Regarding the recent coordinated central bank moves, the key take-away point is that the ECB and US Federal Reserve attempted “shock and awe” tactics with their latest announcements by throwing out words such as “unlimited” and “open-ended.”
The implication here was that the Central Banks would do everything they could to prop up the financial markets. However, as has been the case with every Central Bank intervention, there are unintended consequences.
The first unintended consequence concerns the fact that both programs are essentially a form of “intervention to infinite.” The problem with this is that the primary driver of stock prices over the last three years has been the anticipation of more monetary stimulus from Central Banks.
Indeed, the New York Fed itself has openly admitted that were it to remove the market moves that occurred around Fed FOMC meetings (the times when the Fed announced new programs or hinted at doing so), the S&P 500 would be at 600 today.
So, by announcing programs that will be on going in nature, both the ECB and the Fed have removed the anticipation of future Central Bank intervention from investors’ psychologies. This could become highly problematic, especially if these latest announcements turn out to be duds.
Speaking of which…
Spain’s ten-year bond yield has broken back above 6%. To see Spain’s sovereign bond yields rising like this after the ECB announced it would essentially provide “unlimited” buying as support is simply stunning. Why would Spain be imploding like this when the ECB announced it would do everything possible to keep Spanish bond yields low?
As I’ve noted (and 99% of market analysts ignored), the new ECB program will involve the ECB buying unlimited amounts of bonds only if the countries that are seeking help meet certain financial “conditions.”
Spain doesn’t want conditions for two reasons:
- It would implode the already fragile Spanish economy even further
- It would open Spain’s cooked books for the whole world to see
Regarding #1, Spain has seen how “conditions” affected Greece’s economy. With Spanish total unemployment already at 25% and youth unemployment above 50%, the last thing Spanish politicians want is to impose limits on social spending/ welfare programs.
Regarding #2, every single banker and politician in Spain is highly incentivized to not let anyone take a peek into the true nature of the Spanish banking/ financial system. The reason?
Spain’s been cooking its books for years. And the reality is that the country in far worse shape than anyone has admitted. Case in point, the country just discovered another €28 billion in debt on its books. One wonders what else is hidden in the darkness of Spain’s officials “numbers.”
We get a few hints from various sources. One of them is Spain’s Prime Minister Rajoy text to his finance minister that the cost of a Spanish bailout would be closer to €500 billion (this occurred right before the initial €100 billion Spanish bailout).
Another item concerns Spain’s banks’ capital needs. As I’ve noted recently, Spaniards pulled €75 billion out of the Spanish banks in July. If that’s not crazy enough for you, consider that Spaniards have taken out roughly 17% of total bank deposits in Spain since the year began (just nine months).
There is a full-scale bank-run underway in Spain, and the Spanish banks are in BIG trouble as a result.
Over the last year, the primary buyers of Spanish sovereign debt have been Spanish banks. However, now that the banks are facing bank runs, they’ve become net sellers of Spanish bonds, dumping €16 billion this year (€5.4 billion of this was in July alone).
So who will be buying Spanish bonds?
Apparently no one but the ECB. And the ECB will only do this if Spain agrees to austerity measures… which Spain doesn’t want. Talk about a mess.
A few other items of note: Spain has regional elections on October 12. Prime Minister Rajoy will likely try to drag out presenting his new budget (or seeking additional funds from the ECB) until after this. But with €30 billion in Spanish sovereign debt due in October, that month has the potential for some real fireworks for Spain and, by extension, the EU.
Long-term, there are essentially three primary outcomes for Spain:
- Spain goes the “Greek route” of agreeing to austerity measures in exchange for bailouts (which will implode the economy).
- Prime Minister Rajoy refuses to impose austerity measures and is removed/ replaced by an EU technocrat who is pro-austerity measures (like Italy experienced last year)
- Spain defaults/ leaves the EU.
I cannot say which one of these options will prove to be the case. All I can say is that Spain is facing a massive funding shortfall combined with a severe bank run. This will not end well.
The time to start preparing is now. The Great Debt Implosion has begun. Some folks will walk out of this mess winners. Most will walk out as losers.
At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners. We have a host of FREE Special Reports devoted to helping readers prepare for the coming Debt Implosions in both the US and Europe.
We also feature a special report devoted to inflation as well as which investments will perform best during periods of high inflation (periods like the one we’re entering).
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