What Happens When the Great Attempt to Hold Things Together Fails?

Phoenix Capital Research's picture

 

Now that Obama has been re-elected, the BLS and other Government entities have begun to revise all of the positive data from before the November election downward. New jobless claims are back over 400,000. The amazing new home sales of 389,00 from October has been revised back down to 369,000. And a new record has been set for food stamp usage.

 

Things are only going to get worse for the following reasons:

 

  1. Increased taxes
  2. Increased regulation

 

Both of these items will result in people parking their cash rather than investing in the economy. Case in point, as ZeroHedge noted a few weeks ago, $132 BILLION was suddenly parked in bank savings accounts. That’s $132 billion (nearly 1% of US GDP) leaving the US economy and plunking into savings accounts

 

To put this number into perspective, this is more than the amount of money that fled to the safety of savings accounts when LEHMAN FAILED.

 

In simple terms capital is going into hibernation. Without the investment of capital, the US economy will continue to weaken. Between this, the fiscal cliff, the earnings disaster for corporations and more, the market is set for a truly horrendous 2013.

Economic bell-weathers such as Caterpillar (green), Fed EX (red) and McDonalds (purple) are already discounting this in a big way.

 

 

However, we’re not quite there yet. Unless things come unhinged sooner due to some event in Europe, it will probably be the end of December (when the fiscal cliff will be hitting) before things really get messy in the markets.

 

I want to alert you to all of this in advance because I believe 2013 will be the year in which the real reset happens. As I’ve explained in earlier articles, it almost hit last summer. It was only through the ECB and Fed promising to buy everything that the system held together. But now even the Fed has stated outright that it cannot contain the impact of the fiscal cliff.

 

We get additional signs that those in charge are out of ideas in Europe. There the latest proposal for Greece is a debt buyback plan through which Greece would use €10 billion to buy some €30 billion worth of debt. Greece doesn’t have €10 billion lying around so it would likely tap a bailout fund (the EFSF or ESM) to do this. This means Greece would need (you guessed it) another bailout in order to buy its own debt.

 

It would also need to convince Greek bondholders to sell their stakes, which was a huge issue during the Second Greek bailout earlier this year.

 

So once again, we have yet another non-solution (the goal of this plan is to help Greece get its Debt to GDP to 120% by 2020) which will require a great deal of arm-twisting and political machinations to accomplish almost nothing.

 

The same idiocy is playing out in Spain. The latest plan there is for the country to cut the balance sheets of three nationalized banks by 50% sometime in the next five years. How will they do this? By dumping their toxic property assets into a “bad bank.”

 

The idea here is that somehow someone will want to buy this stuff. Spain already had to postpone the launch of the bad bank by a month because no one wanted to participate in it (despite the mainstream media claiming that the idea was popular which is untrue).

 

So, here we have Spain proposing that it can somehow unload a ton of garbage debts onto “someone” even though there is no “someone” to buy them. And the whole point of this exercise is to meet conditions so that Spain would qualify for another €40 billion in aid.

 

€40 billion in aid.

 

On an annualized basis, Spain has experienced portfolio and investment outflows of more than €700 billion. And the latest plan to address this situation (as well as the implosion of the Spanish banking system) is to dump toxic bank assets into a bad bank to free up €40 billion in aid.

 

Oh, and Spain needs to issue over €200 billion in debt next year.

 

Again, a non-solution that doesn’t fix anything.

 

 As I mentioned before, without a doubt 2013 will be a disastrous year for the global economy and for the financial markets. Things could get ugly before then due to any number of issues that are boiling just beneath the surface… but barring any sudden developments, most of the key players will try to hold things together into year end.

 

At that point, there’s really not anything to look forward to (compared to this year when many pinned their hopes on the US elections or on more intervention from the Central banks). And that’s when things will get really ugly.

 

On that note, we’ve recently prepared a Free Special Report outlining how to prepare for this as well as the coming economic collapse. It’s called: Preparing Your Portfolio For Obama’s Economic Nightmare and it outlines several investments that will profit from Obama’s misguided economic policies, including one targeted at potentially huge returns when the US Debt bubble bursts.

 

You can pick up your FREE copy here:

 

http://gainspainscapital.com/obama-nightmare/

 

Best Regards

 

Graham Summers