Newsletter                                         Larry McDonald
Book Shelf                                                    November 18, 2011
  At the Intersection of                                Wall Street and Politics
Lawrence G. McDonald  
New York Times Bestselling Author
New Cover  
A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers
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 Recently Booked 
Speaking Engagements
November: Chicago
February: South Africa
February: Dubai
February: London 

 Media Appearances

11/18  "Cavuto" on Fox Business at 6:05pm (ET)

Supercommittee at Standstill with Deficit Deadline
Courtesy of my Partner, DC Tripwire
  • The effective deadline for the Supercommittee to reach a deficit reduction deal is Monday, November 21st by midnight.  According to the debt limit legislation, the Supercommittee must present a proposal to the Congressional Board Office at least two days in advance to be voted on by Wednesday, November 23rd.  In the last 96 hours, there has been a lack of progress and there is the possibility that no Supercommittee deal will be reached before the deadline.
  • Three days are left to agree on a $1.2 trillion deficit reduction plan to avoid sequestration (automatic spending cuts totaling $1.2 trillion that would take effect beginning in 2013).
  • Republican leadership is uncertain about the ability to increase "hard" revenue in excess of $250 billion and gain Republican support.  On the other hand, Democrats are unwilling to increase spending cuts without Republican leaders offering greater revenue increases.
  • "The majority of House Republicans would prefer the risk of future spending cuts through sequestration to the chance of even higher future revenue increases." - DC Tripwire
  • Major changes to entitlement programs and an extension of the Bush tax cuts are not expected to be included in any successful deal.

-Most Likely Outcomes

  1. $600-$800 Billion Deal: Primarily legitimate savings, but does not include revenue increases that fundamentally change the tax code or entitlement cuts.
  2. $1.2 Trillion Deal: Primarily made to avoid sequestration that includes $250 billion in "soft savings" (wartime drawdown savings) and/or accounting gimmicks.
  3. No Deal: Sequestration would take effect beginning 2013.

I believe sequestration is the best option as these are "real cuts".

European Bonds Under Pressure
  • Spain was forced to pay record high yields at its government bond auction yesterday; paying an average yield of 6.975% to sell3.563 billion on 10-year bonds, compared to 5.433% at its last auction on October 20th.  At this level yields are unsustainable - Greece, Portugal & Ireland had to seek bailouts after being forced to pay 7% on 10-year bonds.
  • The French auction also disappointed markets yesterday as contagion fears are mounting - medium-dated bonds (2Y & 4Y) were at an average yield of 2.82%, compared to 2.31% at the last auction.  France CDS reached an all-time high yesterday at 227, compared to 158 on October 28th.
  • On Tuesday, Belgium's 10 year bond yields increased by 29 basis points, briefly topping 5%.
  • The spread between French/German 10-year government bonds rose to 206 basis points on November 17th reaching a euro-era high.  
  • The spread between German bunds and other Eurozone member states 10-year bonds widened again yesterday, as contagion from the PIIGS crisis is beginning to effect the "core" of Europe.
  • If Spanish yields continue to rise, the country will find it more difficult to raise new funds in the market.  The European Financial Stability Facility (EFSF), in its present form would be incapable of providing a backstop for both Italy and Spain (combined government debts of €2.5 trillion).  Many observers, including myself believe plans to leverage the EFSF will not succeed in reaching a target greater than a €1 trillion capacity.  This €1 trillion will not be sufficient to rescue countries entangled in the European debt crisis.
  • It was reported by Reuters yesterday that the ECB may provide financing to the IMF, which would be lent to the EFSF.  However, the current IMF mandate only allows lending to individual countries.  The IMF lending to the EFSF would require a change in the IMF charter which non-European states were reluctant to agree on at G20 Summit on November 4th.
  • Since the start of the ECB bond-buying program in May 2010, the ECB has purchased €187 billion of government bonds; which still has not prevented Italy and Spain from passing the critical threshold.


Today's Risk Indicators, Lessons from Lehman Brothers 2008
  • Big recent moves in Libor:  The London Interbank Offered Rate - U.S. Libor OIS 3-month spread was up above 39 basis points late this week, its highest level since June 2009.  This is a measure of bank lending between themselves and the rates they charge each other.  Just like in 2009, some banks are demanding the safety of Treasuries during the European debt crisis.
  • Libor has been up for seven consecutive days; 3 month Libor today is 0.3974%, compared to 0.122% on July 29th and 0.101% a year ago -per Bloomberg.
  • The 2 year USD swap spread is indicating that bank trust is deteriorating, currently trading at 49.31 basis points versus the 200 day moving average of 25.91.
  • Euribor has surged from .17 in June to .913 today, 45% out to the Lehman wides of 2.01.
  • A look at the TED spread:  The 3 month TED spread is trading at multi-month wides at 48.52, the highest level since May 2009.  Compare this to July 29th when the TED 3 month spread was trading at 16.64.
Afternoon Viewing
My Recent Press Interviews
Institutional Investor, November 16
"Cavuto" on Fox Business, November 16
"Taking Stock with Pimm Fox" on Bloomberg, November 2

"The Willis Report" on Fox Business, November 1
Speaking Engagements
Interested in booking a speaking engagement?
Contact Kristin at +1 (650) 201-2997 or by email at, for more information.
Click here to view the latest videos and testimonials from my speaking tour.
Important Dates to Watch For


  • 20 November:         Spanish Elections
  • 25 November:         Italian Short Debt Auction
  • 29 November:         Italian Bond Auction
  • 29 November:         Eurogroup Meeting
  • 30 November:         ECOFIN Meeting
  • 30 November:         €8.8 Billion Italian Bond Matures
  • 30 November:         Portuguese Parliament Votes on Budget
  • 9 December:            EU Summit
  • 13 December:          €2 Billion Greek Bond Matures
  • 15 December:          €11.1 Billion Italian Bond Matures
  • Mid December:       Deadline for distribution of €8 Billion, 6th tranche of Greek Funding
  • 27/30 December:     €2.5 & €8.8 Billion Italian Bond Matures
  • End 2011:                Original schedule for finalization of program for Greece including PSI
  • 10 January:             €1.6 Billion Greek Bond Matures
  • 16/31 January:        €7.7 & €7.5 Billion Italian Bond Matures
  • 1 February:             €25.8 Billion Italian Bond Matures
  • 15/29 February:      €8 and €8.7 Billion Italian Bond Matures
  • 1 March:                 €14.8 Billion Italian Bond Matures 
  • 20 March:               €21.4 billion Greek Bond Matures
  • Q2/Q3 2012:           Likely Italian Elections   
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