So there is literally NO option that could save Europe at this point. We can get verbal interventions and symbolic gestures (such as Draghi's "bazooka" threat), but the fact of the matter is that the capital needed to prop up Europe simply doesn't exist in the EU or anywhere else for that matter.
In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.
One has to question… does the Fed really want to be draining Treasuries and Agencies from the banks’ balance sheets. After all, the big banks, which sit on over $200 TRILLION worth of derivative trades, only have $7.12 trillion in assets.
To me the message is clear, Germany is going to do all it can to appear ready to help, but it will forestall any actual helping, especially if it involves increasing Germany’s exposure to the PIIGS (note: Merkel stated that there would never be Euro-bonds for as long as she lived). This is not political posturing. Germany has already brought its own solvency into question (see the Moody’s warning) by propping up the EU. Angela Merkel is not going to lose Germany’s AAA status the year before she’s up for re-election.
Spain is facing a regional, banking, and sovereign crisis all at once. The funds to prop it up simply do NOT exist. To argue otherwise is to ignore math and Germany.
The Moody’s outlook change on Germany lets us know that this time around the debate is more than political posturing. If Germany loses its AAA status, then it’s GAME OVER for the EU: the German population, already outraged by the EU bailouts, and now facing a recession will NOT tolerate a credit rating downgrade.
As I’ve stated many times, Germany is THE REAL backstop of the EU. And it’s comprised its own solvency as a result: the country is only €328 billion away from reaching an official Debt to GDP of 90%, the level at which national solvency is called into question. Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany's REAL Debt to GDP is closer to 300%.
As I’ve outlined in earlier articles, Spain will be the straw that breaks the EU’s back. The country’s private Debt to GDP is above 300%. Spanish banks are loaded with toxic debts courtesy of a housing bubble that makes the US’s look like a small bump in comparison. And the Spanish government is bankrupt as well.
I’ve spent the last six months digging as deep as I can into the financial system to find the unquantifiable risks that aren’t being discussed by the financial industry. I’ve found them. And they are worse than anything I expected to find. Indeed, what I’ve discovered is more horrifying than I’d care to admit.
According to the IMF’s “official” analysis, EU banks as a whole are leveraged at 26 to 1. I would argue that in reality many of them are well north of 30 to 1 and possibly even up to 50 or 100 to 1. The reason I can claim this with relative certainty is because the EU housing bubbles dwarfed that of the US. In the chart below the US housing bubble is the lowest line. After it comes Britain (blue) and Italy (orange) then Ireland (green) and finally Spain (dark blue).
We’ve recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
Germans NEVER really trusted the Euro. They went along with it because of the benefit to their export driven economy. But now that the PIIGS and others are begging Germany to backstop the entire EU, they’re back to using Deutschemarks again.
Folks, the political game has changed in the US. The Fed is no longer invulnerable. In this climate more QE cannot possibly happen. End of story. Indeed, if the Fed were to launch QE at any time between now and the election, Obama is DONE. The last possibly chance for QE without it being a clear hand-out to Obama (and a gift from the political gods to Romney) was June. The Fed passed on that.
Here we are one year and over 10 Fed FOMC meetings later and the Fed hasn’t launched any new QE programs. Think about that. For over a year now the financial media has been awash with “experts” saying “QE is just around the corner, the Fed will launch QE any minute now, etc” Every time stocks rally. But. No. QE.
