The Next 2008 Event Is Lurching Towards Us

As we noted yesterday, the ECB cannot and will not be able to generate GDP growth or inflation.

The EU is simply too leveraged. You cannot have an entire region sporting a Debt to GDP of over 90%… with banks leveraged at 26 to 1 using sovereign debt as collateral on their derivatives trades, and “fix it” using NIRP or QE.

This is like trying to hold up a 400 lb. weight… and then having someone offer you a floor lamp as additional support. The effect, at best, is largely psychological.

Cue today…

The European Commission told the euro area’s largest economies to reduce debt and modernize labor markets as it again slashed its inflation forecast and warned of slower-than-predicted growth across the 19-nation bloc.

France, Spain and Italy, which have persistently failed to hit European Union budget targets, are still off track, the Brussels-based commission said on Tuesday. Gross domestic product in the currency area will increase by 1.6 percent this year and 1.8 percent in 2017 — both 0.1 percentage point lower than the commission forecast in February. Inflation will average 0.2 percent this year, below the European Central Bank’s target.

            Source: Bloomberg.

So… even after expanding the pace of its QE purchases from €60 billion to €80 billion per month, the ECB expects inflation to be 0.2%.


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Bear in mind, the ECB has been overestimating growth and inflation for four years straight. The notion that inflation will hit 0.2% might be misguided.

The fact of the matter is that nothing in the EU has been fixed. All that happened was the markets bought into Mario Draghi’s fib that he’d do “whatever it takes… and believe me it will be enough.”

This is perhaps the single greatest metaphor for everything post-2008: a Central Banker claiming the impossible and the entire world believing it. Meanwhile no structural issues have been addressed, no deleveraging has taken place, and trillions of Dollars have been misallocated based on Central Banks skewing the risk profile of the world by trying to corner the bond market.

How will this end? Terribly. Bonds are the bedrock of the entire financial system. Currently over $7 trillion in sovereign bonds are sporting NEGATIVE yields. It is absolute insanity.

Eventually this will trigger another 2008 type event. The derivatives market for interest rates is over $500 trillion in size. By way of comparison, the Credit Default Swap market, which nearly took down the system in 2008, was just $50-60 trillion in size.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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Posted by Phoenix Capital Research