Stocks Are Finally Starting to "Get It"

As I have stated time and again, stocks are last to “get it.”

Well, they seem to finally be waking up to the fact that the leveraged EFSF doesn’t solve anything. Remember, the entire European banking system is leveraged at 26 to 1. Yes, 26 to 1. That’s the ENTIRE European Banking system leveraged at near Lehman levels (Lehman was 30 to 1 when it collapsed).

To put this into perspective, with a leverage level of 26 to 1, you only need a 4% drop in asset prices to wipe out ALL capital. What are the odds that European bank assets fall 4% in value in the near future, especially now that Greece has defaulted?

These leverage levels alone position Europe for a full-scale banking collapse on par with Lehman Brothers. Again, I’m talking about Europe’s ENTIRE banking system collapsing.

This is not a question of “if,” it is a question of “when.” And it will very likely happen within the next 10-12 months.

The reason that this is guaranteed to happen before the end of 2012 is that a HUGE percentage of European bank debt needs to be rolled over by the end of 2012.

Between now and then…

§  French banks need to roll over 30% of their TOTAL debt.

§  Spanish banks and Italian banks need to rollover more than 33% of their TOTAL debt.

§  German banks need to roll over nearly 40% of their TOTAL debt.

§  Irish banks need to roll over almost HALF (50%) of their TOTAL debt.

And this is going to happen in an environment in which sovereign debt auctions are failing (or would fail if not for ECB intervention)?

I trust at this point you are beginning to see why any expansion of the EFSF or additional European bailouts is ultimately pointless: Europe’s ENTIRE BANKING SYSTEM as a whole is insolvent. Even a 4-10% drop in asset prices would wipe out ALL equity at many European banks. 

Also bear in mind, that the proposed EFSF expansion would only provide $100 billion to European banks for recapitalization. By my estimates, European banks need more than $1.7 trillion in capital just to bring their leverage levels down to 13 to 1 (US banking system leverage levels).

So even if the EU passes the expanded EFSF proposal, European banks are going to collapse. And those who believe it won’t spread to the US need to consider MF Global which has just gone bankrupt, having lost over 80% of its market cap since August.

Ignore stocks, they’re ALWAYS the last to “get it.” The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.

What happened in 2008 was literally just the warm up. The REAL DEAL is coming in the next 14 months. And it’s going to involve corporate, financial, and sovereign defaults.

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Good Investing!

Graham Summers

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Comments

[msorense]

Love your work Graham but looks like we still Twist higher!  Gone up about 400 Dow points since you put this piece together.  I didn't think we would get past 1260 but boy was I wrong.