We have been getting MAJOR warning signs of a collapse for months now. No less than the Bank of England, the IMF, and legendary asset management firm Franklin Templeton have warned that we are facing an epic, hellish crisis. We got the first taste of this in August when the S&P 500 literally wiped out a year's worth of gains in two weeks The only thing that brought us back from the brink at that time was the belief that the EU mess might be solvable and a coordinated intervention from the world Central Banks.
Based on its debt maturation cycle I expect we’ll see an Italian default within the next six months. Indeed, no matter what happens with Greece, Italy will make sure that the EU in its current form no longer exists within the next year.
Even by a quick back of the envelope analysis, we find ourselves in an environment in which a single corporation such as Exxon is actually more trustworthy (from an investment perspective) than US Treasuries.
The NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?
It is clear as day that the EU in its current form is finished. I’ve been saying this for months, but now even the mainstream media is picking up on rumblings that Germany wants to exit the Euro or at least restructure the entire EU.
As far back as May 2011, Bernanke admitted the benefits of QE were less attractive. Now he’s not only admitting that asset bubbles exist (something Greenspan never admitted) but that Central Banks may even need to “burst” them!?!? In plain terms, the Fed will NOT be launching another round of QE or major policy changes until the next round of the Great Crisis hits in full force. And by that time it will be pointless anyway as once the defaults begin, the leverage in the global banking system will implode rapidly.
To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).
Europe has now gone from a relatively small problem (Greece) to a HUGE problem (Italy). Greece is the 11th largest economy in Europe. Worldwide exposure to Greece's debt is roughly $280 billion. In contrast, Italy is the third largest economy in Europe and the third largest bond market in the WORLD. Global exposure to Italy’s debt is north of $800 billion. It’s already taken down one firm (MF Global), others are coming too.
Europe is finished. The region’s entire banking system is insolvent (with few exceptions). European non-financial corporations are running massive debt to equity ratios. And even EU sovereign states require intervention from the ECB just to meet current debt issuance, to say nothing of the huge amount of sovereign debt roll over that is due over the next 14 months.
So the EFSF is supposedly going to raise 1 trillion Euros… in an environment in which it struggles to even stage a five billion Euro bond offering?Give me a break.
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.
The markets flew into this deal based on rumors and short-covering and are now waking up to the plain obvious facts that you cannot solve a debt problem with more debt. Also, it might be worth considering just where the EFSF bailout money will be coming from when various EU members can’t even stage successful bond auctions without the ECB stepping in.
Do you really think Europe, which is even MORE insolvent that the US, is somehow going to experience a different ending from the Bazooka move? They’re in far, FAR worse fiscal shape that the US was in 2008 (including unfunded liabilities, REAL Debt to GDP levels for most EU members is north of 400%... heck even Germany’s is over 200%).
With OVER $46 trillion in assets outstanding, this means that European banks would need to raise $1.77 TRILLION in capital to bring their leverage levels down to 13 to 1.
Dr Pippa Malmgren is a former economic advisor to George W. Bush and a former advisor to Deutsche Bank. According to Malmgren, Germany has already ordered the printing of Deutsche Marks in anticipation of a possible withdrawal from the EU
