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.
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