The US banking system as a whole is leveraged at 13-to-1. While this is not horrible relative to Europe’s banking system (more on this in a moment), these levels still mean that an 8% drop in asset values wipes out ALL equity. Then you have Europe’s banking system, which is leveraged at 26-to-1. Anecdotally, this is borderline Lehman Brothers (30 to 1). At these levels, even a 4% drop in asset prices wipes out ALL equity.
Last week’s moves were entirely based on the fact that stocks are now tracking the Euro almost tick for tick. And last week, the Euro hit “take off,” despite the clear indications that Europe is facing systemic failure (the entire banking system is leveraged at Lehman-like levels and European sovereigns are facing failed bond auctions on a weekly basis).
While our conversation primarily focused on the restaurant industry, the points and principles Chef Richard lives would serve as an example for any businessperson. His success is the product of hard work, respect for his customers, and a near superhuman focus on quality.
It’s time to settle the debate regarding Europe’s banking system. I know that the mainstream media keeps talking about another round of bailouts or an expansion to the Emergency Financial Stability Facility (EFSF) as though these things matter. But the reality is… they don’t. Europe’s problems go WAY beyond Greece’s debt. And the entire European banking system is primed for a systemic collapse.
Greece is not the issue here. The issue is that Europe as a whole is broke, facing massive unfunded liabilities, and running out of viable creditors to band-aid its banking crisis. We are literally talking about a banking system collapse over there.
Given the economic backdrop in the US and Europe, I remain convinced we’re breaking out of this range to the low side. I’ve warned to get defensive for over a month now. This week looks to be a good time to add to shorts as I expect we’re going to likely see a top this week as earnings season kicks into higher gear and the usual options expiration nonsense ends.
US Commercial banks have $200 TRILLION in interest rate based derivatives sitting on their balance sheets. And guess which banks have the greatest exposure?
Sarkozy and Merkel continue to make "plans" for what to do... The reality is all they're doing is playing for time while they prepare for a Greek default. Indeed, German officials recently told the Telegraph that a "hard" default for Greece is coming which will feature investors taking a 60% "haircut" on their investments in Greek bonds.
The "powers that be" have lost control of the markets. Both the IMF and the Bank of England have warned we are facing a financial meltdown of historic proportions and possibly the worst ever in history. These are the very groups that are supposed to hold up the financial system... telling us that we're facing a "meltdown."
Europe’s banking system is in far FAR worse shape than anyone over there is admitting. The stress tests were complete and total fiction. And the market is starting to figure this out.
It is now clear the US economy has broken down in a BIG way. Indeed, no less than Ben “green shoots” Bernanke has stated that the recovery is “close to faltering.” This, coming from a cherrleader like Bernanke is essentially an admission from the powers that be that the US economy is a disaster.
Do not be fooled. This move is short-covering and a snapback and nothing else. We’ve seen several of these in the last two months alone. Every time the market rolled over quickly and collapsed. So let the traders play their games. Based on retracement levels this move could go to 1,182 or 1,200 on the S&P 500. But this rally should be used to get even more defensive than before.
These charts tell us in no uncertain terms that the US financial system is once again under extreme stress. They tell us that the market is going down, down, DOWN over the coming months.We're going to be seeing major banks go under, market crashes, food shortages, government shutdowns, and SYSTEMIC FAILURE.
The fact that leverage levels prior to this round of the Crisis were even higher than those from the Tech Bubble… combined with the $600+ TRILLION in derivatives floating around in the financial system… should give you a sense of how serious the market declines can and will be as this whole thing breaks apart.
I suggested to get defensive weeks ago. I urge you to be even more defensive now. Use rallies to lower exposure to stocks to the longside and to establish some shorts. I would also be heavily exposed to cash as the US Dollar rally I forecast last month looks ready to go into hyperdrive:
