Two of the Biggest Issues the Financial System Will Face in 2013

Phoenix Capital Research's picture


This week is options expiration week: the week in which various call and put positions will expire. Wall Street is notorious for using these weeks to gun the markets this way and that in order to insure that the greatest number of puts and calls expire worthless. So expect the market to be even more volatile than usual this week.


Outside of this, the investment world is slowly emerging from its Central Bank policy induced stupor to realize two of our long-standing themes:


  1. That European markets are highly overvalued based on their underlying fundamentals.  
  2. China has an inflation problem and cannot print money non-stop to keep its economy on track.


Regarding #1, Bloomberg ran an article over the weekend expressing concerns that the European markets are overvalued. The truth of the matter is that the entire European banking system is insolvent. There is simply no other way to describe a banking system that is leveraged at 26 to 1 with net assets at nearly 300% of GDP (Europe’s GDP is $16 trillion and its banking system is $46 trillion).


However, the mainstream media can never tell the ugly truth here (doing so would trigger a panic). So instead we’re going to see concerns voiced that Europe is “overvalued” and that European economies need to pick up because the ECB is essentially tapped out.


This is about as close as we’ll get to the media admitting Europe is bust and out of solutions. The fact that this story is already showing up in the media should be a warning that the next round of the EU Crisis is likely around the corner. Both Spain and Greece have recently admitted their banks are at negative value. Expect the news to worsen out of Europe in the coming weeks. What happens if the markets call Mario Draghi’s bluff? We’ll find out this year.


Regarding #2, roughly 30% of China’s population lives off of $2 per year. Food inflation hits this country very hard. And the Government is now stuck between a rock (a slowdown in its economy) and a hard place (higher inflation that results in mass civil unrest).


As a result of this, the Government has to focus on managing expectations both inside and outside of the country. Inside of China this means making public displays of cracking down on corruption to keep the population calm (many Chinese area beginning to ask themselves, “why should I go along with a system in which I’m not getting wealthy but corrupt officials are?” The Government is also taking measures to control prices (see the ongoing rise in Chinese imports despite the economic slowdown) in an attempt to keep inflation at bay.


Outside of China, the Government needs to send signals to the rest of the world that it will not be engaging in massive stimulus without triggering a capital run. Notice that the language coming out of the new leadership is carefully crafted: new party leader Xi Jinping has openly stated that China will not be pursuing “high” growth rates through stimulus going forward.


The message here is that “we’ll engage in stimulus, but we won’t be pumping anywhere near the amount needed to hit double digit growth.” The investment world is totally convinced China is going to pump $1 trillion or more into its economy. Chinese officials are denying this. Take note… typically when the investment world finds out it’s wrong there are serious fireworks.


These are just two of the major issues pointing towards 2013 being a debacle for investors. With that in mind, smart investors are taking advantage of the lull in the markets to position themselves for what’s coming.


We offer several FREE Special Reports designed to help them do this. They include:


Preparing Your Portfolio For Obama’s Economic Nightmare

What Europe’s Crisis Means For You and Your Savings


How to Protect Yourself From Inflation


And last but not least…


Bullion 101: Everything You Need to Know About Investing in Gold and Silver Bullion…


You can pick up free copies of all of the above at:




Phoenix Capital Research


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etresoi's picture

Advice,is, at best, only worth what you pay for it.  Graham offers free advice, which is worthless and very inexpensive monthly subscriptions to advice, which is worth nothing.

How much does he pay ZH to get his drivel posted?

SAT 800's picture

It's quite amazing to see someone who can't get $2/day versus $2/year straight; breathlessly offering us his valuable investment advice. I suppose it's comic relief.

Clowns on Acid's picture

Wow...this baloney is sliced quite thin.....

Number 156's picture

roughly 30% of China’s population lives off of $2 per year.

I think you mean $2 per day.

The international poverty line is at 1.25 per year.

Mi Naem's picture

You know Graham, I was intrigued by a missive you posted on ZH a few months ago, so I looked up your site and tried to sign up for your free newsletter.  Your site wouldn't let me complete the registration process, even after repeated attempts.  So, I tried calling, and left one or two messages before giving up.  I never did get a call back. 

My call was also to inquire more about your services, but I want to thank you for not returning it.  I figure, if that's what I can expect BEFORE you get my business, imagine what kind of cold hosing I might expect after signing up.  So, again, thank you for helping me dodge a bullet.  I suppose that, since you seem not to be actually attempting to market your company for the purpose of increasing business, your prose must be donations to the blogosphere made out of the kindness of your heart.  So, thanks again. 

The.Oracle's picture

Wonder how many calls I would have to get wrong to publish my articles on Zerohedge.

Mountainview's picture

The US banking system has already been bailed out by a now even more bankrupt government, Europe is still one step behind and will go the same way with the help of Mister Draghi. China is a a study from a Swiss University team (HEC Lausanne) demonstrates bank risk analysis to be skewed in favor of Western banks and in disfavor of Chinese I take you article with a grain of salt... as we say... 

MeelionDollerBogus's picture

"using these weeks to gun the markets this way and that in order to insure that the greatest number of puts and calls expire worthless."

This is certainly not consistent or I'd be trading that using Strangles into the expiration with little money on the line to lose given how much time is left.

If it was consistent in even ONE direction that would be even easier. It isn't. Looking back at all expiries and comparing volatility to non-expiry days you'll see there's nothing consistent about direction and nothing inconsistent about the volatility.

If it was so, I'd be trading it and you would be too instead of complaining.

Praetorian Guard's picture

It should be $2.00 PER DAY.

Vooter's picture

Yeah, that freaked me out for a second... :-)

Fake Jim Quinn's picture

Thanks to Blackhawk Ben, that is what our retired seniors are living on. Cat food and gruel

Terp's picture

Chinks can live on 2 bucks per anno?


Wow, thats some frugal living right there...somebody tell the folks at Apple to cut back those sweat shop wages...



digitlman's picture

Has Greece defaulted yet?


Should I keep buying gold?


Fuck off, Graham.

are we there yet's picture

When Greece eventually exits the EU, olive oil will be cheap in dollars until the supply is depleted (quickly most likely).

BlueCheeseBandit's picture

To the Graham-haters:

Remember everybody long looked like geniuses and everybody short looked like fools in 2005, 2006, 2007, and much of 2008.

How quickly we all seem to forget the extraordinary government action that's been keeping this sham afloat. Methinks those who think government's power limitless will again be disappointed, and this time without a savior.

SAT 800's picture

I'm short the S&P500; it's very common for a despressive change to occur in the midst of winter; short dark days and freezing sleet don't make people optimistic. Also this is one of the most overcooked, cooked-up "rallies" I've ever seen. But, of course, the market can remain irrational longer than one can remain solvent; so at some point if the jubilation continues; I'll have to accept my losses. So far, at least, I don't see the great rally of the century developing.