Could It Get Worse Than 2008?

Looking around the economic and financial world today, I see countless negative developments and virtually no positive developments to speak of.

Just off the cuff, I note that:

  • China is entering a hard landing if not an outright economic collapse.
  • Europe is facing a recession, banking collapse, sovereign crisis, and a potential break-up.
  • The US is in a stagflationary recession.
  • Japan is in a sovereign debt crisis, approaching armed conflict with China
  • Inflationary pressures are increasing worldwide: new record food prices will hit within the next 12 months.
  • The risk of armed conflict is increasing in the Middle East as well as Asia along with food inflation creating civil unrest/ riots.

Against this backdrop, the one remotely positive development as far as the markets are concerned is the belief that Central banks will somehow solve these problems via endless liquidity.

However, even this is now proving to be a false premise.

The problem with this is that the primary driver of stock prices over the last three years has been the anticipation of more monetary stimulus from Central Banks.

Indeed, the New York Fed itself has openly admitted that were it to remove the market moves that occurred around Fed FOMC meetings (the times when the Fed announced new programs or hinted at doing so), the S&P 500 would be at 600 today:

So, by announcing a program that will be on going in nature, the Fed has removed the anticipation of future Central Bank intervention from investors’ psychologies. This could become highly problematic, especially if these latest announcements turn out to be duds.

Sure enough, stocks are actually down since QE 3 was announced on September 13 2012.

So we’ve got over 50% of the global GDP (China, the EU, and the US) in recession, combined with Europe’s banking and sovereign crisis… at the exact time that the Fed appears to have run out of ammo.

It’s truly astounding. I cannot actually remember a single time in which the global economy and financial system have faced this many difficulties. And that includes the build up to the 2008 Crash.

Now more than ever, investors need to get access to high quality guidance and insights. There sheer magnitude of the issues the global financial system is facing is enormous!

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Best Regards,

Graham Summers

Where Should Gold Be Based On Inflation?

Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.

Here’s a recap of some of the larger Fed moves during the Crisis:

  • Cutting interest rates from 5.25-0.25% (Sept ’07-today).
  • The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
  • Opening various lending windows to investment banks (Mar ’08).
  • Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
  • The Fed takes over insurance company AIG for $85 billion (Sept ’08).
  • The Fed doles out $25 billion for the automakers (Sept ’08)
  • The Feds kick off the $700 billion TARP program (Oct ’08)
  • The Fed buys commercial paper from non-financial firms (Oct ’08)
  • The Fed offers $540 billion to backstop money market funds (Oct ’08)
  • The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
  • $40 billion more to AIG (Nov ’08)
  • The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
  • Obama’s $787 Billion Stimulus (Jan ’09)
  • QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
  • QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
  • QE 2 buys $600 billion in Treasuries (Nov ’10)
  • Operation Twist 2 (Nov ’11)
  • QE 3 ($40 billion in MBS monetization per month)

And this is just a brief recap. I’m almost certain I left something out. Indeed, between 2008 and today, the US Federal Reserve has grown its balance sheet from $800 billion to almost $3 TRILLION in size (larger than the economies of Brazil, the UK, and France).

The Fed is not the only bank to engage in such profligate policies either. Thanks to its bond purchases as well as its LTRO 1 and LTRO 2 schemes, the European Central Bank (ECB) has in fact grown its balance sheet even larger than the Fed.

Country GDP
European Union $16 trillion
United States of America $14.5 trillion
China $5.8 trillion
Japan $5.4 trillion
European Central Bank $3.8 trillion
Germany $3.2 trillion
US Federal Reserve $2.8 trillion
France $2.5 trillion
United Kingdom $2.2 trillion

As a result of this, inflation hedges, particularly Gold have been soaring. Gold was, is, and always will be THE ultimate storehouse of value. Mankind was prizing it long before the concept of stocks, mutual funds, or paper money even existed.

So with world central banks printing paper money day and night it is no surprise that Gold is now emerging as the ultimate currency: one that cannot be printed. Indeed, Gold has broken out against ALL major world currencies in the last ten years. The below chart prices Gold in Dollars (Gold), Euros (Blue), Japanese Yen (Red) and Swiss Francs (Purple):

Now, a lot of commentators have noted that gold is already trading above its 1980 high ($850 an ounce). What they fail to note is that thanks to inflation, $1 in the ‘70s is worth a LOT MORE than a $1 today.

$1 in…

Is Worth Today

1970

$5.49

1980

$2.58

For gold to hit a new all time high adjusted for inflation, it would have to clear at least $2,193 per ounce. If you go by 1970 dollars (when gold started its last bull market) it’d have to hit $4,666 per ounce.

If you do not already have exposure to Gold, consider getting some now. If you do decide to buy, I strongly urge you to buy actual physical bullion because it is not clear that the various Gold ETFs actually own the bullion they claim to

On that note, we just published a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

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Phoenix Capital Research


 

Spain is 100% Totally Beyond Saving

My prediction regarding the breakup of the EU was obviously way early.

However, the fact remains that the EU will break up in time. And it will likely be Spain that brings this about.

The reasons? Among other things:

  1. Spain’s private Debt to GDP is above 300%.
  2. A huge portion of Spain’s banking system (representing over 50% of mortgage loans AND deposits) was totally unregulated up until just a few years ago.
  3. Spanish banks are drawing over €400 billion from the ECB on a monthly basis (up from €377 in June) to fund their liquidity needs.
  4. Spanish banks are now net sellers of Spanish sovereign bonds (leaving the ECB as the only buyer in the market)
  5. Spain’s banking system has lost 18% of its deposits in the last 10 months due to a staggering bank run.
  6. The economy of Spain is a disaster with total unemployment over 25% and youth unemployment above 50%.
  7. Spain is now facing a constitutional crisis with various regions looking to secede if they don’t receive bailouts from the Federal Government “without conditions.”
  8. Spanish banks need to roll over (meaning renew terms on) more than 20% of their bonds this year.

So Spain will suffer a collapse, most likely of its banking system resulting in a sovereign default (barring a bailout). When this happens, some €1 trillion+ worth of collateral (still rated AAA by EU banks) will be sucked out of the system.

This in turn will spur margin and collateral calls on tens of trillions of Euros’ worth of derivative trades.

And the EU Financial System collapses.

This is reality, regardless of who wins the US election. It may take a few months before it hits… but it will hit.

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.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

 

 

 

 

 

 

 

 

The Truth About Europe… Which the Media Won’t Report

I realize that the situation in Europe can be very confusing. Aside from the fact that we’re dealing with over 20 different countries all with their own respective economies and debt issues, we also have the European Central Bank and the numerous bailouts and bailout funds (the LTRO 1 and 2, the EFSF, the ESM and now the OMT) to keep track of.

So for clarity’s sake, I’m going to explain Europe’s problems in simple terms.

The first thing you should know is that European banks, taken as a whole, have far more leverage than their US counterparts. According to the IMF, US banks are leveraged at 13 to 1.

European banks are leveraged at 26 to 1. Put another way, they have $26 in assets for every $1 in equity.

Think of it this way, imagine if had $100K in the bank and you borrowed $2.6 million to buy homes and other items. Do you think you would be in a stable financial condition?

That’s Europe’s banks on the whole.

However, we also know that the IMF only reports based on known assets or the asset levels that the banks admit. How many times in the last few years have we found out that banks were being honest and open about their risk levels?

Never.

So you should use the 26 to 1 leverage level as the minimum. Reality is likely far worse. Which means… European banks are insolvent.

Outside of this, European nations are also bankrupt. I realize that everyone likes to focus on Debt to GDP levels, but the reality is that European banks owe far more when you account for unfunded liabilities.

I know the same is true for the US, but the US’s unfunded liabilities pale in comparison to Europe’s. As far back as 2004, we know that:

Country Debt to GDP Including Unfunded Liabilities
Greece 875%
Spain 244%
Italy 364%
France 549%
Germany 418%
EU as a whole 434%
US 400%

Source: Cato Institute

So, we have a bankrupt banking system in bankrupt countries.

Now for the zinger…

This entire financial system is based on the assumption that European sovereign bonds are still are risk free.

So you have bankrupt nations, selling bonds to insolvent banks, which then use these bonds to leverage up to over 26 to 1 (by the way, Lehman was 30 to 1 when it blew up).

And that’s the ENTIRE European financial system.

I hope this clarifies why Europe is doomed. It is absolutely 100% impossible for Europe to get out of this mess unless the entire union suddenly started growing its GDP at over 10% for a decade.

That will never happen.

My advice to everyone: trust your gut. All of the accounting gimmicks and bailout ideas will never work for the simple fact that the system in Europe is totally broke. The US’s financial system, while problematic (that’s putting it lightly) is nothing compared to how bad Europe is.

I’ve said this before many times, but it cannot be overemphasized… everything I’ve been writing about for nearly a year will still happen. The fact that I was early and we were stopped out of our Euro Crisis trades because the ECB promised “unlimited” bond buying right before the Fed announced QE 3 doesn’t change the ultimate outcome: the EU breaking up and a global financial meltdown.

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.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

 

 

 

 

 

 

 

 

 

 

This Could Be the World’s Largest, Most Toxic Banking System…

As noted earlier in yesterday’s article, the entire European banking and corporate system is over-burdened with debt.

Germany sports a real Debt to GDP of over 200% (this from the former head of the Bundesbank), and the rest of Europe is in even worse shape.

Indeed, Jagadeesh Gokhale of the Cato Institute puts the situation as the following, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”

Suffice to say, no EU country has that kind of money lying around.

Moreover, the argument that the ECB or Federal Reserve could stop this from happening is misguided. True, the Central Banks have managed to prop up the markets for several years now.

So what makes this time different?

Simple: the Crisis coming from Europe will be far, far larger in scope than anything the Fed or Central Banks have dealt with before.

Let me walk through each of these one at a time. We have several facts that we need to remember. They are:

1)   The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).

2)   The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).

3)   Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)

So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.

To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. There are already signs that bank runs are in progress in the PIIGS (Spain has lost 18% of deposits this year alone) and now spreading to France.

Thus, the World’s Central Banks cannot possibly hope to contain the coming disaster. They literally have one of two choices:

1)   Monetize everything (hyperinflation)

2)   Allow the defaults and collapse to happen (mega-deflation)

If they opt for #1, Germany will leave the Euro. End of story. They’ve already experienced Weimar and will not tolerate aggressive monetization.

So even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as the Euro currency would enter a free-fall, forcing the US dollar sharply higher which in turn would trigger a 2008 type event at the minimum.

In simple terms, this time around, when Europe goes down (and it will at some point in the no so distant future) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years.

I’ve said this before many times, but it cannot be overemphasized… everything I’ve been writing about for nearly a year will still happen. The fact that I was early and we were stopped out of our Euro Crisis trades because the ECB promised “unlimited” bond buying right before the Fed announced QE 3 doesn’t change the ultimate outcome: the EU breaking up and a global financial meltdown.

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.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers