L100 billion) of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.

The Bank of England, the key European central banks, and the Bank of Canada all joined in a co-ordinated move with a mix of policies to halt the downward spiral in the credit markets, expanding on the “shock and awe” tactics used late last year.

The Fed’s dramatic step came after an emergency conference call by governors on Monday night.

It followed the meltdown of the US chartered agencies — Fannie Mae, Freddie Mac, and other lenders — which together guarantee 60 percent of the entire US home loan market.

Fannie Mae’s share price fell 19 percent on Monday after Barron’s magazine said it may need a rescue package.

“The agency crisis was a tsunami event,” said Tim Bond, global strategist at Barclays Capital. “The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. That this sector has blown up has caught everybody’s attention in Washington.”

The Fed action set off a powerful relief rally, lifting the Dow Jones index more than 350 points in late trading. Both US and European equities have been hovering on key support lines in recent days, threatening to break down through 18-month lows in a second leg to the bear market.

Stress indicators across almost all parts of the global credit system fell from extreme levels on the Fed news.

The CDX and iTraxx Europe indexes that serve as a default barometer for corporate bonds retreated from record highs, although it is too early to judge whether the latest action will start to thaw the credit freeze. The stock market rally after the last central bank intervention in December fizzled out after just one day.

“This is not going to be enough,” said Hans Redeker, currency chief at BNP Paribas. “The Fed is doing the right thing by soaking up mortgage debt nobody else wants. This will have an impact on spreads, but we’re seeing the deflation of a major bubble. The Fed is still going to have to cut rates by 75 basis points next week.”

It is a groundbreaking move for the Fed to accept mortgage collateral, even if the debt is theoretically “AAA-grade” debt.

The Fed is not allowed to buy mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely.

The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.

The Fed is to create a facility that allows banks to swap mortgage bonds for US Treasuries. It is a well-targeted move to avoid adding fuel to inflationary fire. It follows the Fed’s separate pledge last Friday to add up to $200 billion in liquidity.

The Bank of England also said it was widening the range of eligible collateral as it offers L10 billion of three-month loans, saying pressures in the money markets “have recently increased again.”

The ECB and the Swiss have boosted swap agreements with the Fed to provide $30 billion and $6 billion respectively in dollar liquidity to their own lenders.

Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded bank capital.

He said: “There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But at least the North American central banks are doing their best to stop it spreading to the real economy.”

The emergency actions appear to have been co-ordinated by the Fed’s top two figures, Ben Bernanke and Donald Kohn, working with the Bank of Canada’s Mark Carney.

“We should be thankful we have people in charge who appreciate the gravity of the situation,” said Mr Connolly.

The travails at Fannie Mae and Freddie Mac had combined in a deadly cocktail with a fresh wave of panic over the solvency of the investment banks with heavy exposure to sub-prime debt. Mr Bond said the mortgage agencies may need to be nationalised. Fannie Mae’s shares have fallen 70 percent since October, even though it has an implicit federal guarantee.

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