The following is an excerpt from a recent issue of Private Wealth Advisory. In it I reveal that Germany has in fact already implemented a working group to assess the cost of Greece leaving the EU. Moreover, numerous multinationals are now preparing for this outcome as well.

If you’ve looking for investment ideas on how to profit from this collapse (the gains will be even bigger than those produced during the 2008 Crash) Private Wealth Advisory can show you how. We already have a handful of EU Crisis Trades open, all of which are moving up fast.

To find out more about Private Wealth Advisory and how it can help you navigate the coming crisis… Click Here Now!!!

I believe we are at a major turning point for the financial system.

For nearly four years, the entire financial system has been held together (just barely) by extraordinary interventions on the part of the world’s Central Banks.

These interventions have resulted in capital fleeing the markets (hence the low trading volume), moral hazard becoming the norm and a marketplace in which hope of more intervention has a greater impact than the actual intervention itself.

The problem with this, from day one, was that eventually we would reach the point at which additional intervention no longer had any effect. This would come about due to:

1)   Investors having grown so accustomed to Central Bank intervention that they no longer respond to additional measures.

2)   Central Banks facing a problem so massive that it is beyond their power to stop it.

Few people understand just how close we came to #2 early this past summer. Indeed, there was a brief period there, where we were literally on the verge of systemic collapse courtesy of the Spanish banking system imploding.

It all started with the collapse of Spain’s Bankia in May 2012. Bankia was formed by merging seven smaller bankrupt banks. In early May 2012 Bankia had to be nationalized. This was a potential Lehman moment that kicked off a massive bank run and resulted in the ECB putting the entire Spanish banking system on life support to the tune of over €300 billion Euros (the entire equity base for every bank in Spain is only a little over €100 billion).

At that time, the Spanish Ibex (stock market) broke out of its 20-year bull market and nearly took down all of Europe with it.

The one thing that held the system together was ECB President Mario Draghi promising that he may provide unlimited buying (which would give Spanish banks a chance to dump their assets in exchange for cash to fund liquidity needs… they were in that bad a shape). That pulled the system back from the edge and things rallied.

The ECB did indeed announce an unlimited bond buying program on September 6 2012. The Federal Reserve then announced an open-ended QE program a week later on September 13 2012.

And that’s when everything changed.

Instead of blasting off into the stratosphere, stocks fell soon after this announcement. That was the first sign that the game has changed: after every other announced program in the past four years, the markets fell briefly but then rallied hard and didn’t look back.

Not this time.

And so we experienced the first item I listed above (investors grew accustomed to Central Bank intervention that they no longer respond to additional measures).

We now are also experiencing #2 (Central Banks are facing a problem so massive that it is beyond the power to stop it). That problem is the fiscal cliff which Bernanke himself has admitted that the Fed cannot contain. “I don’t think the Fed has the tools to offset [the fiscal cliff].”

This is Ben Bernanke, arguably one of the most powerful if not the most powerful man in the Western financial system, admitting that the Fed doesn’t have the tools to address an issue. This has never happened before. For every single issue that has arisen going back to 2006, Bernanke claimed he had things under control.

Not this time.

So, we have investors now so accustomed to Central Bank intervention that even the promise of unending intervention doesn’t appease them… at the exact same time that an issue so great (the fiscal cliff) appears that even the Fed has admitted it cannot manage it.

No one is picking up on this because everyone is focusing on Black Friday and the Santa rally which I mentioned in last issue. But things have changed. And they have changed in a big way.

And no one has a clue how to deal with what’s coming.

If you’re an active investor looking for investment ideas on how to play this, I’ve recently unveiled a number of back-door plays designed to produce outsized gains from Europe’s next leg down. They’re available to all subscribers of my Private Wealth Advisory newsletter.

To find out more about Private Wealth Advisory (a bi-weekly investment advisory that focuses on the global economy and outlines which investments will do best in various environments)…

Click Here Now!

Best Regards

Graham Summers

Spain’s financial system is at truly apocalyptic levels.

If you’ve been reading me for some time, you know that Spain has already experienced a bank run equal to 18% of total deposits this year alone (another story the mainstream media is avoiding). However, what you likely don’t know is that an on annualized basis, Spain has experienced portfolio and investment outflows GREATER THAN 50% OF ITS GDP.

To give this number some context, Indonesia only saw outflows equal to 23% of its GDP during the Asian Financial Crisis. Spain is experiencing more than DOUBLE this.

I’ve long averred that Spain will be the straw to break the EU’s back. By the look of things this is not far off. The country’s regional bailout fund has only less than €1 billion in funding left. As the below chart shows, this will barely make a dent in the regions’ debt problems:

Indeed, things are far far worse than is commonly know. Valencia for instance owes its pharmacies over €500 million. In some areas there is no longer insulin.

In the region of Andalusia some government workers haven’t been paid in eight months and are working for free while begging for food.

And Catalonia is pushing to secede from Spain entirely. Indeed, its pro-secessionist leader, President Artur Mas, just won the most recent election. And over 1.5 million of Catalonia’s 7.5 million inhabitants turned out for an independence rally in September.

Again, Spain as a country is finished. Things are so bad that British Airways (many wealthy Brits vacation in Spain) is putting a contingency plan for SPAIN to leave the Euro.

Worst of all, it is clear EU and Spanish leaders have no clue how to deal with any of this. Their latest plan is for the country to cut the balance sheets of three nationalized banks by 50% sometime in the next five years. How will they do this? By dumping their toxic property assets into a “bad bank.”

The idea here is that somehow someone will want to buy this stuff. Spain already had to postpone the launch of the bad bank by a month because no one wanted to participate in it (despite the mainstream media claiming that the idea was popular which is untrue).

So, here we have Spain proposing that it can somehow unload a ton of garbage debts onto “someone” even though there is no “someone” to buy them. And the whole point of this exercise is to meet conditions so that Spain would qualify for another €40 billion in aid.

€40 billion in aid... when  Spain has experienced portfolio and investment outflows of more than €700 billion.

Indeed, things are so bad that the ECB has put the entire Spanish banking system on life support to the tune of over €400 billion Euros. To put this number into perspective, the entire equity base for every bank in Spain is only a little over €100 billion.

Oh, and the country needs to issue over €200 billion in debt next year.

If you’re an active investor looking for investment ideas on how to play this, I’ve recently unveiled a number of back-door plays designed to produce outsized gains from Europe’s next leg down. They’re available to all subscribers of my Private Wealth Advisory newsletter.

To find out more about Private Wealth Advisory (a bi-weekly investment advisory that focuses on the global economy and outlines which investments will do best in various environments)…

Click Here Now!

Best Regards

Graham Summers

Meanwhile, as Greece continues to distract the markets, France, the other primary prop for the EU besides Germany, is now experiencing an economic contraction on par with that of 2008-2009.

Indeed, France’s September’s auto sales numbers were worse than those of September 2008 (the month Lehman collapsed). The country’s PMI reading is back to April 2009 levels. Even the French Central Bank, which would hold off as long as possible before unveiling bad news, has announced the country will re-enter recession before year-end.

Over the past few weeks, an extraordinary cry of alarm has risen from chief executives who warn that the French economy has gone dangerously off track. In an interview to be published on Nov. 15 in the magazine l’Express, Chief Executive Officer Henri de Castries of financial-services group Axa (CS:FP) warns that France is rapidly losing ground, not only against Germany but against nearly all its European neighbors. “There’s a strong risk that in 2013 and 2014, we will fall behind economies such as Spain, Italy, and Britain,” de Castries says.

On Nov. 5, veteran corporate chieftain Louis Gallois released a government-commissioned report calling for “shock treatment” to restore French competitiveness. And on Oct. 28, a group of 98 CEOs published an open letter to Hollande that said public-sector spending, which at 56 percent of gross domestic product is the highest in Europe, “is no longer supportable.” The letter was signed by the CEOs of virtually every major French company. (The few exceptions included utility Electricité de France, which is government controlled.)

            http://www.businessweek.com/articles/2012-11-14/french-ceos-help

We get additional confirmation that France is in big trouble from its partner in propping up the EU, Germany.

German Finance Minister Wolfgang Schaeuble has asked a panel of advisers to look into reform proposals for France, concerned that weakness in the euro zone’s second largest economy could come back to haunt Germany and the broader currency bloc.

Two officials, speaking on condition of anonymity, told Reuters this week that Schaeuble asked the council of economic advisers to the German government, known as the “wise men”, to consider drafting a report on what France should do…

“The biggest problem at the moment in the euro zone is no longer Greece, Spain or Italy, instead it is France, because it has not undertaken anything in order to truly re-establish its competitiveness, and is even heading in the opposite direction,” Feld said on Wednesday.

“France needs labour market reforms, it is the country among euro zone countries that works the least each year, so how do you expect any results from that? Things won’t work unless more efforts are made.”

http://uk.reuters.com/article/2012/11/09/uk-germany-france-economy-idUKBRE8A80MN20121109

France will be a bigger problem than Spain or Italy for the EU?!?! That is one heck of an admission from a German official. If France deteriorates then it’s game over for the EU.  The current bailouts mean Germany is already on the hook for an amount equal to 30% of its GDP. If France tanks the amount will balloon astronomically. At that point it’s game over.

If you’re an active investor looking for investment ideas on how to play this, I’ve recently unveiled a number of back-door plays designed to produce outsized gains from Europe’s next leg down. They’re available to all subscribers of my Private Wealth Advisory newsletter.

To find out more about Private Wealth Advisory (a bi-weekly investment advisory that focuses on the global economy and outlines which investments will do best in various environments)…

Click Here Now!

Best Regards

Graham Summers

The following is an excerpt from a recent issue of Private Wealth Advisory. In it I reveal that Germany has in fact already implemented a working group to assess the cost of Greece leaving the EU. Moreover, numerous multinationals are now preparing for this outcome as well.

If you’ve looking for investment ideas on how to profit from this collapse (the gains will be even bigger than those produced during the 2008 Crash) Private Wealth Advisory can show you how. We already have a handful of EU Crisis Trades open, all of which are moving up fast.

To find out more about Private Wealth Advisory and how it can help you navigate the coming crisis… Click Here Now!!!

The US Presidential election is over and the world has woken up from the political rhetoric and propaganda to realize that the problems it faced before November 6 are still in place. Indeed, one could very well make the case that the US Presidential Election distracted most people from the fact that things were in fact getting markedly worse in the financial system.

Let’s start with Europe.

Greece has managed to get through its latest budgetary crisis (a €5 billion bond redemption due the Friday before last) by the skin of its teeth. In this case, the ECB permitted Greece to redeem asset-backed-securities (read: total and complete garbage) in exchange for funds.

This deal occurred commensurate with the usual promised budgetary cuts on the part of Greek politicians (none of which will be met as usual) along with the Greek populace rioting in Athens. This has been and will remain the deal in Greece right up until someone cuts off funding. At that point Greece will leave the EU, default or both.

Timing this will be quite difficult, but Germany has already given us clues that it is preparing for a Greek exit.

         Debt crisis: German finance ministry examines cost of Greek exit

A special working group, led by deputy finance minister Thomas Steffen, is working on scenarios in the case that Greece is forced to withdraw from the 17-nation bloc, the Financial Times Deutschland reported on Friday.

“Colleagues are making calculations about the financial consequences [of an exit] and are considering how a domino effect on other euro member states might be prevented,” it quoted a finance industry source as saying.

The ten-member working group, which is made up of officials from various finance ministry departments, wanted to be fully prepared for a possible “negative scenario,” the source added.

Last week, German finance minister Wolfgang Schaeuble said it would be “stupid” not to make contingency plans in case Europe’s rescue efforts failed, adding that the debt crisis must not become a “bottomless pit” for Germany.

http://www.telegraph.co.uk/finance/financialcrisis/9496397/Debt-crisis-German-finance-ministry-examines-cost-of-Greek-exit.html

This news story received almost no coverage from the mainstream media, despite its import.

Firstly, this is the first time Germany has officially moved to prepare for a Grexit. Germany has certainly threatened to kick Greece out, but it has never actually taken formal, official steps to prepare for this.

Since August 24 2012, it has.

There is good reason for this and we get clues from German Finance Minister Schauble’s “bottomless pit” comments in the above article.

Schauble made this comment once before back in February 2012 before the second Greek bailout:

Schaeuble pointed out that German opinion polls show a majority of Germans are willing to help Greece.

“But it’s important to say that it cannot be a bottomless pit. That’s why the Greeks have to finally close that pit. And then we can put something in there. At least people are now starting to realize it won’t work with a bottomless pit.”

Schaeuble said Greece would be supported “one way or another” but warned the country needed to do its homework on improving its competitiveness and hinted it might have to leave the euro zone to do that.

http://www.reuters.com/article/2012/02/12/us-germany-greece-idUSTRE81B05N20120212

Note that in reference to Greece being a bottomless pit, Schauble was already hinting that Greece may leave the EU even before the second Greek bailout occurred.

The fact that Schauble has now formed a working group to measure the impact of a Grexit while again referring to Greece as a “bottomless pit,” shows clearly that he is about done with propping up Greece… and for good reason.

Currently Germany is on the hook for €751 billion in EU backstops. The German economy is only €2.5 trillion. Put another way, Germany is on the hook for an amount equal to of its GDP.

Anyone who believes Germany will actually pony up this cash is dreaming. The single largest transfer payment in history was the German Marshall Plan, which was $13 billion at a time when US GDP was just $200 billion.

This constituted a transfer of slightly over 6% of US GDP.

That is the single largest transfer in history… and Germany is going to bailout Europe by an amount equal to over FIVE TIMES this?

This is simply not going to happen. Germany will play ball with the EU by signaling its efforts to keep things together, but the German’s have in fact been implementing a contingency plan for nearly one year now.

I broke this story in February 2012. I haven’t seen it mentioned anywhere else. I wrote:

…Germany has put into place a contingency plan that would permit it to leave the Euro if it had to.

As a brief recap, this contingency plan consists of:

1)    Legislation that would permit Germany to leave the Euro but remain a part of the EU.

2)    The revival of its Special Financial Market Stabilization Funds, or SoFFin for short, to which Germany has allocated 480€ billion Euros to in the case of a banking crisis (the fund will also permit German banks to dump their euro-zone government bonds if needed).

This occurred back in February. And Germany now has a formal working group assessing the cost of a Grexit? The EU is on borrowed time. I mentioned earlier this year that German tourism companies have put contingency plans for the return to the Drachma in the contracts for their Greek subsidiaries. However, now even large US-based multinationals are implementing contingency plans for a Grexit.

The list includes JP Morgan, Bank of America Merrill Lynch, Visa, PricewaterhoursCoopers, Boston Consulting Group, Juniper Networks, and others.

Buckle up, things are about to get ugly.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.

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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers

This is going to be a very special holiday season. The reason? It’s the last hurrah before things get very very ugly.

Just off the cuff, you need to know that:

1)   China, the EU, and the US (comprising over 50% of Global GDP) are in recession already. The EU has already announced this. Look for the formal announcements concerning the US and China to hit the airwaves next year.

2)   Some data points concerning these nations indicate that this recession will be on par with that of 2007-2008.

A rising tide raises all ships. Similarly, a sinking tide lowers everything. Bear this in mind as a global economic contraction will have severe implications for everything.

Beyond the global economy, we now face sovereign and banking crises in Europe.

Regarding the sovereign crisis, the whole issue boils down to where the money will come from. The ECB has pumped the system full of liquidity to help sovereigns meet their funding needs, but unless real capital shows up (not piling just more cheaper debt onto of old debt).

The ECB cannot make capital appear. And the various bailout funds (the EFSF and ESM) all need Spain and Italy, neither of which have any money to spare, to contribute 30% of their funding. So they’re not an option either.

This leaves Germany, which couldn’t pick up the tab for the EU even if it tried. If Germany were to agree to fund things as they are (assuming nothing worsens in the EU), it would amount of over 30% of its GDP.

Never in history has one country issued a transfer of that amount to another. The single largest transfer in history (on a GDP basis) was the German Marshall Plan, which represented only slightly over 6% of US GDP (hat tip to Dr Malmgren for pointing this out).

So forget about Germany writing the check. There will be political machinations and games played to maintain the house of cards that is the EU… but when push comes to shove, Germany will leave before it foots the bill for everything.

As for the EU’s banking crisis, again the matter is one of capital. The EU banking system has over $46 trillion assets making it nearly four times larger than that of the US. And while US leverage levels are just 13 to 1 (this is across the board, the large Wall Street banks are far more levered), the EU banking system is leveraged at an astounding 26 to 1.

To put this in context, Lehman Brothers was leveraged at 30 to 1 when it went bust. Moreover, at a leverage level of 26 to 1, even a 4% decrease in asset values wipes out your entire capital base.

So, unless EU banks raise over $1-2 trillion in capital in the near future (they won’t), they’ll go the way of Lehman. This is just basic common sense. It doesn’t matter how many bailout funds or crazy schemes the EU bureaucrats come up with, unless someone ponies up actual capital to fund the banks and bring down their leverage levels, they’ll got bust.

All of this stuff (a global economic contraction, EU sovereign crisis, and EU banking crisis) will be hitting the fan in 2013.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.

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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers

With most of Wall Street on vacation, those few traders manning their desks are taking advantage of the low volume to push the market sharply higher. This, combined with a large move up by the Euro has pulled the entire risk trade up forcing the US Dollar lower.

This move was to be expected on some levels. Since 2002, there has been a rally from just before Thanksgiving until the second week of December. This year is shaping up to replay this move. Stocks and other risk assets were certainly oversold from the preceding week and needed a breather.

However, from a larger perspective there is no shortage of truly horrible developments in the world. EU budget talks failed to accomplish anything. This comes on the heels of failed Greece debt talks from last week (there is another meeting next week on this).

Meanwhile, France has lost its AAA credit rating, Spain’s bad bank plan has been dropped due to lack of interest. And then there is Cyprus Portugal and soon to be Italy’s issues to deal with.

At the end of the day, the whole issue in the EU boils down to whether or not Germany will foot the bill for everything. The fact of the matter is that it won’t. If Germany were to agree to fund things as they are (assuming nothing worsens in the EU), it would amount of over 30% of its GDP.

Never in history has one country issued a transfer of that amount to another. The single largest transfer in history (on a GDP basis) was the German Marshall Plan, which represented only slightly over 6% of US GDP.

So forget about Germany writing the check. There will be political machinations and games played to maintain the house of cards that is the EU… but when push comes to shove, Germany will leave before it foots the bill for everything.

And then of course there is the fiscal cliff in the US: the single largest tax hike increase in US history (on a % of GDP basis). Ignore the media’s spin on this, no one has a clue how to fix the problem, largely because math is not partisan and we’ve been living beyond our means for far too long to fix this with one deal.

The reality is that what we are witness today is the collapse of the welfare states of the developed world. The real solutions (defaults both sovereign and on social spending plans) are completely unsavory from a political perspective, so politicians will do all they can to avoid what actually needs to happen.

In simple terms, the great debt implosion has begun. It will likely take several years to complete, but what’s coming will make the 2008 debacle will seem like a picnic.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.

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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers

We hope all of you are enjoying a day of family and friends with good food, even if you don’t necessarily celebrate this holiday!

Thank you for reading!

Over the last week I’ve introduced the concept of collateral: the little known basis for the entire financial system. We’ve also addressed why any EU sovereign default would bring about an epic meltdown as EU bonds, particularly those of Spain and Italy are the collateral underlying hundreds of trillions of Euros worth of trades for EU banks.

Again, the most important issue for the financial system is the search for high quality collateral.

Indeed, it is the search for high grade collateral that has caused such periodic spikes in Treasuries, German Bunds, French sovereign bonds, and Japanese bonds (all of these have yielded 0% or even negative yields in the last five years). Big banks are moving away from PIIGS bonds into safer havens.

This is also why the Fed isn’t touching Treasuries with QE3 and why it won’t touch short-term Treasuries with Operation Twist 2 (this program sees the Fed selling short-term Treasuries to buy long-term Treasuries): the Fed wants to keep as much good quality collateral in the system as possible (long-term Treasuries are problematic because institutions know it’s highly likely the US will default within the next 30 years).

However, even this move is problematic because much of the Treasury market is locked up with governments both foreign and domestic.

Again, this is why clearinghouses (which oversee the derivatives markets) are now allowing Gold as collateral: they know that eventually sovereign bonds will be worth less or even worthless. And they want access to their clients’ Gold for when this happens.

With that in mind, the countries that will ultimately be considered safe havens when the BIG collapse starts are those with the largest Gold reserves.

I’m not going to get into the issue of whether this Gold exists still (many commentators claim that Central Banks have in fact sold much of this) as I have no way of proving it. The key issue is that the financial elite are now trying to get their hands on Gold as collateral because they realize that sovereign paper based collateral from the EU will soon be worth much less or even worthless.

It is no coincidence that Germany floated the idea of accepting other EU nation’s Gold in exchanged for bailouts back in May 2012 when Europe teetered on the brink of collapse:

Europe’s debtors must pawn their gold for Eurobond Redemption

Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.

The German scheme — known as the European Redemption Pact — offers a form of “Eurobonds Lite” that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble.

http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html

It’s also not coincidental that Germany is performing an audit of its Gold holdings today, either.

Bundesbank Says NY Fed to Help Meet Gold Audit Request

The Bundesbank said the Federal Reserve Bank of New York will help it meet auditing requirements related to its gold reserves that were demanded by Germany’s Audit Court.

“We have been in discussions with the Federal Reserve Bank of New York about the Bundesbank’s holdings of gold,” the Bundesbank said yesterday in a letter to the German parliament’s budget committee. “The discussions have been fruitful and the Federal Reserve has expressed a commitment to work with the Bundesbank to explore ways to address the audit observations, consistent with its own security and control processes and logistical constraints.”

The agreement is part of a compromise between the German central bank and the Audit Court, which has called on the Bundesbank to take stock of its gold holdings outside Germany, saying it has never verified their existence.

The Bundesbank distributed the letter to reporters after board member Carl-Ludwig Thiele and the Audit Court’s head Dieter Engels testified to budget committee lawmakers in the lower house of parliament in Berlin.

http://www.bloomberg.com/news/2012-10-25/new-york-fed-to-help-bundesbank-meet-gold-audit-requirements.html

I realize that the last few essays have been pretty dense. So I’ll summate everything here:

1)   The #1 issue for the financial world is too little quality collateral backing too many trades.

2)   The search for good collateral has lead investors to seek high grade sovereign bonds (Treasuries, German bunds, French bonds, Japanese bonds) as a safe haven between 2008-the present.

3)   The folks who monitor the derivatives market (the large clearing houses) realize that sovereign bonds are not going to be a safe haven for much longer and so are looking at Gold as a new form of collateral for trades (this has NEVER been the case before).

4)   Germany and other nations will be increasingly looking to audit and accumulate their Gold holdings.

Keep all of this in mind at all times going forward. This is the BIG picture for the financial world.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse: the collateral crunch that will ensue when Spain or Italy defaults (they have €1.78 trillion and €1.87 trillion in external debt respectively) will be absolutely massive. At a minimum it will be multiples of times larger than what followed Lehman’s bankruptcy.

If you’re looking for someone who can help protect yourself from this mess and even profit from it, I can show you how. 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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers

The following is an excerpt from a recent issue of Private Wealth Advisory. We are reprinting it here because no one is addressing the real reason why Europe is such a huge problem for the financial system. You need to know this.

If you’ve looking for investment ideas on how to profit from this collapse (the gains will be even bigger than those produced during the 2008 Crash) Private Wealth Advisory can show you how. We already have a handful of EU Crisis Trades open, all of which are up.

To find out more about Private Wealth Advisory and how it can help you navigate the coming crisis… Click Here Now!!!

Last week I outlined the issue of collateral and how it is the most critical issue in the financial system today. For a review of that article, click here now.

If you want further evidence that the financial elites are already preparing for a default from Spain and a collateral crunch, you should consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) have ALL begun accepting Gold as collateral.

Gold as Collateral Acceptable for Margin Cover Purposes

From 28 August 2012 unallocated Gold (Loco London) will be accepted by LCH.Clearnet Limited (LCH.Clearnet) as collateral for margin cover purposes.

This addition to acceptable margin collateral will be subject to the following criteria;

Available for members clearing OTC precious metals forwards (LCH EnClear Precious Metals division) or precious metals contracts on the Hong Kong Mercantile Exchange. Acceptable to cover margin requirements for all markets cleared on both House and ‘Segregated’ omnibus Client accounts.

http://www.lchclearnet.com/member_notices/circulars/2012-08-21.asp

CME Clearing Europe to Accept Gold as Collateral on Demand

CME Clearing Europe will accept physical gold as collateral, extending the list of assets it’s prepared to receive as regulators globally push more derivatives trading through clearing houses.

CME Group Inc. (CME)’s European clearing house, based in London, appointed Deutsche Bank AG (DBK), HSBC Holdings Plc and JPMorgan Chase & Co. as gold depositaries. There will be a 15 percent charge on the market value of gold deposits and a limit of $200 million or 20 percent of the overall initial margin requirement per clearing member based on whichever is lower, Andrew Lamb, chief executive officer of CME Clearing Europe, said today.

“We started with a narrow range of government securities and are now extending that,” Lamb said in an interview today. “We recognize there will be a massive demand for collateral as a result of the clearing mandate. This is part of our attempt to maintain the risk management standard and to offer greater flexibility to clearing members and end clients.”

http://www.bloomberg.com/news/2012-08-17/cme-clearing-europe-to-accept-gold-as-collateral-on-demand-1-.html

Is it coincidence that this began ONLY when the possibility of a sovereign default from Greece or Spain began? Nope. This actions show that the large clearinghouses see the writing on the wall (that defaults are coming accompanied by a mad scramble for collateral) and so are moving away from paper (sovereign bonds) into hard money.

The reason?

They know that when Spain defaults the system will be rocked even harder than it was with Lehman in 2008. And they are doing everything they can get access to real collateral (Gold) when paper collateral (Spanish bonds) becomes worthless.

Remember, history has shown us time and again that defaults come in waves. So when Spain defaults, it will be only a matter of time before the rest of the PIIGS, the UK, Japan, and then the US do as well.

However, for now Spain is the biggest issue. As a result of this, Treasuries, Japanese bonds, German bunds and even French sovereign bonds remain attractive to the big banks as collateral… for now.

Indeed, it is the search for high grade collateral that has caused such periodic spikes in Treasuries, German Bunds, French sovereign bonds, and Japanese bonds (all of these have yielded 0% or even negative yields in the last five years). Big banks are moving away from PIIGS bonds into safer havens.

This is also why the Fed isn’t touching Treasuries with QE3 and why it won’t touch short-term Treasuries with Operation Twist 2 (this program sees the Fed selling short-term Treasuries to buy long-term Treasuries): the Fed wants to keep as much good quality collateral in the system as possible (long-term Treasuries are problematic because institutions know it’s highly likely the US will default within the next 30 years).

However, even this move is problematic because much of the Treasury market is locked up with governments both foreign and domestic.

Again, this is why clearinghouses (which oversee the derivatives markets) are now allowing Gold as collateral: they know that eventually sovereign bonds will be worth less or even worthless. And they want access to their clients’ Gold for when this happens.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.

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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers

The following is an excerpt from a recent issue of Private Wealth Advisory. We are reprinting it here because no one is addressing the real reason why Europe is such a huge problem for the financial system. You need to know this.

If you’ve looking for investment ideas on how to profit from this collapse (the gains will be even bigger than those produced during the 2008 Crash) Private Wealth Advisory can show you how. We already have a handful of EU Crisis Trades open, all of which are up.

To find out more about Private Wealth Advisory and how it can help you navigate the coming crisis… Click Here Now!!!

This is not going to be your usual investment newsletter.

This week I am going to devote this entire issue to explaining how the global financial system really works. Before we delve into things, I have to warn you in advance that what follows will be both extremely dense as well as extremely worrisome.

I am doing this because you need to know the real risks being posed to your wealth today. However, in order for you to understand this, you first need to understand how the financial system really works. Over 99% of people, including investment professionals do not understand what I am about to write. But I can assure you, that before this issue is done, everything that’s happened in the world since 2007 will make a lot more sense.

So let’s buckle up and get started.

Everything that has happened since 2007, every Central Bank move, ever major political decision regarding the big banks, every trend, have all been focused solely on one issue.

That issue is collateral.

What is collateral?

Collateral is an underlying asset that is pledged when a party enters into a financial arrangement.  It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.

You no doubt are familiar with this concept on a personal level: any time you take out a bank loan the bank wants something pledged as collateral should you fail to pay the money back. In the case of property, the property itself is usually the collateral posted on the mortgage. So if you fail to pay your mortage, the bank can seize the home and sell it to recoup the losses on the mortgage loan (at least in theory).

In this sense, collateral is a kind of “insurance” for any financial transaction; it is a way that the parties involved mitigate the risk of their deal not working out.

As many of you know, our entire global financial system is based on leverage or borrowed money. Collateral is what allows this to work. Without collateral, there is no borrowed money. And without borrowed money, money does not enter the financial system.

In this sense, collateral is the “reality” underlying the “imaginary” or “borrowed” component of leverage: the asset is real and can be used to back-stop a proposed deal/ trade that has yet to come to fruition.

On a consumer level, our bank deposits (cash), homes, and other assets are the collateral pledged when we borrow money from a bank to finance something. This applies to everyone in the US all the way up to the multi-billionaire bracket.

How Larry Ellison Actually Funds His Lavish Lifestyle

One of the mysteries surrounding Larry Ellison is how he can afford so many mansions, islands, yachts and planes, all while retaining his shares in his company.

Yes, the Oracle CEO is one of the richest men in the world, worth over $30 billion. Yet he sells only small amounts of stock under a schedule stock-sale plan. And last I checked, yacht builders don’t take Oracle stock for payment.

Now we have some clues as to how Ellison funds his acquisitive lifestyle.

According to Oracle’s proxy, filed this month, Ellison has pledged 139 million shares “as collateral to secure certain personal indebtedness, including various lines of credit.” In other words, he’s got over $4.2 billion worth of stock pledged for personal loans.

http://www.cnbc.com/id/49194482/How_Larry_Ellison_Actually_Funds_His_Lavish_Lifestyle

On a corporate level, companies pledge various assets as collateral for their corporate loans. For manufacturing firms, this might be the actual steel inventory they own. For property companies, it’s portions of their real estate portfolios.

And for financial firms, at the top of the corporate food chain, it’s sovereign bonds.

Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.

Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.

The “hundreds” of trillions of Dollars of trades stems from a 2004 SEC ruling in which the SEC ruled that broker-dealers with capital bases above $5 billion (think Goldman, JP Morgan, etc) could increase their leverage above previously required levels while also abandoning market to market valuation methods (a methodology through which a security was priced at the value that a market participant would pay for it).

So, after the 2004 ruling, large broker dealers were permitted to increase their leverage levels dramatically. And because they could value their trades at whatever price their in-house models chose (what are the odds that these models were conservative?), the broker-dealers and large Wall Street banks are now sitting on over $700 trillion worth of derivatives trades.

Now, every large bank/ broker dealer knows that the other banks/dealers are overstating the value of their securities. As a result, these derivatives trades, like all financial instruments, require collateral to be pledged to insure that if the trades blow up, the other party has access to some asset to compensate it for the loss.

As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.

When you realize this, the entire picture for the Central Banks’ actions over the last five years becomes clear: every move has been about accomplishing one of two things:

1)   Giving the over-leveraged banks access to cash for immediate funding needs (QE 1, QE 2, LTRO 1, LTRO 2, etc)

2)   Giving the banks a chance to swap out low grade collateral (Mortgage Backed Securities and other crap debts) for cash that they could use to purchase higher grade collateral (QE 1’s MBS component, Operation Twist 2 which lets bank their long-term Treasuries and buy short-term Treasuries, QE 3, etc).

By way of example, let’s first consider Greece.

Lost amidst the hub-bub about austerity measures and Debt to GDP ratio for Greece is the real issue that concerns the EU banks and the EU regulators: what happens to the trades that are backstopped by Greece sovereign bonds?

Remember:

1)   Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.

2)   Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.

Regarding #1, the ECB had just permitted EU nations to dump over €1 trillion worth of sovereign bonds onto its balance sheet in exchange for immediate financing needs via its LTRO 1 and LTRO 2 schemes dated December 2011 and February 2012.

So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.

So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not having to put up new collateral on their trade portfolios.

Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.

Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.

Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.

Now, Greece was always the small player in this mess. It’s entire sovereign bond market is a mere €300 billion.

Spain and Italy, by comparison, have €1.78 trillion and €1.87 trillion in external debt respectively.

I do not have an exact figure for how much of the derivatives market uses Spanish and Italian sovereign bonds as collateral, but I can create an estimate using the US bank data I have available.

In the US, we know that the top four banks have over $222 trillion in derivatives exposure with just $7 trillion in total assets. So the leverage here is roughly 31 to 1.

Using this as a ballpark estimate for derivatives leverage, it is very possible that Spain and Italy’s sovereign bonds are pledged as collateral for well over $100 trillion worth of derivatives trades ($1.78 trillion X 31 + $1.87 trillion X 31).

This is why Spain is dragging its feet about asking for a bailout: the mess of trying to sort out the collateral issues for €1.78 trillion in collateral that is backstopping what is likely tens of TRILLIONS of Euros’ worth of trades is capable of causing systemic failure.

This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.

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. Already three of our picks are up more than 5% in the last week.

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

Click Here Now!

Graham Summers