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Legal Reality Newsletter 25 November A. D. 2011

25 November A.D. 2011

About the “money,” …

When we get into the “funny money” scam, we realize that supply and demand is “the” game.

Picture the tub.  That’s the container of the “money.”

The faucet brings more into circulation; the drain takes it out of circulation.

If there’s too much, or too little, the supply-demand equation/balance is thrown off balance.

Since the “money” is borrowed into existence, paying the debt is actually the larger side of the problem.  To pay the debt is to take that much “money” back out of circulation.

Not to pay the debt is to leave that much “funny money” in circulation, but at rates, on the books commonly displayed to the people, that render the amount totally unpayable.

At the end of the day, “funny money” was designed from the beginning just to be a ticking economic time bomb.  Those in charge of the lending happen also to be in charge of the information of the system, which means they get to set off that situation at their convenience.  The derivatives are clearly to serve as an accelerant.

Using the “funny money” is, legally speaking, 100% voluntary.  The vonNothaus case will continue to be marketed to the contrary, and it’s disappointing that Ron Paul is championing doj’s marketing in the matter.  Either way, using “funny money” always has been voluntary and always will be voluntary.  The only place there’s “no option” is when dealing with the present system.  Paying the “government” has to be done with “funny money.”  For everything else, we have a choice.

Harmon L. Taylor
Legal Reality
Dallas, Texas

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——– Original Message ——–

Date: Fri, 25 Nov 2011 08:43:00 -0500
From: Don Stacey <>

“This Is The Problem” – Charting The Cash Supply-Demand Crunch In Europe


Italian 5 Year Bond Rises To Record 7.847% In Aftermath Of Catastrophic 6 Month Auction

Submitted by Tyler Durden on 11/25/2011

Italy held an auction for EUR8 billion 6 month Bills today. Unlike Wednesday’s German 10 Year Bund issuance, the auction was not a failure (at least not yet), and for good reason – the yield paid for the Bill was 6.504%, the highest since August 1997, and is nearly double the October 26 auction when it priced at a now nostalgic 3.535%. But… the maximum target of EUR 8 billion was met without anybody’s central bank have to retain anything. The bid-to-cover was 1.47 compared to a bid-to-cover of 1.57 one month ago and average yield of the last six 6-month auctions of 2.443% and average bid-to-cover 1.636. All sarcasm aside, this is an unprecedented collapse and a total catastrophe as Italian Bills now yield more than Greek ones – the market has basically said Rome needs a debt haircut and pari passu treatment with Athens. In the aftermath of the auction everything has come unglued: 2s10s is inverted at unseen levels, the 5 Year has hit 7.847% , and Euro liquidity is gone…it’s all gone.. as the 3 month basis swap hits -157.5 bps below Euribor, the lowest since October 2008.


European Bailout Time Of Death: EFSF Cut In Half Due To “Market Conditions”

Submitted by Tyler Durden on 11/24/2011

If only we had known that the EFSF was nothing but the latest Chinese reverse merger IPO gimmick, dependent entirely on market conditions for its success, we probably would have sold even more euros to Thomas Stolper. Alas, despite all the pomp and circumstance of last month’s European summit announcement when the 50% Greek debt haircut (which has a snowball’s chance in hell of passing) was accompanied by vague promises of a 4-5x leveraging of the EFSF’s €440 billion, it now appears that our original skepticism was well-founded. Because according to the latest news out of the FT, the EFSF won’t get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist. From the FT: “A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials.” Well what do you know. Next we will learn that when the EFSF denied it was an outright pyramid scheme, and was buying its own bonds, it was actually kidding. Either way, as it currently stands, there is no bailout in place for Europe whatsoever, as the ECB’s demands for a fallback to the ECB are now moot. Furthermore, once the market realizes there is no even implicit backstop to the trillions in debt rollover over the next several years, it will dump sovereign bonds with even more gusto, pushing Europe into an even deeper funding crisis, which in turn will make bond repayment even more impossible, which will send prices even lower, and so on. There is a reason they call it a toxic debt spiral.

Hungary ‘Junked’ By Moody’s

Submitted by Tyler Durden on 11/24/2011

Citing uncertainty over the country’s ability to meet ‘austerity’ targets and its rising susceptibility to external shocks – given its heavy reliance on external investors – Moody’s just downgraded Hungary to Junk Ba1 (with a negative outlook). With its 10Y yield currently at 9%, only 190bps wider than Italy, we thought it somewhat ironic that Hungary’s average 10Y yield from SEP09 to SEP11 was 7.2% – almost exactly where Italy finds itself trading currently.

The best thing ever written on Europe

by Simon Black · View Comments

[Editor’s note: Simon’s friend Tim Price is a delightfully witty fund manager in the UK, one of the few free-thinking individuals in all of institutional finance. His recent thoughts below on the euro debacle, gold, and hyperinflation are some of the best ever written on the topics.]

“We think we have an agreement, but we are not sure what it is.”
– Negotiator at the Euro Zone “crisis summit” last month, as reported in The Economist.

“You don’t have to be paranoid to be terrified.”
– Ditto.

If a ballistics expert were so poor at his job that his artillery routinely fired missiles into the sea or, worse still, at his own men, he would soon be removed from office. He might perhaps be purged more dramatically, pour encourager les autres. No such logic would seem to apply, however, in either politics or economics in the west, where discredited practitioners of failed theories are allowed to pontificate and spend into absurdity.

We cannot say with certainty what was spooking European investors prior to last week’s make-or-break summit (the 14th such “crisis summit” in 21 months), but it seems plausible to argue that they were concerned about an unsustainable build-up of credit, credit risk and leverage. Happily, those concerns have now been put to rest, because the Euro Zone’s leaders have pledged more credit, more credit risk, and more leverage.

To put it another way, President Sarkozy and Chancellor Merkel have bought more time, albeit time paid for with yet more borrowed money. A three ring circus of blind, incontinent clowns would have more class.

The term ‘haircut’ seems somewhat redundant

 Guest Post: The best thing ever written on Europe

Source: Financial Times

We know from previous climactic bailouts that money, being so debased by our central banks, doesn’t get you very far these days. We have now had a €1 trillion bailout whose benign market impact lasted all of a day.

By Friday last week, Italian 10 year bond yields were back up at 6% – the ”danger zone” – which does rather make one wonder just what the hell our monetary and political “leaders” think they are achieving with all this thinly disguised but very costly can-kicking. Evolution Securities’ fixed income research team called the bailout plan “a sugar rush” of stimulus.

A one-day wonder is neither here nor there; what matters is where Italian government bond yields are in 6 or 12 months’ time.

The Euro Zone’s leaders faced at least three specific objectives. Resolution to each would have been and remains necessary but not sufficient to ease the crisis:

1. Put Greece out of our misery.
2. Recapitalise the banks.
3. Do something magical and sexy with the EFSF.

What we actually have is a peculiar fudge even by the standards of eurofudge whereby a Greek default mysteriously doesn’t appear to trigger credit default swap protection, as Alen Mattich of the Wall Street Journal points out. Separately, and not for the first time, banks are being tasked with mutually exclusive objectives: keeping the lending taps open without compromising and indeed actively improving the quality of their balance sheets.

This is impossible. The Economist (whose coverage of the summit this week has been excellent) cites Morgan Stanley’s Huw van Steenis, who suggests that European banks might end up pursuing a “crash diet” that results in a shrinking of balance sheets by up to €2 trillion over the next year, which would be a disaster for SMEs and others.

And in the meantime, a credit bust that is the natural response to too much inherent leverage and financial engineering is being “solved” by… leverage and financial engineering. At least the acronym for the Special Purpose Investment Vehicle is a fair reflection of the intellectual bankruptcy being deployed. One summit attendee noted of the bailout plan that “the more zeroes the better.”

It is unclear whether he was referring to taxpayers’ further involuntary capital commitments, or to political non-entities.

One cannot really avoid the conclusion first reached by writer Adam Fergusson in his study of the Weimar era collapse and hyperinflation, When Money Dies:

“What really broke Germany [and which may end up breaking the Euro Zone] was the constant taking of the soft political option in respect of money.”

Talk of hyperinflation will, one trusts, ultimately be both premature and irrelevant, but wishful thinking is no sustainable basis for an investment approach when we have the current crop of political and economic no-talent ass clowns calling the shots.

Last week we hosted our external investment panel, an oversight committee in effect, and one of the panellists pointed out that the anticipation and preparation for acute inflation, like that for financial panic, cannot be finely timed.

One minute the system is deemed to be secure. The next minute, pensioners are queuing up outside Northern Rock.

Since we have mentioned the “W” word, we have an obligation to discuss what strategies best preserved the wealth of German investors during that dark period. (“Life was madness, nightmare, desperation, chaos,” writes Fergusson. We are not quite there yet – but we also note that sensible financial commentators have already begun to refer to Japan as our Weimar in waiting.)

Other, more valuable foreign currencies, for example. In 1923, that meant the US Dollar. This time round, since the Swiss National Bank has lost the plot, we would favour the Canadian and Singapore Dollars. Back then, the answer lay in gold, and we think it does this time, too, as the finest currency protection paper money can buy.

One can also consider gold and silver mining companies – John Hathaway of Tocqueville Asset Management has written very nicely about the “Golden Mulligan” being presented to investors who missed the gold bull on the way up.

Markets very rarely offer second chances; investors without any form of gold exposure would, we think, be well advised to step on board now.

Other forms of real assets will play their part (we note the substantial increase in the cost of British agricultural land). And since sins of omission can also be costly, investors looking for “safe havens” would be well advised to be highly selective in their choice of bonds (if they choose bonds at all), as well as common stocks.

Those who have studied the Weimar experience suggest that the point of no return in the inflationary process did not come about through currency depreciation alone, nor from the growing velocity of money in circulation (as German savers tried desperately to spend their fast-eroding paper wealth), nor from the balance of payments deficit.

In fact it came from a devaluation of political principles. Yale Economist Robert Shiller has suggested that one of the reasons for equity investors’ irrational exuberance in the 1990s (it was Shiller, and not Greenspan, who coined the phrase) was the fall of the Berlin Wall- which seemed to conclusively display the superiority of western free market capitalism over the discredited Soviet model.

Now the superiority of the western model is so apparent that we have cash-strapped eurocrats looking to raise money from the Communist leaders of a country, most of whose citizens live in abject poverty. This writer is proud to call himself British; he would be disgusted to be regarded as European.

Tim Price

Director of Investment
PFP Wealth Management


Tim Price is Director of Investment at PFP Wealth Management in the


2 Comments on “Legal Reality Newsletter 25 November A. D. 2011”

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