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The Euro’s Exponential Decay
Submitted by Tyler Durden on 02/11/2015
There’s nothing good left from the initial idea that gave birth to the EU. It’s devolved into something utterly ugly, in which fat Germans driving their Mercs and Beamers down the autobahn can yell at their car stereos that those lazy Greeks must pay their due - which stems from Merkel et al. bailing out Deutsche Bank’s insanely outsized derivatives portfolios. The whole thing is so morally bankrupt, it’s really insane that we’re still trying to have a serious discussion about it. The whole thing, the entire global banking system, is as morally bankrupt as it is financially. So far, all the EU has (anyone notice how silent the IMF has been?) is hubris, bluster and chest-thumping. They play politicians, but Syriza plays real life.
Gold Chart
The inverted head and shoulder pattern is reaching its limit on this pullback. A close below 1216 would pretty much invalidate the pattern at set the next projections for the 1172-1202 area. The failure to close above 1239 on Monday and Tuesday set the pace for today as gold tests the next level we discussed on the website (1216-1222). There’s minor support near 1210 but true support is not until 1167-1197. Resistance is the 1239-1247 area. The short term trend remains down at the moment but a bounce potential after today’s mid-week Wednesday rout could provide a bounce into the last two days this week. The 50 day average is at 1216 so it would be natural to get a bounce there. If we close below the dotted neckline, the pattern will be invalidated and odds will favor a quick drop to 1167-1197.
 
Cycles
On the cycles chart we positioned the blue cycle as a high last night on the website with the question did the cycle invert? It sure looks that way as we have made a new weekly low. Odds favor we’re going lower into the 19th of the month (plus or minus 72 hours). If we lose 1216 the next support is around the 1200 area and then near 1172. That’s where we probably heading next.
Of more concern is a blue cycle high. That’s not a bullish omen for gold.
Silver
Silver has yet to break down, but odds favor it will also. Support is 1650-1664. If that gives way, silver is favored to move to 15.50-15.80. Resistance is now 1710-1740 in silver. A break of the channel lines at 1650 also would suggest the rally is over in silver for the meantime.
INTRA-DAY NEWSLETTER ~ Feb 11 2015
How Fast Would Contagion Spread If Greece Exits the Eurozone
Submitted by Tyler Durden on 02/10/2015
It is very difficult for governments to control the progress of a monetary union break-up because the example of one country exiting will create a precedent in the eyes of other members of the monetary union. The transmission channel is not government bonds, nor equities, not currency markets, but banks. In the event of a Greek exit from the euro, the loss in the real value of Greek bank deposits would encourage bank depositors in other countries to withdraw their funds. This is not a question of bank solvency in these other countries – just as deposit withdrawal from Scottish banks ahead of the Scottish referendum in 2014 was presumably not motivated by questions of solvency. Rather the motive is the perception of risk around what currency one will receive in exchange for one's deposit in the future, and what that currency will buy relative to what it can buy today.
The process can be very rapid indeed.
In its 1933 report the US Federal Reserve commented, with commendable understatement, that at the start of the year "In addition to currency hoarding, there were substantial transfers of deposit accounts from banks in which depositors had lost confidence to other institutions, involving in many cases the shift of funds from one section of the country to another."
Nevada was the first state to declare a bank holiday on 31 October 1932. The contagion was initially quite slow, but then accelerated – on 4 February 1933 Louisiana joined in, and then on 14 February Michigan declared a four-day holiday and then extended it. Michigan's actions are regarded as the tipping point for contagion. Less than a fortnight later a bank holiday was declared in Maryland. On 1 March 1933 four states declared holidays, another six declared on 2 March, another seven on 3 March, and five (including New York) on 4 March 1933. On 6 March 1933 the national banking system was closed by Presidential order.
In the case of the euro area it seems unlikely that the current, incomplete banking union and non-existent fiscal union would be sufficient to prevent the contagion of bank runs spreading to other countries in the wake of a Greek exit from the euro. The starting point is that other countries are at risk of departure in response to a Greek exit. If the political status quo is maintained, it has to be thought likely, maybe probable, that Greece will not be alone in exiting the euro. It would be irrational for depositors to gamble their life savings if they believe that there is even a 5% chance that their country could leave the Euro. A 5% chance of a 60% loss in the value of one's savings (assuming a Greek parallel) would make the effort of withdrawing or transferring funds worthwhile. As with the deposit withdrawal within Greece, once the first spark of fear has been ignited the conflagration of contagion is likely to spread very rapidly.
The issue is whether, subsequent to those strains emerging, new policy initiatives from the euro area would be sufficient to change perceptions around the credibility of the political will to defend the integrity of the euro. Unlimited support from the ECB to euro area banks, large-scale debt monetisation and euro area fiscal confederation would be the sort of policies that could change the perception of credibility. All, of course, come at a cost. One metric to measure the success of such policies might be analysis of the contagion not of bond or other financial markets, but of household sight deposits at banks. The correlation of the change in Greek deposits with the changes in sight deposits in some other peripheral countries has also been high in the past (notably in the wake of 2008 and in the wake of the first wave of concerns about membership of the euro area). While the correlations of deposit change are generally quite low, they are rising. Correlation is not causation, and there are many other factors (including overall economic performance) that can encourage such a correlation, but this fact does rather emphasise the risks.
This then adds an entirely unpredictable element to the Euro area cost of a Greek exit from the euro. The direct costs can be calculated, and an intelligent approximation of the costs of increased risk can be factored in. However, if the break-up of the union expands, the direct costs expand exponentially (because the costs of the Target 2 system increase, and the costs of recapitalising for the remaining members increase, and the costs of financial system exposure increase). The transmission of fear may not be to the most obvious of candidates of course – this is not a question of solvency or of economics. If a Greek exit from the euro leads to other countries exiting, it will be the lack of plausibility of policy makers that generates the collapse.
Which is precisely why Syriza is still, in this late 11th hour, maintaining its uncompromising position in hopes that Europe finally grasps that the downside risk from a Grexit is far, far greater than the downside from appearing weak and caving to one peripheral nation. It remains to be seen if Europe agrees with this, although following today's seesaw rumor-induced action, it appears that the standoff may well end without any agreement.
The Minsk Summit Begins
Submitted by Tyler Durden on 02/11/2015
The so-called "Normandy Quartet" of Merkel, Hollande, Poroshenko, and Putin are arriving for the latest/final round of Ukraine peace talks... Poroshenko warns "things in east Ukraine will "go haywire" if Minsk talks fall through."
Russia Warns US, Supplying Arms To Ukraine "Will Have Dramatic Consequences"
Submitted by Tyler Durden on 02/11/2015 - 11:30
As Putin arrives at the Minsk Summit, his Deputy Foreign Minister makes the Russian position clear to Washington:
*U.S. ARMS SUPPLIES TO UKRAINE WILL HAVE DRAMATIC OUTCOME: IFX
*RUSSIA WILL NOT IGNORE U.S. ARMS SUPPLIES TO UKRAINE: IFX
Hardly what Merkel or Hollande wants to hear?
Obama May Attack ISIS In Any Country He Chooses, Deploy Ground Troops On
A Whim, Delay Afghanistan Pull Out
Submitted by Tyler Durden on 02/11/2015 - 13:03
The Nobel peace prize-winning president has been busy today: not only did he already petition Congress earlier to declare war on the Islamic State, a non-country which technically doesn't exist, but now he plans to expand his "war powers" to any other place in the world. From Reuters:
•MILITARY AUTHORIZATION BILL WOULD PRESERVE PRESIDENT'S ABILITY TO ORDER OPERATIONS AGAINST ISLAMIC STATE IN COUNTRIES OTHER THAN IRAQ, SYRIA - WHITE HOUSE SPOKESMAN
•WHITE HOUSE SAYS COMBAT BOOTS ON THE GROUND MAY BE USED FOR HOSTAGE RESCUE OPERATIONS
•OBAMA NOT RULING OUT DEPLOYING COMBAT TROOPS ON GROUND TO ASSIST AIR STRIKES AGAINST ISLAMIC STATE, IF PENTAGON RECOMMENDS IT -WHITE HOUSE
And not only that: also according to Reuters, Obama is considering a request from Afghan President Ashraf Ghani to slow the pace of the withdrawal of U.S. troops in Afghanistan, a senior administration official said on Wednesday.
Europe's Greek Contagion Update: Peripheral Bonds Risk Surges
Submitted by Tyler Durden on 02/11/2015
While US equities suggest all is well and Greece is contained, the less mainstream-news indicators of European stress are starting to flash orangey/red as the surge in spreads across European peripheral bonds since the Greek election suggests Q€ is being over-run. Italian, Spanish, and Portuguese bond spreads are all wider on the year now and up 25-30bps from their Greek Election (fastest rise in months). Greek bank bonds and stocks remain near record lows and even broad European stock indices are struggling to hold gains post-election
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The Euro’s Exponential Decay
Submitted by Tyler Durden on 02/11/2015
There’s nothing good left from the initial idea that gave birth to the EU. It’s devolved into something utterly ugly, in which fat Germans driving their Mercs and Beamers down the autobahn can yell at their car stereos that those lazy Greeks must pay their due - which stems from Merkel et al. bailing out Deutsche Bank’s insanely outsized derivatives portfolios. The whole thing is so morally bankrupt, it’s really insane that we’re still trying to have a serious discussion about it. The whole thing, the entire global banking system, is as morally bankrupt as it is financially. So far, all the EU has (anyone notice how silent the IMF has been?) is hubris, bluster and chest-thumping. They play politicians, but Syriza plays real life.
Gold Chart
The inverted head and shoulder pattern is reaching its limit on this pullback. A close below 1216 would pretty much invalidate the pattern at set the next projections for the 1172-1202 area. The failure to close above 1239 on Monday and Tuesday set the pace for today as gold tests the next level we discussed on the website (1216-1222). There’s minor support near 1210 but true support is not until 1167-1197. Resistance is the 1239-1247 area. The short term trend remains down at the moment but a bounce potential after today’s mid-week Wednesday rout could provide a bounce into the last two days this week. The 50 day average is at 1216 so it would be natural to get a bounce there. If we close below the dotted neckline, the pattern will be invalidated and odds will favor a quick drop to 1167-1197. It’s possible that gold waits until next week to do so.
Cycles
On the cycles chart we positioned the blue cycle as a high last night on the website with the question did the cycle invert? It sure looks that way as we have made a new weekly low. Odds favor we’re going lower into the 19th of the month (plus or minus 72 hours). If we lose 1216 the next support is around the 1200 area and then near 1172. That’s where we probably heading next.
Of more concern is a blue cycle high. That’s not a bullish omen for gold.
Silver
Silver has yet to break down, but odds favor it will also. Support is 1650-1664. If that gives way, silver is favored to move to 15.50-15.80. Resistance is now 1710-1740 in silver. A break of the channel lines at 1650 also would suggest the rally is over in silver for the meantime.
Submitted by Tyler Durden on 02/11/2015 - 13:15 
As expected following yesterday's scorching 3 Year bond auction in which Indirect, aka official foreign, demand soared to the highest in 5 years, today the trend of relentless demand from abroad for US yields continued, when the Treasury sold $21 billion in 10 Year paper, which not only priced 1.4 bps though the When Issued 2.014%, hitting the high yield precisely at 2.000%, but saw the highest Indirect Bid, of 59.5%, since December of 2011.
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