This is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist. In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting. This sent Japanese stocks soaring and the Japanese yen plunging. The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low. Essentially what the Bank of Japan has done is declare a currency war. And as you will see below, in every currency war there are winners and there are losers. Let’s just hope that global financial markets do not get shredded in the crossfire.
Without a doubt, the Japanese are desperate. Their economic decline has lasted for decades, and their debt levels are off the charts. In such a situation, printing more money seems like such an easy solution. But as history has shown us, wild money printing always ends badly. Just remember what happened in the Weimar Republic and in Zimbabwe.
At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison. The following is how David Stockman summarized what just happened…
This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.
Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.
The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.
So why would they want to devalue their currency?
Well, there are too main reasons why nations do this.
One reason is that it makes it easier to pay off debt. The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent. When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.
Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.
In other words, it helps them sell more stuff to other people.
But in the process, this hurts other exporters. For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers…
In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.
South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.
From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”
This is why I said that there are winners and there are losers in every currency war.
If you boost your exports by devaluing your currency, you take away business from someone else. And ultimately other nations start devaluing their currencies in an attempt to stay competitive. That is why they call it a currency war.
For now, the Japanese are celebrating. On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high. Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.
But of course rising stock prices are not always a good thing. As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…
Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).
However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…
And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy. Here is more from David Stockman…
Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.
So up to this point Japan’s experiment in crazy money printing has been a dismal failure.
Will printing even more money turn things around?
We shall see, but I wouldn’t hold your breath.
Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing. Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.
Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.
You can see it coming, can’t you? The yield on 10 year U.S. Treasuries is skyrocketing, the S&P 500 has been down for 9 of the last 11 trading days and troubling economic news is pouring in from all over the planet. The much anticipated “financial correction” is rapidly approaching, and investors are starting to race for the exits. We have not seen so many financial trouble signs all come together at one time like this since just prior to the last major financial crisis. It is almost as if a “perfect storm” is brewing, and a lot of the “smart money” has already gotten out of stocks and bonds. Could it be possible that we are heading toward another nightmarish financial crisis? Could we see a repeat of 2008 or potentially even something worse? Of course a lot of people believe that we will never see another major financial crisis like we experienced in 2008 ever again. A lot of people think that this type of “doom and gloom” talk is foolish. It is those kinds of people that did not see the last financial crash coming and that are choosing not to prepare for the next one even though the warning signs are exceedingly clear. Let us hope for the best, but let us also prepare for the worst, and right now things do not look good at all. The following are 18 signs that global financial markets are entering a horrifying death spiral…
#1 The yield on 10 year U.S. Treasuries has risen for 5 of the past 6 days, and it briefly touched the 2.90% level on Monday.
#2 Rapidly rising interest rates are spooking investors and causing them to pull money out of bonds at a very rapid pace…
Investors have yanked nearly $20 billion from bond mutual funds and exchange traded funds so far in August. That’s the fourth highest pullback ever, according to TrimTabs data. In June, investors took out $69.1 billion — the highest on record.
#3 The sell-off of U.S. Treasuries is being led by foreigners. In particular, China and Japan have been particularly aggressive in selling off bonds…
China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries.
The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.
#4 Thanks to rapidly rising bond yields, some of the largest exchange-traded bond funds are getting absolutely hammered right now…
• The $18 billion iShares iBoxx $ Investment Grade Corporate Bond fund (ticker: LQD) has fallen 7.94% since May 2, according to S&P Capital IQ. That’s including reinvested interest from the fund’s bond holdings.
• The 3.7 billion iShares Barclays 20+ Year Treasury Bond (TLT) has plunged 15.9% the same period. Longer-term bonds typically get hit harder when rates rise than shorter-term bonds. For example, the iShares Barclays 3-7 Year Treasury Bond fund (IEI) has fallen 3.2% since May 2.
• PowerShares Emerging Markets Sovereign Debt (PCY), which invests in government bonds issued in developing countries, has fallen 12.7%. The fund has $1.8 billion in assets.
#5 In recent weeks we have witnessed the largest cluster of Hindenburg Omens that we have seen since prior to the last financial crisis.
#6 George Soros has bet a tremendous amount of money that the S&P 500 is going to be heading down.
#7 At this point, the S&P 500 has fallen for 9 out of the last 11 trading days.
#8 Margin debt has spiked to extremely dangerous levels. This is a pattern that we also saw just before the last financial crash and just before the dotcom bubble burst…
The exuberant mood comes as margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis.
“Investors have rarely been more levered than today,” said Deutsche Bank, warning that the spike in margin debt is a “red flag” and should be watched closely.
#9 The growth rate of new commercial bank loans and leases is now the slowest that it has been since the end of the last financial crisis.
#10 According to a shocking new report, Fannie Mae and Freddie Mac are masking “billions of dollars” in losses. Will they need to be bailed out again just like they were during the last financial crisis?
#11 Wal-Mart reported very disappointing sales numbers for the second quarter. Sales at stores open at least a year were down 0.3%. This is a continuation of a trend that has been building for years.
#12 U.S. consumer bankruptcies just experienced their largest quarterly increase in three years.
#13 The velocity of money in the United States has hit another stunning new low.
#14 The massive civil unrest in Egypt threatens to disrupt the steady flow of oil out of the Middle East…
After last week’s bloody crackdown by the Egyptian army, fears of a disruption of oil supplies to the West have boosted the oil price. Brent crude prices were propelled to a four-month high of $111.23 on Thursday. If the turmoil gets worse – or unrest spreads to other countries – the risk premium currently factored into the price of crude is likely to increase further.
#15 European stocks just experienced their biggest decline in six weeks.
#16 The Japanese national debt recently crossed the quadrillion yen mark, and many are expecting the Japanese financial system to start melting down at any time.
#17 In Indonesia, the stock market is “cratering“.
#18 In India, the yield on their 10 year government bonds has skyrocketed from 7.1 percent in May to 9.25 percent now.
As the coming months unfold, keep a close eye on the “too big to fail” banks both in Europe and in the United States. When the next great financial crisis strikes, they will play a starring role once again. They have been incredibly reckless, and as James Rickards told Greg Hunter during an interview the other day, we are in much worse shape to deal with a major banking crisis than we were back in 2008…
What’s going to cause the next crisis? Rickards says, “The problem in 2008 was too-big-to-fail banks. Well, those banks are now bigger. Their derivative books are bigger. In other words, everything that was wrong in 2008 is worse today.” Rickards goes on to warn, “The last time, in 2008 when the crisis started, the Fed’s balance sheet was $800 billion. Today, the Fed’s balance sheet is $3.3 trillion and increasing at $1 trillion a year.” Rickards contends, “You’re going to have a banking crisis worse than the last one because the banking system is bigger without the resources because the Fed is tapped out.” As far as the Fed ending the money printing, Rickards predicts, “My view is they won’t. The economy is fundamentally weak. We have 50 million on food stamps, 24 million unemployed and 11 million on disability, and all these numbers are going up.”
We never even came close to recovering from the last financial crisis and the last recession.
Now the next major wave of the economic collapse is coming up quickly.
I hope that you are taking this time to prepare for the approaching storm, because it is going to be very painful.
Can you smell that? It is the smell of panic in the air. As I have noted before, when financial markets catch up to economic reality they tend to do so very rapidly. Normally we don’t see virtually all asset classes get slammed at the same time, but the bucket of cold water that Federal Reserve Chairman Ben Bernanke threw on global financial markets on Wednesday has set off an epic temper tantrum. On Thursday, U.S. stocks, European stocks, Asian stocks, gold, silver and government bonds all over the planet all got absolutely shredded. This is not normal market activity. Unfortunately, there is nothing “normal” about our financial markets anymore. Over the past several years they have been grossly twisted and distorted by the Federal Reserve and by the other major central banks around the globe. Did the central bankers really believe that there wouldn’t be a great price to pay for messing with the markets? The behavior that we have been watching this week is the kind of behavior that one would expect at the beginning of a financial panic. Dick Bove, the vice president of equity research at Rafferty Capital Markets, told CNBC that what we are witnessing right now “is not normal. It is not normal for all markets to move in the same direction at the same point in time due to the same development.” The overriding emotion in the financial world right now is fear. And fear can cause investors to do some crazy things. So will global financial markets continue to drop, or will things stabilize for now? That is a very good question. But even if there is a respite for a while, it will only be temporary. More carnage is coming at some point.
What we have witnessed this week very much has the feeling of a turning point. The euphoria that drove the Dow well over the 15,000 mark is now gone, and investors all over the planet are going into crisis mode. The following is a summary of the damage that was done on Thursday…
-U.S. stocks had their worst day of the year by a good margin. The Dow fell 354 points, and that was the biggest one day drop that we have seen since November 2011. Overall, the Dow has lost more than 550 points over the past two days.
-Thursday was the eighth trading day in a row that we have seen a triple digit move in the Dow either up or down. That is the longest such streak since October 2011.
-The yield on 10 year U.S. Treasuries went as high as 2.47% before settling back to 2.42%. That was a level that we have not seen since August 2011, and the 10 year yield is now a full point above the all-time low of 1.4% that we saw back in July 2012.
– The yield on 30 year U.S. Treasuries hit 3.53 percent on Thursday. That was the first time it had been that high since September 2011.
-The CBOE Volatility Index jumped 28 percent on Thursday. It hit 20.49, and this was the first time in 2013 that it has risen above 20. When volatility rises, that means that the markets are getting stressed.
-European stocks got slammed too. The Bloomberg Europe 500 index fell more than 3 percent on Thursday. It was the worst day for European stocks in 20 months.
-In London, the FTSE fell about 3 percent. In Germany, the DAX fell 3.3 percent. In France, the CAC-40 fell 3.7 percent.
-Things continue to get even worse in Japan. The Nikkei has fallen close to 17 percent over the past month.
-Brazilian stocks have fallen by about 15 percent over the past month.
-On Thursday the price of gold got absolutely hammered. Gold was down nearly $100 an ounce. As I am writing this, it is trading at $1273.60.
-Silver got slammed even more than gold did. It fell more than 8 percent. At the moment it is trading at $19.57. That is ridiculously low. I have a feeling that anyone that gets into silver now is going to be extremely happy in the long-term if they are able to handle the wild fluctuations in the short-term.
-Manufacturing activity in China is contracting at a rate that we haven’t seen since the middle of the last recession.
-For the week ending June 15th, initial claims for unemployment benefits in the United States rose by about 18,000 from the previous week to 354,000. This is a number that investors are going to be watching closely in the months ahead.
Needless to say, Thursday was the type of day that investors don’t see too often. The following is what one stock trader told CNBC…
“It’s freaking, crazy now,” said one stock trader during the 3 p.m. ET hour as the Dow sunk more than 350 points. “Even defensive sectors are getting smoked. The super broad-based sell off between commodities, bonds, equities – I wouldn’t say it’s panic, but we’ve seen aggressive selling on the lows.”
Unfortunately, this may just be the beginning.
In fact, Mark J. Grant has suggested that we may see even more panic in the short-term…
Yesterday was the first day of the reversal. There will be more days to come.
What you are seeing, in the first instance, is leverage coming off the table. With short term interest rates right off of Kelvin’s absolute Zero there was been massive leverage utilized in both the bond and equity markets. While it cannot be quantified I can tell you, dealing with so many institutional investors, that the amount of leverage on the books is giant and is now going to get covered. It will not be pretty and it will be a rush through the exit doors as the fire alarm has been pulled by the Fed and the alarms are ringing. There is also an additional problem here.
The Street is not what it was. There is not enough liquidity in the major Wall Street banks, any longer, to deal with the amount of securities that will be thrown at them and I expect the down cycle to get exacerbated by this very real issue. Bernanke is no longer at the gate and the Barbarians are going to be out in force.
If we see global interest rates start to shift in a major way, that is going to be huge.
Well, it is because there are literally hundreds of trillions of dollars worth of interest rate derivatives contracts sitting out there…
The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world’s top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options.
If interest rates begin to swing wildly, that could burst the derivatives bubble that I keep talking about.
And when that house of cards starts falling, we are going to see panic that is going to absolutely dwarf anything that we have seen this week.
So keep watching interest rates, and keep listening for any mention of a problem with “derivatives” in the mainstream media.
When the next great financial crash comes, global credit markets are going to freeze up just like they did in 2008. That will cause economic activity to grind to a standstill and a period of deflation will be upon us. Yes, the way that the Federal Reserve and the federal government respond to such a crisis will ultimately cause tremendous inflation, but as I have written about before, deflation will come first.
It would be wise to build up your emergency fund while you still can. When the next great financial crisis fully erupts a lot of people are going to lose their jobs and for a while it will seem like hardly anyone has any extra money. If you have stashed some cash away, you will be in better shape than most people.
Is the stock market going to crash by the end of this year? Are we on the verge of major financial chaos on a global scale? Well, this is the time of the year when investors start getting nervous. We all remember what happened during the fall of 1929, the fall of 1987 and the fall of 2008. However, it is important to keep in mind that we do not see a stock market crash in the fall of every year. Some years the stock market cruises through the months of September, October, November and December without any problems whatsoever. But this year conditions certainly seem to be right for a “perfect storm” to develop. Technical indicators are screaming that a stock market decline is imminent and sources in the financial industry all over the world are warning that a massive crisis is on the way. What you are about to read should alarm you. But it is not a guarantee that anything will or will not happen. When Ben Bernanke gives his speech at the Jackson Hole summit on Friday he could announce to the rest of the world that the Federal Reserve has decided to launch QE3 and that the Fed will be printing up trillions of new dollars. If that happened global financial markets would leap for joy. So it is always a dangerous thing when anyone out there tries to tell you that they can “guarantee” what is about to happen in the financial world. There are just so many moving parts. But if we do not see major intervention by the governments of the world or by global central banks a major financial crisis could rapidly develop this fall. The conditions are certainly right for a stock market collapse, and we could easily see a repeat of what happened back in 2008.
The truth is that the second half of 2012 looks a little bit more like the second half of 2008 with each passing day.
Just check out what Bob Janjuah of Nomura Securities has been saying….
Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011! US equity markets, along with parts of the EM spectrum, will I think underperform eurozone equity markets, where already very little hope resides.
Others are issuing similar warnings. For example, the following is what a couple of Bank of America analysts said in a report the other day….
Our strategists see an unusually high number of macro catalysts over the next 3-6 months that could take markets lower. We expect economic growth to disappoint in the second half of the year in anticipation of the fiscal cliff. This would exacerbate any slowdown from the deepening recession in Europe and decelerating growth in emerging markets. There is also the ongoing tension in the Middle East, the potential for a US credit downgrade and accelerating downward analyst estimate revisions. To top it off, September is seasonally the weakest month of the year for stock price returns.
There has been an unusual amount of chatter in the financial world about the September to December time frame.
That could mean something or it could mean nothing.
But is is very interesting to watch what some top financial insiders are doing with their stocks right now.
Dennis Gartman, the publisher of the Gartman Leter, has dumped all of his stocks at this point.
As I have written about previously, George Soros has dumped all of his stock in banking giants JP Morgan, Citigroup and Goldman Sachs.
Are they just being paranoid?
Or do they know something that we do not?
If you are looking for the next “Lehman Brothers moment” in the United States, you might want to watch Morgan Stanley. Morgan Stanley was heavily involved in the Facebook IPO disaster, earlier this year their credit rating was downgraded, and now there are persistent rumors that Morgan Stanley is in big trouble and that it will be allowed to fail. You can check out some of these rumors for yourself here, here and here.
But of course as I have said all along the center of the coming crisis is going to be in Europe, and many analysts agree with me. For example, the following is what the chairman of Casey Research, Doug Casey, had to say during a recent interview….
Europe is a full cycle ahead of the U.S. Its governments and its banks are both bankrupt. It’s a couple of drunks standing on the street corner holding each other up at this point. Europe is in much worse shape than the U.S. It’s highly regulated, highly taxed and much more socially unstable.
Europe is going to be the epicenter of the coming storm. Japan is waiting in the wings, as is China. This is going to be a worldwide phenomenon. Of course, the U.S. will be in it, too. We’re going to see this all over the world.
Much of southern Europe is already experiencing depression-like conditions. Unemployment in both Greece and Spain is well above 20 percent and both economies are steadily shrinking.
Money is flowing out of Spanish banks at an unprecedented rate right now. Just take a look at these charts. The only thing that is going to keep the Spanish banking system from totally collapsing is outside intervention.
But the truth is that all of Europe is in big trouble. Even German companies are slashing job right now. For example, check out what Siemens is up to….
German engineering conglomerate Siemens (SIEGn.DE) is in early internal talks to cut thousands of jobs in response to a weakening economy, particularly in Europe, a German newspaper reported.
Decisions could be made in October or November, according to daily Boersen-Zeitung, which did not specify its sources.
A Siemens spokesman declined to comment.
We are living in the greatest debt bubble in the history of the world, and at some point that bubble is going to burst in a very messy way.
It is vital that people understand that our system is not even close to sustainable.
Knowing exactly when it will collapse is not nearly as important as understanding that a collapse is absolutely inevitable.
I think what former World Bank economist Richard Duncan had to say recently is very helpful….
“The explosion in credit drove economic growth in the U.S. and around the world, and now that’s the only thing that’s keeping us from collapsing in a debt/deflation spiral,” he said. “[What] I think everybody needs to understand is that the kind of economy that we have now, it’s not capitalism. It has very little in common with capitalism. Capitalism was an economic system in which the government played very little role …. Under capitalism, gold was money and the government had nothing to do with it. Now the central bank creates the money and manipulates its value.”
And he is very right.
We aren’t seeing a failure of capitalism.
What we are witnessing is the failure of debt-based central banking.
And if you think that the global elite are not aware of what is happening then you have not been paying attention.
This summer the global elite have been preparing very hard. Either they are getting very paranoid or they know things that we do not.
If you want to catch up on what the global elite have been up to recently, check out these three articles that I have published previously….
-“Are The Government And The Big Banks Quietly Preparing For An Imminent Financial Collapse?”
-“Startling Evidence That Central Banks And Wall Street Insiders Are Rapidly Preparing For Something BIG”
-“Jacob Rothschild, John Paulson And George Soros Are All Betting That Financial Disaster Is Coming”
If you are waiting for the nightly news to tell you what to do, then you have not learned anything.
Did anyone in the mainstream media warn you about what was about to happen back in 2008?
Of course not.
The “authorities” insisted that everything was going to be just fine and many average Americans were absolutely wiped out.
So don’t expect someone to come along and nicely inform you that your retirement savings are about to be absolutely devastated.
In this day and age it is absolutely critical for people to learn to think for themselves.
Barack Obama is not going to save you.
Mitt Romney is not going to save you.
The U.S. Congress is not going to save you. They are too busy living the high life at taxpayer expense.
The system is not looking out for you. Nobody is really going to care if your financial planning gets turned upside down. This is a cold, cruel world and you need to understand how the game is played. The financial insiders are looking out for themselves and most of them usually are able to avoid financial disaster.
Average folks like you and I are normally not so fortunate.
There are lots of warning signs that indicate that this fall could be a very turbulent time for global financial markets.
Ignore them at your own peril.
Has Europe finally been saved this time? Has this latest “breakthrough” solved the European debt crisis? Of course not, and you should know better by now. European leaders have held 18 summits since the beginning of the debt crisis. After most of the preceding summits, global financial markets responded with joy because European leaders had reached “a deal” which would supposedly solve the crisis. But a few weeks after each summit it would become clear that nothing had been solved and that the financial crisis had actually gotten even worse than before. How many times do they expect us to fall for the same sorry routine? Nothing in Europe has been solved. You can’t solve a debt problem with more debt. European leaders are just kicking the can down the road. More debt will relieve some of the short-term pressure, but in a few weeks it will be apparent that the underlying problems in Europe continue to grow. Unfortunately, there is not an unlimited amount of EU bailout money, so once all of these “financial bullets” have been fired European leaders are going to find that kicking the can down the road will not be so easy anymore. The truth is that the financial crisis in Europe has not been cancelled – it has just been put off for a few weeks or a few months.
Do you solve the problems of a credit card addict by giving that person another credit card? Of course not. You may delay the short-term financial problems of the credit card addict by giving that person another credit card, but in the process you make the long-term problems even worse.
Well, that is essentially what is happening in Europe. European governments and the European financial system have become ridiculously dependent on debt. By giving European debt junkies another “hit” or two it may relieve a bit of short-term suffering but it doesn’t solve anything.
Just think about it.
Did the first bailout package solve the problems in Greece?
Did the second bailout package solve the problems in Greece?
Today, the Greek financial system is a complete and total mess, and Greek politicians are saying that a third bailout package may be necessary.
Many are claiming that Italy and Spain have been “saved” by this new deal, but that is a joke.
Yes, the ability to inject bailout funds directly into troubled banks is going to keep some of them going for a little while. But the deal also calls for a new governing body to be established that will supervise those banks. Will that governing body be established in time to even provide the short-term help that is needed?
Yes, spending bailout funds to buy up Spanish debt and Italian debt will artificially suppress bond yields for a time.
We have seen this before.
But what happened?
After the bond buying program was over, bond yields started spiking again.
So do the Europeans plan to suppress bond yields forever?
Of course not. There is not enough bailout money to do that.
Let’s review the equation that I have shared in previous articles….
Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions
Have any of those elements been removed?
Bond yields will be suppressed for a period of time, but that will not last forever, and all of the other underlying issues are still there.
Meanwhile, the rest of Europe continues to follow the Greek economy into economic depression.
The Spanish economy shrunk again in the second quarter of 2012, and austerity in that nation has barely even begun.
As a recent CNBC article detailed, the big spending cuts are still coming….
The conservatives, who inherited from the outgoing Socialists one of the euro zone’s highest public deficits, at 8.9 percent of GDP in 2011, have said they will shrink the shortfall to 5.3 percent this year and 3 percent in 2013.
Austerity has absolutely shredded the Greek economy, and we are starting to see that same pattern be repeated all over Europe.
When you spend far more money than you bring in for decades, eventually you have to go through a very painful adjustment. What is going on in Greece should be a lesson for all of us. Debt allows you to live above your means, but the consequences of going into way too much debt can be absolutely horrific.
More debt can delay the consequences of a debt problem but it cannot solve a debt problem. The following is what Jim Rogers told CNBC on Friday….
“Just because now you have a way to get them (the banks) to borrow even more money, this is not solving the problem, this is making the problem worse,” Rogers said on Friday.
“People need to stop spending money they don’t have. The solution to too much debt is not more debt. All this little agreement does is give them (banks) a chance to have even more debt for a while longer,” he added.
But if you just went by the headlines in most of the newspapers around the world you would think that European leaders had discovered the cure for cancer or something.
Sadly, the truth is that they are simply choosing to fire off a few of the “financial bullets” that they still have left as a recent Washington Post article described….
The European bailout funds don’t have unlimited resources. If they throw $125 billion at Spain’s banks and another couple hundred billion toward Italy, pretty soon they’ll be running low. The only entity with unlimited euros is the European Central Bank. And right now, there’s no talk of using the ECB to provide bailouts. Which means that this latest move might have just forestalled the crisis, rather than ending it permanently.
So what comes next?
Bruce Krasting believes that the “half-life of this bailout will be measured in weeks”. The following is his summary of what he sees coming next in Europe….
If I’m right, after a few weeks things turn south again in the capital markets. Then what?
- More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.
- Cut ECB % rate. Doesn’t matter. It won’t change conditions in Italian or Spanish funding markets one bit.
- A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.
- Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation). Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.
- The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.
- Merkel does a 180 and embraces Euro bonds. No chance in hell.
-The US or China are going to start buying EU bonds? Lunacy – not happening.
-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.
In other words, kicking the can down the road is going to get quite a bit harder after the current “sugar high” wears off.
Europe is still headed for the greatest financial crisis since the Great Depression (at least) and European leaders seem powerless to stop it.
Of course the United States is also facing a crisis of too much debt and a great day of reckoning is on the way for this country as well.
So yes, the global economy is still heading for collapse and there is still a multitude of reasons to be extremely concerned about the second half of 2012.
What is your opinion about all of this?
Do you think that European leaders will be able to keep kicking the can down the road?
Please feel free to post a comment with your opinion below….
If you enjoy watching financial doom, then you are quite likely to really enjoy the rest of 2012. Right now, red flags are popping up all over the place. Corporate insiders are selling off stock like there is no tomorrow, major economies all over Europe continue to implode, the IMF is warning that the eurozone could actually break up and there are signs of trouble at major banks all over the planet. Unfortunately, it looks like the period of relative stability that global financial markets have been enjoying is about to come to an end. A whole host of problems that have been festering just below the surface are starting to manifest, and we are beginning to see the ingredients for a “perfect storm” start to come together. The greatest global debt bubble in human history is showing signs that it is getting ready to burst, and when that happens the consequences are going to be absolutely horrific. Hopefully we still have at least a little bit more time before the global financial system implodes, but at this point it doesn’t look like anything is going to be able to stop the chaos that is on the horizon.
The following are 22 red flags that indicate that very serious doom is coming for global financial markets….
#1 According to CNN, the level of selling by insiders at corporations listed on the S&P 500 is the highest that it has been in almost a decade. Do those insiders know something that the rest of us do not?
#2 Home prices in the United States have fallen for six months in a row and are now down 35 percent from the peak of the housing market. The last time that home prices in the U.S. were this low was back in 2002.
#3 It is now being projected that the Greek economy will shrink by another 5 percent this year.
#4 Despite wave after wave of austerity measures, Greece is still going to have a budget deficit equivalent to about 7 percent of GDP in 2012.
#5 Interest rates on Italian and Spanish sovereign debt are rapidly rising. The following is from a recent RTE article….
Spain’s borrowing rate nearly doubled in a short-term debt auction as investors fretted over the euro zone’s determination to deal with its debts.
And Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.
#6 The government of Spain recently announced that its 2011 budget deficit was much larger than originally projected and that it probably will not meet its budget targets for 2012 either.
#7 Amazingly, bad loans now make up 8.15 percent of all loans on the books of Spanish banks. That is the highest level in 18 years. The total value of all toxic loans in Spain is equivalent to approximately 13 percent of Spanish GDP.
#8 One key Spanish stock index has already fallen by more than 19 percent so far this year.
#9 The Spanish government has announced a ban on all cash transactions larger than 2,500 euros. Many are interpreting this as a panic move.
#10 It is looking increasingly likely that a major bailout for Spain will be needed. The following is from a recent Reuters article….
Economic experts watching Spain don’t know how much money will be needed or precisely when, but some are near certain that Madrid will eventually seek a multi-billion euro bailout for its banks, and perhaps even for the state itself.
#11 Analysts at Moody’s Analytics are warning that Italy has now reached financially unsustainable territory….
“Italy is already out of fiscal space, in our estimate.” said Moody’s. “Its debt levels relative to GDP already exceed a manageable level. The manageable limit for Italian 10-year bond yields is estimated at 4.2pc. As of Wednesday, Italian 10-year yields were 5.46pc.”
#12 It is being projected that the Portuguese economy will shrink by 5.7 percent during 2012.
#13 There is even trouble in European nations that have been considered relatively stable up to this point. For example, the Dutch government collapsed on Monday after austerity talks broke down.
#14 The head of the IMF, Christine Lagarde, says that there are “dark clouds on the horizon” for the global economy.
#15 The top economist for the IMF, Olivier Blanchard, recently made this statement: “One has the feeling that at any moment, things could get very bad again.”
#16 A recent IMF report admitted that the current financial crisis could lead to the break up of the eurozone….
Under these circumstances, a break-up of the euro area could not be ruled out. The financial and real spillovers to other regions, especially emerging Europe, would likely be very large.
This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.
#17 George Soros is publicly declaring that the European Union could soon experience a collapse similar to what happened to the Soviet Union.
#18 A member of the European Parliament, Nigel Farage, stated during one recent interview that it is inevitable that some major banks in Europe will collapse….
There are going to be some serious banking collapses and the impact of that on some sovereign states, will be serious. I’m afraid we’ve gotten to a point where we really can’t stop this now. We’re beginning to reach a stage where however much false money you create, the problem becomes bigger than the people trying to solve it. We are very close to that point.
When I talk about the threats and the risk that this thing could wind up in some kind of rebellion, some sort of awful social cataclysm, they (other European politicians) are now very worried indeed. They will talk to you in private, but in public, nobody dares utter a word.
I think the deterioration, in the last two or three weeks, in the eurozone is very serious indeed. It’s the bond spreads in Italy and Spain. It’s the fact that youth unemployment is now over 50% in some of these Mediterranean countries.
It’s riot and disorder on the streets. And yet a month ago I was here and there was Herman Van Rumpuy telling us, ‘We’ve turned the corner. Everything is solved. There are no more problems with the eurozone.’ What a pack of jokers they look like.”
#19 The IMF is projecting that Japan will have a debt to GDP ratio of 256 percent by next year.
#20 Goldman Sachs is projecting that the S&P 500 will fall by about 11 percent by the end of 2012.
#21 Over the past six months, hundreds of prominent bankers have resigned all over the globe. Is there a reason why so many are suddenly leaving their posts?
#22 The 9 largest U.S. banks have a total of 228.72 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy. It is a financial bubble so immense in size that it is nearly impossible to fully comprehend how large it is.
The financial crisis of 2008 was just a warm up act for what is coming. The too big to fail banks are larger than ever, the governments of the western world are in far more debt than they were back then, and the entire global financial system is more unstable and more vulnerable than ever before.
But this time the epicenter of the financial crisis will be in Europe.
Outside of Europe, most people simply do not understand how truly nightmarish the European economic crisis really is.
Spain, Italy and Portugal are all heading for an economic depression and Greece is already in one.
The European Central Bank was able to kick the can down the road a little bit by expanding its balance sheet by about a trillion dollars over the last nine months, but the truth is that the underlying problems in Europe just continue to get worse and worse.
It truly is like watching a horrible car wreck happen in slow motion.
The good news is that there is still a little time to get yourself into a better position for the next financial crisis. Don’t leave yourself financially exposed to the next crash.
Sadly, just like back in 2008, most people will never even see this next crisis coming.
So do you have any other red flags to add to the list above? Please feel free to post a comment with your thoughts below….
Have you heard the good news? Financial armageddon has been averted. The economic collapse in Europe has been cancelled. Everything is going to be okay. Well, actually none of those statements is true, but news of the “debt deal” in Europe has set off a frenzy of irrational exuberance throughout the financial world anyway. Newspapers all over the globe are declaring that the financial crisis in Europe is over. Stock markets all over the world are soaring. The Dow was up nearly 3 percent today, and this recent surge is helping the S&P 500 to have its best month since 1974. Global financial markets are experiencing an explosion of optimism right now. Yes, European leaders have been able to kick the can down the road for a few months and a total Greek default is not going to happen right now. However, as you will see below, the core elements of this “debt deal” actually make a financial disaster in Europe even more likely in the future.
The two most important parts of the plan are a 50% “haircut” on Greek debt held by private investors and highly leveraging the European Financial Stability Facility (EFSF) to give it much more “firepower”.
Both of these elements are likely to cause significant problems down the road. But most investors do not seem to have figured this out yet. In fact, most investors seem to be buying into the hype that Europe’s problems have been solved.
There is a tremendous lack of critical thinking in the financial community today. Just because politicians in Europe say that the crisis has been solved does not mean that the crisis has been solved. But all over the world there are bold declarations that a great “breakthrough” has been achieved. An article posted on USA Today is an example of this irrational exuberance….
Investors — at least for now — don’t have to worry about a financial collapse like the one in 2008, after Wall Street investment bank Lehman Bros. filed for bankruptcy, sparking a global financial crisis.
“Financial Armageddon seems to have been taken off the table,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
Wow, doesn’t that sound great?
But now let’s look at the facts.
You can’t solve a debt problem with even more debt. But that is what this debt deal is trying to do.
The politicians in Europe did not want to raise more money for the EFSF the “hard way”. Voters in Germany (and other European nations) are overwhelmingly against contributing even more cash to a fund that many see as a financial black hole.
So what do you do when more money is needed but nobody wants to contribute?
You borrow it.
Essentially, this debt deal calls for the EFSF to become four or five times larger by “leveraging” the existing funds in the EFSF.
But isn’t that risky?
Of course it is.
There are some leaders in Europe that recognize this. For example, an article in The Telegraph notes the reservations that the president of the Bundesbank has about this plan….
Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.
He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds.
So who is going to fund all of this new debt?
Well, it turns out that the Europeans are counting on the same folks that the U.S. government is constantly borrowing money from.
French President Nicolas Sarkozy has already spoken directly with Chinese President Hu Jintao about funding this new bailout effort.
So is borrowing money from the Chinese to fund bailouts for Greece and other weak sisters in Europe sound policy?
Of course not.
And the sad thing is that this expanded EFSF is still not going to be enough to solve the financial problems in Europe.
According to an article in The Telegraph, a recent survey of economists found that most of them do not believe that this new plan is going to raise enough money….
The plan to increase the European Financial and Stability Facility to €1 trillion on paper was attacked by economists as not enough to “stave off” worsening debt problems in Italy and Spain.
In a survey of economists, 26 of 48 thought the firepower was not enough.
But the worst part of this new plan is the 50 percent “haircut” that private investors are being forced to take.
This is essentially a partial default by the Greek government. A lot of folks are going to get hit really hard by losses from this. Instead of making financial institutions in Europe stronger, these losses are going to make a lot of them even weaker.
Normally, in the event of a default, credit default swap contracts would be triggered. But apparently because this was considered to be a “voluntary” haircut, that is not going to happen in this instance.
A Bloomberg article explained this in greater detail. The following is a brief excerpt….
The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules.
That means that investors and financial institutions all over the world are just going to have to eat these losses.
Greek Prime Minister George Papandreou is already acknowledging that a number of Greek banks will have to be nationalized because of the severity of this “haircut”. A recent CNBC article detailed this….
The haircut is expected to impose big losses on the country’s banks and state-run pension funds, which are up their necks in toxic Greek government bonds of about 100 billion euros.
The government will replenish pension funds’ capital, but banks may face temporary nationalisation, Papandreou said.
“It is very likely that a large part of the banks’ shares will pass into state ownership,” Papandreou said. He pledged, however, that these stakes will be sold back to private investors after the banks’ restructuring.
So where will the Greek government get the funds to “replenish” the capital of those banks?
That is a very good question.
But we haven’t even discussed the worst part of this “debt deal” yet.
If you don’t remember any other part of this article, please remember this.
The debt deal in Europe sends a very frightening message to the market.
The truth is that Europe could have totally bailed out Greece without any sort of a “haircut” taking place.
But they didn’t.
So now investors all over the globe have got to be thinking that if they are holding Portuguese bonds, Italian bonds or Spanish bonds there is a really good chance that they will be forced to take a massive “haircut” at some point as well.
At this time last year, the yield on two year Italian bonds was about 2.5 percent. Now it is about 4.5 percent. As investors begin to price in the probability of having to take a future “haircut” on Italian debt, those bond yields are going to go much, much higher.
That means that it is going to become much more expensive for the Italian government to borrow money and that also means that it is going to become much more difficult for the Italians to get their financial house in order.
In essence, the haircut on Greek debt is a signal to investors that they should require a much higher rate of return on the debt of all of the PIIGS. This is going to make the financial collapse of all of the PIIGS much more likely.
Remember, about this time last year the yield on two year Greek bonds was about 10 percent. Today, it is over 70 percent.
As I wrote about in a previous article, the western world is in debt up to its eyeballs right now and trying to kick the can down the road is not going to solve anything.
Our leaders may succeed in delaying the pain for a while, but it most definitely is coming.
Greece, Portugal, Ireland and Italy all have debt to GDP ratios that are well over 100% right now. Spain is in a huge amount of trouble as well.
When you add up all the debt, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.
If Italy or Spain goes down, the rest of Europe is going to be helpless to stop it. There simply is not going to be enough money to bail either one of them out.
That is why this “debt deal” is so alarming. All investors in Italian or Spanish debt will now have to factor in the probability that they will be required to accept a 50 percent haircut at some point in the future.
If the markets behave rationally (and if the ECB does not manipulate them too much), it appears inevitable that bond yields over in Europe are going to rise substantially, and that will put tremendous additional financial strain on governments all over Europe.
Basically, we have got a huge mess on our hands, and this debt deal just made it a lot worse.
Yes, a financial collapse has been averted in Greece for the moment, but the truth is that there is no real reason to be celebrating this deal.
A massive financial storm is coming to Europe, and this “debt deal” has made that all the more certain.
Once again, politicians in Europe have tried to kick the can down the road, but in the end their efforts are only going to lead to complete and total financial disaster.