E-passports spread to half the globe

Nearly half of all United Nations (U.N.) member states are now issuing biometric e-passports, according to the newest data from the International Civil Aviation Organization (ICAO), the U.N. agency that oversees international air travel.

ICAO, which held its 20th TAG/MRTD meeting in September, reports that 93 out of 193 U.N. member states now issue e-passports, with 21 additional countries ready to deploy the technology in the next 12 to 48 months.

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E-passport deployments

Country	Start Date	Annual Issuance	Issued to Date	PKD use	Reading ePassports
Albania	Jun-09	450,000	900,000
Algeria	2010	500,000	500,000
Andorra	Sep-06	4,000	19,000
Argentina	2010	2,000,000	1,500,000
Australia	Oct-05	1,800,000	10,800,000	Yes	Yes
Austria	Jun-06	500,000	2,500,000	Yes
Bahamas	Dec-07	52,000	200,000
Belgium	Nov-04	500,000	3,500,000
Bosnia Herzegovina	Oct-09	300,000	600,000
Botswana	Mar-10	100,000	120,000
Brazil	Jan-10	1,500,000	2,200,000
Brunei	Feb-07	21,000	80,000
Bulgaria	Mar-10	500,000	750,000
Cambodia	Nov-08	220,000	600,000
Canada (limited)	Jan-09	3,500,000	50,000	Yes	Yes
Chile	Dec-09	300,000	480,000
Congo Dem. Rep.	Apr-09	250,000	400,000
Cote d’Ivoire	Jul-08	200,000	600,000
Croatia	Jul-09	200,000	400,000
Cyprus	Dec-10	32,000	16,000
Czech Rep.	Sep-06	800,000	2,700,000	Yes
Denmark	Aug-06	750,000	3,750,000
Dominican Rep.	May-04	480,000	3,360,000
Estonia	May-07	50,000	200,000
Finland	Aug-06	400,000	2,000,000	Pending
France	Apr-06	3,500,000	18,000,000	Yes
Gabon	Jan-09	n/a	n/a
Georgia	Jun-10	35,000	35,000
Germany	Nov-05	3,000,000	15,500,000	Yes	Yes
Ghana	2010	240,000	240,000
Greece	Aug-06	1,000,000	4,000,000
Hong Kong	Feb-07	500,000	1,500,000	Yes
Hungary	Aug-06	800,000	3,500,000	Yes
Iceland	May-06	45,000	200,000
India	Jun-08	12,000,000	20,000,000	Yes
Indonesia	2010	2,500,000	2,500,000		Yes
Iran	Jul-07	1,000,000	1,500,000
Ireland	Oct-06	600,000	2,800,000	Pending
Italy	Oct-06	2,500,000	11,200,000
Japan	Mar-06	4,200,000	20,000,000	Yes	Yes
Kazakhstan	Jan-09	65,000	130,000	Yes
Korea (South)	Mar-08	4,000,000	10,000,000	Yes
Kosovo	2010	300,000	200,000
Latvia	Nov-07	300,000	1,000,000	Yes
Liberia	2011	14,000	4,000
Libya	2009	20,000	30,000
Liechtenstein	Oct-06	6,700	30,000
Lithuania	Aug-06	230,000	1,100,000	Pending
Luxembourg	Aug-06	25,000	110,000	Pending
Macao	Sep-09	180,000	150,000	Yes
Macedonia	Apr-07	180,000	1,100,000
Madagascar	2010	80,000	80,000
Malaysia	Mar-10	1,300,000	1,500,000
Maldives	Jul-07	30,000	100,000
Malta	Oct-08	16,000	40,000
Monaco	Jul-05	3,000	18,000
Montenegro	May-08	20,000	70,000
Morocco	2010	200,000	150,000	Yes
Mozambique	2011	200,000	20,000
Netherlands	Aug-06	1,800,000	10,000,000	Yes
New Zealand	Nov-05	720,000	2,600,000	Yes	Yes
Nigeria	Aug-07	1,100,000	5,000,000	Yes
Norway	Oct-05	600,000	3,600,000	Yes
Philippines	Aug-08	5,000,000	12,000,000
Poland	Aug-06	1,500,000	7,500,000
Portugal	Jul-06	400,000	2,000,000	Pending	Yes
Qatar	Apr-08	15,000	45,000
Romania	Jan-09	1,000,000	2,000,000
Russia	Sep-06	2,200,000	7,500,000	Pending
San Marino	Oct-06	2,000	10,000
Senegal	Dec-07	620,000	1,300,000
Serbia	Jul-08	440,000	1,300,000
Singapore	Apr-06	600,000	3,000,000	Yes	Yes
Slovakia	Jan-08	750,000	1,500,000	Yes
Slovenia	Aug-06	51,000	250,000
Soloman Islands	2009	n/a	n/a
Somalia	Jan-07	n/a	n/a
Spain	Aug-06	2,000,000	10,000,000	Pending
Sudan	May-09	100,000	200,000
Sweden	Oct-05	825,000	5,100,000	Pending
Switzerland	Sep-06	750,000	3,500,000	Yes
Taiwan	Dec-08	1,500,000	4,000,000
Tajilkistan (limited)	Feb-10	40,000	50,000
Thailand	May-05	860,000	5,200,000
Togo	Aug-09	30,000	50,000
Turkey	Jun-10	1,430,000	1,500,000
Turkmenistan	Jul-08	80,000	200,000
United Arab Emirates	2010	300,000	400,000	Yes
United Kingdom	Mar-06	5,000,000	27,000,000	Yes	Yes
USA	Aug-06	13,000,000	72,000,000	Yes	Yes
Vatican City	Jun-08	0	2,000
Venezuela	Jul-07	420,000	1,200,000

Source: ICAO

ICAO estimates that as of July 2011, these 93 states have issued more than 345 million e-passports, of which almost 340 million are in circulation.

As per ICAO specifications, each of these documents contains a contactless integrated circuit chip that stores biometric data–i.e. facial, fingerprint or iris–of the passport holder as well as other encrypted identification data. Forty-five of the e-passport issuing states store both fingerprint and facial data on their documents, while 34 store only the facial data. The remaining 14 states currently use facial data, but will begin including fingerprints by the end of 2011.

According to ICAO’s findings, the U.S. remains the largest issuer with 72 million documents issued to date. The U.S. issued 13 million in the past year. The UK, which issued 5 million e-passports in 2011, ranks as the second largest issuer with 27 million in total.

By region, Europe leads the pack with multiple countries–notably France, Spain, Italy, the Netherlands and Germany–each issuing more than a million e-passports in the past year.

However, according to Acuity Market Intelligence, Europe will soon be challenged by the Asia Pacific region, which is projected to issue 55 million documents in 2014 alone, representing 42% of the global share. Altogether, Acuity projects that there will be 26 Asia Pacific nations issuing e-passports by 2014.

Japan and India are leading the Asia Pacific region each with 20 million e-passports issued to date. According to ICAO, India rolled out 12 million documents in the past year, compared to Japan’s 4 million. The two are followed by the Philippines with 12 million issued to date, followed by Australia with nearly 11 million.

Many states in Africa, Central America and South America have yet to commit to the new technology, although several major countries including Mexico and South Africa are among the 21 nations listed by ICAO as “pending” for e-passport deployments.

The other nations planning to issue e-passports in the near future include Armenia, Azerbaijan, Bahrain, Belarus, Cameroon, China, Colombia, Israel, Jamaica, Kenya, Kuwait, Lebanon, Oman, Panama, Saudi Arabia, Sri Lanka, Ukraine, Uzbekistan and Vietnam.
Issuance strong but usage lags

Despite the growing numbers, ICAO reports that less than a third of e-passport issuing nations participate in the organization’s Public Key Directory (PKD)–a system ICAO says is “key” in maintaining global interoperability of e-passports.

The PKD system acts as a central broker to manage the exchange of Public Key Infrastructure certificates and PKI certificate revocation lists. ICAO says the PKD plays a critical role in minimizing the volume of certificate lists that must be exchanged and is essential to keeping the exchange of these crucial lists accurate and timely.

Even fewer states use Automated Border Crossing systems, which require the traveler to pass through e-gates that verify the biometric information stored on the passport. ICAO reports that 15 nations now use the systems–of which six employ facial scans, six check fingerprints and the remaining three use both facial and fingerprint scans.

According to ICAO, just eight states read e-passports at airports and borders. These include the U.S., the U.K., Singapore, Portugal, New Zealand, Japan, Indonesia and Germany.
Report: 90% of passports chip-enabled by 2016

IMS Research predicts that within five years 90% of passport holders will be using e-passports with integrated smart card IC chips.

Nearly half of all current passports issued today use smart chip technology, thanks to a rapid migration started in 2007. “This trend is set to continue,” states Alex Green, author of the IMS report “Electronic Government and Health Care ID Cards.”

“There are still a few countries around the world that are not yet issuing e-passports. However, most have started and with the typical five to ten year replacement rates for passports, it is only a matter of time before all passports in circulation are e-passports,” explains Green.

The report examines the use of biometrics in e-passports, which is still largely limited to a digital image of the holders face stored on the IC.

Green says this will change: “By 2014, the situation is forecast to have been reversed. By this time the majority of passports being issued will also include additional biometric data such as one or more fingerprints, iris scans, etc.”

Contactless News

Iranian enemies will face 'rainy day' weapons in case of attack

Iran is prepared with hidden "rainy day" military capabilities it is saving for when it is attacked, Iranian Defense Minister Ahmad Vahidi said on Tuesday, warning potential enemies of a "new environment" created by Iran's developing arms industry.

Earlier Tuesday, a U.S. intelligence official familiar with the discussions between top Israeli officials and Pentagon counterparts said that Israel indicated it would not warn the U.S. if they decide to launch a pre-emptive strike against Iranian nuclear facilities.

The pronouncement, delivered in a series of private, top-level conversations, sets a tense tone ahead of meetings in the coming days at the White House and Capitol Hill.

Israeli officials said that if they eventually decide a strike is necessary, they would keep the Americans in the dark to decrease the likelihood that the U.S. would be held responsible for failing to stop Israel's potential attack.

Referring to the possibility of an attack on Iran's nuclear facilities, the country's defense minister warned possible perpetrators of Iran's secret weapons capabilities, saying that the "Islamic Republic of Iran has many hidden capabilities which are kept for rainy days."

"We have not yet revealed all our capabilities," Vahidi told the semi-official Fars news agency, stressing the added value of Iran's independently run and operated military industry.

"Undoubtedly, since our defense is an independent and defensive one based on our own defensive policies, special defense doctrines and our own indigenous defense and internal capabilities, the U.S. will face a completely new environment when gets involved with the new issues that Iran is pursuing and it will be obliged to think of this new environment," Vahidi said

The top Iranian official also spoke of what he said was the United States' inability to influence Iran's military progress, saying that, "naturally, they cannot reach this point since we have not displayed all our capabilities and capacities."

"These days Americans badly fear that an incident happens in the region and they can't stand against the Islamic Republic's firm positions vis-à-vis that given event," Vahidi told Fars.

Haaretz

Silver Surges 4.5% To Over $37/Oz On Massive Fund Buying

Over 800 European banks have taken €529.5 billion from the ECB today after taking €489 billion euros at the first tender in December. The ECB’s 3 year lending is now near 1 trillion euros ($1.35 trillion) and the ECB’s balance sheet looks increasingly precarious.

Although the flood of paper has been credited with fuelling a rally on Europe’s distraught bond markets and safeguarding the region’s banks, it is another exercise in kicking the beer keg down the road as it fails to address the fundamental issue which is the insolvency of many European banks and many European nations and the obvious risk of contagion from that. 

The continuation of ultra loose monetary policies increases the risk of inflation which will benefit gold which is an excellent inflation hedge. Extremely low yields on deposits and “risk free” sovereign debt means the opportunity cost of carrying non yielding bullion remains very low.

Spot silver gained 0.4% to $37.05 an ounce, after surging 4% and hitting a 5 month high of $37.21 in the previous session.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily.

Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors.

This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months.

There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.

Very bullish is the fact that silver also remains more than 30% below its record nominal high 32 years ago in 1980 and more than 75% below its inflation adjusted high of $140/oz in 1980.

The gold-silver ratio dropped to its lowest level in 5 months, after silver rose more than 12% so far this month and an enormous 34% this year, outperforming other precious metals.

Rising holdings of silver-backed ETF’s also indicated growing investor interest in the metal. The overall silver Exchange Traded Funds holdings rose to 491.079 million ounces, the highest since last May.

Spot platinum gained nearly 0.5% to $1,722.24, as investors await the latest in Impala Platinum's dealing with an illegal strike that has disrupted production at Rustenburg, the world's largest platinum mine.

For breaking news and commentary on financial markets and gold, follow us on Twitter.

OTHER NEWS 
(AP) -- Silver Prices Jump, Playing Catch-up to Gold
Silver prices shot up 4.5 percent Tuesday, playing catch-up to gold.

Silver is both a precious and an industrial metal. Traders can buy it to hedge against a volatile stock market, as they do with gold. But it can also be used to make products like computer chips, meaning prices can rise when traders expect demand from manufacturers to go up.

In March contracts, silver rose $1.616 to $37.14 per ounce. It's up roughly 10 percent from where it was a year ago. Sterling Smith, senior market analyst at Country Hedging in St. Paul, Minn., said part of the reason silver is surging is that traders believe it's undervalued compared to gold. Gold closed at $1,788.40 an ounce, up $13.50 for the day. It's up about 26 percent compared to a year ago.

Copper rose 3.15 cents to $3.912 per pound, and platinum rose $9.20 to $1,723.50.

Energy contracts fell, partly because investors were pulling back after price gains last week. Oil prices remain close to nine-month highs because of concerns that Iran could cut shipments of crude to Europe and interfere with supplies elsewhere. The European Union and the U.S. are using sanctions against Iran because they fear the country is developing a nuclear weapon.

Benchmark oil fell $2.01 to finish at $106.55 per barrel on the New York Mercantile Exchange. Natural gas prices fell 8.5 cents to end at $2.627 per 1,000 cubic feet. Heating oil fell 6.28 cents to $3.2201 per gallon.

Smith said grains and other agricultural products have been enjoying a "winning streak" for the past week. Those movements are especially important now as farmers decide what to plant this year.

Soybean prices on Monday topped $13 a bushel for the first time in five months. That's because traders think there will be greater demand for U.S. exports of the protein-rich beans because smaller harvests from South America are expected.

On Tuesday, soybeans for March delivery rose less than 1 percent, to $13.125 per bushel from $13.025. March wheat rose 15.5 cents to finish at $6.6825 per bushel. Corn ended up 8.75 cents to $6.5725 per bushel.

The price of orange juice also rose. Cocoa and sugar fell.

(Bloomberg) -- Gold-Oil Correlation Rises to Eight-Month High
Gold’s strengthening correlation with oil means more gains for the metal as Brent near a nine- month high spurs demand for an inflation hedge, UBS AG said.

The CHART OF THE DAY shows Brent prices reached $125.55 a barrel in London on Feb. 24, the highest since early May, and are up 15 percent this year. Bullion has gained 14 percent in the period and reached $1,787.55 an ounce last week, the highest since Nov. 14. The 30-week correlation coefficient between the commodities rose to 0.61 today, the most since June. A figure of 1 means the two always move in the same direction.

Gold’s “rolling correlation with oil is slowly inching higher and we think this signals that some catching up lies ahead,” Edel Tully, an analyst at UBS in London, wrote today in a report. “To the extent that rising oil prices feed into higher inflation expectations, gold is bound to reap benefits.”

Some investors buy gold to hedge against accelerating consumer prices and as a protection from slowing growth and geopolitical risk. The metal, which generally earns holders returns only through price gains, rallied for an 11th year in 2011 as central banks in Europe and the U.S. kept interest rates near record lows. Oil advanced this year on concern the west’s dispute with Iran over the Islamic republic’s nuclear program may lead to a disruption in exports from the Middle East.

Investors are holding a record 2,398.2 metric tons of gold in exchange-traded products backed by the metal, valued at about $137.1 billion, according to data compiled by Bloomberg. The tonnage exceeds the holdings of all but four central banks, which are expanding reserves for the first time in a generation.

The Islamic republic has threatened to close the Strait of Hormuz, a transit point for about 20 percent of globally traded crude oil, if its exports are banned in sanctions. While UBS forecasts Brent at $110 a barrel in the second quarter, “any Iran-related headlines, military threats or small incidents in the Persian Gulf are likely to push oil prices sharply higher and potentially boost gold in turn,” Tully said.

(Bloomberg) -- Oil Set for Best Month Since October on Recovery Signs, Iran
Oil rose, heading for its best month since October in New York, amid signs of economic recovery and concern that tension with Iran threatens global crude supplies.

West Texas Intermediate futures climbed as much as 0.6 percent after sliding yesterday the most in five weeks. Industrial output in Japan and South Korea beat estimates and U.S. consumer confidence rose to the highest level in a year. Oil has advanced 8.8 percent in February, its first monthly gain in three, as sanctions tighten against Iran, OPEC’s second- biggest producer.

(Bloomberg) -- Impala Says Strike Halts 2 Billion Rand of Platinum Output
Impala Platinum Holdings Ltd. said 100,000 ounces of output, equivalent to sales of 2 billion rand ($265 million), was halted by a strike at its Rustenburg mine.

The company, based in Johannesburg, is working to resume output at the world’s biggest platinum mine after bringing back 9,800 of 17,200 staff fired during the illegal strike, Impala said today in a statement. About 15,800 didn’t join the strike.

“It is dependent on operational turnout of staff,” Impala said. Fired workers have until tomorrow to return on their prior terms after the walkout, which has entered a sixth week.

SILVER 
Silver is trading at $37.14/oz, €27.64/oz and £23.30/oz. 

PLATINUM GROUP METALS 
Platinum is trading at $1,723.00/oz, palladium at $710.00/oz and rhodium at $1,475/oz. 

Zero Hedge

Pyongyang rattles saber over Key Resolve drill

South Korea and the U.S. kicked off their joint Key Resolve military exercise yesterday, as North Korea issued yet another threat to strike back.

Key Resolve, which will go on until March 9, will involve about 200,000 South Korean troops and 2,100 U.S. troops. About 800 more U.S. participants will come from outside South Korea, according to the South Korea-U.S. Combined Forces Command.

Officials have stressed that Key Resolve is “routine and defense-oriented” and was planned months in advance, with no connection to current international affairs.

They also said Australia, Canada, Denmark, Norway and Britain, members of the UN Command, will take part as observers.

North Korea routinely denounces the Key Resolve drills as precursors for an invasion.

On Monday, North Korea accused the two allies of being “poised for a war carrying nuclear war equipment” and dubbed the South and the U.S. “warmongers.”

“The war drills are an unpardonable infringement upon the sovereignty and dignity of the DPRK as they evidently target the DPRK, which is in the mourning period” after the death of former leader Kim Jong-il, said a report on the Korean Central News Agency, Pyongyang’s state media. DPRK stands for the North’s official name, the Democratic People’s Republic of Korea.

“The army and people of the DPRK are fully ready to fight a war with them,” the report added.

Last Saturday, Pyongyang had vowed to launch a “sacred war” against South Korea and the U.S. In light of that threat, the South and the U.S. on Sunday heightened their alert against North Korea.

They have fully mobilized their surveillance assets, such as radar and reconnaissance planes, and the South’s Air Force placed its F-15K fighters on emergency standby.

Earlier Sunday, the KCNA said the North’s new leader Kim Jong-un inspected frontline artillery units. Military officials here said the North has also placed its 4th Army Corps in the southwestern region on heightened alert and recently conducted live-fire drills, apparently targeting South Korea.

Another joint exercise, Foal Eagle, will take place from March 1 to April 30 and include about 11,000 U.S. forces plus South Korean troops in division-sized or smaller units, officials have said. Yonhap

Inside Korea

The next big global financial crisis will emanate from China

The next big global financial crisis will emanate from China. That is not a firm prediction. But few countries have avoided crises after financial liberalization and global integration. Think of the U.S. in the 1930s, Japan and Sweden in the early 1990s, Mexico and South Korea in the later 1990s and the U.S., UK and much of the eurozone now. Financial crises afflict every kind of country. As Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard have remarked, they are “an equal opportunity menace”. Would China be different? Only if Chinese policymakers retain their caution.

Such caution permeated last week’s report that the People’s Bank of China hasrecommended accelerated opening up of the Chinese financial system. Given what is at stake, in both China and the world, it is essential to consider the implications. Maybe the world will then do a better job of managing this process than it has done in the past.

This plan was published by Xinhua, the state news agency, not on the PBoC’s web site. Moreover, it was published under the name of Sheng Songcheng, head of the statistics department, not that of the governor or a deputy governor. This must mean that it is more an exercise in kite-flying than a policy. Nevertheless, this was published with the PBoC’s approval and, quite possibly, with that of people much higher up still.

The article lays out three stages for reform. The first, to occur over the next three years, would clear the path for more Chinese investment abroad as “the shrinkage of western banks and companies has vacated space for Chinese investments” and so presented a “strategic opportunity”. The second phase, in between three and five years, would accelerate foreign lending of the renminbi. In the longer term, over five to 10 years, foreigners could invest in Chinese stocks, bonds and property. Free convertibility of the renminbi would be the “last step”, to be taken at an unspecified time. It would also be combined with restrictions on “speculative” capital flows and short-term foreign borrowing. In sum, full integration would be indefinitely delayed.

What are the implications of this plan? The answer is that it seems sensible. In reaching that view, one has to take into account the benefits and risks of financial “reform and opening” for China and the world.

The arguments for such opening up to the world are closely connected to those for domestic reform. Indeed, the former cannot be undertaken prior to the latter: opening up today’s highly regulated financial system to the world is a recipe for disaster, as Chinese policymakers know. It is for this reason that full convertibility would come in the distant future, as this plan suggests.

Happily, arguments for domestic reform are powerful. Dynamic financial markets are an essential element in any economy that wishes both to sustain growth and to begin rivaling rich countries in productivity, as China surely aspires to do. More immediately, as Nicholas Lardy of the Peterson Institute for International Economics notes in a recent study: “Negative real deposit rates impose a high implicit tax on households, which are large net depositors in the banking system, and lead to excessive investment in residential housing. Negative real lending rates subsidize investment in capital-intensive industries, thus undermining the goal of restructuring the economy in favor of light industries and services.”*


Yet, as Mr Lardy also knows, this distorted financial regime is part of a wider system for taxing savings, promoting investment and repressing consumption, which has led to huge interventions in foreign currency markets and vast accumulations of foreign currency reserves. The deeper case for reform is that this system no longer contributes to a desirable pattern of development. But it has become so deeply entrenched in the economy that reform is politically fraught and economically disruptive. The question is even whether such reform is politically feasible. It is surely likely to be a slow process.

How would the PBoC’s proposed moves towards opening up then fit with such a cautious reform? Presumably, the greater freedom for capital outflows envisaged for the next five years would partly substitute for accumulations of foreign currency reserves. Yet if this went with suggested moves towards higher real interest rates, China’s savings and current account surpluses might explode, worsening the external imbalances.

This point underlines just how big a stake the rest of the world has in the nature of China’s reform and opening up of the financial sector.

China’s gross savings are running at an annual rate of well over $3 trillion, which is more than 50 per cent larger than the gross savings of the U.S.. Full integration of these vast flows is sure to have huge global effects. China’s financial institutions, already enormous, are also almost certain to become the biggest in the world over the next decade. One need only think back to Japan’s integration in the 1980s and subsequent financial implosion to recognize the possible dangers. We should be pleased, therefore, that China is taking a cautious approach.

The world has a huge interest in a shift of China’s economy towards more balanced growth. It has a parallel interest in the way China manages its domestic reform and opening up of the financial system. A whole range of policies need to be co-ordinated, particularly over financial regulation, monetary policy and exchange rate regimes. If this is done well, today’s high-income countries’ crisis will not be promptly followed by the “China crisis” of the 2020s or 2030s. If it is done badly, even the Chinese might lose control, with devastating results.

The PBoC suggests a timetable of reforms that would fit with China’s and the world’s needs. But if this is to happen, thorough discussion of all the implications must now occur. China’s policies do not matter for the Chinese alone. That is what it means to be a superpower — as the U.S. should note.

CNBC

2012 The Year Of Living Dangerously

It is a curious world that we live in these days. America bumping along, China grinding down, Europe gaming the system, bonds trading off Treasuries compressing significantly, equities buoyed by new cash and the dearth of decent places to put capital and a risk factor that increases with each ratchet up of the great European pyramid scheme. It was on January 13, 2010 that I said Greece would default and yesterday S&P placed them in default which was so widely expected that the market yawned and turned its attention to the coming European LTRO. I think the markets will be surprised, during the next few weeks, with the consequences of the Greek default but that remains to be seen. In the meantime, despite the ECB’s open spigot, one of the major banks in Austria needed to be recapitalized yesterday with Austria not only injecting new capital but taking an almost one billion dollar hit.

We are living in a world these days of semi-transparent “knowns” and great “unknowns” that provide a complexity for investing far past any normal scenario. Not only could the markets be turned on the proverbial dime but they could be violently ratcheted down the cliffs of Dover by any number of possible and not outlier events. Knowing about something and understanding the intended and unintended consequences are two different turns of the screw. As the last several years have unfolded I have noted a progress of events where markets rally on manufactured headlines, calm down and then react negatively as the entire story is understood. A pattern has developed in fact which is why I point out the grave dangers lurking now in the Great Game and why I continue to advise caution and cash as we veer off the bumpers in some strange pinball game that sometimes seems to have been mechanized by some hallucinating artist such as Salvador Dali. Europe continues to just barely pull the cat out of the hat but I shudder at the consequences when the trickery no longer produces the desired effects and the audience catches on to the magician’s deceit.

You will recall the days leading into the sub-prime meltdown; easy money, loans without documentation, a massive leveraging up of assets and then the crack in the Earth’s surface and the abyss that we faced. When I regard Europe these days I see a repeat of this cycle which now involves sovereign credits and European banks and easy money and loans without documentation and a massive leveraging up of assets and liabilities with unhampered capital provided by the printing presses at the European Central Bank. The similarities are there for all of us that would like to stop and look, which clearly is not many, but then that was also the case during the heady days of the subprime funding madness. First it was Greece and then Ireland and Portugal and now Spain is sinking into the quicksand and asking for better terms so it doesn’t have to plunge into even greater fiscal controls and austerity measures and the pressures on the fault lines are increasing dramatically in my opinion.

I point specifically to the reasons for my increasing concern; the European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

Now I am quite used to being ballyhooed. It was on December 27, 2007 when I identified the risks of subprime mortgages and CDO’s, my early call on Greece was when their ten year yield 4.38% and while perhaps not of giant intellect I am a reasonably good sleuth. I tout nothing but I warn plenty in an effort to keep all of you out of some gaping hole that is squarely in front of the path that we are taking. It is not gloom and doom that I pull around like Pig Pen’s black cloud but a giant warning sign that I plant firmly in the ground which says, “Don’t step here.” Today I point at Europe and intone once again, “Don‘t step here.”
Zero Hedge