Canaries In The Mineshaft: Should Markets Be Apprehensive?

London, UK - 7th November 2011, 00:35 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

1. The G20 summit in Cannes has not been able to deliver any meaningful solution to the Eurozone crisis. As the Breton prayer goes, "O Lord, thy sea is so great and my boat is so small!" The summit has confirmed that China, India and other emerging countries will neither be able and nor will they be willing to rescue the richer Eurozone nations. Also, the US is in no mood to roll out a second Marshall Plan on this occasion. The world has moved on since 1948. As one distinguished G20 summit attendee from the US told ATCA 5000, "if the Europeans are not going to take their fire engine out to put out their fires why should we lend them our fire engine? What happens if we have a mini-fire of our own in the meantime?" The much vaunted IMF solution also appears to have fizzled out, at least for the time being;

We ignore canaries in the mineshaft at our own peril

2. The MF Global bankruptcy -- now likened to a mini-Lehman crisis -- is still playing out in the global commodity markets and it is going to come to the fore this week as it causes further degradation in liquidity, loss of trust amongst counter-parties, and discovery of unsettled black holes in derivative trades. Let us hope the mini does not become a maxi! The Chicago Mercantile Exchange (CME) Group and InterContinental Exchange (ICE)'s U-turn in regard to margin requirements over the weekend -- by first raising them and then reducing them -- suggests a liquidity crisis is now brewing. This does not augur well. The last time when Lehman Brothers blew up on September 15th, 2008, it took about a week for liquidity in the markets to dry up;

3. The Italian sovereign debt yields and spreads against German bunds are reaching dangerous levels similar to when Ireland and Portugal needed IMF-EU-ECB emergency assistance. The scale of the Italian debt mountain at circa two trillion euros is so large that the Eurozone fire engines do not have long enough ladders and big enough water tanks for that "towering inferno" unless the ECB starts printing a few trillion euros to bring about a financial deluge. This the Germans have indicated they cannot allow because of historic Weimar Republic fears that led to hyperinflation in the 1920s followed by the rise of fascism in the 1930s;

4. The Greek crisis is moving on to the next rung of a step-by-step default and exit from the Eurozone as the present prime minister steps down and the new coalition government lasts but for a short time to try to restore confidence in the euro plan -- without achieving traction with the Greek people -- just as the previous ATCA 5000 briefing, "Disorderly Greek Default and Exit from Eurozone?" has already explained; and

5. Markets may be spooked by the possibility of conflict between Iran and the West based on rising reports of heightened activity between Israel, the US and European powers including the UK. Any hint of further escalation will have a detrimental effect on already fragile market confidence with the possible exception being the pricing of oil and gold. If oil prices escalate, this will damage the already weakening global economic recovery, increasing the chances of a worldwide recession.

[STOPS]

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[ENDS]

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