GAINS, PAINS & CAPITAL

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:

1. Suing Goldman Sachs
2. Opening itself to Q&A sessions and townhall meetings
3. Having “pro Fed” editorials written in the Wall Street Journal
4. 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

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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:

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 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

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.

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)…

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.

Well, Spain just woke up and smelled the coffee:

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/

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

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).

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.

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

The situation in Europe has now reached the point that the major players have shown their hands. And they are:

1)   Germany will not put up more money unless Greece essentially passes up its fiscal sovereignty.

2)   The G20 will not give more money to Europe via the IMF unless Germany and other EU nations create a “firewall” by putting more capital into the ESM mega-fund.

3)   The ECB has announced Greek bonds are not eligible collateral for its LTRO operations, so if banks need immediate liquidity, they need to go to national central banks (read Germany).

This is quite a turn of events. Prior to this, the ECB and Germany were seen to be working hand in hand (aside from the usual political spats) to save Europe. But between the ECB’s decision to swap out its Greek debt for new debt that won’t take a hit in the event of Greek default as well as its recent rejection of Greek debt as collateral for LTRO loans, it appears that the ECB is increasingly going to make Europe’s problems Germany’s problems.

Both parties have a lot to lose in this battle. Over a quarter of the ECB’s balance sheet is made up of PIIGS debt. And German banks have plenty of exposure to the PIIGS as well.

This is why both entities (the ECB and Germany) have made moves to firewall themselves from a European fall-out. However, it is Germany that appears to have realized the reality of the situation more clearly: that there is no “good” way out of this mess, that austerity measures only cripple economic growth and make defaults even more likely, and that the Great Euro experiment is coming to an end.

This is most clear in the fact that Germany doesn’t want to commit more funds to the ESM mega-fund. It’s also illustrated by Germany’s intense demands of Greece, demands it knows Greece won’t possibly go for (which begs the question, “is Germany trying to simply force Greece out of the Euro without having to explicitly call for its exit?).

After all, Germany has its own problems to deal with. German banks are some of the most highly leveraged in Europe. And when you include unfunded liabilities, German Debt to GDP is north of 200%.

Plus you have an increasingly outraged German populace (the majority of them don’t want a second Greek bailout) putting pressure on German politicians. Indeed, the only political points German leaders have scored in the last few months have come from playing hardball with Greece.

So…

Germany is in a great squeeze. On one side the ECB and G20 want Germany to step up with more money to save Europe. On the other hand, German CEOs, voters, and even the courts, are increasingly wanting out of the Euro.

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.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

As I’ve stated time and again, Germany is the only EU member that has the money to get Greece through this next round of debt payments (14.4 billion Euros coming due March 20). But Merkel isn’t going to give the money without Greece submitting to German fiscal demands.

However, there is no way Greece will submit to German fiscal authority. Heck the Greeks are even going so far as to bring up German war reparations from WWII!

Greek MP’s raise the issue of German war reparations

The Athens News reported that the MP’s have stressed that Germany owes Greece a debt of 54 billion euros before interest (70 billion with interest). They are calling for the issue to be raised as a national issue as Greece was the only country to which Germany failed to pay war reparations.

The issue of war reparations is one which is widely discussed amongst the Greek population who are increasingly resentful of criticism from Germany, which came to the fore when Germany proposed that Greece hand over budgetary sovereignty to the EU. In an article in German paper Der Spiegel in June 2011, eminent historian Albrecht Ritschl, a professor at the London School of Economics, criticized Germany for their hostility towards Greece in the current economic. He pointed out that Germany’s debt default in the 1930s makes the Greek debt look insignificant in comparison.

http://digitaljournal.com/article/319064#ixzz1lqi1y9WF

Let’s be blunt here, Merkel is well aware that Greece will likely never submit to German fiscal demands. She is also well aware that:

1) Come April and May, all her efforts to unite the Euro under a banner of fiscal prudence (read: German rule) will end as it’s highly likely France will have become completely socialistic

 2) Greece will have already defaulted and German banks will be in trouble.

Regarding #1, Nicolas Sarkozy, who has technically yet to announce his campaign, will soon be facing off against an extremely popular socialist François Hollande, in France’s two round elections for President in April and May.

A few facts about Hollande:

1)   He wants to cut all tax breaks to the wealthy and use the money to create more government jobs

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 more loose and profligate

Now, Hollande is extremely popular with French voters (according to current polls, if he and Sarkozy make it to the second round of elections in May, Hollande would win 60% of the votes while Sarkozy only got 40%).

So Merkel knows Sarkozy will likely soon be gone… which would mean she’d be alone in her quest for greater fiscal conservatism in Europe.

Merkel also knows that it is highly likely that Greece will default (no one else has the funds to bail the country out and Greece will never submit to German fiscal demands especially given the two country’s WWII history).

So Merkel is staging a brilliant political move right now.

By emphasizing that she doesn’t want to kick Greece out of the Euro but will give Greece more money only if Greece submits to German fiscal control, Merkel is in fact doing two things politically:

1)   She’s winning MAJOR political points in Germany where up until recently her ratings were dropping like a stone due to her being perceived as “pro-bailouts.”

Merkel Approval in Germany Climbs to Highest Level Since 2009 Re-Election

Support for German Chancellor Angela Merkel’s party bloc rose to the highest since before her re- election in 2009, pointing to voter backing for her handling of the European financial crisis.

Merkel’s ratings have jumped since December as she led the drive to lock in euro-area budget discipline while resisting calls to provide more public money to fight the debt crisis. It’s a reversal after Germans’ anger at bailouts for Greece (GDBR10), Ireland and Portugal sent support for her bloc to 29 percent in the fall of 2010 and helped defeat the Christian Democrats in state elections last year.

“Germans like that she continues to be seen as tough on Greece while managing to get all the other euro countries on board,” Christian Schulz, an economist at Berenberg Bank in London, said by phone. “Italy, Greece, Spain, Portugal — all these countries are moving into a German direction.”

http://www.bloomberg.com/news/2012-02-08/merkel-approval-in-germany-climbs-to-highest-level-since-2009-re-election.html

The second thing Merkel is doing by emphasizing that she doesn’t want to kick Greece out of the Euro but will give Greece more money only if Greece submits to German fiscal control, is:

2)   She’s covering herself in case Germany has to pull out of the Euro and others accuse her of not doing enough to stop the debt implosion (her defense will be “we offered the money time and again when no one else did, but they didn’t want to get their financial house in order”)

This last option is not some delusion. Germany has just gone to the IMF and G20 requesting additional funds for the Greek bailout and was told, “firewall Europe first, then we’ll talk.” The majority of Germans don’t want a second bailout. And Germany’s Finance Minister has made it clear that Germany won’t be putting up more money for the various EFSF or ESM bailout funds for Europe.

In other words, the big players at the table are finally showing their hands. Given the public outrage concerning the 2008 bailouts as well as the fact it’s an election year, the US-backed IMF won’t cough up money for a European bailout. Which means Germany is on its own here. And it’s very likely going to lose its biggest ally in the fight for austerity (Sarkozy).

Will Germany go “all in” on the Euro experiment? I doubt it. In fact I’ve found the “smoking gun” the little known act that Germany has recently implemented that proves the country has a Plan B that involves leaving the Euro with minimal damage.

To find out what it is, and take actionable advice on how to play the markets I suggest checking out my Private Wealth Advisory newsletter.

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the real threats Greece poses to the world financial system. The primary point is that the mainstream media is massively underplaying the true threats here. To learn more about Private Wealth Advisory, CLICK HERE.

Now let’s take our analysis from yesterday a step further.

Deutsche Bank trades on US stock exchanges and so has to publish SEC filings on its balance sheet risk. Well, according to Deutsche Bank’s own filings, it had 1.6 billion Euros’ worth of credit exposure to Greece at the end of 2010. True, this is credit exposure not direct exposure to sovereign debt… but it’s still four times what the Guardian claims to the case.

More interesting that this, the term “Greece” is only mentioned twice in Deutsche Bank’s 2010 416-page annual report. Remember, this was the year in which the Greek Euro Crisis nearly took the system down: between January 2010 and June 2001, when the first Greek bailout was announced, the Euro lost 17% if its value. Worldwide, stock markets cratered despite central bank intervention. And it was only the Fed’s promise of QE lite and QE 2 that got the global equity rally rolling again.

So it’s a bit odd that Deutsche Bank’s 2010 416-page annual report would only mention the term “Greece” two times. Regardless, let’s fast forward to Deutsche Bank’s Third Quarter 2011 filing (its most recent) for some more recent data.

This time around, the term “Greece” shows up six times in the 100-page report. And this time around Deutsche Bank states it has 881 million Euros’ worth of exposure to Greek sovereign debt (TWO TIMES what The Guardian claimed).

By the way, Deutsche Bank has only 59 billion Euros’ worth of shareholder equity, so this position alone is worth roughly 1.5% of the banks’ equity. True, this is not a huge percentage, but if Greek creditors take a 70-80% haircut, Deutsche Bank would need to raise capital.

On a side note, I want to point out that we’re completely ignoring the fact that if Greece defaults so will Italy and Spain whose sovereign debt and financial institutions Deutsche Bank has 14.8 BILLION EUROS worth exposure to: an amount equal 23% of Deutsche Bank’s TOTAL EQUITY.

But let’s just focus on Deutsche Bank’s exposure to Greece for now. According to its Third Quarter 2011 filing, aside from the 881 million Euros’ worth of exposure to Greek sovereign debt, Deutsche Bank also has 665 million Euros’ worth of exposure to Greek financial institutions, and a whopping 1.3 BILLION Euros’ worth of exposure to Greek corporates (plus a negligible 8 million Euros’ worth of exposure to Greek retails) for a total of 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses.

So… having taken our analysis one step further, we find that one single German bank, one of the alleged strongest I might add, has in fact, far, far more exposure to Greece and its economy than both the Bank of International Settlements and the mainstream financial press indicates.

Bear in mind, the numbers presented in Deutsche Bank’s are simply those that Deutsche Bank’s executives have told the company’s accountants are acceptable for public disclosure (we have no clue about the banks off-balance sheet risk).

It’s also worth noting that in 2010 Deutsche Bank claimed to have only 1.6 billion Euros’ worth of credit exposure to Greece, whereas by late 2011 the number has swelled to 2.8 billion Euros.

I have to ask… how exactly does a bank, which is supposedly managing its risk levels and adjusting its exposure accordingly, manage to increase its credit exposure to something as financially toxic as Greece by 75% in a nine month period?

This hardly strikes me as good risk management. But here’s how Deutsche Bank’s accountants try to explain that none of this (even the 2.8 billion Euros’ worth of exposure) is  a big deal (click on image for larger version).

If the above chart sounds like it’s written in obfuscating language, let me translate it for you. According to Deutsche Bank’s accountants, once you include collateral held (likely garbage assets valued at mark to model fantasy land valuations), guarantees received (from GREEK institutions!?!?!), and “risk mitigation”, Deutsche Bank’s “actual” exposure to Greece drops from 2.8 billion Euros to only 1.2 billion Euros.

So… this is a bank whose credit exposure to Greece increased by 75% as the Greek Crisis worsened from 2010 to 2011… now claiming that thanks to their risk management, their “real” exposure to Greece is only 1.2 billion Euros.

Ok, well if we’re going to play by those rules, let’s consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.

At these levels, and using the currently proposed Greek 50% haircuts as a model for future defaults in the EU, Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’ exposure.  This would wipe out 16%-25% of the bank’s entire equity and render it borderline insolvent.

And we’re talking about one of the biggest, most “solvent” banks in Germany here.

Make no mistake, the situation in Europe is far far worse than 99% of investors realize. Even if the second Greek Bailout is finalized (the details are still emerging) we’ve still got Italy and Spain to deal with: two problems that are far too big for any of the current troika (ECB, IMF, and EU) to handle.

On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.

I can show you how with my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory designed to help investors outperform the market and avoid critical portfolio risks at all times.

Case in point, my clients MADE money in 2008. They also profited beautifully from the May 2010 Euro Crisis, outperforming the S&P 500 by 15% at that time.

And in 2011, while most investors were whipsawed this way and that, the Private Wealth Advisory model portfolio returned 9%, crushing the S&P 500’s 0%.

Every annual Private Wealth Advisory subscription comes with 26 bi-weekly investment reports (usually 15-20 pages each). These reports all feature my best research regarding macroeconomics, financial developments and geopolitical impact on the markets.

In plain terms I lay out what’s really happening in the markets as well as which investments to buy and sell to insure you’re maximizing your returns.

In this manner, my clients are always abreast of what’s happening behind the scenes in the markets. Even more importantly they’re making REAL money on their investments, while avoiding risk (again, we’ve just closed out 34 straight winners).

To find out more about Private Wealth Advisory and how it can help you grow your portfolio during these trying times…

Click Here Now!!!

Graham Summers

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the real threats Greece poses to the world financial system. The primary point is that the mainstream media is massively underplaying the true threats here. To learn more about Private Wealth Advisory, CLICK HERE.

The financial world is awash with theories as to how significant the Second Greek Bailout is. I’m far less concerned with this (the Bailout accomplishes nothing of import and only puts off the coming Greek default by a short period). Instead, I think it much more important to ascertain the true exposure to Greek sovereign debt.

And what better place to start than the banking system of the one country that is playing hardball with Greece during this latest6 round of negotiations: Germany.

First off, the reports concerning German bank exposure to Greek debt are anything but reliable. For instance, according to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).

This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.

Source: Guardian datablog

Let’s consider Commerzbank as an example. Let’s say Greece defaults and creditors get 20 cent on the dollar (this is likely wishful thinking). This means Commerzbank now faces 2.3 billion Euros’ worth of write-downs on its Greek holdings… which means it’s wiped out 21% of its entire equity… which pushes its leverage levels through the roof and most likely renders it totally insolvent (there is no way Greece is the only toxic junk this bank owns).

Mind you, I’m just doing back of the envelope analysis here. But this might explain the following story:

Berlin May Have to Nationalize Giant Commerzbank

… If Commerzbank CEO Martin Blessing could make one wish, he would presumably ask for a few billion euros, or that someone would take the bank’s ailing subsidiary Eurohypo off his hands, or that the entire sovereign debt crisis would simply disappear.

But banks, along with their managers and owners, are not allowed to pin their hopes on miracles. They need money, as quickly as possible. And since Commerzbank’s survival is at stake once again, the major shareholder in Berlin is thinking the unthinkable: One-quarter of Germany’s second-largest financial institution already belongs to the state; now the government is considering fully nationalizing the bank if necessary.

http://www.spiegel.de/international/business/0,1518,801827,00.html

So… based on this brief analysis right off the bat we know the following:

1)   The Bank of International Settlements is either completely clueless about the risks posed to the financial system by PIIGS’ debt OR intentionally downplays those risks (neither is good).

2)   The Guardian’s datablog (which obtains all of its data from publicly accessible records) somehow comes up with numbers that are dramatically different (and higher) from those published by the Bank of International Settlements.

In my next article, I’ll show how even The Guardian’s numbers are far too small. But suffice to say, it’s clear right off the bat that the Greece situation is a much bigger deal than most investors realize. Indeed, if the Greece debt restructuring does trigger a credit event, we could very well see a Crisis that makes 2008 look like a joke.

On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.

I can show you how with my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory designed to help investors outperform the market and avoid critical portfolio risks at all times.

Case in point, my clients MADE money in 2008. They also profited beautifully from the May 2010 Euro Crisis, outperforming the S&P 500 by 15% at that time.

And in 2011, while most investors were whipsawed this way and that, the Private Wealth Advisory model portfolio returned 9%, crushing the S&P 500’s 0%.

Every annual Private Wealth Advisory subscription comes with 26 bi-weekly investment reports (usually 15-20 pages each). These reports all feature my best research regarding macroeconomics, financial developments and geopolitical impact on the markets.

In plain terms I lay out what’s really happening in the markets as well as which investments to buy and sell to insure you’re maximizing your returns.

In this manner, my clients are always abreast of what’s happening behind the scenes in the markets. Even more importantly they’re making REAL money on their investments, while avoiding risk (again, we’ve just closed out 34 straight winners).

To find out more about Private Wealth Advisory and how it can help you grow your portfolio during these trying times…

Click Here Now!!!

Graham Summers

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the growing threat of inflation in the financial system. Today we assess how population demographics and finite resources will impact the cost of living going forward. To learn more about Private Wealth Advisory, CLICK HERE.

As noted previously, the world’s central banks, while flooding the financial system with liquidity to combat their dreaded debt deflation, have let the inflation genie out of the bottle. However, there is a second, far more important trend that will determine a higher cost of living going forward: that of finite resources vs. an exponentially growing population.

In 1800 there were roughly 800 million people on the planet. Today there is north of seven billion. And according to Mark McLoran of Agro-Terra, the Earth’s population will be growing by 70-80 million people per year going forward.

Against this backdrop of rapid growth, the supply of food is falling. Up until the 1960s, mankind dealt with increased food demand by increasing farmland. However, starting in the ‘60s we began trying to meet demand by increasing yield via fertilizers, irrigation, and better seed. It worked for a while (McLoran notes that between 1975 and 1986 yields for wheat and rice rose 32% and 51% respectively).

However, in the last two decades, these techniques have stopped producing increased yields due to their deleterious effects: you can’t spray fertilizer and irrigate fields ad infinitum without damaging the land, which reduces yields. McLoran points out that from 1970 to 1990, global average aggregate yield grew by 2.2% a year. It has since declined to only 1.1% a year. And it’s expected to fall even further this decade.

Thus, since the ‘60s we’ve added roughly three billion people to the planet. But we’ve actually seen a decrease in food output in terms of yield. And we’re not discovering new farmland to compensate for this. Indeed, worldwide arable land per person has essentially halved from 0.42 hectares per person in 1961 to 0.23 hectares per person in 2002.

The result of this is that we are currently witnessing a tremendous shift in the natural resources space. As asset management firm GMO noted in a recent client letter, a 100-year trend in commodity prices began to shift in 2002.

This chart and population demographics tell us in no uncertain terms that higher prices will be a reality going forward. Put another way, the days of cheap food and cheap resources is ending.

This ties in with one of our dominant themes at Phoenix Capital Research: that inflation will be growing in the coming years. Whether it’s by currency devaluation, supply shocks, or population demographics, the cost of living will be rising in the years to come.

For this reason, long-term investors need to be preparing for inflation now if they are to maintain their purchasing power in the years to come.

To read the rest of this client letter, see the investments I’ve isolated that will maintain their purchasing power during inflation (they’re not Gold and Silver) and learn more about Private Wealth Advisory can help you outperform the market…

Click Here Now!

Best Regards

Graham Summers

Investors simply do not understand the significance of Greece. Comparisons are being made to Lehman, but these comparisons are moot for the following reason: Greece is a country not a private institution.

This is not a subtle difference. True, Lehman’s derivatives were spread throughout the global financial system just as Greek sovereign debt is. However, investors are missing the true scope of the fall-out a Greek default would create.

First, let’s think about Lehman. When Lehman went under, half of the other institutions that were in trouble had already been merged with larger entities (Bear Stearns, Merrill Lynch) or had been nationalized (Fannie and Freddie). Those that were still standing after Lehman went under, changed to bank holding companies (Morgan Stanley, Goldman Sachs) in order to receive special access to Fed lending or were nationalized (AIG).

None of these options exist regarding the sovereign crisis in Europe today. If Greece defaults, Portugal can’t merge with Spain. And Italy can’t be nationalized by Germany or suddenly change itself to a new type of country that gets special treatment from the ECB (it’s already getting special treatment from the ECB by the way).

This cuts to the core issues for sovereign defaults in the EU. Here are the facts regarding those EU countries on the verge of collapse:

1)   You cannot solve a debt problem with more debt

2)   Austerity measures slow economic growth which in turn makes it harder to meet debt payments

This is simple basic common sense. But these are the policies being promoted by EU leaders: we’ll give you more money if you implement more austerity measures to get your finances in order.

The fact of the matter is that there is simply no way on earth that Greece can get its finances in order (short of a massive default). Greece has terrible age demographics, a lack of economic growth, and cultural issues (e.g. paying taxes is for suckers) that make it impossible for the country to solve its financial problems.

In plain terms, Greece racked up too big of a tab and simply doesn’t have the means of paying it. End of story. The world needs to realize this. Because Greece will default and it will default in a big way,

The impact of this will be tremendous. For one thing, pretty much everyone is lying about their exposure to Greece. Consider Germany for instance. According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).

This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.

But even these numbers are far below the mark. By my own analysis, which I recently shared with subscribers of Private Wealth Advisory one of the “strongest” banks in Germany alone, by its own admission, has twice the exposure to Greece that the Guardian claims. And this is one of the strongest banks in Germany.

So, when Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.

Secondly, when Greece defaults, the other PIIGS (Italy, Ireland, Spain, and Portugal) will have to ask themselves… “do we opt for austerity measures and more debt which obviously didn’t work for Greece and will only stifle our economies more? Or do we also default?”

That’s a very tough question to answer. But I’d wager more than one of them will opt for default. And if you think European bank exposure to Greece is understated, you don’t even want to know how bad exposure to Italy and Spain is (to give you an idea, the German bank I referred to earlier, again by its own admission, has total PIIGS exposure equal to 60% of its equity).

Folks, the European banking system is literally on the edge of the abyss. This won’t be Lehman 2.0. This is going to be something far, far worse. Some of these countries are already sporting unemployment of 20%. What happens when their largest banks go under?

Also, remember that the EU is:

1)   The single largest economy in the world ($16.28 trillion)

2)   China’s largest trade partner

3)   Accounts for 21% of US exports

4)   Accounts for $121 billion worth of exports for South America

The global impact of an EU banking Crisis will be tremendous. And it’s clear the EU is already heading into a recession without a banking crisis hitting. What do you think will be the impact when Europe as a whole experiences its own “2008” only on a sovereign level?

The answer is: we are literally on the eve of a Crisis that will make 2008 look like a picnic.

On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.

I can show you how with my Private Wealth Advisory newsletter.

Private Wealth Advisory is my bi-weekly investment advisory designed to help investors outperform the market and avoid critical portfolio risks at all times.

Case in point, my clients MADE money in 2008. They also profited beautifully from the May 2010 Euro Crisis, outperforming the S&P 500 by 15% at that time.

And in last eight months, while most investors were whipsawed this way and that, my Private Wealth Advisory subscribers locked in 34 straight winners. In fact, we haven’t closed a single losing trade since July 2011.

Every annual Private Wealth Advisory subscription comes with 26 bi-weekly investment reports (usually 15-20 pages each). These reports all feature my best research regarding macroeconomics, financial developments and geopolitical impact on the markets.

In plain terms I lay out what’s really happening in the markets as well as which investments to buy and sell to insure you’re maximizing your returns.

In this manner, my clients are always abreast of what’s happening behind the scenes in the markets. Even more importantly they’re making REAL money on their investments, while avoiding risk (again, we’ve just closed out 34 straight winners).

To find out more about Private Wealth Advisory and how it can help you grow your portfolio during these trying times…

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Graham Summers

Graham’s note: this is a continuation of Monday’s article which was an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the growing threat of inflation in the financial system.

Today we assess how inflation is already impacting the cost of living as well as why the Fed won’t be able to rein it in, no matter what Bernanke says. To learn more about Private Wealth Advisory, CLICK HERE.

As noted in Monday’s essay, the Federal Reserve and world Central Banks, by loosening monetary policy and spending money in order to combat their dreaded debt deflation, have unleashed inflation upon the financial system.

This is happening both blatantly in the form of prices being raised:

Food prices hit record highs in 2011

The price of basic foodstuffs hit a record high in 2011, with the cost of cereals surging by more than a third over the last 12 months, the UN’s Food and Agriculture Organisation said on Thursday.

The FAO said that its monthly Food Price Index averaged 228 points in 2011, the highest level since records began in 1990, although prices did slide by some 2.4 percent in December. The previous high was in 2008 at 200 points.

The Rome-based organisation said that its cereal price index — which includes the cost of rice, wheat and maize — averaged 247 points in 2011, up some 35 percent from 2010 and the highest since the 1970s.

http://www.google.com/hostednews/afp/article/ALeqM5gcfBxJe2n-ZPmGrv2cHMqFcrrZ1g?docId=CNG.d5ee67dd42d5a468e9ea68e927470560.301

McDonald’s 4Q net income jumps 11 pct

Higher costs for ingredients also continue to be an issue, even though costs for some ingredients, like wheat and corn, have leveled off. McDonald’s said it expects costs for most of its commodities in the U.S. to increase 4.5 to 5.5 percent in 2012, in line with 2011’s 4.9 percent increase. Last year, McDonald’s raised menu prices three times, for a total price increase of about 3 percent, in March, May and November.

Chief financial officer Pete Bensen said the company would continue to “strategically take increases to offset some but not all of our higher costs.”

http://seattletimes.nwsource.com/text/2017317381.html

Starbucks raises prices in U.S. Northeast, Sunbelt     

Starbucks Corp (SBUX.O) raised prices by an average of about 1 percent in the U.S. Northeast and Sunbelt on Tuesday, making coffee-drinkers spend more in New York, Boston, Washington, Atlanta, Dallas, Albuquerque and other cities.

Shares of Starbucks, which boosted drink prices in some other U.S. markets in November, retreated to $45.30, down 1.5 percent, after hitting a new high of $47.04 in early trading.

Starbucks expects high costs for things like coffee, milk and fuel to cut into profits this year. Like other restaurant operators ranging from Chipotle Mexican Grill (CMG.N) to McDonald’s Corp (MCD.N), it is raising prices to help offset some of that cost pressure.

http://www.reuters.com/article/2012/01/03/us-starbucks-idUSTRE8021N220120103

The State of the Economy By the Numbers

In Jan 2012 the average national gas price is $3.389 a gallon, an increase of 28 cents compared with $3.11 a gallon a year ago.

Historically this is fairly high for this time of year.

http://abcnews.go.com/blogs/business/2012/01/the-state-of-the-economy-by-the-numbers/

… however, inflation is also entering the financial system in a more stealthy mode as retailers begin to offer less product for the same price.

Indeed, as the below article summarizes, Kellogg’s has reduced 15% of the cereal in its boxes. Snickers has reduced its bars by 11%.  Haagen-Das has reduced content by 12.5%, Heinz Ketchup has reduced content by 11%, etc.

U.S. Companies Shrink Packages as Food Prices Rise

Large food companies have recently announced that they will raise the prices they charge grocery retailers for commodities-based products. For example, a chocolate bar will cost more soon: Hershey last week announced a 10% increase for most of its confectionery goods.

 Of course, straightforward price hikes could cause consumers to buy less of those products or to choose less costly store brands. So in many cases, food companies are trying a different tactic: Keeping the price of an item the same while decreasing the amount of food in the package. The company recoups the costs of the rise in commodities and hopes consumers don’t notice that they’re getting less of the product for the same price.

http://www.dailyfinance.com/2011/04/04/u-s-companies-shrink-packages-as-food-prices-rise/

It’s worth noting that this trend has been in place as far back as 2008:

The incredible shrinking Doritos bag

PepsiCo is not alone in subtly cutting size as a substitute for raising prices. Kellogg (K, news, msgs), General Mills (GIS, news, msgs), Unilever (UL, news, msgs), Wm. Wrigley Jr. (WWY, news, msgs) and Procter & Gamble (PG, news, msgs) have quietly trimmed the amount of cereal, ice cream, chewing gum, paper towels and toilet paper you get. (See the slide show.)

http://articles.moneycentral.msn.com/Investing/CompanyFocus/TheIncredibleShrinkingDoritosBag.aspx

Make no mistake, inflation is creeping into the system in a big way. And the Fed will not raise interest rates to fight it until it’s far too late. Debt levels are simply too high for the Federal Government and US corporations, particularly the large banks which the Fed has been doing everything it can to prop up.

To read the rest of this client letter, see the investments I’ve isolated that will maintain their purchasing power during inflation (they’re not Gold and Silver) and learn more about Private Wealth Advisory can help you outperform the market…

Click Here Now!

Best Regards

Graham Summers

The Obama administration, as it pursues re-election in 2012, is doing all it can to claim that the US economy is in fact not quite as bad as previously thought. One of the tactics is to massage GDP and jobs data. True, this practice has been in place for over a decade, but the recent January jobs report from the BLS has set, shall we say, a new high-water mark for “adjustments.”

According to the BLS, we ADDED 243,00 jobs that month. 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 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%).

These numbers make the Obama administration look good, at least relative to how it’s looked in the previous 12 months. However, they’re not reflecting as positively on two of Obama’s primary support groups: Wall Street and the US Federal Reserve.

As a brief refresher, let’s take a look at Obama’s top campaign contributors in 2008:

Altogether, the finance industry ponied up $24 million for Obama in 2008. And Wall Street has not only been cutting their growth forecasts but has actually been firing people based on the fact the economy is so rough.

N.Y. faces 10,000 Wall St. cuts through 2012

            (From October 2011)

Bank of America Corp. plans to cut 30,000 jobs over the next few years, while UBS AG intends to shave 3,500 jobs and Goldman Sachs Group expects to eliminate 1,000 jobs.

http://www.marketwatch.com/story/ny-faces-10000-wall-st-cuts-through-2012-2011-10-11

As for the forecasting component:

            Wall Street banks curb economic growth forecasts

            (From January 2012)

Wall Street banks lowered their outlook for U.S. economic growth due to concerns over the European debt crisis, oil prices, regulatory uncertainties and “continued disarray in Washington,” according to a financial industry survey released on Tuesday.

The survey, which included bankers from Morgan Stanley, Wells Fargo Securities and Citigroup, forecast that the U.S. economy will grow at a rate of 2.2 percent this year, down from a previous forecast of 3.1 percent.

http://finance.yahoo.com/news/wall-street-banks-curb-economic-180224475.html

The January jobs report not only makes these guys look like they can’t forecast anything…  but that they don’t even know how to run their own businesses. It also adds to the image that they’re heartless and will lay people off to maintain profits (if the economy is improving, why are they firing people?)

This is not exactly the best policy to maintain for constituents who have put up some big money for Obama’s campaigns in the past. One wonders if Obama’s campaign managers considered this.

The January jobs report also reflects poorly on the White House’s monetary buddy, the Obama’s administration’s “go to” guy for any kind of uptick in economic data: Ben Bernanke. After all, the Fed has also been cutting its growth forecasts and expecting higher unemployment.

US Fed cuts growth forecasts for 2012

(From November 2011)

The Federal Reserve said it now expects US growth to be weaker and unemployment higher than it thought in its last set of forecasts, as the central bank left the door open to fresh measures to help the world’s biggest economy.

http://www.telegraph.co.uk/finance/economics/8866407/US-Fed-cuts-growth-forecasts-for-2012.html

Fed foresees weak US growth through 2014

(From January 2012)

The Federal Reserve cut its US growth forecast Wednesday and said that with business investment and the housing sector depressed, it expected to keep interest rates near zero for another three years

Despite an upturn late last year, the Fed said ongoing economic weaknesses and strains in global financial markets mandated continued easy-money policies…

“I don’t think we’re ready to declare that we have entered a strong phase at this point.

http://www.google.com/hostednews/afp/article/ALeqM5ilJPZ-WxGiniRvvsHbHdUZXEOq9Q?docId=CNG.84bbac5e7752374be11d2c4ab994076e.1d1

So add the Fed to the group of people Obama’s jobs report leaves looking less than on top of things. On a side note, it also makes the likelihood of more QE or monetary easing from the Fed more remote (if the economy is improving, they have no reason to announce more policies… which is not positive for asset prices… or Wall Street).

This all returns to two primary themes I’ve been expounding on for months now: that the political environment has changed dramatically in the US and that we are going to see escalating tension between Wall Street, the Fed, and the White House.

The reason for this is simple: the public is growing more outraged by the minute. That anger will have to be directed somewhere. And when push comes to shove, it’s likely we’re going to see some actual real litigation relating to what happened in 2008-2009.

When this happens, the whole Fed/ Wall Street/ Politician triumvirate will begin to change dramatically. Some of these groups will try to portray themselves as “men of the people” (Obama is doing this, and so is the Fed with its recent town-hall meetings and Bernanke’s efforts to appear like a average joe who reads his kindle). Others will prepare for battle (Goldman Sachs’ CEO has hired a defense attorney).

How this will all play out remains to be seen. But the debt markets are going to speed this process up dramatically as Europe implodes and the great debt implosion comes to the US. With 48% of US citizens living in a house in which at least one person receives Government aid, you can imagine the impact that the sort of large cuts in social welfare programs that a debt restructuring in the US would have on the political process in here.

My assessment, this January jobs report is the tip of the iceberg. Tensions will be rising in the US over the next 12 months. How exactly this will play out remains to be seen (there are too many factors), but changes are coming to the political arena as well as the monetary balance between Wall Street and the Fed (remember, the Fed actually sued Goldman Sachs last year).  These changes will be dramatic.

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

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

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

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

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Graham Summers

Chief Market Strategist

Graham’s note: this is an excerpt from a recent client note I sent out to subscribers of Private Wealth Advisory regarding the Fed’s most recent FOMC announcement: no QE 3 and extended ZIRP. Moreover, in that client letter I detail precisely how the Fed, while fearing deflation, has let inflation into the financial system as well as which investments will profit most from this. To learn more about Private Wealth Advisory, CLICK HERE.

As I predicted the US Federal Reserve disappointed in a big way with its January 25 FOMC meeting. There was no announcement of QE 3. Instead the Fed promised to maintain its Zero Interest Rate policy (ZIRP) until 2014: an innocuous and mainly symbolic gesture.

In truth the Fed is now trapped. Because of political pressure, it cannot announce QE 3 or any other large monetary program without a Crisis first erupting.

However, if the Fed were simply to announce that its view of the economy had worsened and not throw the markets a bone, then we could very well have seen a Crash in multiple asset classes as the entire financial system is trading primarily based on the notion that the Fed and other Central Banks can somehow manage to prop this house of cards up interminably.

As a result of this, we got more of the same with the Fed January FOMC: promises to act if needed, and a symbolic promise of future accommodation in the form of promising to extend ZIRP for years to come.

The reality is that the Fed is stuck in ZIRP and will never be able to leave it. In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%.

Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year.

And of course, if interest rates rise in any fashion, the interest payment load will rise as well. This is part of the reason why the Fed cannot raise interest rates in the future… ever.

A second reason the Fed is trapped in ZIRP pertains to corporate leverage levels, which we detailed in an earlier issue of PWA. Any rise in interest rates, particularly on the short-end of the curve, will mean that corporations will see a massive increase in interest payments due on the $7.3 trillion in debt they currently owe. That could put a serious dent in the “earnings” side of the P/E valuations sell side analysts are touting to claim stocks are cheap today.

Finally, we need to consider the over the counter derivatives market. Currently 82% of the $248 trillion in derivatives sitting on US commercial bank balance sheets are based on interest rates. If even 2% of these contracts are “at risk” and one quarter of those “at risk” contracts blow up, you’ve wiped out all equity at the five largest US banks.

Suffice to say, the Fed doesn’t want interest rates to rise in any way shape or form.

So the Fed is trapped at a ZIRP rate and will not be raising rates until the market forces it to do so.

This in turn means that inflation, which has already crept into the financial system as a result of QE 1 and QE2, will be gaining further traction in the months to come. As I’ve stated before, inflation and deflation are not mutually exclusive. And while the Fed is focusing on stopping the dreaded debt deflation (a la 2008) hitting the financial system, it’s let the inflation genie out of the bottle resulting in higher costs of living and civil unrest around the globe.

To read the rest of this client letter, see the investments I’ve isolated that will maintain their purchasing power during inflation (they’re not Gold and Silver) and learn more about Private Wealth Advisory can help you outperform the market…

Click Here Now!

Best Regards

Graham Summers

Graham’s note: this is an excerpt from a recent client note I sent out to subscribers of Rapid Fire Options Alert regarding the situation in China (we’ve locked in both a 55% and a 15% thanks to some well timed trades regarding this).

The impact of the coming change will be dramatic both in terms of its impact on Europe (China’s single largest trade partner) and the US with whom China is fast developing a trade war.

Most of the rally in China’s markets over the last few months stemmed from the belief that China was going to begin monetary easing again in order to soften its economic slowdown.

Risk Of Hard Landing Rises As China Begins

Monetary Easing (From Forbes 11/18/11)

Chinese policymakers have begun to selectively ease macroeconomic policy to support growth, according to Barclays’ analysts.  While full on easing won’t come until 2012, China will face a significant economic slowdown as the export sector feels the impact of a fragile global economy, and residential investment, which makes up 12% of GDP, falls drastically as the People’s Bank of China (PBoC) seeks to control a real estate bubble.

In their attempt to execute a “soft landing,” China’s leaders have engineered a slowdown by tightening policy over the last several quarters.  This was a response to unwanted consequences of prior stimulative policy.

Read the Rest of the Story

Note the effect this view had on the Chinese market’s action:

China cannot risk a severe economic slowdown. There are already over 30 million Chinese who have lost their jobs, left the coastal cities, and are moving back to the countryside.

Moreover, during times of economic turmoil, civil unrest grows. Since 2006, China has averaged 90,000+ “mass incidents” (riots and protests) per year. In 1993, during the boom years, this number was less than 10,000.

Suffice to say, an economic slowdown is a MAJOR problem for China’s Government.

This is most recently clear in the village of Wukan, which in September began a series of protests based on the fact that the Government took away the villagers’ farmland and fishing rights (thereby removing their primary means of earning  a living).

Wukan began a mass sit-in/ protest. The tiny village of 13,000 has since become such a headache (thanks to the international press) that China’s Government actually let the villagers vote on who should be their local officials.

This is absolutely unbelievable. China…letting a village vote on its leadership. And it gives us some idea of just how tenuous the Chinese Government’s control over the general population is.

However, while unemployment is a big problem for the Chinese Government, inflation is a HUGE problem. Over one third of China’s population lives off less than $2 a day. If the price of food rises in China… those “mass incidents” will explode into outright widespread rioting and civil unrest.

Well, thanks to China’s aggressive easing since November, inflation is back in a big way (it had been in decline since July 2011 before this).

China’s inflation rebounds in January, renewing pressure to control living costs

(From Washington Post 2/8/12)

China’s inflation rebounded in January as food prices soared, renewing pressure on  Beijing to control surging living costs as it tries to boost slowing growth in the world’s  second-largest economy amid warnings of a global downturn.

Consumer prices rose by an unexpectedly strong 4.5 percent over a year earlier, up from December’s 4.1 percent, data showed Thursday. Food prices jumped 10.5 percent, accelerating from the previous month’s 9.1 percent.

Read the Rest of the Story

This is a major development. China’s Government will ABSOLUTELY have to put the brakes on monetary easing and possibly even tighten if it doesn’t want to have the whole country begin to go up in flames.

Investors take note, there is a seismic change taking place in China. As inflation spreads throughout China there will be dramatic social, political, and monetary changes. And these will ripple throughout both the Asian region as well as the global financial system.

Those investors who wish to outperform in the coming months will need to keep these trends in mind.

To learn more about Rapid Fire Options Alert and how it can help you grow your portfolio aggressively with minimal risk (we’re already up 50% this year).

Click Here Now!!!

Best Regards,

Graham Summers

Graham’s note: the following is an excerpt from a recent issue of my Private Wealth Advisory newsletter with some additional research I did on the economy of Greece.

The Greeks have no idea what they’ve gotten themselves into.

A few facts about Greece…

First off, demographics wise, Greece is a disaster.

Real Clear Markets shares the following facts.

• Greece’s fertility rate is 1.3 children per women. This is nearly a full child below the “replacement rate”: the number of children needed to maintain the current population.

• Greece’s population of 65 and over has soared from 11% in 1970 to 24% in 2010. It will hit 33% by 2050. Meanwhile, Greece’s working population will decline to 20% over the same time period.

• Because of this, Greece spends 12% of its GDP on pensions.

As if this weren’t bad enough, the unemployment rate for Greeks aged 15-24 is 40%. For Greeks aged 24-34 it’s 22%. Imagine being a young person, not being able to find a job, and then knowing that huge percentage of your efforts (42%) are going to be taxed to fund all the crazy social welfare programs for Greece’s aging population. Small wonder that seven out of ten young Greeks want to work abroad and four of out ten are actively seeking work outside of Greece.

Also, it’s no surprise that those Greeks who do have jobs, don’t want to pay this massive tax load. Consider that the Greek working population is roughly seven million people. 95 percent of them declare annual income of less than 30,000 euros.

So that’s the situation in Greece. Terrible age demographics, an economy that’s in the toilet, and politicians who simply don’t get it.

Now let’s consider who’s actually got the cash to potentially help Greece from a default, and what they want in return.

We’re talking about Germany.

For most of the Greece Crisis, the supposed “saviors” were the IMF, the ECB, and Germany. That all changed in the last month. The IMF has called for more funds. Those funds aren’t coming. Remember, the IMF is largely a US-backed organization. And the US sure as heck won’t go for a US-backed bailout of Europe.

So the IMF is out of the picture in terms of helping Greece in any meaningful way.

Now, how about the ECB? Well Germany has told the ECB to its face that if it continues to monetize EU sovereign bonds that Germany will walk out on the Euro. So the ECB may continue to meddle in the bond market to avert a Crisis, but if it ever decides to publicly state it will be monetizing EU debt going forward, Germany’s out and the Euro implodes.

Which leaves Germany as the official backstop/ savior for Greece. And here’s how Germany recently address the IMF when the IMF asked Germany for help with the Greek situation.

Berlin resists pressure to give Greece more

 Germany, the biggest and richest country in the euro zone, has provided the bulk of the funds for the bailouts of Ireland, Portugal and Greece. Now it is firmly rejecting calls to come up with yet more funds for Greece to compensate for any shortfalls in a debt relief deal with private creditors.

On Friday Foreign Minister Guido Westerwelle defended Berlin’s tough stance. The Greeks, he insisted, should show that they are willing to implement reforms before getting more money.

“We Germans do not expect from anyone in Europe more than what we are asking from our own citizens. We cannot explain to taxpayers in Germany that they have to do things that others do not want to do while at the same time asking for their money,” Westerwelle said in Brussels.

He pointed out that Germany had already come up over 200 billion euros ($262 billion) for the bailout funds. “It makes no sense” he said, to give more money to Greece, “if we don’t know whether the reforms which have been agreed upon will be really implemented.” He argued that coming up with more money just lessened the pressure to reform.

http://www.globalpost.com/dispatch/news/regions/europe/germany/120127/berlin-resists-pressure-give-greece-more

Diplomatically, this is about as close as Germany can come to telling the IMF to “stuff it.” Germany knows the IMF doesn’t have the funds and won’t be getting them (the IMF is primarily a US-backed entity and the US won’t stand for a US-backed European bailout).

Indeed, just a few days after Germany said “nein” to more Greece bailouts, it then threw the following suggestion out:

German proposal seeks EU commissioner with sweeping powers to directly control Greece’s budget

Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.

The idea was quickly rejected by the European Union’s executive body and the government in Athens, with the EU Commission in Brussels insisting that “executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions.”

http://www.washingtonpost.com/business/markets/german-proposal-seeks-eu-commissioner-with-sweeping-powers-to-directly-control-greeces-budget/2012/01/28/gIQAxHWgXQ_story.html

In plain terms, push has now to come shove in Europe. Germany permitted the ECB to implicitly monetize various EU sovereign nations’ debts during 2011 because Germany hadn’t yet taken the steps to prepare for a collapse of the EU.

It now has. In the last six months, Germany has:

1)   Passed legislation permitting it to leave the Euro without leaving the EU.

2)   Passed legislation permitting it to nationalize German banks during times of Crisis.

3)   Demanded that German banks in general raise capital.

In plain terms, Germany is now prepared to walk if it has to. And it’s made its demands very clear: if you want German funds, you will need to give up fiscal sovereignty.

It’s also made it clear that it will tolerate neither the issuance of Eurobonds OR direct and open monetization by the ECB.

In other words, Germany has said “it’s our way or the highway.” True, this borders on an act of financial warfare, but in the end, Germany has never truly been interested in a monetary union so much as a political union.

Germany will not suffer inflation (they’ve seen how monetization works out, e.g. Weimar), nor internal discord (in November 78% of Germans thought the Euro would survive… by December 60% of them though the Euro was a “bad idea”.) Germany is going to look after its own domestic interests.

Put another way, if Greece wants to remain Greece it’s no getting any more funds and its bond markets will implode. The alternative is that if Greece wants German funds, it’s going to have to give up its fiscal sovereignty and essentially become a vassal state for Germany. End of story.

With that in mind, I believe the next round of the Euro Crisis is now at our doorstep. Indeed, this latest short-covering rally in the Euro (Euro shorts were at a record high) looks ready to end and reverse.

So if you think the EU Crisis is over, think again. True we’ve got until March 20^th for the Greek deal to be reached, but things have already gotten to the point that Germany has essentially issued its ultimatum. Either Greece hands over fiscal sovereignty, or it defaults in a BIG way.

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

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist

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

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

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

1)   Didn’t experience the 1987 Crash

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click Here Now!!!

Graham Summers

Chief Market Strategist