Top points from UBS report earlier today. With SNB intervening, markets all over the place, politicians talking their books, many investors are becoming rather confused. UBS tries explaining a possible Euro break up and the ultimate horror, a civil war. Although this overly bearish report marked a short term bottom in the market, they have some good points to remember;
␣ The Euro should not exist (like this) Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change.
Fiscal confederation, not break-up Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move.
The economic cost (part 1) The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.
The economic cost (part 2) Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit.
The political cost The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
Let’s start a run through of central banks balance sheets. First up is Bank of Japan, with relatively “good” assets. Below a summary of Bank of Japan’s Balance Sheet. By Greshams Law.
Total Size of the BoJ’s Balance Sheet – Click to enlarge. Source: Bank of Japan
USDJPY (how many Japanese yen it takes to buy one US dollar) – Weekly Chart – Click to enlarge. Source:FINVIZ.com
Assets of the Bank of Japan – Click to enlarge. Source: Bank of Japan
By World Complex;
Today we apply the same methodology that we previously used to study the rise and fall of confidence in the American economy to the UK. The chart below is the historical plot of the ratio of the UK public debt (in pounds sterling) to the value of the UK Central Bank gold holdings (similarly in pounds). A low ratio generally suggests economic soundness, and the ratio tends to increase with increased debt load. The ratio can fall due to increased holdings of gold, but for the UK and the US since WWII, the ratio falls due to a rising price of gold.
Gold reserve data to 1998 comes from the World Gold Council website (you need to create an account and sign in to download files).
Full article here.
By Gold Core;
Gold is trading at USD 1,899.50, EUR 1,339.10, GBP 1,177.30, CHF 1,611.10 (up from CHF 1,486.50 yesterday) and JPY 146,350 per ounce. Gold is down 0.18% in dollar terms and strong physical demand continues at these levels.
Just prior to the announcement, spot gold for immediate delivery had risen to a new record nominal high of $1,921.15/oz in early morning trading in Europe.
Then just before 0900 hours GMT came the news that the Swiss National Bank has decided to fix the country’s exchange rate at 1.20 Swiss francs per euro. The SNB indicated it would buy an unlimited amount of euros regardless of the risk to maintain that value.
In a matter of minutes, gold fell 3% from the high of $1,921.15 to an inter day low of $1,862.72. It then recovered as quickly and surged back to over $1,912/oz.
Gold’s London AM fix this morning was USD 1,891.00, EUR 1,330.75, GBP 1,172.86 per ounce. Gold fixed lower in all currencies (USD 1,896.50, EUR 1,341.13, GBP 1,174.67 per ounce).
The SNB announced the currency fix because of what it called “the current massive overvaluation of the Swiss franc.”
It said it will “no longer tolerate” an exchange rate below the minimum rate of 1.20 francs, which it said is still high.
The euro, which had been trading at close to 1.10 Swiss francs before the announcement, surged 9% to 1.2024 in the minutes afterwards.
While the US celebrated Labor Day, Europe collapsed. What has happened?
- European Markets tanked Monday with new fears over Euro zone problems. Banks got hit hard, with several halts among the Italian banks.
- Further credit risk spreads continued higher. Greek yields have reached ridiculous levels, and we argue Greece should leave the Euro.
- Ackerman spoke of banks unable to write down Greek Exposure which increased the Panic.
- Italian and Spanish CDS prices continued higher, as yields continue to inch higher, despite ECB desperately buying Italian bonds. Keep a close eye on the Italian 10 year yield….
- SNB “unexpectedly” announced to put a minimum level on the CHF/EUR. This was first seen as risk on by the market, but we believe this is telling us another story. Does somebody “know” Greece is about to exit the Euro, and therefore prepares for the consequences?
Gold collapses, while Euro rallies. Governments and central banks are playing with investors minds. Too much volatility will cause the ultimate collapse.