Month: March 2012

Mar

2012

Germany is Now Openly Engaging In Monetary Policies Against the ECB… What’s Next?

While the mainstream financial media and 99% of investors continue to believe that Germany will align itself with the EU, we’ve been pounding the table Germany will in fact look after its own interests rather than the EU’s and that it might in fact leave the Euro temporarily.

We’ll start with German Finance Minister Wolfgang Schauble, who was hinting that the EU was off-track in its policies and that Germany was focusing on a “political union” NOT a “monetary union” as far back as November 2011.

Wolfgang Schauble admits euro bail-out fund won’t halt crisis

Europe’s “big bazooka” bail-out fund is not ready and won’t stem the debt crisis that on Tuesday pounded Italy and the European Central Bank (ECB), admitted Wolfgang Schauble, Germany’s finance minister.

http://www.telegraph.co.uk/finance/financialcrisis/8924462/Wolfgang-Schauble-admits-euro-bail-out-fund-wont-halt-crisis.html

This is a pretty strong admission from the finance minister of the country that Europe looks to as a financial backstop. And the following is even more disconcerting for the future of the Euro:

Seeing in Crisis the Last Best Chance to Unite Europe

MR. SCHÄUBLE said the German government would propose treaty changes at the summit of European leaders in Brussels on Dec. 9 that would move Europe closer to the centralized fiscal government that the currency zone has lacked. The ultimate goal, Mr. Schäuble says, is a political union with a European president directly elected by the people.

“What we’re now doing with the fiscal union, what I’m describing here, is a short-term step for the currency,” Mr. Schäuble said. “In a larger context, naturally we need a political union.”

Critics say the spending cuts German leaders have demanded from other countries are hurting growth across the Continent, in the process making debts only harder to repay. And his proposals to give the European Commission far-reaching powers to enforce budgetary discipline have been likened by skeptics in Britain to an invasive new “super state.” Even some euro supporters fear that Mrs. Merkel and Mr. Schäuble are talking about long-term changes while panicked investors and practiced speculators are tearing the euro to pieces right now.

“There is a limited transition period where we have to manage the nervousness on the markets,” Mr. Schäuble said. “If it is clear that by the end of 2012 or the middle of 2013 that we have all the ingredients for new, strengthened and deepened political structures together, I think that will work.”

He sees the turmoil as not an obstacle but a necessity. “We can only achieve a political union if we have a crisis,” Mr. Schäuble said.

http://www.nytimes.com/2011/11/19/world/europe/for-wolfgang-schauble-seeing-opportunity-in-europes-crisis.html?_r=1&pagewanted=2

Note that Schauble repeatedly emphasizes the goal of a “political union,” NOT a “fiscal union” or “monetary union.” Indeed, his one reference to a “fiscal union” is in the “short-term,” while stressing that in a “larger context” the EU needs a “political union.”

Since Schauble’s statements, Germany has also reactivated its Sonderfonds Finanzmarktstabilisierung – Special Financial Market Stabilization Funds, or SoFFin for short.

The SoFFin is essentially Germany’s emergency bailout fund for times of Crisis. It was created in October 2008 to help the German financial system get through the 2008 Collapse by allowing German banks to dump toxic mortgage assets and other items into the fund so they could clear their balance sheets.

Once things improved, SoFFin was essentially put on hold in December 2010. But in the last three months, Germany has brought it back. And it’s brought it back with one very crucial difference:

Germany Approves Bank Bailout Bill

The SoFFin will give up to €400 billion ($524.24 billion) in guarantees for banks and provide up to €80 billion for recapitalization. The fund, which for the first time will accept euro-zone government bonds, will be operational until Dec. 31 2012.

http://online.wsj.com/article/SB10001424052970204573704577184362262410868.html?mod=googlenews_wsj

This is the mother of all bombshells in Europe and no one is talking about it. Germany basically just announced that it will allow German banks to DUMP euro-zone government bonds off their balance sheets. It also announced it will provide up to 400 billion euros in backstops and 80 billion euros for bank recapitalization.

So Germany will put up 480 billion to backstop its own financial system. Just like that. This is the same country that has to be dragged kicking and screaming into raising any additional funds to defend the EU.

By the way, Germany has also passed legislation that would permit it to leave the Euro but remain in the EU if it chose to. And now, after months of butting heads with ECB officials regarding monetary policy, Germany is taking monetary matters into its own hands to counteract the ECB’s moves.

Germany launches strategy to counter ECB largesse

The plans have major implications for monetary union, dashing hopes in Southern Europe that Germany might accept a few years of mini-boom at home to help lift the whole system off the reefs.

Andreas Dombret, a key board member of the Bundesbank, said the body would be given powers to check “excessive credit growth” and impose “maximum leverage ratios” to nip economic overheating in the bud.

The Bundesbank will be able to impose “counter-cyclical capital buffers” on lenders, and use “macro-prudential haircuts” in the securities markets. It is understood that the menu of new tools will include limits on the loan-to-value on mortgages along the lines of those used in Hong Kong and other Asian states.

The new framework – introduced by German government in a draft law this week – is partly inspired by the Bank of England’s new system but it also has a German twist…

German house prices rose 5.6pc last year after a decade of stagnation. Officials in Frankfurt are watching the property data closely, fearing that Germany may succumb to the sort of housing bubble that engulfed the Club Med bloc in the early years of EMU.

“The Bundesbank does not want to be blamed for making the same mistakes as central banks in Ireland and Spain where they did not address asset bubbles early enough,” said Bernhard Speyer from Deutsche Bank.

The German authorities are in effect preparing a form of quasi-monetary tightening to offset ECB largesse…

“If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits,” said Dr Speyer.

“One way to do that is to allow higher inflation in Germany but I don’t see any willingness in the German government to tolerate that, or to accept a current account deficit.

http://www.telegraph.co.uk/finance/financialcrisis/9174661/Germany-launches-strategy-to-counter-ECB-largesse.html

It’s now clear that Germany has been hoping its austerity measures and new fiscal demands would result in weaker EU members leaving the Euro. However, that plan has not worked out. So Germany has begun enacting a “Plan B” namely, putting up a firewall around its financial system.

It’s too soon for us to know how this game of chess will conclude. But our feeling is that Germany is putting all of these measures in place in case it needs to leave the Euro at some point. The catalyst(s) that might provoke this are the upcoming French, Irish, and Greek elections, which could see a resurgence in leftist, anti-austerity measures in these countries.

Most important here is the French election, due in four weeks. where the current frontrunners are Nicolas Sarkozy (Angela Merkel’s right hand man in trying to take control of the EU) and super-socialist François Hollande.

A few facts about Hollande:

1) He just proposed raising tax rates on high-income earners from 41% to 75%.

2) He wants to lower the retirement age to 60.

3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.

Currently polls have Sarkozy and Hollande securing the top slots in the first round of the election on April 22. This would then lead to a second election in May which current polls show Hollande winning (this has been the case in all polls for over two months).

However, there’s now another leftist wildcard coming into the mix: communist Jean-Luc Mélenchon who is now taking 11% in the polls (he was at 5% last month). And Mélenchon’s primary campaign message? Rejecting austerity measures completely via “civic uprising.”

Now, Mélenchon could end up taking votes away from Hollande therby allowing Sarkozy to win. It’s difficult to say how this will play out. But if Sarkozy loses to either of these candidates, then the EU in its current form will crumble as Germany loses its principle ally in pushing for fiscal reform and austerity measures

Thus Germany is facing the following:

1) A potential change in the political climate to one of anti-austerity measures and fiscal prudence in the EU.

2) Tensions with the ECB which continues to flood the markets with liquidity… liquidity that is flowing into Germany and kicking up inflation.

Hence Germany’s ‘Plan B”: firewall its banking system and lay the groundwork for leaving the Euro if it has to.

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Phoenix Capital Research

Mar

2012

Three Political Wildcards That Could Upset the Bailouts in the Europe

Much of the fiscal and monetary insanity that has come out of the EU over the last two years can be summated by one of my central global theses:

European policies are determined by politics, NOT economics.

What I mean by this is that economic realities do not determine political decisions as they do in the US. One can see this quite clearly in the manner in which EU leaders have pushed for bailouts and austerity measures despite the clear evidence that doing so has actually exacerbated the EU’s problems and failed to help those countries on the receiving end (Greece, Ireland, Portugal).

With that in mind, we must acknowledge that EU leaders will continue on their current path of more bailouts until one of two things happens:

1) The political consequences of maintaining this strategy outweigh the benefits

2) The European markets force EU leaders’ hands

Regarding #1, this process is already well underway for those countries needing bailouts. Investors must be aware that the Governments of Ireland, Portugal, Spain, and Italy have all watched/are watching the Greece situation closely.

Moreover we can safely assume that the topic of defaulting vs. asking for bailouts in return for austerity measures has been discussed at the highest levels of these countries’ respective Governments (more on this in a moment).

These discussions are also underway at those countries that are providing bailout funds. German politicians have won major political points with German voters for playing hardball with Greece. As I’ve stated before Germany may in fact be the country that ends up walking if EU continues down its current path of bailout madness.

With that in mind, there are three key political developments coming up.

1) Ireland’s upcoming referendum

2) Greece’s upcoming election

3) France’s upcoming elections (April and May)

Regarding #1, Ireland will be staging a referendum regarding the new fiscal requirements of the EU sometime before October. While the actual date has yet to be set, Ireland will likely stage its referendum after the French elections in (April and/or May… more on this in a moment).

Ireland has already staged two referendums which Irish citizens voted AGAINST until various concessions were made. This time around the primary concession being discussed is potential debt forgiveness (the country definitely needs it). Indeed, according the Boston Consulting Group, Ireland needs to write-off some €340 billion in debt just to make its debt levels “sustainable.”

So Ireland could easily be a wildcard here. The country is already in recession. So we need to monitor developments there as this referendum could go very, very wrong for the EU.

However, the BIG election of note is that of France where the current frontrunners are Nicolas Sarkozy (Angela Merkel’s right hand man in trying to take control of the EU) and super-socialist François Hollande.

A few facts about Hollande:

1) He just proposed raising tax rates on high-income earners from 41% to 75%.

2) He wants to lower the retirement age to 60.

3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.

Now, Mélenchon could end up taking votes away from Hollande thereby allowing Sarkozy to win. It’s difficult to say how this will play out. But if Sarkozy loses to either of these candidates, then the EU in its current form will crumble as Germany loses its principle ally in pushing for fiscal reform and austerity measures.

Finally, let’s not forget Greece where politicians are now pushing for an election on April 29 or May 6 (the Second Bailout was passed based on new parliamentary elections being held soon after).

This could be yet another wildcard as it is around the time of the French elections, which Greek politicians will be watching closely. Remember, the key data points regarding Greece’s economy:

1) A 20% economic contraction over the last five years

2) Unemployment north of 20% and youth unemployment over 50%

3) Unfunded liabilities equal to 800% of GDP courtesy of an aging population and shrinking working population (which is shrinking all the time as youth leave the country in search of jobs)

These facts will not play out in a victory for “pro-bailout” politicians. So the Greece deal, which is supposed to solve Greece’s problems, could actually be in danger based on a change in politics.

Remember, as stated before, politics determine European policies, not economics. And Europe now appears to be shifting towards a more leftist/ anti-austerity measure political environment. If this shift is cemented in the coming Greek, French, and Irish elections/ referendums, then things could get ugly in the Eurozone VERY quickly.

With that in mind, I believe that the European markets will force EU leaders’ hands sometime in the May-June window. Indeed, we have a confluence of negative factors (monetary, political, technical, etc.) hitting during that window of time, which is unlike anything I’ve ever seen before. And unlike the 2008 Crisis, the Central Banks won’t be able to rein this collapse in.

Why? Because Europe’s banking system is $46 trillion in size. And the Fed and ECB are already leveraged to the max having spent all their ammunition combating the Crisis this far.

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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.

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2) which banks to avoid

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Graham Summers

Chief Market Strategist

Mar

2012

Europe’s Bazooka Will Fire Blanks… Good Luck Killing the Crisis With That

Europe continues to take a page out of Hank Paulson’s “Crisis Combat” booklet, by unveiling one monetary “bazooka” after another. Obviously, EU leaders didn’t notice that Paulson’s “bazooka” completely failed to stop the 2008 Crash.

Even more strangely, they keep pulling out bazooka after bazooka, first unveiling the EFSF which was supposed to raise €1 trillion but failed to raise even €10 billion without having to intervene in its own bond auctions.

Then came the ESM, which was supposed to be another mega-bailout fund, which as before, is having trouble raising funds. After all, if one bailout fund is a dud, why would launching another fix anything?

Oh, and I forgot to mention that both bailout funds will be leveraged… which Europe obviously doesn’t have enough of already (the EU banking system as a whole is leveraged at 26 to 1. Lehman Brothers was at 30-to-1 when it imploded).

Indeed, you don’t even need to look at the math (though the math is impossible and makes the premise of “saving Europe” even more insane) to know that this can’t work. Which is why the idea that the EU as a whole can create mega-bailout funds to put up a “firewall” around its banking system is outright absurd.

The EU is 27 countries. Of these, only 17 use the Euro. And these countries have a long, bloody history of political conflicts with one another. We’ve already seen hints of this with Germany calling Greece a “bottomless hole” to which Greece responded by portraying German politicians as Nazis.

Spain, France, and the others aren’t exactly the best of friends either. And as their respective economies collapse at varying speeds (even Germany posted negative QoQ GDP for 4Q11), political tensions will rise even more rapidly.

So in the end, Europe’s bazookas will be firing blanks (assuming they even can fire at all, which their respective efforts to raise capital call into doubt). Which brings me back to one of my central themes for Europe: that you cannot band together such disparate economies and cultures in one monetary union and expect it to work.

Again, this is common sense. And when we add in the math, it becomes even more clear just how insane these political proposals are.

Consider Germany, for instance. As I’ve noted for months now, that country sports a REAL Debt to GDP of 200% (from former Bundesbank officials’ own admissions) when you include unfunded liabilities. And Germany is somehow going to bailout Italy or Spain (which both sport REAL Debt to GDPs north of 300%)?!?

Again, the whole thing is absurd. The entire European financial system is just one big house of cards, propped up by the hopes that the ECB can hold this thing together.

But it can’t. Europe isn’t the US. And the ECB isn’t the Federal Reserve. What I mean is that you can maybe fool investors into believing that a financial system is fixed if you’re only dealing with one country and one Central Bank. But when you’re dealing with 17+ countries, many of which have their own national Central Banks, and you’re trying to save this system with a larger regional Central Bank (the ECB) the whole thing is impossible.

Indeed, because of its interventions and bond purchases, ¼ of the ECB’s balance sheet is now PIIGS debt AKA totally worthless junk. And the ECB claims it isn’t going to take any losses on these holdings either. No, instead it’s going to roll the losses back onto the shoulders of the individual national Central Banks.

How is that going to work out? The ECB steps in to save the day and stop the bond market from imploding… but the minute it’s clear that losses are coming, it’s going to roll its holdings back onto the specific sovereigns’ balance sheets.

So… PIIGS debt is essentially just a monetary “hot potato” that the various Central Banks in Europe are tossing around? And this is supposed to save Europe? Good luck with that.

On that note, I fully believe the EU is heading into a Crisis in the May-June window of time. We have a confluence of negative factors (monetary, political, technical, etc.) hitting during that window of time, which is unlike anything I’ve ever seen before. And unlike the 2008 Crisis, the Central Banks won’t be able to rein this one in.

Why? Because Europe’s banking system is $46 trillion in size. And the Fed and ECB are already leveraged to the max having spent all their ammunition combating the Crisis this far.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

In fact, I’m just unveiled several trades to profit from the coming Collapse of Europe in last Wednesday’s issue. Already ALL of them are up. And we’re just getting started.

These reports outline:

1) how to prepare for bank holidays

2) which banks to avoid

3) how much bullion to own

4) how much cash is needed to get through systemic crises

5) how much food to stockpile, what kind to get, and where to get it

And more…

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

Mar

2012

Graham Summers’ Free Weekly Market Forecast (a tenuous balance)

The markets will likely try to rally this week based on the following items:

1) End of quarter performance gaming

2) Last week’s weak stock performance

3) Angela Merkel signaling that Germany will increase the pointless “firewall” around Europe’s banking system

4) Bernanke’s hint that more QE is coming in April in this morning’s speech

#1 is a regular phenomenon in the markets and needs not be explained. #2 is closely tied in with the latest policy of verbal intervention on the part of the Fed: any time stocks weaken some Fed official, usually Charles Evans of Chicago or Bill Dudley of New York, gives a speech suggesting more easing is just around the corner and VOOM! stocks take off again.

#3 is just the next step in Germany trying to hold the EU together long enough to see how the French elections turn out in April/ May. Given that Merkel’s political ratings drop like a stone any time she spends more German money and explode higher any time she plays hardball with the EU, we can take this move to be mainly posturing and playing for time.

Indeed, France is now a wildcard in the great EU bailout scheme. Most polls show a socialist winning in the second round of the elections. And not just any socialist, but François Hollande.

A few facts about Hollande:

1) He just proposed raising tax rates on high-income earners from 41% to 75%.

2) He wants to lower the retirement age to 60.

3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.

So Merkel knows that if Hollande wins in France, her campaign to turn the EU into a fiscally responsible German-led group of colonies will be over. Europe could very well collapse before then as the Spanish and Italian bond markets are flashing danger signs again (despite the world believing LTRO’s 1 and 2 solved everything). And the facts remain that the entire EU banking system is a disaster waiting to hit (anyone notice that EU banks continue to park cash at the ECB like there’s a systemic catastrophe looming?)

Finally, Bailout Ben Bernanke just hinted at more QE in his speech at the National Association for Business Economics this morning. With gas prices at $4 and food prices not far off from their all time highs, I cannot see how Bernanke can possibly unveil more QE without unleashing major political outrage and destroying Obama’s chances at re-election (Obama did re-elect Bernanke as Fed Chairman).

So I view this hint as more posturing from Bernanke. He likely is aware that seasonal adjustments have made all economic data from the last three months look better than reality and is simply trying to prep the markets for what’s likely going to be a slew of bad data started in 2Q12. We also have to note that stocks took it on the chin last week, so Bernanke could very well be maintaining item #1 on the list above: verbally intervening to keep the markets up.

Big picture: the markets are being held together via a very tenuous balancing act on the part of EU leaders and the world Central Banks. The short-term bias will be bullish due to the factors listed above. But big trouble is lurking just beneath the surface. And should anything upset the current balance being maintained, we could see some real fireworks in the markets in short order.

Indeed, we are facing a confluence of negative factors regarding Europe (political, monetary, fundamental, and technical) that indicate BIG TROUBLE could be hitting in May-June, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

In fact, I’m just unveiled several trades to profit from the coming Collapse of Europe in last Wednesday’s issue. Already ALL of them are up. And we’re just getting started.

These reports outline:

1) how to prepare for bank holidays

2) which banks to avoid

3) how much bullion to own

4) how much cash is needed to get through systemic crises

5) how much food to stockpile, what kind to get, and where to get it

And more…

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

Mar

2012

I’ve Never Seen a Confluence of Negative Factors Like This

Since August I’ve been calling for a collapse in Europe. Obviously I’m way early here, largely due to intervention from the ECB. I also underestimated the extent to which leaders would push to hold things together.

After all, Greece had already received bailouts in excess of 150% of its GDP and still posted a GDP loss of 6.8% in 2011. It’s hard to believe they’d want to accept more austerity measures and more debt.

Moreover, political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble as Nazis while the Germans referred to Greece as a “bottomless hole” into which money was being tossed.

Looking back on it, the clear reality was that Germany wanted to force Greece out of the EU but didn’t want to do it explicitly: instead they opted to offer Greece aid provided Greece accepted austerity measures so onerous that there was no chance Greece would go for it.

Well, Greece surprised many, including myself, and went for it. And so the EU experiment continues to exist today. However, before the end of this issue I will make it clear precisely why this will not be the case for much longer and why we are on the verge of a systemic collapse in Europe.

For starters, unemployment in Greece as a whole is now over 20%. For Greek youth (aged 15-24) it’s over 50%. The country is in nothing short of a Depression.

Indeed, Greece has now experienced five straight years of contraction bringing the total contraction of Greece’s GDP to 17%. To provide some historical perspective here, when Argentina collapsed in 2001 its total GDP collapse was 20% and this was accompanied by full-scale defaults as well as systemic collapse and open riots.

With new austerity measures now in place there is little doubt Greece will see a GDP contraction of 20%, if not more. I expect we’ll see other “Argentina-esque” developments in the country as well. Put mildly, the Greek issue is not resolved.

The one thing that would change my views here would be if Greece staged a full-scale default. While the political leaders and others view a total default as a nightmare (and it would be for Greek pensions, retirees, and many EU banks), it is only a total default that could possibly solve Greece’s debt problems and allow it to return to growth.

Defaults are akin to forest fires; they wipe out all the dead wood and set the stage for a new period of growth. We’ve just witnessed this in Iceland, which did the following between 2008 and 2011:

Had its banks default on $85 billion in debt (the country’s GDP is just $13 billion).
Jailed the bankers responsible for committing fraud during the bubble.
Gave Icelandic citizens debt forgiveness equal to 13% of GD.

Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland’s recovery.

Now, compare this to Greece which has “kicked the can” i.e. put off a default, for two years now, dragging its economy into one of the worst Depressions of the last 20 years, while actually increasing its debt load (this latest bailout added €130 billion in debt in return for €100 billion in debt forgiveness).

Iceland staged a REAL default, and has returned to growth within 2-3 years. Greece and the Eurozone in general have done everything they can to put off a REAL default with miserable results. I’ll let the numbers talk for themselves:

Country	2011 GDP Growth	2012 GDP Growth Forecast
Iceland	2.9%	2.4%
EU (all 27 countries)	1.5%	0.0%
17 EU countries using Euro	1.4%	-0.3%

* Data from EuroStat

The point I’m trying to make here is that defaults can in fact be positive in the sense that they deleverage the system and set a sound foundation for growth. The short-term pain is acute (Iceland saw its economy collapse 6.7% in 2009 when it defaulted). However, a combination of defaulting and debt forgiveness (for households) can restructure an economy enough for it to begin growing again.

However, EU leaders refuse to accept this even though the facts are staring them right in the face. The reason is due to one of my old adages: politics drives Europe, NOT economics.

And thanks to the Second Greek Bailout (not to mention the talk of a potential Third Bailout which has already sprung up), we now know that EU leaders have chosen to go “all in” on the EU experiment.

Put another way, EU leaders will continue on their current path of more bailouts until one of two things happens:

1) The political consequences of maintaining this strategy outweigh the benefits

2) The European bond markets force EU leaders’ hands.

I firmly believe that we will see one of these happen in the May-June window of time. We have a confluence of political, fundamental, technical, and monetary factors occurring in that time period make the possibility of a banking Crisis in Europe higher than at any other point in the last three years. Indeed, I’ve never seen such confluence of factors like this before. And it all makes for a very ugly situation in Europe.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

In fact, I’m just unveiled several trades to profit from the coming Collapse of Europe in last Wednesday’s issue. Already ALL of them are up. And we’re just getting started.

These reports outline:

1) how to prepare for bank holidays

2) which banks to avoid

3) how much bullion to own

4) how much cash is needed to get through systemic crises

5) how much food to stockpile, what kind to get, and where to get it

And more…

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

Mar

2012

Greece is Now Irrelevant. Spain and Germany Will Decide the Euro’s Future

Earlier this month, Spain began “rocking” the EU boat by telling the EU it wasn’t going to meet the new EU fiscal requirements.

Spain’s sovereign thunderclap and the end of Merkel’s Europe

As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).

Taking what he called a “sovereign decision”, he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).

In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.

With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015432/spains-sovereign-thunderclap-and-the-end-of-merkels-europe/

Spain ultimately acquiesced here once the EU permitted it to meet more lax requirements. However, this was a definite warning shot from a BIG PROBLEM country for the EU.

As I’ve noted before, Spain must be watching what’s happening in Greece and asking itself whether it wants to go through this whole process of negotiating for bailouts via austerity measures.

Indeed, Spain’s economy is already disastrous. Unemployment is already 20+% without any major austerity measures having been put in place. Anecdotal reports show Spain to be an absolute disaster. Spanish banks GREATLY underplay their exposure to the Spanish housing market (“officially” prices are down 20% but most likely it’s a lot more than that).

Put another way, Spain in many ways, Spain is already in as bad a shape as Greece. And it hasn’t begun any significant austerity measures yet. Having seen what austerity has done to Greece (Greek GDP shrank 6.8% in 2011 AFTER Greece received bailouts equal to 57% of its GDP), Spain is much less likely to opt for the bailout/ austerity measure program.

The significance of this is HUGE. According to the Bank of International Settlements worldwide exposure to Spain is north of $1 TRILLION with Great Britain on the hook for $51 billion, the US on the hook for $187 billion, France on the hook for $224 billion and Germany on the hook for a whopping $244 billion.

However, as I have proven in previous issues, the Bank of International Settlements’ estimates actually underestimate the true exposure EU nations pose to the financial system (for instance, the Bank of International Settlements claims German exposure to Greece is only $3.9 billion… when Germany’s Deutsche Bank alone has over 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses). And Germany has TENS of other banks with exposure to Greece besides Deutsche Bank.

So it is safe to assume that global exposure to Spain is well north of $1 trillion. So if Spain chooses in any way to stage a default/ messy debt restructuring, we’re going to see:

1) A systemic crisis that would make Lehman look like a joke

2) The breaking up of the EU

3) A bear market in bonds (which we have not seen in roughly 30 years)

Germany, the de facto bailout member of the EU, is most certainly aware of this Spain’s situation. Indeed, Germany is showing more and more displeasures with the ECB.

Rift Grows Between Germany’s Bundesbank and ECB

There is a rift among top-ranking officials at the ECB, and it also extends between the majority of the ECB’s Governing Council and the Bundesbank. First, two leading German ECB officials — chief economist Jürgen Stark and Bundesbank President Axel Weber — resigned because the monetary authority was buying up sovereign bonds from Greece and Portugal. Then Weber’s successor Weidmann objected to the ECB’s purchase of government bonds from heavily indebted Italy.

Now, Weidmann is rebelling against the manner in which Draghi is giving European banks one new cash injection after another. Although Weidmann admits that the measures are basically correct, their conditions are “very generous,” he complains — and expresses his total opposition to this policy in the jargon of the central bankers: “This can particularly become a problem if banks are discouraged from taking action to restructure their balance sheets and strengthen their capital base.”

Last week, the conflict escalated to a new level. Weidmann complained in a letter to ECB President Draghi that the central bank was accepting increasingly lower-grade collateral in exchange for its cash injections. This poses a danger, he warned, as the central banks in the north of the euro zone are owed ever growing amounts of money by their counterparts in the south. If the euro zone broke apart, the Bundesbank would be left holding a good deal of its bad debt from so-called TARGET2 loans, which currently amount to some €500 billion ($660 billion), he warned.

This may sound somewhat technical to most laypeople, but among leading ECB officials the letter was seen as violating a taboo. TARGET2 refers to the central banks’ internal payment system, which has accumulated massive imbalances during the course of the euro crisis. These inequalities aren’t problematic as long as the monetary union remains intact. So far, the Bundesbank has always played down this risk. But Weidmann’s about-face is a “disastrous signal,” say ECB executives because, for the first time ever, the Bundesbank “is no longer ruling out a break-up of the euro zone.”

http://www.spiegel.de/international/germany/0,1518,819255,00.html

Weidmann has every reason to be nervous about the ECB’s actions. Thanks to the ECB’s LTRO 1 and LTRO 2 schemes, the ECB’s balance sheet is now over €3 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1), Germany has a very specific concern regarding the ECB’s actions:

ECB Balance Sheet Jumps Above €3 Trillion

The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-downs.

If banks that have borrowed from the ECB can’t pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany’s Bundesbank would face the largest exposure.

http://online.wsj.com/article/SB10001424052970203458604577265373668388122.html?mod=googlenews_wsj

I’ve noted before that Germany is preparing to leave the Euro. With Spain now openly defying the EU and the ECB shifting the potential losses from its actions onto Germany’s shoulders, the likelihood of Germany walking out of the Euro has greatly risen.

And Germany is ready to go if it needs to. Remember as I’ve noted in previous articles, Germany has just put a firewall around its banking system by re-instating its SoFFIN emergency bailout fund. As a quick refresher, the SoFFIN has:

1) €400 billion in guarantees to prop up German banks

2) €80 billion to help German banks recapitalize themselves

3) The authority to let German banks dump their euro-zone government bonds.

http://online.wsj.com/article/SB10001424052970204573704577184362262410868.html?mod=googlenews_wsj

These actions, taken in the context of the fact that Germany refuses to provide any additional capital to the EU’s EFSF mega-bailout fund, make it clear just where Germany’s priorities lie: with Germany NOT with Europe.

This situation needs to be watched VERY carefully. Greece is no longer important, you need to keep your eyes on Spain and on Germany: the former in terms of how it chooses to proceed regarding potential bailouts, the latter in terms of how it reacts to the ECB and Spain.

If Spain doesn’t opt for austerity measures in return for bailouts, the EU collapses. If Spain does opt for austerity measures in return for bailouts, it’s quite possible Germany will bail on the EU.

If either of these happen, we’re going to see a Crisis that’s worse than 2008.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

In fact, I’m about to unveil several trades to profit from the coming Collapse of Europe in tonight’s issue, due out after the market closes (4:00 EST). If you subscribe now, you’ll find out what they are.

You’ll also gain immediate access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio Special Reports outlining how to prepare these areas of your life for the coming Great Crisis.

These reports outline:

1) how to prepare for bank holidays

2) which banks to avoid

3) how much bullion to own

4) how much cash is needed to get through systemic crises

5) how much food to stockpile, what kind to get, and where to get it

And more…

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

Mar

2012

An Open Letter to All Presidential Candidates

Dear Presidential Candidates: Democrats, Republicans, Independents, etc.

Watching your debates and speeches of late, it is clear that you are all (with possibly the exception of Ron Paul) missing the point and only continuing to widen the gap between the US Government and the American people.

In some regards, this is not entirely your fault. You all are doubtless surrounded by strategists and experts who ascribe to the dominant economic theories of the last 80 years; namely that Government and monetary intervention can “fix” any economic problems this country faces. Mr. President I know for a fact that your inner circle of advisors is comprised of individuals who owe their current jobs and fortunes to bailouts (Mr. Immelt and Mr. Buffett to name two).

Your strategists are missing the point. Aside from the fact that their own self-interests are completely at odds with those of the American people, they are looking at economic numbers and data as “realities” or stand alone items. This the completely off-base. The economy and economic data are not reality, they are simply measures of the American People’s activity.

With that in mind, you need to actually consider the people, not the data.

The people are already voting whether you realize it or not. They’ve voted with their money by doing the following:

1) Pulling their money out of the stock market en masse (the mutual fund industry saw investors pull $132 billion from stock-based funds in 2011).

2) Buying guns (according to the FBI, there were over 16 million background checks in 2011, an all-time record. The FBI has noted that only 1.3% of background checks result in denial of a weapon… so these were gun buyers.)

These two data points tell us one thing: Americans do not buy into or trust the current policies being enacted in the US.

Americans don’t believe that the stock market represents the US economy or should be the main focus of the Government’s efforts. Moreover, they don’t believe that the bailouts/ Stimulus have worked.

It is easy to see why. Despite record Government deficits, debt levels, and stimulus, the US economy is in the gutter. The following four charts prove it beyond any doubt.

Here’s duration of unemployment. Official recessions are marked with gray columns. While the chart only goes back to 1967 I want to note that we are in fact at an all-time high with your average unemployed person needing more than 40 weeks to find work (or simply falling off the statistics).

Here’s the labor participation rate with recessions again market by gray columns:

Another way to look at this chart is to say that since the Tech Crash, a smaller and smaller percentage of the US population has been working. Today, the same percentage of the US population are working as in 1980.

Here’s industrial production. I want to point out that during EVERY recovery since 1919 industrial production has quickly topped its former peak. Not this time. We’ve spent literally trillions of US Dollars on Stimulus and bailouts and production is well below the pre-Crisis highs.

Here’s a close up of the last 10 years.

Again, what’s happening in the US is NOT a garden-variety cyclical recession. It is a STRUCTURAL SECULAR DEPRESSION.

Americans don’t pay their bills using the proceeds from stocks. They pay their bills and buy their food/ gas with the money earned from their incomes.

This is why most people don’t care about the stock market anymore. Well, that and the fact that a large percentage of the ones running the show in the markets committed massive fraud, earned billions doing it, and have never been called to justice despite admitting they did this.

As for the Depression, the reason we are in a Depression is due to the realities underlying our financial system: namely too much debt. Moreover, the US’s response to dealing with this problem has been to simply add more debt: since 2008, the National Debt has increased over $4 trillion since 2008.

Let’s face the facts… we are saturated with debt on a Federal, State, Local, and Household basis. You cannot solve a debt problem by issuing more debt no matter what your economists and strategists tell you.

For the sake of my letter to you, let’s focus on US Households since they’re the ones who will vote for the next President.

During the housing boom, consumer leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and bankruptcies, US household debt is equal to nearly 100% of US total GDP.

To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).

This is the mathematical reality underpinning our economy today.

So how do we solve this?

The only way for us to get out of this mess is for incomes to start rising. And the only way that will happen is if jobs pick up. For that to happen, we HAVE to do two things:

1) Focus almost exclusively on small businesses.

2) Remove the distrust that Government policies have engendered in the US populace.

Regarding #1, according to the Government’s own data:

Represent 99.7 percent of all employer firms.
Employ half of all private sector employees.
Generated 65 percent of net new jobs over the past 17 years.
Create more than half of the nonfarm private GDP.
Produce 13 times more patents per employee than large patenting firms.

Who runs these small businesses? The American people. Main Street. Not the big firms. Not the Too Big To Fails. Not Wall Street. Not the firms that were bailed out. Etc.

In simple terms, the US economy is PRIMARILY comprised of those who decide political elections. They‘re not the ones coughing up $30,000 to have dinner with you, but they’re the ones who decide who will be in office starting in 2013.

And they will vote based on their experiences of the economy, NOT based on the fudged numbers coming out of the BLS.

So, if you want to win the 2012 Presidential Election, you need to focus on these people and win back their trust. And how can you do that? Two simple steps:

1) Stop bailing out/ permitting the elite to get away with crimes that normal Americans would be prosecuted for.

2) Stop interfering with small business. Make it easier for small business to start hiring by removing the uncertainty surrounding future benefits/ regulations/ taxes that small businesses will face (why do you think everyone’s hiring temps and part-timers?)

Obviously these moves wouldn’t solve the problems for the US. But they’d go a long ways towards getting us back on track in terms of re-establishing trust in the Government and the system at large.

Trust creates jobs. Trust wins votes. Trust gets the economy back on track, even if it means some short-term pain (defaults/ deleveraging). This country has gotten through a Civil War, Great Depression, numerous recessions, and more. We will get through this latest Depression as well. But this will only happen if we go back to being the United States of America, not the United States of Government Driven America.

Whichever of you figures this out first and acts accordingly, will be the next President.

Sincerely,

Graham Summers

Mar

2012

What the End Result of the Fed’s Cancerous Policies Will Be and When It Will Hit

Yesterday I noted that the “addict/ dealer” metaphor for the Fed’s intervention in the markets was in fact not accurate and that the Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.

Today I’m going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).

In the case of the Fed’s actions we will see a similar “death” of Democratic Capitalism and the subsequent death of the capital markets. I am, of course, talking in metaphors here: the world will not end, and commerce and business will continue, but the form of capital markets and Capitalism we are experiencing today will cease to exist as the Fed’s policies result in the market and economy eventually collapsing in such a fashion that what follows will bear little resemblance to that which we are experiencing now.

The focus of this “death” will not be stocks, but bonds, particularly sovereign bonds: the asset class against which all monetary policy and investment theory has been based for the last 80+ years.

Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20^th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years.

The reason for this is that the Treasury (US sovereign bond) market is the basis of the entire monetary system in the US and the Global financial system in general. Indeed, US Treasuries are the senior most assets on the Primary Dealers’ (world’s largest banks) balance sheets. To understand why this is as well as why the Fed’s policies will ultimately destroy this system, you first need to understand the Primary Dealer system that is the basis for the US banking system at large.

If you’re unfamiliar with the Primary Dealers, these are the 18 banks at the top of the US private banking system. They’re in charge of handling US Treasury Debt auctions and as such they have unprecedented access to US debt both in terms of pricing and monetary control.

The Primary Dealers are:

Bank of America
Barclays Capital Inc.
BNP Paribas Securities Corp.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Jefferies & Company Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International Inc.
RBC Capital Markets
RBS Securities Inc.
UBS Securities LLC.

I’m you’ll sure you’ll recognize these names by the mere fact that they are the exact banks that the Fed focused on “saving” thereby removing their “risk of failure” during the Financial Crisis.

These banks are also the largest beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact was meant to benefit those Primary Dealers in Europe, not the US housing market.

The Primary Dealers are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.

Put another way, Treasuries are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system, thereby controlling the amount of money in circulation in the economy.

When the Financial Crisis hit in 2007-2008, the Fed responded in several ways, but the most important for the point of today’s discussion is the Fed removing the “risk of failure” for the Primary Dealers by spreading these firms’ toxic debts onto the public’s balance sheet and funneling trillions of dollars into them via various lending windows.

In simple terms, the Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels). This again ties in with my “cancer” metaphor, much as cancer spreads by infecting healthy cells.

When the Fed did this it did not save capitalism or the Capital Markets. What it did was allow the “cancer” of excessive leverage, toxic debts, and moral hazard to spread to the very basis of the US, indeed the entire world’s, financial system: the US balance sheet/ Sovereign Bond market.

These actions have already resulted in the US losing its AAA credit rating. But that is just the beginning. Indeed, few if any understand the real risk of what the Fed has done.

The reality is that the Fed has done the following:

1) Set itself up for a collapse: at $2.8 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $54 billion, the Fed is leveraged at 51 to 1 (Lehman was at 30 to 1 when it failed).

2) Called the risk profile of US sovereign debt into question: foreign investors, now fully aware that the US’s balance sheet is suspect (the US has lost its AAA credit rating), are dumping Treasuries (see China and Russia). This has resulted in the Fed now being responsible for the purchase of up to 91% of all new long-term (20+ years) US debt issuance.

3) Put the entire Financial System (not just the private banks) at risk.

The Financial System requires trust to operate. Having changed the risk profile of US sovereign debt, the Fed has undermined the very basis of the US banking system (remember Treasuries are the senior most asset against which all banks lend).

Moreover, the Fed has undermined investor confidence in the capital markets as most now perceive the markets to be a “rigged game” in which certain participants, namely the large banks, are favored, while the rest of us (including even smaller banks) are still subject to the basic tenants of Democratic Capitalism: risk of failure.

This has resulted in retail investors fleeing the markets while institutional investors and those forced to participate in the markets for professional reasons now invest based on either the hope of more intervention from the Fed or simply front-running those Fed policies that have already been announced.

Put another way, the financial system and capital markets are no longer a healthy, thriving system of Democratic Capitalism in which a multitude of participants pursue different strategies. Instead they are an environment fraught with risk in which there is essentially “one trade,” and that trade is based on cancerous policies and beliefs that undermine the very basis of Democratic Capitalism, which in the end, is the foundation of the capital markets.

In simple terms, by damaging trust and permitting Wall Street to dump its toxic debts on the public’s balance sheet, the Fed has taken the Financial System from a status of extremely unhealthy to terminal.

The end result will be a Crisis that makes 2008 look like a joke. It will be a Crisis in which the US Treasury market implodes, taking down much of the US banking system with it (remember, Treasuries are the senior most assets on US bank balance sheets).

I cannot say when this will happen. But it will happen. It might be next week, next month, or several years from now. But we’ve crossed the point of no return. The Treasury market is almost entirely dependent on the Fed to continue to function. That alone should make it clear that we are heading for a period of systemic risk that is far greater than anything we’ve seen in 80+ years (including 2008).

The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine.

That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

Private Wealth Advisory is my answer to the consensus view presented by the mainstream media and non-thinking “analysts.” It’s a 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 strategists at many of the largest financial firms in the world as well as numerous hedge funds.

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

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Graham Summers

Chief Market Strategist

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Mar

2012

The Fed Isn’t Providing “Monetary Morphine”; It’s Spreading Financial Cancer That is Killing the Markets and Democratic Capitalism in General

While the vast majority of commentators look at the market action of the last three months and celebrate, I cannot help but shudder. The reason is that the stock market has been propped up solely by Central Bank and/or Federal Government intervention or the hope of more intervention.

That alone is worrisome as it indicates the stock market no longer cares for economic or financial fundamentals (something that has been clear for several years now).

However, far more worrisome is fact that the Fed and Federal Government are now not only propping up stock prices, but are openly trying to crush other assets (especially politically dangerous commodities such as oil and gasoline) in an attempt to make it appear that inflation is under control.

Consider the following:

1) The sudden talk of “sterilized QE” or QE that won’t involve more money printing (read: There is No Such Thing as Sterilized QE).

2) The sudden and curious collapse in precious metals (right after Bernanke says QE 3 isn’t coming anytime soon… only for the Fed to leak the “sterilized QE” talk a week after Gold and Silver collapse).

3) The Government’s decision to unlock our Strategic Petroleum Reserves again (crushing gas prices which were the primary inflationary concern of the Obama administration)

4) Those Wall Streeters close to the Fed (Goldman’s Jan Hatzius) predicting “sterilized QE” coming in April or June

All of these moves have two goals:

1) Propping up stocks

2) Crushing those commodities/ assets that are politically (and economically) dangerous (gasoline, food prices).

The take away point that I’m trying to make here is that we’re now at the point of intervention in which the Fed is openly managing the markets right down to specific asset classes.

Never in history has Central Planning gone well for either the markets or the economy. Wall Street and the mainstream media may cheer that stocks are up and inflation “transitory” (despite clear evidence that the latter point is false: the bond market indicates real inflation to be around 10%). However, I for one am truly terrified by what I see occurring in the markets.

The reason for this is that I do not view what’s happening through the same lens as most investment commentators. Most commentators, including Fed officials, view the Fed’s involvement in the markets as being akin to a drug dealer trying to cure an addict of his/her addiction by providing more drugs (see Dallas President Fisher’s recent speech on the market’s need for “monetary morphine”).

I disagree with the “addiction” metaphor because it implies that the markets/ addict could potentially become healthy if the dealer stopped dishing out the drugs. This ties in with Bernanke’s claims that everything is under control and that he can remove the excess liquidity anytime he wants to.

Remember, Bernanke is speaking from the perspective of an economist: someone who believes that monetary policy and the economy are items that are separate from human psychology or emotion (much as an addiction can be viewed as a physical issue that can be cleared up by physical removal of the drug and the body adjusting accordingly).

However, the markets and the economy are not standalone items or “real things” in of themselves. They are in fact measures of human activity. And human activity is guided by reason and emotions, which are based on varying amounts of evidence and belief.

With that in mind, I believe Central Bank intervention is not a drug or “hit” for an addict. Instead, it is a cancer that has spread throughout the financial system’s psyche and which is killing the markets and Democratic capitalism.

The markets are supposed to be based on Capitalism. And Capitalism, particularly Democratic Capitalism, which is based on the involvement of the general population, by definition requires two primary items:

1) The risk of failure as well as the opportunity for success

2) Trust between market participants

The Fed’s policies have damaged both of these areas beyond repair.

Regarding #1, the Fed’s action of bailing out the connected elite erased the concept of risk of failure for that group entirely. The Big Banks continue to engage in reckless practices including drawing down loan loss reserves, refusing to come clean about their true balance sheet risk, paying out record bonuses, and of course, screwing their clients (the Greg Smith op-ed in the New York Times is only the beginning of the whistleblowing for Wall Street).

Put simply, the Big Banks, and even well-connected hedge funds (several of which were warned in advance of the Fed’s upcoming moves in private meetings with Fed officials) are now basing their business models and investment strategies on the idea that risk of failure is next to none.

This in turn has destroyed the second principle of Democratic Capitalism: trust between market participants.

By supporting the very folks who should have failed (the Big Banks) the Fed has engendered distrust from those who were not on the receiving end of the bailouts (Main Street). Indeed, housing data has now made it clear that the policies implemented by the Fed were aimed at propping up the Big Banks/ Wall Street, NOT the housing market/ Main Street.

As a result, the markets are now viewed by market participants and the general public as a “rigged game.” This, in turn, has caused two trends to emerge:

1) Investors leaving the market en masse (the mutual fund industry saw investors pull $132 billion from stock-based funds in 2011 while the hedge fund industry experienced a net removal of funds in 4Q11 for the first time since 2Q09).

2) Those investors who remain market participants simply betting on continued Fed intervention and/or front-running Fed policies when they can.

Put another way, the Fed has killed the most important form of trust for Democratic Capitalism. I’m referring to the trust that there is one set of rules/ guidelines for all market participants or that the person on the other side of the transaction has the same risk of failure and opportunity for success as you or I do.

Indeed, things have gotten so bad that even those on the receiving end of Fed largesse no longer trust one another as evinced by inter-bank lending in the US and the EU.

As if this was not bad enough, the Fed is not only killing the basic trust of Democratic Capitalism and replacing it with another, more “sickly” form of trust: the trust that the Fed will continue to prop up those institutions that should have failed as well as the stock market in general.

This fits well within my “cancer” metaphor, as the Fed is literally killing off the positive form of Democratic trust needed for Capitalism and spreading a negative Moral Hazard-based form of trust, much as cancer cells kill off healthy cells by infecting them until they too are cancerous.

So while the mainstream media and various “gurus” view the Fed’s actions as saving capitalism, I totally disagree.

The Fed’s actions have permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.

Short-term, this may have allowed the “patient” (the markets) to continue to function, much as can someone with cancer can continue to function normally for a while before the disease makes it impossible. But long-term the end result will prove disastrous.

I’ll address the “end result” in my next research piece. But for now, everyone should know that whether the “end result” happens next week, next month, next year, or further down the road, it will be akin to what happens when cancer spreads unchecked throughout a patient.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

The Big Fat Greek Lie Is Now Obvious to Spain… So Who’s Next to Default?

The big fat Greek lie being spread throughout the financial community is that Greece has been saved. It’s a lie for the following reasons:

1) Greece did in fact default

2) Greece now has more debt than it did before the bailout (how does writing off €100 billion Euros in debt and taking on €130 billion Euros in more debt improve this situation?)

3) The Greek economy continues to implode (youth unemployment over 50%, one in ten Greek youth looking for jobs abroad, Greek GDP fell 7% in 4Q11)

4) This Second Bailout was indeed a “Credit event” which the markets have yet to discount (though German investors are already lining up litigation)

5) Germany’s finance minister has already admitted Greece may need a third bailout.

Anyone who thinks that Greece is better off, let alone “saved” is out of their minds. The Euro may have been saved for a few more weeks/ months. But Greece is in worse shape than ever.

Indeed, if anything, the Greek situation has made it clear that the whole “give up fiscal sovereignty and implement austerity measures in exchange for bailouts” formula is a waste of time and money. Let’s take a look at the progression here.

1) Greece claims it doesn’t need a bailout at all (January 2010-March 2010)

2) Greece begins to ask for a bailout (April-May 2010)

3) Greece gets a bailout equal to 57% of its GDP (May 2010)

4) Greece posts a GDP of -4% in 2010

5) Greece announces it won’t be able to meet budget requirements/ payback the first bailout on time and asks for an extension (January-February 2011)

6) Greece asks for another extension (May 2011)

7) Talk of Second Greek Bailout begins (July –October 2011)

8) Greece posts a GDP of -6.5% in 2011

9) Second Greek bailout announced/ finalized (February/March 2012)

10) Talk of third Greek bailout begins (March 2012)

No other EU country could look at this progression and think “this looks like a good approach.” Indeed, Spain and Italy must be watching what’s happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.

Both countries have already had a small sampling of the austerity measure medicine. Spain recently implemented a meager 19€ billion in austerity measures while Italy passed 30€ billion in austerity measures in 2011… hardly a drop out of their respective 1.06€ trillion and 1.5€ trillion economies.

Yet, even these tiny moves resulted in protests and riots. One can only imagine what Spanish and Italian politicians are thinking as they witness the widespread civil unrest, country-wide strikes, and economic depression that have occurred in Greece as a result of that country’s full commitment to the EU’s austerity measure demands.

Spain’s official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).

Moreover, the country is already experiencing an economic Crisis with an unemployment rate of 20+% and an economy that has been contracting since mid-2011 (in fact Spain’s GDP just actually went negative in the first quarter of 2012)…

Indeed, Spain’s recent efforts to tell the EU to “shove it” have put a crack in the Eurogroup power over individual EU members that can quickly widen.

Spain’s sovereign thunderclap and the end of Merkel’s Europe

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015432/spains-sovereign-thunderclap-and-the-end-of-merkels-europe/

The EU rejected this (of course) and Spain has since agreed to meet softer budgetary requirements. But it’s clear that a shift has begun in how EU members will deal with the Eurogroup as a whole.

So… we must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don’t work and it’s simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

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…

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

Mar

2012

The Relationships Between Wall Street, the Fed, and Politicians Are Crumbling

People often write to my company asking customer service to forward emails to me asking how I can remain bearish when stocks continue to rally.

For one thing, I want to note that one can be bearish, but still profit from the “current game,” or short-term trends that are in place. For example, while I am ultimately very bearish on the economy and on the markets, I positioned my Private Wealth Advisory clients to profit from the various trends of 2011 so that we saw a 9% return for the year vs. a 0% return for the S&P 500.

Having said that, the big picture reason why I’m bearish can be expressed as follows: the current situation that is allowing the market to rally is based on relationships and policies that are crumbling.

The relationships that most matter for stocks are those between the Federal Reserve, Wall Street, and the White House (the topic of today’s research).

The policy that matters most is the Fed’s ability to convince the market that it can and will keep the markets up without letting inflation get out of control (we’ll address this tomorrow).

Regarding the relationships that matter, I’ve stated for months now that we are going to see them crumble. This process has already begun in the sense that we’ve seen:

1) Key Wall Street players hiring famed defense attorneys (Lloyd Blankfein of Goldman Sachs) in preparation for future litigation.

2) The Fed distancing itself from its responsibility for the Crisis by:

Suing Goldman Sachs
Opening itself to Q&A sessions and townhall meetings
Having “pro Fed” editorials written in the Wall Street Journal
Putting the blame for the Crisis and the US’s financial weakness on Congress’s shoulders

3) Various members of Congress (especially Ron Paul) and GOP Presidential candidates taking aim at the Federal Reserve.

Do not, for one minute, believe that the folks involved in the Crisis will get away with it. The only reason why we haven’t yet seen major players get slammed is because no one wants the system to crumble again. And the only way for the system to remain propped up is for the Powers That Be to appear to have things under control and be on good terms with one another.

However, eventually things will come unhinged again. Whether it’s Europe collapsing, or the US facing runaway inflation, or another stock market crash, etc, something will break and the Financial Crisis of 2008 will begin anew.

When this happens, the relationships between Wall Street, the Fed, and the White House will crumble to the point that some key figures are sacrificed.

Indeed, this process is already starting.

Fed Fights Subpoena on Bernanke

The Federal Reserve is fighting a subpoena from lawyers in a civil lawsuit who want the central bank’s chairman, Ben Bernanke, to testify about conversations he had with Bank of America Corp. executives before the lender completed its purchase of Merrill Lynch & Co.

The three-year-old class-action suit alleges that the Charlotte, N.C., bank and Kenneth D. Lewis, then its chief executive, misled shareholders about ballooning losses at Merrill before the $19.4 billion acquisition was approved. The government provided $20 billion in U.S. aid after Bank of America officials told Mr. Bernanke and then-Treasury Secretary Henry Paulson in December 2008 …

http://online.wsj.com/article/SB10001424052702303717304577277712160795098.html

I’ve stated before that I believe Bernanke will face legal troubles in the coming months. The only reason he got a free pass before was because he was thought to have saved the system and capitalism. So, when it becomes evident that he actually didn’t do either of these things (another Crisis hits), expect to see Bernanke in the hot seat.

Indeed, things may already be accelerating here. Consider JP Morgan’s moves yesterday in which it announced ahead of the Fed’s release of its stress test results that it (JPM) would be raising its dividend and issuing a $15 billion buyback program with Fed approval.

Jamie Dimon played this one beautifully. By including the “with Fed approval” phrase he made it appear that the Fed is in charge of JP Morgan’s business. However, by announcing that he wanted to raise JPM’s dividend and issue a buyback program he:

1) Implicitly stated that JPM was in great shape and would pass the Fed stress test with flying colors.

2) Indicates that JPM was depleting its capital, which goes against the Fed’s supposed claims that it wants banks to raise capital.

3) Shows who’s really running the show in the markets (the Fed had to speed up the release of its stress test results as the other large banks released similar leaks to the press).

This last factor is key. Wall Street just publicly stated “we’ll do as we like, thank you very much” which undermines the view that the Fed is the one in charge of the markets. This is yet another illustration that the relationship between Wall Street and the Fed is not what it used to be.

This is a major political trend that needs to be watched closely as we approach the next Crisis as well as the Presidential election. Just how it will play out remains to be seen. But it is certain that dynamics these three groups (Wall Street, the Fed, the White House/ politicians) will be changing dramatically in the months to come. And when push comes to shove, eventually someone(s) will be sacrificed so that others can maintain control. This will happen concurrently with the markets facing “reality” which is that the Crisis is not over and we’re in worse shape than we were in 2008.

I’ll explain why in tomorrow’s research. Until then…

Best Regards,

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Mar

2012

Two Reasons Why the Global Economy Will Slow and Government Promises to Retirees Will be Broken

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.

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 report.

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.

With that in mind, people will have to make do with less. This will have a profound social impact, as it will force many more traditional values to come to the forefront of American culture again. Among other things I believe:

1) Divorce rates will drop as people cannot afford to divorce anymore.

2) Individualism will give way to more community focused lifestyles: whether they be food co-ops, neighborhood watches, or simply having to live with relatives, the nuclear family and local community will become increasingly important as an emotional and economic support.

3) Savings will increase and entertainment expenditures will become more frugal (Netflix vs. going to the movies, camping vs. more expensive vacations, etc.)

More importantly, the political process will change dramatically in the developed world, as politicians will no longer be able to promise social benefits and other handouts in order to incur votes. The impact of this will be very dramatic both in terms of campaigning and lobbying efforts in DC.

From an economic growth standpoint, these age demographics and their accompanying debt overhangs will act as a drag in the developed world. Regrettably, this will likely lead to increase geopolitical tensions (much as we saw in the Arab spring) as times of economic contraction usually result in increased conflict both in terms of trade (the US and China) and actual warfare (the Middle East).

However, the fact remains that we will witness a Global Debt Implosion. It has already begun in Europe and will be coming to Japan and eventually the US.

On that note, if you’re looking for actionable investment strategies on how to play these themes in the markets I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

Five Charts That Prove We’re in a Depression and That the Federal Reserve and Washington Are Wasting Money

Wall Street and mainstream economists are abuzz with chatter that we’re seeing a recovery in the US due to the latest jobs data. These folks are not only missing the big picture, but they’re not even reading the fine print (more on this in a moment).

The reality is that what’s happening in the US today is not a cyclical recession, but a one in 100 year, secular economic shift.

See for yourself. Here’s duration of unemployment. Official recessions are marked with gray columns. While the chart only goes back to 1967 I want to note that we are in fact at an all-time high with your average unemployed person needing more than 40 weeks to find work (or simply falling off the statistics).

Here’s the labor participation rate with recessions again market by gray columns:

Here’s a close up of the last 10 years.

Again, what’s happening in the US is NOT a garden-variety cyclical recession. It is STRUCTURAL SECULAR DEPRESSION.

As for the jobs data… while the headlines claim we’re adding 200K+ jobs per month the sad fact is that without adjustments we’ve lost jobs 1.8 million jobs so far in 2012.

Not only is this data point actually in the JOBS REPORTS THEMSELVES… but it’s supported by the fact that taxes (which are closely tied to actual incomes/ jobs) are in fact below 2005 levels.

Folks, this is a DE-pression. And those who claim we’ve turned a corner are going by “adjusted” AKA “massaged” data. The actual data (which is provided by the Federal Reserve and Federal Government by the way) does not support these claims at all. In fact, if anything they prove we’ve wasted money by not permitted the proper debt restructuring/ cleaning of house needed in the financial system.

It all boils down to the same simple sentence repeated by myself and others: you cannot solve a debt problem by issuing more debt (even if it’s at better rates).

Indeed, take a look at Greece today. The ECB and IMF have spent two years trying to post-pone a real default. Having wasted over €200 billion, they’ve now let Greece stage a pseudo-default (at least in their minds)… which, by the way, has only actually increased Greece’s debt load and crippled its economy.

Just like in the US. And while the topic of a US default is not openly discussed today, it’s evident that what’s happening in Greece will eventually come our way, after first making stop at the other PIIGS countries as well as Japan.

Which is why smart investors are already preparing for a global debt implosion. And they’re doing it by carefully constructing portfolios that will profit from it (while also profiting from Central Bank largesse in the near-term).

If you’ve yet to take these steps, I strongly suggest you consider a subscription to my Private Wealth Advisory newsletter. Few people on the planet can match my ability to return a profit during times of Crisis.

To wit , my clients MADE money in 2008 outperforming every mutual fund on the planet as well as 99% of investment legends.

We also outperformed the market by 15% during the Euro Crisis of 2010. And since the latest round of the Euro Crisis began in July 2011, we’ve locked in not 10, not 20, but 35 STRAIGHT WINNERS including gains of 12%, 14%, 16% and 18%,

So if you’re looking for a guide to get you through the coming disaster, I’m your man.

I’ve been helping investors, including executives at many of the Fortune 500 companies, navigate their personal portfolios through the markets for years.

I can do the same for you with my Private Wealth Advisory newsletter.

The minute you subscribe to Private Wealth Advisory you’ll be given access to my Protect Your Family, Protect Your Savings, and Protect Your Portfolio reports telling you precisely which steps to take to prepare your loved ones and your personal finances for what’s coming.

You’ll also join my private client list in receiving my bi-weekly market updates outlining what’s really happening behind the scenes in the markets and which investments will profit in the coming months.

And when it’s time to pull the trigger on a given investment, I’ll send you real-time trade alerts.

All of this is yours for just $249 per year.

The time for dilly dallying is over. Europe is literally on the eve of systemic failure. Even the IMF has warned we’re facing a global collapse.

To take action to protect yourself… and insure that the coming weeks and months are a time of profit and safety, NOT losses and pain…

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Best Regards

Graham Summers

Mar

2012

Mr. Market: Get It Through Your Head, The PSI DOESN’T Matter

I don’t know how many times I have to say this, but I’m saying it again.

Greece and the Euro are finished. The math is impossible. There is no way on earth that this Second Bailout accomplishes anything worthy of note. The idea that this country will somehow return to economic growth within two years, based on an additional €130billion in bailouts is outright insane.

Remember, Greece already received €110 billion in bailout funds in 2010… and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011. Greece’s economy is only €227 billion, so the country failed to post any economic growth and in fact saw its economic collapse accelerate after receiving a bailout equal to 57% of its GDP!!!

And somehow another 130€ billion is going to get this country back to economic growth in two years’ time? Greece hasn’t experienced any growth in five years.

Again, this entire deal is just stupid. And all it’s done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time.

As I wrote to clients several weeks ago:

Meanwhile, on the other side of EU equation, Spain and Italy must be watching what’s happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.

Spain’s official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).

Well, Spain just woke up and smelled the coffee:

Spain’s sovereign thunderclap and the end of Merkel’s Europe

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015432/spains-sovereign-thunderclap-and-the-end-of-merkels-europe/

So… if you still think the Greek PSI matters in any way, you’re not thinking past the next 24 hours. Spain has just told the EU to “shove it.” Having seen Greece enter a depression and get pushed around by Germany and France for two years, Spain’s just told the EU that it’s not going that route.

So… if Greece, whose economy is roughly the size of Massachusetts, nearly took down the European banking system… what do you think will happen when Spain decides to it doesn’t want to play ball and would rather just default.

Hint: It will be Lehman times ten.

On that note, if you’re looking for actionable advice on how to play this situation (and the markets in general) I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

There is No Such Thing as Sterilized QE

Over the last 24 hours, the market has rallied on a Wall Street Journal piece stating that the Fed is considering a new bond buying program through which it would print money to buy bonds but then borrow the money back to make sure inflation remains under control. This has resulted in some commentators calling this “sterilized QE.”

The story was published by Jon Hilsenrath who is generally considered to be a mouthpiece for the Fed itself. Because of this, the markets are taking his story to be
gospel.

I don’t buy it. There is no such thing as “sterilized QE.” Either the Fed prints and inflation explodes or the Fed doesn’t and the market tanks. End of story. The notion that it can somehow inject money but then take it out to make sure there’s no inflationary impact is ridiculous.

Besides, the Fed cannot announce more QE due to political pressure (if they do Obama has NO CHANCE at re-election which in turn means the White House turning on the Fed) not to mention gasoline prices, which are already through the roof.

Do you really think the Fed would do QE now? What for? The markets have only fallen a few percentage points.
So… a much more likely interpretation of this is that this story is a Fed leak to attempt to juice the market because the Fed is going to disappoint by announcing NO QE at next week’s meeting.

Remember, just last week Bernanke told Congress that no more QE was coming. Also remember that the Fed has been largely using verbal and symbolic interventions to prop up the market rather than actual money printing or new monetary policies (Operation Twist 2 only shuffles the Fed balance sheet; it doesn’t actually inject more money into the system).

So my view is that the Fed is about to disappoint and is doing damage control by verbally intervening via its favorite Wall Street Journal reporter to juice the markets higher.

Which means… the Fed will disappoint, and we will get a market correction. This Hilsenrath story is just an attempt to prop things up verbally without the Fed openly contradicting Bernanke’s testimony last week. All the macro and technical signs point towards something bad coming this way. The red flags are literally everywhere. And judging by the significance of them, we could very well be heading into a full-scale Crisis.

On that note, if you’re looking for actionable advice on how to play this situation (and the markets in general) I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

The Mainstream Media Still Doesn’t Get the ECB Greek Debt Swap

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the ECB’s “game changing” Greek debt swap. To learn more about Private Wealth Advisory and how it can help you grow your portfolio (we returned 9% last year vs 0% for the S&P 500) CLICK HERE.

First off, the details of the swap are as follows: the ECB simply exchanged 50€ billion worth of old Greek sovereign bonds (which were soon to be worth much less if not be outright worthless) for 50€ billion worth of new Greek sovereign bonds which would not be exposed to default risk or any kind of debt restructuring (unlike those bonds held by private Greek bond holders).

I want to mention here that the ECB only owned about 50€ billion worth of Greek sovereign bonds to begin with. So they exchanged roughly ALL of their exposure to Greece to new bonds that will not lose money during a restructuring or default.

The message here is clear: all private investor sovereign bond holdings are now subordinate to those of the Central Banks/ the IMF.

The ECB had been toying with this idea of subordinating private debt holders for over a year now: all negotiations concerning a Greek debt restructuring featured private debt holdings taking a “haircut” while the ECB, IMF, and Eurozone countries kept their holdings at 100 cents on the Dollar.

However, this latest move by the ECB has made this arrangement completely formal. Essentially, the ECB just told the private bond market “what we own and what you own are two different things, and ours are the only holdings that are risk free because we make the rules.”

Thus, the academics, who have been governing the private economy and private capital markets for the last four years, have finally made their control of these entities explicit. It’s simply astounding. And the repercussions will be severe.

However, for now, the mainstream media believes this move to be insignificant:

Feared Bond Swap Met With Shrug (from the Wall Street Journal)

A bond swap completed last week aimed at protecting the European Central Bank from a restructuring of Greek government debt was widely seen as unsettling euro-zone sovereign-bond markets. So far, though, it hasn’t.

Last week, the ECB swapped the estimated €45 billion to €50 billion ($59.2 billion to $65.7 billion) face value of bonds—bought in the open market in 2010 and 2011 in a vain effort to quell bond-market turmoil—for bonds of the same face value. The new bonds—unlike the old—won’t be subject to any forced restructuring like those held by private bondholders.

The above story only confirms that that mainstream media, like the Central Banks themselves, have no concept of the unintended consequences such policies can create: if you’ll recall most coverage of the Fed’s QE 2 announcement only briefly mentioned that some “critics” thought the move might result in runaway inflation. What actually happened were numerous revolutions, riots, and a massive increase in the cost of living as inflation took food prices to record highs.

With that in mind, it is not surprising that the media has not caught on to the true consequences of the ECB’s move. However, the ripple effect this will have on the private bond market is going to be seismic in nature.

The global sovereign bond market is roughly $40 trillion in size. And the ECB just sent a message to all bond fund managers and private financial institutions that their Euro-zone sovereign bond holdings are not only the only holdings that are “at risk” for debt restructuring, but that ECB can change the rules at any point it likes.

This instantly and immediately makes Euro-zone bonds far less attractive to private investors. It was bad enough that the idea of a 50+% haircut on a sovereign bond was on the table. The only reason private Greek bondholders were willing to stomach this was in order to avoid a default/ catastrophe and the total loss of capital.

However, now all private bond investors know that not only will they be shouldering all of the losses during any upcoming sovereign defaults/ debt restructurings but that the ECB can change the rules any time it likes.

Indeed, the only reason the ECB was able to get away with this without causing private bondholders to flee European sovereign debt en masse was because it didn’t take a profit on the debt swap.

In terms of Europe’s ongoing debt Crisis, this move is extremely damaging to any hopes of clean debt restructuring for Greece or the other PIIGS countries (Portugal, Ireland, Italy, and Spain). Remember, this entire round of the Euro Crisis was caused by concerns over 14€ billion in Greek debt payments that were due March 20^th.

So what happens once we get into the hundreds of billions of Euros’ worth of sovereign debt that needs to be rolled over in the coming months. The ECB, IMF, and EU have already spent 176€ billion trying to prop up the PIIGS bond markets. What happens now that private bondholders know that any potential restructuring of sovereign bonds for these countries means them taking a large hit while the ECB doesn’t suffer a cent in losses?

Again, we really need to step back and think about what just happened: the entire Eurozone and financial system were on the verge of collapse because of a mere 14€ billion in debt payments from minor country. This should give us pause when we consider the fragility of the financial system.

Regarding the actual Greek deal itself, it:

1) Fails to address Greece’s debt issues (the new forecast is that Greece will cut its Debt to GDP ratio to 120% by 2020)

2) Slams Greece with additional 3.3€ billion in austerity measures (spending cuts and tax increases) thereby guaranteeing a weaker Greek economy (Greece is already in its fifth year of economic contraction)

3) Is anything but guaranteed (Germany and the Netherlands have raised issues that could stop the deal dead in its tracks)

We’re fast approaching the end of the line here. It’s clear that the EU is out of ideas and is fast approaching the dreaded messy default they’ve been putting off for two years now.

Indeed, Greece is just the trial run for what’s coming towards Italy and Spain in short order. NO ONE can bail out those countries. And they must already be asking themselves if it’s worth even bothering with the whole economically crushing austerity measures/ begging for bailouts option.

Which means… sooner or later, Europe is going to have to “take the hit.” When it does, we’re talking about numerous sovereign defaults, hundreds of banks going under, and more. It will be worse than 2008. Guaranteed.

This is not a situation that gives one much confidence that Germany will stick around for too much longer. It is my view Germany is going to do all it can to force Greece out of the Euro before March 20^th (the date that the next round of Greek debt is due) or will simply pull out of the Euro (but not the EU) itself.

Indeed, I recently told subscribers of my Private Wealth Advisory of a “smoking gun” that proves Germany is ready to walk out of the Euro at any point. I guarantee you 99% of investors don’t have a clue about this as the mainstream media has completely ignored this development.

So if you’re looking for actionable advice on how to play this situation (and the markets in general) I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

You Cannot Build a Strong Economy or a Bull Market on Fudged Numbers and Lipstick

Let’s say that you just spent a large sum, to the tune of several trillion Dollars, bailing out various businesses that were literally run into insolvency by shortsighted and greedy business practices.

Having spent this money, your next concern becomes avoiding popular outrage as sooner or later folks will find out that this money was practically given away and that everyone else got a raw deal.

So, at that point your primary focus must become convincing the world that your policies worked and that you did in fact save the world.

How do you do this?

1) The businesses you bailed out need to appear successful and profitable again

2) The economy you “saved” needs to look to be in recovery

This is precisely the blueprint for what the Powers That Be have followed post 2009.

Regarding the bailed out businesses, the large banks are posting great profits by writing down bonds they own (and recording this as a profit) and by lowering loss reserves.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $26.3 billion in the fourth quarter of 2011, a $4.9 billion improvement from the $21.4 billion in net income the industry reported in the fourth quarter of 2010. This is the 10th consecutive quarter that earnings have registered a year-over-year increase. As has been the case in each of the past nine quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings…

Fourth-quarter loss provisions totaled $19.5 billion, about 40 percent less than the $32.7 billion that insured institutions set aside for losses in the fourth quarter of 2010. Net operating revenue (net interest income plus total noninterest income) was $3.8 billion (2.3 percent) lower than a year earlier, due to a $4.4 billion (7.4 percent) decline in noninterest income.

http://www.fdic.gov/news/news/press/2012/pr12023.html

Nevermind that most of these profits are illusory and that the policies used to create them (not thinking ahead but focusing on the near-term) are precisely what caused the 2008 Crisis. As long as headlines ready “great profits” all will be well.

Then of course there’s General Motors, the other bailout darling.

GM’s Crowded Truck Stop

A year ago today analysts rained on General Motors’ parade. Wall Street’s finest pointed out that GM’s strong February 2011 sales were boosted by extremely generous incentives to customers. These turned out to be wholly unnecessary too: Japan’s earthquake 10 days later wrecked competitors’ supply chains. U.S. carmakers gained market share, slashing inventory and making record profits with solid pricing over the next several months.

While not wishing natural disasters on anyone, GM could use a deus ex machina of some sort this year. Not only did it lag every major carmaker last month with a mere 1.1% U.S. sales gain (fellow bankruptcy victim Chrysler notched 40%). But GM’s dealer inventories are also at a post-bankruptcy record of 667,000 vehicles, up 29% versus a year ago and 59% compared to two years ago.

And it’s the wrong sort of inventory to boot: With pump prices surging, GM has 116 selling days’ worth of trucks gathering dust. Zero percent financing, anyone?

http://blogs.wsj.com/overheard/2012/03/01/gms-crowded-truck-stop/

In this situation, GM is seeing some sales growth, though it’s the worst of any major carmaker. However, what the company is really excelling at is delivering cars to dealers, in a sense, maintaining the appearance of economic growth, when in reality the cars are just sitting on the lots unsold.

Here again, the “success” is illusory in nature.

As for the other issue, (making the economy you “saved” look like it’s in recovery), you’ve got Government bean-counters with an entire arsenal of seasonal adjustments and other accounting gimmickry to make the economy look far better off than it really is.

Case in point, the BLS claims we ADDED 243,00 jobs in January. That’s an odd claim given that the BLS admits, in the very same report, that without adjustments, the US actually LOST 2.69 MILLION jobs in January.

This is roughly a discrepancy of 3 MILLION jobs. And this 243,000 jobs number for January also comes along with upward revisions that saw roughly 50,000 jobs added in both October and November.

So according to the BLS, the US is on the upswing again, maybe not in a HUGE way, but overall things are improving: we’re adding jobs and unemployment is falling (from 8.5% to 8.3%).

In the end, both policies (making the bailed out businesses look successful and the economy strong) essentially boil down to fudging the numbers. And whether or not people fully understand these issues, most Americans have a sense that the Government is lying to them about the “success” of the 2008 bailouts and the recovery.

Put another way, most Americans know that all this talk of recovery is just putting lipstick on a pig. They know that the economic reality facing the US is in fact far worse than the numbers claim. Heck, it’s the people are on unemployment, food stamps, and are unable to find jobs that know the real situation in the US.

An equally dangerous problem is the fact that professional investors (institutions, hedge funds, traders) are investing based on this fudged data. We’ve already seen how this kind of situation plays out before (2007-2008). What happens when the REAL situation in the economy and the financial system comes home to roost? What happens when Americans’ retirement accounts get decimated by yet another collapse as most asset managers and financial advisors have yet to even regain their 2008 losses.

Big hint: it won’t be pretty.

Make no mistake, the entire “success” of the 2008-2009 bailouts and stimulus is just a mirage. And the people simply aren’t buying it. Which is why they’re pulling their money from the markets en masse (investors pulled $132 billion from Us-stock based mutual funds in 2011, that’s only $15 billion short of the record amount they pulled in 2008).

On that note, if you’re looking for actionable investment strategies on how to markets I suggest checking out my Private Wealth Advisory newsletter.

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

Mar

2012

Why is the Financial World So Messed Up?

Why is the financial world so messed up? Because it’s run by Central Bankers. And those folks view money very differently from the businesspeople who actually create businesses, jobs, and wealth.

For your average Central Banker, the professional relationship between money and risk is a distant one. This has much to do with the fact that your average Central Banker is an academic, someone whose income has been fixed based on his or her status at a particular academic institution (tenure vs. non-tenured).

Consequently, there is virtually no direct correlation between a salary increase and risk-taking or innovation. In academia, politics and the number of one’s publications (which is also a highly political process) are what determine one’s income, status, and power.

Compare this to an entrepreneur or small business owner (who comprise 70% of jobs in the economy and whose efforts ultimately lead to the creation of medium and even large businesses). For this group of people, money and risk are very closely related: every decision they make concerning spending capital comes with the risk of the loss of said capital and subsequent damage to their business.

In this environment, one thinks about money very, very differently from those in academia. Income and salary are far from guaranteed. For many entrepreneurs and small business owners (particularly in this economy) the security of a bi-weekly paycheck is non-existent. Moreover, business capital, once lost, is very difficult to rebuild.

Mind you, I am primarily focusing on entrepreneurs and those who create and grow businesses here. Most managers at pre-established, medium to large enterprises tend to avoid taking risks as their focus is on climbing the corporate ladder step by step. Thus they tend to avoid taking large risks or engaging in much innovation as the career risk of failure far outweighs the benefits of success. Yet even for this group, the chance of losing money for their employer makes the relationship between money and risk palpable (unlike academics).

To return to our Central Bankers, once one leaves academia to join a Central Bank, the salaries remain fixed (though they can be quite high: the Swiss National Bank’s head earns almost $1 million per year vs. Bernanke’s $175K per year). Thus, one’s personal relationship towards money does not change dramatically in the sense that one’s salary is still fixed. The only difference is that one’s power and influence are now so great that many life expenses (travel, luncheons and dinners, etc.) are covered by various institutions and no longer come out of one’s own pocket.

However, on a professional level, your average Central Banker’s relationship to money has changed completely. Money is no longer simply a data input for a formula to be tested on economic models. It is now literally something that can be created out of thin air by the pushing of a button. And that money can be sent into the economy or banking system permitting a real-time real-world execution of one’s academic theories/ economic models.

One can only imagine the sense of entitlement and power this situation would create, particularly for those who have never worked in the private sector or started a business and thus haven’t participated in actual wealth generation.

I raise all of these issues because they go a long way towards explaining the unbridled arrogance of the ECB’s recent Greek bond swap. The details of the swap are as follows: the ECB simply exchanged 50€ billion worth of old Greek sovereign bonds (which were soon to be worth much less if not be outright worthless) for 50€ billion worth of new Greek sovereign bonds which would not be exposed to default risk or any kind of debt restructuring (unlike those bonds held by private Greek bond holders).

The message here is clear: all private investor sovereign bond holdings are now subordinate to those of the Central Banks/ the IMF.

So what kind of impact do you think this will have on the bond markets? What about bond managers who now know for a fact that their holdings subordinate to the Central Banks’s and that the latter group can change the rules of the game any moment they want?

More importantly for today’s market… there’s no way the ECB pull this same act again for its other PIIGS bonds? Over a quarter of the ECB’s balance sheet is PIIGS’ debt. You think the bond market would put up with another swap like this? No way.

In plain terms, we’re fast heading into a situation in which even the Central Banks are at danger of blowing up (how could the ECB stomach the losses of its PIIGS exposure without going belly-up? Heck it’s leveraged at 36 to 1!).

This leaves Germany as the final potential backstop for the EU. But Germany doesn’t want anything to do with it. It’s making demands that it knows Greece won’t meet. And it’s said point blank it won’t pony up more cash for the ESM mega-bailout fund.

The reason is simple. Germany wants Greece to leave or it will walk out of the Euro. In fact, I’ve found the “smoking gun” that proves Germany is ready to walk out of the Euro at any point. I guarantee you 99% of investors don’t have a clue about this as the mainstream media has completely ignored this development. But I subscribers of my Private Wealth Advisory newsletter are aware of it and have already established several trades to prepare for it.

So if you’re looking for actionable advice on how to play this situation (and the markets in general) I suggest checking out my Private Wealth Advisory newsletter.

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

Month: March 2012

Germany is Now Openly Engaging In Monetary Policies Against the ECB… What’s Next?

Three Political Wildcards That Could Upset the Bailouts in the Europe

Europe’s Bazooka Will Fire Blanks… Good Luck Killing the Crisis With That

Graham Summers’ Free Weekly Market Forecast (a tenuous balance)

I’ve Never Seen a Confluence of Negative Factors Like This

Greece is Now Irrelevant. Spain and Germany Will Decide the Euro’s Future

An Open Letter to All Presidential Candidates

What the End Result of the Fed’s Cancerous Policies Will Be and When It Will Hit

The Fed Isn’t Providing “Monetary Morphine”; It’s Spreading Financial Cancer That is Killing the Markets and Democratic Capitalism in General

The Big Fat Greek Lie Is Now Obvious to Spain… So Who’s Next to Default?

The Relationships Between Wall Street, the Fed, and Politicians Are Crumbling

Two Reasons Why the Global Economy Will Slow and Government Promises to Retirees Will be Broken

Five Charts That Prove We’re in a Depression and That the Federal Reserve and Washington Are Wasting Money

Mr. Market: Get It Through Your Head, The PSI DOESN’T Matter

There is No Such Thing as Sterilized QE

The Mainstream Media Still Doesn’t Get the ECB Greek Debt Swap

You Cannot Build a Strong Economy or a Bull Market on Fudged Numbers and Lipstick

Why is the Financial World So Messed Up?

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