The world is breathlessly hoping that Central Banks will somehow save the day. Indeed, when you consider that the markets have rallied so dramatically based on a vague speech from ECB President Mario Draghi, you get a sense of just how desperate everyone is to believe in this.
Outside of beliefs, here are the key developments you need to know:
1) Spain is now outright demanding that the ECB monetize Spanish bonds (in other words, it’s back on the brink of collapse after receiving a €100 billion bailout a few months ago).
2) Greece is asking for “room to breathe” because… frankly it’s run out of money again despite receiving €240 billion in bailouts and failing to enact any real meaningful reform.
3) Both the ECB and Germany have stated that no more funds are coming without strict conditions.
So… we’re essentially where we were before this latest rally began. No new programs have been announced, no new funds released, no new policies enacted.
And that’s been the most frustrating part of what’s going on… nothing has actually happened, but the markets have acted as though some massive new plan has emerged all based on a whole lot of nothing.
Today as was the case a month ago, everything ultimately hinges on Germany. It’s interesting to note that the majority of this rally occurred while Angela Merkel was on vacation (as much of Europe is during late July-August). One wonders if Mario Draghi purposely timed his “bazooka” speech for when Germany was least likely to rain on the parade?
Political intrigues aside, Germany is just about out of money. And Merkel has to decide… save Germany or save the EU. Only one of these options is even possible at this point (save Germany) as the EU is beyond saving.
Why do I say this? The EU banking system is €36 trillion trillion in size. Total Eurozone banking deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion.
Germany doesn’t have the funds to backstop even 10% of this. That’s a fact. No one does. The money simply does not exist. And if the ECB decided to print it, Germany would walk out of the Euro (it may in fact do this regardless of what the ECB does).
These are the facts pertaining to Europe. Everything else (all the claims of new plans/ new strategies, all the stories of secret meetings, all of that garbage) is just one great big distraction.
So if you somehow think Draghi or someone else is going to pull out a magic wand and save the day, you might want to think again. Did you know that Spanish citizens pulled 75 billions Euros out of the Spanish banking system in July? Why is this a big deal? Because the ENTIRE market cap for the Spanish Banking system is just 114 billion Euros.
That might be a problem. Also, consider that France just nationalized its second largest mortgage lender. We all know how things worked out for the US when we started nationalizing mortgage lenders in 2008.
On that note, if you are not preparing for a bloodbath in the markets, now is the time to do so. The reality is that the Central Banks are fast losing their grip on the markets. They’ll never admit this publicly, but I can assure you that Bernanke and pals are scared stiff by what’s happening in the banking system right now.
If you’re looking for someone who can help you navigate and even profit from this mess, I’m your man. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).
Indeed, during that entire time we saw 73 winning trades and only one single loser. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher as the EU crumbles.
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