Phoenix Capital Research's blog

According to the IMF’s “official” analysis, EU banks as a whole are leveraged at 26 to 1. I would argue that in reality many of them are well north of 30 to 1 and possibly even up to 50 or 100 to 1. The reason I can claim this with relative certainty is because the EU housing bubbles dwarfed that of the US. In the chart below the US housing bubble is the lowest line. After it comes Britain (blue) and Italy (orange) then Ireland (green) and finally Spain (dark blue).

We’ve recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

Germans NEVER really trusted the Euro. They went along with it because of the benefit to their export driven economy. But now that the PIIGS and others are begging Germany to backstop the entire EU, they’re back to using Deutschemarks again.

Folks, the political game has changed in the US. The Fed is no longer invulnerable. In this climate more QE cannot possibly happen. End of story. Indeed, if the Fed were to launch QE at any time between now and the election, Obama is DONE. The last possibly chance for QE without it being a clear hand-out to Obama (and a gift from the political gods to Romney) was June. The Fed passed on that.

Here we are one year and over 10 Fed FOMC meetings later and the Fed hasn’t launched any new QE programs. Think about that. For over a year now the financial media has been awash with “experts” saying “QE is just around the corner, the Fed will launch QE any minute now, etc” Every time stocks rally. But. No. QE.

In simple terms, we’re getting many signals that the US economy may in fact be slipping into a second recession in the context of a greater DE-pression.

Merkel and Weidermann’s points here are crucial. There is no way that either can OK giving German funds (ultimately Germany is the real backstop for the EFSF and ESM) without conditions. Why should Germany risk its AAA status to prop up countries that have proven to be unwilling to implement any meaningful reforms and whom actually lie openly to Germany’s face time and again?

Germany will leave the Euro the moment that the EU Crisis spreads to France.  At that point any discussion of EU bailouts is pointless, as the very countries needing aid (France, Italy, Spain, and Greece) account for 53% of the ESM’s funding. 

The Fed, by buying Treasuries is making insolvent banks even more insolvent. It is a short-term gain (liquidity) for a long-term disaster: banks need as much collateral as they can get their hands on right now. And with Treasuries rallying (raising the value of the banks' assets) any aggressive Fed program to take Treasuries out of the system would be a MAJOR step towards another solvency Crisis a la 2008.

Consequently, the real question is: “when does Germany and the rest of the EU stop picking up the tab for Greece?” Judging from the above survey in which even the French and Italians now think Greece should leave the EU if it doesn’t start paying its bills, it won’t be long: Greece will need another €16 billion in financing if the EU accepts its request for another extension (yes, this would be the third bailout).

Markets will stage a knee jerk reaction to these measures. That reaction will see bank shares rise and yields fall, temporarily. But this move will be short-lived, just as moves following LTRO1 and LTRO 2 were. After all, these announcements are just more political measures than anything else. And Europe needs capital NOT politics at this point.

In simple terms, Germany may be willing to prop up the EU, but only if its demands are met. The track record for the PIIGS in terms of meeting demands is abysmal. Moreover, implementing such measures takes months if not years. Given that Spain’s ten-year is back over 7% and Italy is now begging informally for a bailout, the EU doesn’t have that time.

Talks are already underway of suspending the Schengen agreement and implementing border and capital controls. The Schengen agreement and freedom across borders was at the very basis of the Eurozone. And now the political elite want to suspend this?

Let’s consider Germany. According to Axel Weber, the former  head of Germany’s Central Bank, Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.

Months ago, I forecast that Germany will walk before it goes “all in” on the EU to prop up everyone else. I believe that day is fast approaching. Unless Angela Merkel wants to commit political suicide, she will be forced to protect Germany’s domestic issues. Whether this comes as a result of Germany pre-emptively leaving the Euro or doing so after one of the PIIGS has already left remains to be seen. But in the end, Germany WILL WALK IF IT HAS TO.