Morgan Stanley's Recession Doom Scenario

The global economy is likely to be stuck in the "twilight zone" of sluggish growth in 2013, Morgan Stanley has warned, but if policymakers fail to act, it could get a lot worse.

The bank's economics team forecasts a full-blown recession next year, under a pessimistic scenario, with global gross domestic product (GDP) likely to plunge 2 percent.

"More than ever, the economic outlook hinges upon the actions taken or not taken by governments and central banks," Morgan Stanley said in a report.

Under the bank's more gloomy scenario, the U.S. would go over the "fiscal cliff" leading to a contraction in U.S. GDP for the first three quarters of 2013. In Europe, the bank's pessimistic scenario assumes a failure of the European Central Bank (ECB) in cutting rates and a delay of its bond-buying program.

But the bank says investors should also be nimble, in case policy action is "convincing and decisive," leading to a big uptick in growth.

"Importantly, investors should keep an open mind and be prepared to switch between the scenarios as policy developments unfold." Read More >>

Spain And Italy Are Toast Unless Germany Allows The ECB To Print Trillions Of Euros

The financial chess game in Europe is still being played out, but in the end it is going to boil down to one very fundamental decision.  Is Germany going to allow the ECB to print up trillions of euros and use those euros to buy up the sovereign debt of troubled eurozone members such as Spain and Italy or not? 

Nothing short of this is going to solve the problems in Europe.  You can forget the ESM and the EFSF.  Anyone that thinks they are going to solve the problems in Europe is someone that would also take a water pistol to fight a raging wildfire.  No, the only thing that is going to keep Spain and Italy from collapsing under the weight of a mountain of debt is a financial nuke. 

The ECB needs to have the power to print up trillions of euros and use that money to buy up massive amounts of sovereign debt in order to guarantee that Spain and Italy will be able to borrow lots more money at very low interest rates.  In fact, this is probably what European Central Bank President Mario Draghi has in mind when he says that he is going to "do whatever it takes to preserve the euro". 

However, there is one giant problem.  The ECB is not going to be able to do this unless Germany allows them to.  And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy. 

If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together.  That doesn't sound like a very good deal for Germany. Read more >>

Eurozone Unemployment Hits Record High

The European Central Bank is widely expected to make an interest-rate cut this week to try to invigorate the eurozone’s ailing economy after unemployment in the region climbed to a record high and a key survey of manufacturing showed the sector to be at its weakest in three years.

Attention is back on the ECB’s role in helping the eurozone emerge from its debt crisis, after last week’s EU summit agreed that the central bank should play a role in common bank supervision. Leaders also backed the view of Mario Draghi, ECB president, that eurozone bailout funds should be offered directly to recapitalize struggling banks.

Few analysts expect the ECB to offer politicians a quid pro quo this week by giving further direct support to banks or governments such as more cheap loans or bond buying. But markets are pricing in the likelihood that the ECB will respond to worsening economic data by cutting its main policy rate to below 1 per cent for the first time – a step that should help peripheral eurozone banks that rely on central bank borrowing. Read more >>

€100 Billion In Secret Funds Props Up Greek Banks

There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.

Extensive use of “emergency liquidity assistance” (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis. Separate from normal supplies of liquidity and meant originally as a temporary facility for national authorities to use when banks hit problems, ELA proved a lifesaver for the financial system Ireland and is now even more so in Greece.

As such, it has given the ECB — which has ultimate control over the facility — considerable power to determine countries’ fates. Whether that power would ever be exercised is unclear. ELA is a subject on which the ECB is deeply reluctant to provide information — even on where or when it is provided. More...

With Every Government Printing, $3000 Conservative For Gold

Image by motoyen via Flickr

Joe Weisenthal
This seems to be a very common theme.

In his latest letter to investors, regarding the euro bailout, Kyle Bass revealed that he made a big gold buy on the grounds that everyone from Brussel to Tokyo was now in print-and-debase mode.

In his daily note, David Rosenberg says almost exactly the same thing:

Meanwhile, a new socialist government in Japan wants a weaker yen. Sterling has only one way to go in an environment of heightened political uncertainty and a balance sheet that is at least as extended as Greece. And the ECB just gave notice with its agreement to buy sovereign and corporate debt that it is willing to distort the pricing of risk in the bond market for the greater good of helping profligate countries to avoid either defaulting or certainly help them finance their obligations at a subsidized cost. The Bundesbank, this is not.

So gold is no government’s liability and the shape and shift in its supply curve is the shape would seem to be a little easier to make out than fiat currency. We may end up being overly conservative on our peak gold price forecast of $3,000
an ounce.

It seems hard to argue with the logic of the gold bulls right now, except that when everyone is making the same call, that's not usually a time for bullishness.

What else could be bearish for gold?

Well, if the real economy comes humming back, that could prompt investors to pour money into real assets. And if the world enjoys a shock bout of stability, then at least some of the fear premium could come out.