I wanted to take a moment to address the notion of serious collapse and/or systemic failure.

First off, most people in general tend to be optimists or to generally believe that things will work out fine. So the idea of catastrophe is not something they spend much time thinking about.

Because of this and other factors I’m about to explore, for most investors the notion of systemic failure is virtually impossible to grasp. Most professional traders are usually under the age of 40 (in fact they’re typically in their mid to late 20s). As a result of this, they:

1)   Didn’t experience the 1987 Crash

2)   Have never seen a Crisis that the Fed/ IMF/ etc. couldn’t handle

Let’s add a secondary element to this. Most institutional traders today operate, for the most part, based on trading models. These models, in general, are quantitative and based on correlations and patterns, not qualitative judgments.

This goes a long ways towards explaining why the market has developed such simplistic trading patterns. Consider the “Monday market rally” phenomenon we saw throughout 2009-2010. Or how about the Aussie Dollar/Japanese yen correlation to the S&P 500 we saw throughout much of 2010-2011. As one asset manager put it to me recently, the market has essentially become “one big trade” with virtually all asset classes moving tick for tick relative to each other.

Let us consider the mentality these age demographics and professional working tools engender. In general, both of these factors make for short-term thinking and a lack of qualitative analysis. They also mean that items or developments that exist outside the universe of trading models (most of which are entirely based on post-WWII data), are outside the scope of these traders’ thinking.

This issue doesn’t merely pertain to traders either. Going back 80+ years, there’s never been a time in which the markets didn’t have a backstop in the form of the Fed/ IMF/ or some other entity. No matter the Crisis that erupted, there was always money printing and other monetary policies to calm the storm.

Now, let’s expand out analysis outside of professional traders to include asset managers and other institutional investors, the vast majority of whom are under the age of 50 or so.

Based on this age demographic, we find that there is an entire generation of investment professionals (aged 35-50+) who:

1)   Have never witnessed nor invested during a bear market in bonds

2)   Have never witnessed, nor invested during a credit market collapse

3)   Have never witnessed a secular shift in the global economy

Consequently, the vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.

Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose job it is to manage investors’ money or advise investors on how to allocate their capital.

If this doesn’t worry you, you need to start looking at the actual numbers in the financial system today. Here are just a few worth considering:

1)   US commercial banks currently sit atop $248 TRILLION in derivatives

2)   The US Federal Reserve is now buying 91% of all long-term new US debt issuance (at the same time China and Russia are dumping US bonds)

3)   Japan already spends roughly half of its annual -tax revenues on debt payments and has relied on debt issuance more than tax revenues to fund its budget for four years now (how much longer can this last?)

4)   Europe’s entire banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it failed)

Folks, bad times are coming. It doesn’t matter what the trading programs or “professionals” thinking about it… the math simply doesn’t add up to us having a calm, profitable time in the markets over the next few years. On that note the time to be preparing for what’s coming is now.

If you’re looking for actionable advice on how to play the markets as well as real-world business ideas on how to generate wealth in this tough economy, I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future (both in the capital markets and in the real world economy).

My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

At some point someone will talk… and that’s when things will get interesting.

The last four years have been something of a high-water mark for corruption in the US. Whether it’s Solyndra, Congress’s insider trading, MF Global, the countless pork spending bills from Congress, or any number of the other hundred or so incidents that have made decent ordinary people outraged, we’ve definitely entered a period in which everyone knows the deal: the power elite live by a different set of laws than the rest of us.

A record 64 percent of American adults surveyed by Gallup in a poll released Monday rated the honesty and ethical standards for members of Congress as “low” or “very low.

The question all of us are thinking is “when will this change?” The answer has much to do with the nature of corruption itself. Corruption is only possible if the benefits to the parties engaged in it far outweigh the potential consequences.

However, as soon as the potential consequences become real, that’s when everything changes: people start talking/ confessing, and the corruption begins to come unraveled.

We had a taste of this with Ron Blagovich and Jack Abramoff. We’re going to be seeing more of this in the future as well. And it’s going to be the debt deleveraging that forces it.

Let me explain.

For much of the last three decades, the political process in the US has largely consisted of politicians winning votes by promising various social programs and benefits to voters. Once in office, they then showered their high level donors and corporate sponsors with various goodies and handouts through bills and various no-bid contracts, while throwing voters a bone through the various social programs they promised during their campaigns.

This whole game was made possible by the fact that the US could find the necessary funding to meet the near-term needs for the welfare programs promised to voters and there was enough financial largesse to permit the various handouts to corporate sponsors and other crony capitalists.

However, as the great debt implosion picks up steam globally and politicians are forced to renege of various promised social programs (the money simply won’t be there), this game of “vote for me and I’ll give you these handouts” will end.

When this happens, the crony capitalism and rampant corruption that has come to define American politics will change dramatically. Various parties will find that the benefits of “not talking” will no longer be there and they will try to broker deals with authorities and the general populace by going public about the various shenanigans that have been going on.

Let me put this in even more straightforward terms, once there becomes a very real chance that a Wall Street CEO or member of Congress might go to jail, the confessions are going to start coming fast and furious.

This will have a seismic shift on the lobbying/ crony capitalism/ back-room deals that currently define American politics. That shift is already beginning (note that Goldman Sachs’ CEO hired a defense attorney and Ben Bernanke is trying to present himself as a man of the people).  Also, consider the recent “slip up” by an MF Global executive under oath.

Granted, we’re not yet at the point where people area actually getting nailed for the crimes they’ve committed (these seismic shifts take years), but we are getting to the point that those “in the know” are preparing for future litigation and lesser figures in the corruption game are starting to come forward and occasionally slip up during their testimony.

Do not be mistaken, the time of cleaning house is coming. It’s only a matter of time. And the debt market is going to be what forces it, just as it will force the necessary purging of the rotten banks and the insolvent financial system.

And when that happens, we’ll finally begin to start fresh and build an economy with real sustained growth.

If you’re looking for actionable advice on how to play the markets as well as real-world business ideas on how to generate wealth in this tough economy, I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future (both in the capital markets and in the real world economy).

My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

PS. I am not naïve and do realize that corruption will always exist on some level. I am merely talking about the Fall of Rome-like levels of corruption we are witnessing today.

Graham’s Note: This is an excerpt from my latest issue of Private Wealth Advisory in it, I note that despite a global wave of deleveraging there will be tremendous opportunities to make fortunes for those who are able to think creatively and innovate. To learn more about Private Wealth Advisory and how it can help you grow your portfolio and navigate the coming changes to the global economy and capital markets… Click Here!!!

As noted in yesterday’s article, the developed world will be entering a period of lower global growth for the following four reasons:

1)   Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.

2)   Excessive debt overhang.

3)   A return to more frugal “common sense” spending patterns in the developed world.

4)   Political and Geopolitical uncertainty.

This backdrop is going to engender dramatic changes in the way people choose to spend their money. However, while the “across the board” perspective looks quite bleak, there are going to be truly outstanding opportunities for wealth creation available to those entrepreneurs and businesspeople who are able to think creatively.

The most critical aspects for all businesses going forward are:

1)   Selling an experience, NOT a product.

2)   Respecting your clients with the intention of building a long-term relationship with them.

3)   Using innovation and creativity to navigate shortages of capital.

4)   Passion, hard work, and determination.

Regarding #1, the days in which people will buy things simply for the sake of buying them are over. Having been to trade shows and other similar events since the Depression began, I always noted that those vendors who are offering a “widget” based solely on the idea that people have needed that widget before are going out of business.

However, those businesses that are attempting to create an experience for their clients, are finding that people are still willing to pay good money for something that has a strong emotional impact and/ or will provide them with memories.

I will give you a personal example from a dining experience I had in 2011.

Back in November 2011, my wife and I had dinner at Michel at Tyson’s Corner, one of the most recent restaurants opened by legendary French chef Michel Richard.

The food was exemplary, a kind of French-American bistro gone uber-gourmet. However, the highlight of the night was the “chicken” we had for dessert, one of Richard’s signature, whimsical dishes.

See for yourself.

 This is a meringue, shaped like a hen, filled with luscious ice cream and sitting atop a nest of brittle sugar “straw,” whipped cream, and a pool of caramel syrup.

It was extraordinary. The combination of textures and tastes was beyond anything my wife or I had seen in a dessert. Adding to this explosion of flavors was the fun of eating “chicken” as a dessert food and this was possibly the most memorable dessert of our lives.

Indeed, this was more than just a dessert, it was a marketing tool for the restaurant as a whole: as soon as our order came out, every table around us ordered one too. By the time we left, I counted six other tables having “chicken” for dessert.

In plain terms, we ordered a dessert, but Chef Richard delivered an “experience.” My wife and I laughed and shared many delightful moments as we butchered our “chicken.” Because of this, I didn’t care that the dessert cost $12. In fact, I probably would have paid $17 or more for it and not even batted an eye.

Now, compare this to your average dessert (brownie, sundae, etc) at most restaurants. How often do you find yourself remembering a random dessert you had months ago? From a business perspective, how many times have you found every other table around you ordering a dessert after they see yours?

This is what I mean by selling an experience. It’s no longer about products, it’s about creating memories and emotional experiences that touch people. That’s where the money will be going forward.

I’ll give you another example.

At a recent dinner party I struck up a conversation with a young entrepreneur who had recently attained an MBA from Harvard. One of his classmates was Will Dean, a former British counter-terrorism agent who competed in marathons, triathlons and the like.

Dean was bored with the average fitness course, so he decided to launch Tough Mudder, a 10-12 mile fitness course that is based on the kind of courses and challenges he had to overcome during his training for the British Special forces (we’re talking about 12 foot walls, underground mud tunnels, etc).

The company’s entire start up cost was probably less than $50K: all they had to do was rent a track of land and build and dig the obstacles (walls, tunnels, etc.).

However, people all over the country have lined up in droves for the experience of pushing themselves to the limit at one of these events. The whole thing is like an enormous playground for adults. It challenges you physically, mentally, and emotionally.

And people are willing to pay north of $150 per pop to participate. Spectators have to pay $50 just to watch. Small wonder that the company made $2.2 million in revenues in its first year and $22 million in its second year. That’s $22 million in revenues, from a glorified fitness course, that was launched DURING the current Depression.

This is what I meant by innovation and creativity finding pockets of wealth. Will Dean saw a niche in the fitness industry (an event that was more challenging and less monotonous than traditional marathons and other fitness tests). He then moved to capitalize on that niche with minimal risk by keeping his start-up costs to a minimum. And today he’s sitting atop a $20 million business with numerous corporate sponsors.

You can learn more about Tough Mudder here:

http://toughmudder.com/

Dean’s story shows, in no uncertain terms, that if you’re able to think creatively about pre-existing industries, you can make an absolute fortune, even during times of severe economic contraction.

The above two examples concern generating value for entrepreneurs. My final story pertains to seeking out wealth generating opportunities from an investing standpoint.

The financial markets today are heavily if not completely reliant on Central Bank intervention. We now have a time in which virtually every traditional asset class under the sun is overvalued and susceptible to a crash (this is even true for Gold if we get another 2008 event).

With that in mind, investors are going to need to look outside of the capital markets for opportunities to generate returns. Indeed, I fully believe that performing assets (things like lead mines, shopping malls or wood mills) will potentially offer better returns than stocks for instance.

I’ll give you a final example.

A friend of mine is a master baker. Having trained both in the US and in France, he’s now at the level that Yale and other large organizations hire him as a consultant to design their breads and pastries.

Recently my friend told me that he had decided to launch a new bakery (he sold his last one several years ago). Given his reputation, skill, and earlier success (he’s run several very successful bakeries in the past) he would have little if any trouble raising capital for the business.

However, rather than seeking out loans from a bank or other financial entity that would want a claim on his private assets in return, he’s chosen to raise capital from private investors. And he’s offering a 10% yield on all loans.

This is a heck of a return relative to most savings accounts (0.15% at best) or even Treasuries (the 30-year yields less than 4%). And he’s only looking to need the money for 1-2 years before paying it back.

Thus we have a serial entrepreneur, with a nationally recognized talent, offering investors a 10% yield on loans made to fund his latest venture. Having seen his spreadsheets and projections, even by extremely conservative estimates his business should be producing close to $500K in EBITDA within the first three years.

As I said before, there are opportunities to generate value in the real economy today, outside of the volatile and manipulated capital markets. With that in mind, all investors should devote some time over the coming months to seeking out investments outside of what’s on Yahoo! Finance and CNBC. I fully believe some of the greatest opportunities available today will be in the real economy, NOT seen on a stock screen.

If you’re looking for actionable advice on how to play the markets as well as real-world business ideas on how to generate wealth in this tough economy, I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future (both in the capital markets and in the real world economy).

My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

Graham’s Note: This is an excerpt from my latest issue of Private Wealth Advisory in it, I detail the global impact that debt deleveraging will have as well as which industries will thrive and present the best investment opportunities in this environment. To learn more about Private Wealth Advisory and how it can help you grow your portfolio and navigate the coming changes to the global economy and capital markets… Click Here!!!

The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. Jeremy Grantham, an asset manager I respect, believes we’ll see global growth at 2% over the next seven years. Personally I believe it could be even lower than that.

The reasons for this slow down are myriad but the most important are:

1)   Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.

2)   Excessive debt overhang.

3)   A return to more frugal “common sense” spending patterns in the developed world.

4)   Political and Geopolitical uncertainty.

Regarding #1, Europe is the most glaring situation. According to Eurostat, between 2004 and 2050, the number of people of non-working age relative to those of working age will increase dramatically. In the EU in 2004 there were approximately four people of working age (19-64) for every person of non-working age (65 and older). By 2050, this number will have dropped to only two people of working age for every person of non-working age.

Over the same time period, Europe will also see a tripling in people considered to be “elderly” (80 or older) from 18 million to 50 million.

These numbers alone go a long ways towards explaining why Europe is facing a budgetary Crisis of epic proportions. All of these retirees will be expecting various Government/ private sector outlays whether they are pensions, healthcare, or various other social services.

These issues are, for the most part, left out of most current analysis of Europe’s debt crisis. Indeed, while the vast majority of commentators are well aware of Europe’s official Debt to GDP ratios, when we include unfunded liabilities such as the Government outlays or social programs I detailed above, it is clear that the situation in Europe is far, far worse than is commonly known.

Jagadeesh Gokhale of the Cato Institute presents the situation with an interesting data point, “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.”

The situation is not quite as profound in the US, though we will be seeing a dramatic increase in the age dependency ratio (the number of people of retired age relative to those of working age) between 2010 and 2030 as the Baby Boomers retire: in 2010 there were 22 people aged 65 and older for every 100 people of working age. By 2030, this number will have grown to 37 people aged 65 and older for every 100 people of working age.

However, while the ratios are not as poor in the US as in Europe, the unfunded liabilities the US faces are truly astronomical. USAToday puts the number at $61.6 trillion in unfunded obligations, an amount equal to roughly $528,000 per US household.

However, Japan makes both the EU and the US look tame.  In 2009, Japan already had 35 people aged 65 or older for every 100 people of working age. However, by 2050, this number will have swelled to an incredible 73 people aged 65 or older out of every 100 people of working age. This among other things sets Japan as a ticking time bomb, which we will assess in another article.

The EU, Japan, and the US comprise $36 trillion of the global $64 trillion economy (roughly 57%). So this debt overhang will have a profound impact on global growth particularly in the developed world going forward.

This debt overhang will result in several developments from a political perspective. For one thing, the social contract between Governments and retirees will have to be re-negotiated, as the money promised by the former to the latter simply isn’t there.

Governments will try to deal with this in one of two ways: by raising taxes on high- income earners/ any other potential avenue for raising revenues and by reneging on the promises made to retirees.

The impact these moves will have on the political landscape will be profound. Among other things we will be seeing more protests both at the ballot box and in the streets (Greece’s riots are a taste of what’s to come for much of Europe and eventually the US).

To picture how a cutback in social programs will impact the US populace, consider that in 2011, 48% of Americans lived in a household in which at least one member received some kind of Government benefit. Over 45 million Americans currently receive food stamps. And 43% of Americans aged 65-74 are Medicare beneficiaries.

Consider the impact that even a 10% reduction in these various programs would have on the US populace.

Make no mistake, we are heading into a Crisis that will make 2008 look like a joke. The money for all of these various programs (both in Europe and the US) simply isn’t there. So this time around we’re going to see stock crashes AS WELL as civil unrest, food shortages, and the like.

If you’re looking for actionable advice on how to play the markets I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future.

My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

Well the Fed disappointed as I stated it would. How anyone could be surprised by this is beyond me. The Fed was admitting that the consequences of QE rendered it less “attractive” as an option as far back as May 2011.

Moreover, the last six months have shown the Fed to be relying heavily on verbal intervention rather than direct monetary intervention. Every FOMC meeting (and any time the market takes a dive) some Fed official steps forward and promises that the Fed stands ready to help if needed.

The reasons for this are three fold:

1)   Why bother with monetary intervention when you can get the same effect from verbal intervention?

2)   The Fed is too politically toxic now to simply unveil a massive new monetary scheme without a Crisis hitting first.

3)   The Fed is well aware of the consequences of QE (higher food and gas prices) and while it focuses on CPI as the measure of inflation, the political pressure engendered by higher costs of living are certainly on the Fed’s radar.

In plain terms, the bar for more QE is set much, much higher than the vast majority of analysts realize. The reason is that the Fed can no longer simply prime up the printing presses if the economy takes a dip.

We’ve seen this clearly in the last two Fed FOMC statements, in which the Fed downgraded its view of the US economy to posting “modest growth” (Fed speak for next to none) and then offered a “highly accommodative stance,” (Fed speak for “we’re out of ideas but can always hit the ‘print’ button”) as way of dealing with this.

Let’s cut the BS here. The Fed has maintained a more than highly accommodative stance for three years now and U-16 unemployment, food stamp usage, home prices, and virtually every other economic metric indicate that they’ve done little to boost the US economy in any meaningful way. QE has and always will be about boosting asset prices in the hope that the Fed can stimulate a recovery by getting the S&P 500 to some level.

The only problem with this is that people don’t engage in financial speculation to pay their bills. Incomes have and always will be the single most important metric for gauging consumer strength. And as the below chart from Morgan Stanley shows, the Fed’s policies of the last few years have done nothing to boost incomes (unless you work on Wall Street).

This chart goes a long way towards explaining the current political environment in which the Fed is about as popular as the bubonic plague. If you read headlines stating “Fed Gave Trillions to Banks” and you’ve been laid off and are living off food stamps, your blood pressure might tend to rise.

And you might tend to vote based on that.

Folks, the reality is that the Fed’s hands are tied. That’s why they keep issuing these innocuous policies (keeping interest rates low until 5056 or some insane future date) without actually doing anything. They know that additional easing means inflation soaring, which makes the Fed that much more a target of popular outrage.

So if you’re counting on the Fed propping the market up throughout 2012 as it did in 2011, you may be in for a rude awakening in the coming months. Every day that we get closer to the 2012 Presidential election, the bar for more QE goes higher and higher. Truly unless we get some kind of major Crisis, the Fed won’t be doing much of anything.

So let the traders run their “end of the month” games this week. But don’t be surprised if stocks start to take a dive in early February.

If you’re looking for actionable advice on how to play the markets I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future.

My research has been featured inRollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

Phoenix Capital Research

The financial world seems to have adopted the idea that things will somehow work themselves out in Europe. I don’t know if it’s because people don’t like to think about negative things or if someone sent out a memo to everyone that math doesn’t exist or count in Europe, but somehow investors seem to have decided that as long as we think positive thoughts everything will be fine.

The reality is that every day, Europe is approaching a debt implosion.

First off, European sovereigns need to roll over 740 billion Euros’ worth of debt this year. The brunt of this is going to fall on the ECB which has become the de facto bond market for Europe: the ECB was intervening on an almost daily basis during the second half of 2011… and things still nearly cratered.

Indeed, with the prospect of default and 50%+ haircuts now on the table, private bondholders (hedge funds in particular) are going to be much less willing to pony up the cash for EU sovereign debt. So this means the ECB will be stepping up to the table a lot more.

The problem with this is that Germany, (the de facto sovereign backstop for the EU) is not going to tolerate rampant monetization. Thus far, Germany has been willing to permit the ECB to implicitly monetize various EU sovereigns’ bonds rather than face the damage that a series of sovereign defaults would cause to German banks.

However, at some point, the market will force the issue of whether or not the ECB is going to be monetizing everything or not. Germany, having already seen the ultimate outcome of monetization (Weimar) has already made it clear that it will not tolerate this.

Which means that at some point, push will come to shove and either the defaults come fast and furious as the ECB steps back, or the ECB monetizes everything and Germany walks.

Whichever option occurs, the European financial system as we know it will collapse.

Mind you, we’re only considering the sovereign debt issue here. Outside of this, European banks are facing their own Crisis.

To whit, within the next 11 months…

• Irish banks need to roll over 25% of their outstanding debt.
• Spanish banks need to roll over 20%+ of their outstanding debt.
• Italian banks need to roll over 15%+ of their outstanding debt.
• French banks need to roll over 15% of their outstanding debt.

Rolling over debt isn’t a problem under healthy market circumstances… but when you’re posting Lehman-like leverage levels (EU banks in general are leveraged at 26 to 1)… and sitting atop hundreds of billions of Euros’ worth of EU sovereign debt (much of which has declined dramatically in value), convincing investors to lend you money isn’t easy.

Indeed, European banks don’t even trust each other at this point: interbank liquidity has all but dried up. What are the odds they’ll convince outside investors to load up on their debt? Will the ECB be monetizing bank debt too?

In simple terms, the metaphoric “bill” is coming due for European sovereigns and banks this year. The world continues to believe that somehow money will magically fall from the sky and solve this situation, but the reality is that the ECB is the only thing standing between Europe and complete collapse. And every day that the ECB expands its balance sheet buying worthless sovereign bonds, it comes that much closer to blowing itself up.

Do not believe the consensus or the hype: Europe is not fine, not even close. And those investors who are investing based on the idea that it is are just like those who bought in late 2007/ early 2008.

If you’re looking for actionable advice on how to play the markets I suggest checking out myPrivate Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future.

My research has been featured inRollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

To learn more about Private Wealth Advisory and how it can help you navigate the markets successfully…

Click Here Now!!!

Graham Summers

Chief Market Strategist

Phoenix Capital Research

The market is rallying… again… on hopes of a Greek deal… and QE 3.

This is the very same game we’ve been playing for over two years now. Greece is broke. Everyone knows it. The Greeks know it. Greek politicians know it. EU politicians know it. Even the IMF knows it. The only people who don’t seem to “get it” are stock investors that invest for one reason only:

1)   The hope of more juice/ intervention from Governments/ Central Banks

That one sentence dictates ALL market action today: the hope of a stupid policy (spending more money), which has failed to solve anything. It’s amazing that this is what the markets have become. What’s even more amazing is that people are actually paid (large salaries) to engage in this stupid behavior.

Honestly, how many times have we heard rumors that Greece was solved? How many “officials” claimed a deal was close? How many investors bought based on these outright lies?

Moreover, it’s not as though the actual proposals that do get announced are worth the paper they’re written on. A 50% haircut on private bondholders of Greek debt accomplishes nothing (Greece’s Debt to GDP would still be north of 120%). The only way Greece gets back to some semblance of solvency is a complete and total wipe out of all debt other than that held by the Troika (though they should take a hit as well).

This whole mess will end terribly. Greece will default. The default will be bigger than 50% (likely 70-80%). Italy, Spain, and other EU members will default as well. This will happen. There is no question about it.

However, right this week, the market is waiting for more juice from the Fed’s Jan 25 FOMC and the hope of a Greek deal out of Europe. For that reason stocks have gone almost straight up for the last two weeks.

By the look of things we’ve got a messy bearish rising wedge here. We’re now testing resistance in the form of the upper trendline.

What’s truly interesting here is that the Emerging Market space has been lagging US stocks in a big way on this move: a marked difference from the market action that preceded QE lite and QE 2.

The same goes for commodities and other “Risk On” assets, which are not even close to exceeding recent highs:

So… are stock investors smarter than everyone else… or are they just gunning the market on low volume yet again regardless of reality? We’ll find out this week once we get past the Fed FOMC and Europe’s decision on Greece.

If you’re looking for actionable advice on how to play the markets I suggest checking out my Private Wealth Advisory newsletter.

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

Investors are getting strangely bullish.

If you’ll recall, the entire European banking system nearly imploded just 8 weeks ago. Things were so dire that we even had a coordinated Central Bank intervention among other measures to try and prop things up over there.

The Powers That Be have since launched the Long-Term Refinancing Operation or LTRO: essentially a program through which European banks can borrow from the ECB at just 1% for up to a year. The whole thing is essentially just another liquidity handout and it’s telling that those firms which do borrow from the LTRO are parking almost all the borrowed cash at the ECB soon after.

And while the LTRO has been beneficial in terms of some liquidity concerns, it’s done nothing to address Europe’s solvency issues. Case in point, European banks in general are leveraged at 26 to 1. At that level even a 4% drop in asset prices wipes out all equity.

In this environment, the ability to borrow more money doesn’t accomplish anything from a balance sheet perspective. It’s simply a matter of common sense: you cannot solve a debt problem with more debt.

But since the ECB cannot directly monetize EU bonds without Germany pulling out of the EU, and since the German rules Euro-bonds as illegal, the LTRO is about the best the ECB can do in these circumstances.

What’s truly concerning however, is the fact that investors have piled into risk assets based on the LTRO (and misguided hopes of more QE) as though none of these issues exist.

Folks, just a few months ago, no less than the IMF, Bank of England, and others warned that we were facing a global meltdown and the worst financial crisis in history. Do you really think a few liquidity programs have solved all of this?

Moreover, if a huge round of QE or other stimulus money were coming, shouldn’t commodities be exploding higher just as they did before QE 2 in 2010?

Gold is still in a downward channel well under resistance:

Agricultural commodities, which were the first asset class to predict QE 2 are struggling too.

These charts don’t scream, “more easing is coming” to me. Which makes the extreme bullishness of investors all the more disconcerting. Any time a trade grows too lopsided, there’s the opportunity for a sharp reversal. Right now, investors are piling into risk assets in anticipation of more QE from the Fed. But none of the fundamental issues that nearly took Europe down have been resolved. And the Fed has made it clear that it’s finding QE less and less “attractive” since as far back as May 2011.

The reality is that the EU in its current form is finished. There is simply no way we can muddle through the debt deleveraging that will take place. And when the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.

Many people see their portfolios go up in smoke with this. But you don’t have to be one of them. In fact, I’ve laid out a series of steps every investor can take to prepare for the coming European Collapse.

Many people see their portfolios go up in smoke with this. Don’t be one of them. The time to prepare your portfolio for the collapse is NOW before it starts.

I can show you how.

Indeed, while 99.9% of investors lost their shirts in 2008, my subscribers actually MADE MONEY.

We did the same thing during the first round of the Euro Crisis in 2010.

And so far we’ve locked in 34 straight winners in the last five months… including gains of 12%, 15% even 18%.

In fact we haven’t closed a SINGLE LOSING TRADE in the second half of 2011.

We just opened several new positions last week, all of them designed to profit beautifully from the coming collapse of the EU.

To find out what they are… and  take action to insure that the coming disaster will produce profits NOT pain for you and your portfolio…

Click Here Now!!!

Graham Summers
Chief Market Strategist
Phoenix Capital Research

I continue to see commentators claiming QE 3 is just around the corner. I don’t see how this is possible because all of the Fed’s excuses for more QE are no longer valid.

First off, interest rates are already at or near record lows. So the Fed cannot argue that it needs to lower rates. Moreover, it’s not like lowering rates via QE 1, QE lite, QE 2, and Operation Twist 2 did much to help the US housing market. So QE 3 can’t be presented as a solution to housing.

Secondly, the economic data coming out of the US has been massaged to the point of not looking so bad. So the Fed cannot use the “economy is collapsing” argument this time either. And it’s not as though the public isn’t totally aware that QE 2 did next to nothing for the economy.

Indeed, the Fed spent $600 billion on QE 2 and had at most three months’ of improved economic data as a result (QE 2 was announced in November and the US economy rolled over in February 2011). The public is well aware of this as well as the fact that QE 2 saw inflation exploding higher.

Despite end-of-year decline, 2011 food prices highest on record – UN

Global food prices declined in December, but the overall annual average was the highest ever on record, the United Nations Food and Agriculture Organization (FAO) reported today.

Last month, FAO’s Food Price Index level was 211 points – 27 points below its peak in February. The decline was driven by sharp falls in the international prices of cereals, sugar and oils due to a productive harvest coupled with a slowing demand and a stronger United States dollar.

However, despite the steady decline in prices during the second half of the year, the Index overall averaged 228 points in 2011 – the highest average since FAO started measuring international food prices in 1990. The second highest average occurred in 2008 at 200 points.

http://www.un.org/apps/news/story.asp?NewsID=40925&Cr=food&Cr1=prices

Food prices hit all time highs in 2011, resulting in numerous revolutions and riots throughout the world. The increased cost of living also drew a lot of negative attention to the Fed from the US populace. So it’s not like the Fed can use the “QE will stimulate the economy” argument anymore.

The final argument for QE is that Obama needs the economy to recover to win the 2012 election. This argument completely overlooks the fact that Bernanke and the Fed are now politically toxic.

If the Fed were not in trouble politically, why would it:

1)   Stage town hall meetings

2)   Open up to Q&A sessions

3)   Have “humanizing’ articles written about Bernanke in major media publications.

4)   Moving towards more transparency on its forecasts and projections

These are all defensive moves. And the Fed wouldn’t be making them if it wasn’t under pressure. Which makes it all the more unlikely that QE 3 would help Obama. The public is already outraged at the Fed moves. And QE 3 would send inflation through the roof.  How exactly would this benefit Obama’s Presidential campaign?

In the end, the bar for QE 3 is much, much higher than most people think. The days in which the Fed could do whatever it wanted are over. And there simply isn’t a decent argument for QE 3 at this time.

In the end, it’s not as though QE 3 would do much for the market anyway. Look at the recent coordinated Central Bank intervention in November… the benefits lasted less than a month.

And somehow QE 3 is going to send stocks through the roof? Give me a break. Look at earnings. They’ve been a disaster, and investors are pulling their funds from the market en masse.

On that note, I truly believe we’re on the verge of the next round of the Great Crisis. The credit and bond markets are already starting to predict another 2008 event. Only this time things will be even worse because the Fed has already used up its tools into combating the First Round of the Crisis.

Many people see their portfolios go up in smoke with this. Don’t be one of them. The time to prepare your portfolio for the collapse is NOW before it starts.

I can show you how.

Indeed, while 99.9% of investors lost their shirts in 2008, my subscribers actually MADE MONEY.

We did the same thing during the first round of the Euro Crisis in 2010.

And so far we’ve locked in 34 STRAIGHT WINNERS in the last five months… including gains of 12%, 15% even 18%.

In fact we haven’t closed a SINGLE LOSING TRADE in the second half of 2011.

We just opened several new positions last week, all of them designed to profit beautifully from the coming collapse of the EU.

To find out what they are… and  take action to insure that the coming disaster will produce profits NOT pain for you and your portfolio…

Click Here Now!!!

Graham Summers
Chief Market Strategist
Phoenix Capital Research

For months I’ve been warning that when push come to shove Germany will bail on the Euro.

The reasons for this are simple:

1)   The German public and court system won’t stand for QE from the European Central Bank

2)   Issuing Euro bonds goes against the German constitution

3)   Germany has its own share of domestic problems with a REAL Debt to GDP ratio north of 200% and its banks needing tens of billions of Euros in new capital

All of these factors lead me to believe that Germany would refuse to be the ultimate backstop for the EU. You could also see Germany preparing the legislation to allow it to walk if it wanted to:

German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.

http://www.bloomberg.com/news/2011-11-11/german-cdu-is-set-to-back-motion-allowing-euro-member-exit-1-.html

The resolution reads:

“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”

I believe Germany implemented this legislation for itself… not some other country. And by the look of things, Germany’s getting a lot closer to walking.

BBK Thiele: Current ECB Government Bond Buys Violate Treaty

The European Central Bank’s government bond buys are a violation of the Maastricht Treaty, Bundesbank board member Carl-Ludwig Thiele said Monday.

Thiele’s comments depart form the official Bundesbank line. While the German central bank has warned that larger purchases may be illegal, it has said that current purchases do not violate the prohibition of monetary financing.

Thiele recalled that the decision to buy Greek government bonds had found no support from German ECB Governing Council members. “Germany was over-ruled on the Council,” Thiele said.

“These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state,” Thiele said in a speech text provided by the Bundesbank.

https://mninews.deutsche-boerse.com/index.php/bbk-thiele-current-ecb-government-bond-buys-violate-treaty?q=content/bbk-thiele-current-ecb-government-bond-buys-violate-treaty

Bundesbanker says euro zone must forget idea of QE

Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis, Bundesbank board member Carl-Ludwig Thiele said on Monday.

Thiele called for euro zone countries to exercise fiscal discipline and said that boosting the resources of Europe’s rescue funds would buy time to address the bloc’s debt woes.

“But lasting confidence cannot be bought with money alone,” he added in the text of a speech for delivery in Hamburg.

“One idea should be brushed aside once and for all – namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank.”

http://www.sharenet.co.za/news/Bundesbanker_says_euro_zone_must_forget_idea_of_QE/d02483d59237b6eb2c6ae98f17b3e1ce

These are extremely strong statements coming from the Bundesbank. Remember, Merkel is the German political leader, but she doesn’t control the purse strings to Germany: the German courts and Bundesbank do. And if they don’t support more bailouts, there’s nothing Merkel can do.

We see similar warnings coming out of German CEOs:

Linde CEO says Germany should mull euro exit-paper

Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.

“I fear the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in,” Linde’s chief executive Wolfgang Reitzle was quoted as saying.

“If we do not succeed in disciplining crisis countries, Germany needs to exit,” said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.

http://in.reuters.com/article/2012/01/15/eurozone-linde-idINDEE80E07Z20120115

I firmly believe Germany is already makings moves to prepare for precisely this outcome. No EU member state is going to submit to German authority regarding fiscal policies. Indeed, virtually every EU legislation passed in the post-WWII era was aimed at limiting Germany’s power.

And Germany isn’t going to simply prop up the EU out of the goodness of its heart. As I mentioned before, Germany has its own domestic issues to deal with. And when push comes to shove, Germany will look after its own interests rather than Greece’s or Italy’s.

With that in mind I believe it’s only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults.

When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.

Many people see their portfolios go up in smoke with this. Don’t be one of them. The time to prepare your portfolio for the collapse is NOW before it starts.

I can show you how.

Indeed, while 99.9% of investors lost their shirts in 2008, my subscribers actually MADE MONEY.

We did the same thing during the first round of the Euro Crisis in 2010.

And so far we’ve locked in 34 STRAIGHT WINNERS in the last five months… including gains of 12%, 15% even 18%.

In fact we haven’t closed a SINGLE LOSING TRADE in the second half of 2011.

We just opened several new positions last week, all of them designed to profit beautifully from the coming collapse of the EU.

To find out what they are… and  take action to insure that the coming disaster will produce profits NOT pain for you and your portfolio…

Click Here Now!!!

Graham Summers
Chief Market Strategist
Phoenix Capital Research