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The Global Financial System Can and Will Collapse Thanks to Europe... Are You Prepared?

Phoenix Capital Research's picture




 

 

A lot has been said about the European Crisis. I’m going to explain it all in simple terms.

 

In simple terms, today we are facing a Crisis that is far, far worse than 2008. Before it ends, it is quite possible that we will see the entire Western Financial System collapse and a new system put into place.

 

This will mean:

 

  1. Many major banks disappearing, as well as numerous potentially lengthy bank holidays (think Argentina in 2001)
  2. Multiple sovereign defaults as well as broad economic contractions and their commensurate unemployment/ civil unrest/ erasure of retirement accounts/ pensions (this process has already begun in some US municipals, e.g. San Bernandino and Stockton California as well as Harrisburg Pennsylvania).
  3. Possibly new currencies being introduced or new denominations of currencies (say one new unit being worth 1,000 of the old one)
  4. Massive wealth destruction to the tune of tens of trillions of Dollars (think MF Global i.e. the money is gone… only systemically… in fact we just had another such instance with PF)
  5. A global contraction that will result in new political/ power structures being implemented as well as the breakup of various countries/ unions.
  6. Very serious trade wars to begin (see Obama’s recent attack on China) and very possibly a real war.

 

If the above make you frightened, you’re not alone. As I’ve dug deeper and deeper into the inner workings of the global financial system over the past months, the information I’ve come across has only gotten worse. I’ve been holding off writing all of this because up until roughly April/May it seemed possible that the world might veer towards another outcome.

 

I no longer view this to be the case. I am almost certain that what I’ve written above will come to pass. I know that much of what I’ve written to you in the past could be labeled as “gloom and doom.” However, I want you to know that I do not use the words “systemic collapse” lightly. Indeed, I wish I wasn’t mentioning them now, but I’d be doing you a disservice not to bring them up because we’re well on our way towards it.

 

So buckle up and let’s dive in.

 

In order to understand why we’re at risk of the financial system collapsing, you first need to understand how the global banking system works. When you or I buy an asset (say a house, or shares in a stock, or a Treasury bond), we do so because we’re looking to increase our wealth through either capital gains or through the income that asset will pay us in exchange for us parking our capital there.

 

In simple terms, you’re putting/ lending your money somewhere (especially if you’re buying a bond) in the hope of increasing the value or your money.

 

This is not how banks work. When a bank buys something, especially a bond, it parks that bond on its balance sheet as an “asset.” It then lends money out against that asset. This in of itself is not problematic except for the fact that the financial modeling of 99% of banks base assume that sovereign bonds are “risk-free.” Put another way, these models assume that the banks will always get their money back on 100 cents on the Dollar.

 

Yes, you read that correctly, despite the fact that world history is replete with examples of sovereign defaults (in the last 20 years alone we’ve seen more than 15 including countries as significant as Russia, Argentina, and Brazil), most banks assume that the sovereign bonds sitting on their balance sheets are risk free.

 

This phenomenon occurs worldwide, but given that it will be Europe, not the US that takes the system down, I’m going to focus on European bank models/ capital ratios.

 

You may or may not be familiar with EU banking law. EU banks are meant to comply with Basel II which is a series of capital requirements and other specifications meant to limit systemic risk.

 

In terms of capital ratios, Basel II requires that EU banks have equity and Tier 1 capital equal to 6% of risk weighted assets. On paper this idea was supposed to limit bank leverage to 16 to 1 (the bank has €1 in capital or equity for every €16 in loans).

 

However, the term “risk weighted assets” destroys this premise because it means that the bank’s loan portfolio and ultimately its leverage ratio are based on the bank’s in house models/ assumptions concerning the risk of its loans.

 

Let me give you an example…

 

Let’s say XYZ Bank lends out €50 million to a corporation. The bank won’t necessarily claim that all €50 million is “at risk.” Instead, the bank will claim that only a percentage of this €50 million is “at risk” based on the company’s credit rating, financial records (debt to equity, etc), and the like.

 

Thus, based on “in-house” risk modeling, European banks could in fact lend out much, much more than the Basel II requirements would imply. Considering that both bank profits and executive compensation were/are closely tied to more lenient definitions of “risk-weighted,” (i.e. lend as much as you possibly can) it’s safe to assume that EU banks are in fact much, much more leveraged.

 

Indeed, 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).

 

 

You can only get bubbles of this magnitude if you’re lending to literally anyone with a pulse. And you can only lend that much if your in-house risk models believe that the risk of lending to anyone with a pulse is much, much lower than reality.

 

Hench, EU banks are likely leveraged at much, much more than 26 to 1. Indeed, considering how leveraged and toxic US banks’ (especially the investment banks’) balance sheets became from the US housing bubble, the above chart should give everyone pause when they consider the TRUE state of EU bank balance sheets.

 

This fact in of itself makes the possibility of a systemic collapse of the EU banking system relatively high.

 

On that note, 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.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

 

 

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Wed, 07/25/2012 - 16:05 | 2650579 Cam Mather
Cam Mather's picture

Buckle up and read "Thriving During Challenging Times, The Energy, Food and Financial Independence Handbook." It's nice to have a warm home and dinner when you're figuring out how to invest in a collapse.  http://www.aztext.com/thriving.cfm

Tue, 07/24/2012 - 18:52 | 2647394 chasman
chasman's picture

I'm depressed and need a drink after this article.....ohhhhhhhh whoooooo is me we are all doomed....As Dr. smith would say in lost n space

"Nothing good can come of this"

 

Tue, 07/24/2012 - 18:48 | 2647389 Aquarius
Aquarius's picture

The enemy http://tinyurl.com/d2t949v

 

and

Its analogical form http://tinyurl.com/cpqod8l

it's just natural physics

Tue, 07/24/2012 - 18:35 | 2647371 Zero Govt
Zero Govt's picture


The Global Financial System Can and Will Collapse Thanks to Europe

That's it Graham, blame Europe if it makes you feel better

...as gooda place as any to start, but point the finger at bankers and politicians please

Tue, 07/24/2012 - 17:32 | 2647217 spinone
spinone's picture

As long as OPEC only takes dollars for oil, no worries.

Tue, 07/24/2012 - 17:25 | 2647189 dimitar
Tue, 07/24/2012 - 17:07 | 2647127 Tinky
Tinky's picture

It's sad that many on this site are sympathetic to Graham's general outlook, yet this:

"...it explains exactly how the coming Crisis will unfold..."

tends to undermine almost everything he says.

Tue, 07/24/2012 - 20:22 | 2647609 I dont belong here
I dont belong here's picture

Good point. My crystal ball shows the derivatives bubble popping the whole house of cards, but only the ones engineering the collapse really know.

Tue, 07/24/2012 - 16:56 | 2647069 vmromk
vmromk's picture

Hey Graham, it appears that the comments posted about your "service" speak volumes.

 

Tue, 07/24/2012 - 16:49 | 2647040 lasvegaspersona
lasvegaspersona's picture

In simple terms, today we are facing a Crisis that is far, far worse than 2008. Before it ends, it is quite possible that we will see the entire Western Financial System collapse and a new system put into place.

'possible' eh? that's pretty brave and radical lingo

Tue, 07/24/2012 - 16:30 | 2646881 Haddock
Haddock's picture

101

Tue, 07/24/2012 - 16:24 | 2646857 petolo
petolo's picture

Don,t  bother going tothis loser,s website.Pure manure.Charge Graham for the advertising drivel.

Tue, 07/24/2012 - 16:03 | 2646740 LMAOLORI
LMAOLORI's picture

 

 

I hope so I've been prepping for a while but can you ever really be ready for an event of this magnitude?

 

http://www.youtube.com/watch?v=2N8gJSMoOJc

Tue, 07/24/2012 - 16:03 | 2646736 stocktivity
stocktivity's picture

This is the same shit posted a few days ago isn't it?

Tue, 07/24/2012 - 19:58 | 2647561 cbxer55
cbxer55's picture

The top portion of it is the same as yesterdays. He does go into more detail in the lower portion, and that was not in yesterdays. Ya just got to read the entire thing to catch that.

Tue, 07/24/2012 - 18:24 | 2647347 Papasmurf
Papasmurf's picture

He's more scareder today, so post again.

Tue, 07/24/2012 - 16:01 | 2646734 madcows
madcows's picture

Get lost, Spammer!

Tue, 07/24/2012 - 15:58 | 2646723 digitlman
digitlman's picture

PISS OFF!

 

You haven't been right yet!

Tue, 07/24/2012 - 20:09 | 2647589 LowProfile
LowProfile's picture

To be fair, he's gotten some things right.

However, he clearly doesn't understand the construction of the euro will prevent it from becoming worthless.  This is why bond yields in the EU are soaring.  The EU is not the USA, not by a long stretch.

So, bond yields will rise, governments in the EU will contract, policies will become more business-friendly, etc.  There may be countries that will leave the euro, but they will NOT abandon use of the euro (you may see Greece using drachma side by side with euros).  Some bondholders may take a haircut instead of losing everything, and some euro banks might go under, but it won't destroy the euro, IT'S TOO USEFUL AS A MEDIUM OF EXCHANGE.

And, there's that niggling matter of 15% of the euro's reserves being in gold, which is marked to market, and that European countries *do not tax gold bullion*.

Ponder well the last half of that previous sentence.

Wed, 07/25/2012 - 03:13 | 2648210 Ghordius
Ghordius's picture

+1  I find interesting, though, how the narrative of several commentators is "doom is near because of Europe". grand call for repatriation

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