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Why Europe Matters… And How Spain Could Wipe Out Your 401(k)
Many people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?”
The short answer is that everyone should care about Spain. Spain could potentially take down the banking system in Europe, which would mean the US facing a Financial Crisis at least on par with 2008.
How would this unfold?
To understand this, you need to understand how the European banking system works. By now everyone knows that many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.
Well, when these countries issue debt, it is mainly the European banks that buy it. So let’s say Spain issues €5 billion in new debt. Most of that will be snatched up by Spanish banks or some other European financial entity.
This bank will then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk (I realize this sounds insane given how bad Spain’s finances are, but this is how the banking system’s “risk models” work).
The bank will then use this Spanish bond to backstop loans to Spanish businesses, developers (not so much any more) even student loans: pretty much every other type of loan the bank might make.
On top of this, the bank will also use this Spanish bond to backstop hundreds of billions of Euros worth of trades.
Do you see the problem with this? If Spain defaults, one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke. At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).
So what? Who cares? This is Spain’s problem right?
Wrong. This is Europe’s problem as European banks across the board are sitting on Spanish debt: Spain’s sovereign bond market is €2.1 trillion in size.
So if Spain defaults, then a heck of a lot of EU banks (and some US banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent. This in turn could spread like wildfire throughout Europe’s banking system.
This is why the Spanish bank bailout was so rapid (it took only one weekend). EU officials know that if Spain’s banking system goes down, most of Europe will as well. This is also why EU officials continue to give money to Greece despite the clear fact that Greece is completely and totally bankrupt and has failed to meet fiscal demands placed on it throughout the EU Crisis.
Indeed, I wager most people at some point have asked themselves, “what’s the big deal about Greece? It represents only 2% of the EU economy. How is it that a country this small is still an issue after TWO YEARS!?!”
Now you know. By some estimates, Greece’s true debt exposure is north of $1 trillion. Lehman brothers had $649 billion in assets when it collapsed. Can you imagine the impact that a $1 trillion vacuum would have on the EU’s banking system (a banking system which backstops well over €200 trillion in derivative trades by the way).
How would the debt implosion of Spain’s $2.2 trillion in sovereign bonds affect the financial system? What about the effect of Europe’s $46 TRILLION banking system collapsing?
It would be Lehman by a factor of ten, easily.
So what does this have to do with the US?
The US banking system is $12 trillion in size. And this backstops over $220 trillion in derivative trades. Of this $220 trillion, 85% are based on interest rates. So…
If Spain, or any of the other PIIGS default, and Europe’s banking system (which is $46 trillion in size by the way) crumbles, interest rates across Europe will spike as the EU sovereign crisis spreads.
At the same time, Treasuries will spike pushing interest rates close to ZERO in the US, if not into negative territory (this happened when Lehman went under).
This in turn would very likely trigger an implosion of all those derivative trades based on interest rates. This blows up Wall Street and likely results in bank holidays and the stock market even being closed down for a period.
This is why Europe matters. This is why Spain could wipe out your 401(K). This is why European leaders are so frantic NOT to let a default occur in Greece or Spain (remember, the Spanish bailout was rushed through in less than a weekend).
In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.
This is why I keep talking about Europe so much. And it’s why I’m more concerned now than I was in early 2008. No joke. What’s coming will be truly horrific. I believe we have, at most, maybe 9-10 months to prepare for all of this (possibly less).
On that note, we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You 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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He's just a shill for ProShares. His free papers tell you to short everything with leveraged inverse ETFs.
When the markets are closed for 'bank holiday', who are you gonna sell to? And will ProShares remain solvent, or simply default on your massive winning position?
And why does ZH keep publishing his stuff?
Graham, you made the exact same argument about Greece.
Graham, do everyone a favor and go peddle your drivel to some kindergarteners.
"Many people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?”
Show us these letters Graham.
We wanna see them. We don't believe you.
I think the vast majority of the letters you get are;
"Take Me Off Your List"
Graham and Simon Black like to write endless posts about how many fans they have. It's all a crock.
Nobody is writing letters to Graham other than "please stfu", and "quiet dummy".
looks like Pheonix crapital research has a down-arrow algorithm
As a broke genius myself, I'm gonna laugh full heartedly when all of these baby Boomer suckers, who most likely rooted for the cops to beat the living crap out of "Occupy" protesters (who were defending these pensioners from the fraud allows Wal St to plunder these savings), get their 401Ks cleaned out when the DOW takes its Nestle plunge.
#lolsuckers
Dow plunge isn't the danger.
Confiscation is the danger.
<<EU officials know that if Spain’s banking system goes down, most of Europe will as well.>>
So it's one for all and all for one. Seems like they are a close buunch, eh. Mr Dumas would be proud of them.
"when all these baby Boomer suckers, who most likely rooted for the copes to beat the living crap out of "Occupy" protesters ..."
Peter Schiff is precious metals advocate yet he mocked the "Occupy" people ... generalizations in the real world are usually off the mark.
So shitting on cop cars and raping girls was all in my defense? I'll do it myself then, thank you very much.
Jesus, you're more deluded than even those numb-skulls.
AND
It would be simpler and more effective to keep it to "US AGAINST THEM"....
Instead of, us against them, and them, and them, and them.....
The only "crime" US baby boomers commited , is being ripped off for longer than you kids.
If you think cheating us out of the fund we paid into since we were 15 is OK, then you are just another brainwashed tool like the DWTS/American Idol/snooki fans you joke about.
True.
But they still think their kids and grandkids should make them whole.
They supported and encouraged goobermint to expand and strip away our Republic, allowing it to continue, despite the Gulf of Tonkin, the Kennedys, Waco, Ruby Ridge, etc. etc.
Fuck the Boomers.
Genius? After reading this, I can see that not only are you broke, you're a dumbass to boot. Where do you get the idea that baby boomers oppose OWS, or are you just making shit up as you go?
I am a baby-boomer proper. I am not oppose OWS.
Arguing over paper claims (i.e. your 401k) when all paper fails is beyond stupid.
I just come here for the comments on Graham's posts. I look forward to them greatly. His posts, not so much...
It's just so easy to take shots at the clueless oracle of suburban Arizona.
Between this Graham douche and that other junior-varsity blogger, Simon Black -- there's always plenty of fun to be had in the comments section.
.....But Graham, you predicted it would be all over by now with a total collapse of the Eurozone by July? Or perhaps that was not July 2012?
The EUR will devalue. But it won't disappear, or lose utility.
Ghordius so far has said it best http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen...
"it is well known that the bulk of Europe's sovereign gold is also contained deep under downtown Manhattan: we wish them all the best when they attempt to repatriate the physical when they need it, such as the day after the EUR finally collapses".
This is the other way round. First Nixon forbade repatriation on August 1971. Then europe had think through where all this was heading and concocted the EUR as a response to the situation, present and future.
This included expectations of future currency wars and great rounds of "competitive devaluations" in an environment that would make small currencies very, very fragile in view of huge waves of hot, speculative fiat looking for something to break for a quick profit. The CHF is already hiding under the EUR skirt, if this goes on we'll soon see other small currencies in some kind of trouble (the GBP's fate will also be very interesting). No financial pundit is currently ever thinking through (in the way of Bastiat) how this mess since 2008 would have looked like with 17 eu currencies all biting each other...
Ironically, the best way to get rid of the EUR would be the repatriation of the european gold, same as in 1971.
Fat chance. As long as the US Treasury/FED goes the fiat way and the USD is the global reserve currency (the two facts reinforce each other), I don't see how this "EUR collapse" could happen with an eurozone that is a net exporter, an ECB that values it's gold at market value and the European Fiscal Compact that is going to at least try to institutionalize nearly-balanced-budgets in the eurozone's future.
For all near-blind hate against all central banks that some here have, anybody looking seriously at the current situation should realize a few of those facts, that make btw the search for "understanding where the EURUSD is going" quite irrelevant, a mere short-term distraction. By now, we all have some proof that the ECB is really guided by the compromise between 17 national interests (yeah, call them mercantile, if you wish).
Parts of the gold markets are "getting it", eventually we'll talk here about "eurogold vs. usdgold", and more about "central banks FX reserves", etc.
And for all those that are expecting a "marriage of convenience" between the USD and the EUR - or even think this is a "grand plan": please remember East Asia's policies, expectations, demands (including SDRs), past currency manipulations and plans for the future. And how the current global trade flows function.
All I can add to that at the moment is the EUR is a supra-national currency, with no single nation in control of the issuance of currency (BIG difference between the ECB and the Fed, although it's clear the Fed is in collusion with the big banks).
Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency.
This also has the effect of limiting the ability of any one Eurozone member from issuing unsustainable debt (Greece, Spain, et. al. are running up against this market limit right now).
This has the effect of in the long run, making the EUR the most stable of all transactional currencies in the world.
The USD could do the same, but to try and adopt the EUR model, it would create a price shock in gold (and the USD) that TPTB are clearly trying to avoid.
This IMO will result in the EUR becoming (at least in the West) the transactional currency of choice. Not a great store of value (unless you buy stable EU nation bonds, depending on the larger environment), but a superior medium of exchange than other currencies (owing to it's wide acceptance and greater stability).
Complete bullshit.
All it would take to crash USD and Euro is a new gold redeemable currency introduced by a consortium of nations backed up with enough nuclear weapons to thumb their noses at western governments and bankers.
The only meaningful thing in GS's article is loss of 401k when it's confiscated to "recapitalize" banks (again and again).
After 4 years it's clear now, banks are the only thing that matter anymore to western governments. They'll rob their populations blind to keep banks going.
"Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency."
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I'm not all that clear on how their system works, but didn't they "print money" awhile back with TRO etc.?
I agree that actually the pain they are taking at the moment and the structural changes they're trying to make to bring their budgets back into line with reality are giving them a head start over the U.S. which will need to do the same, and will be paying an ever growing price the longer they wait. But, I don't think that remaining true to their current system is a given going forward. It sounds like at least Italy, France, Spain, Greece etc. are pushing hard for Eurobonds and "printing" more money, which would devalue the euro & ease the pressure on the otherwise insolvent sovereigns and banks. A lot of the world economists are urging the same, and Timmay was apparently over there trying to talk them into it.
I guess time will tell, but the status quo may not stand.
Awsome post.