Europe
Can and Will Cause a Systemic Collapse… Are You Ready?
July 25, 2012 By gpc1981
http://albertpeia.com/europecanandwillcausesystemiccollapse.htm
‘A lot has been said about the European Crisis. I’m (Summers) going to explain it all in simple terms.
In simple terms, today we are facing a Crisis that is far, far
worse than 2008. Before it ends, it is quite possible that we will see the
entire Western Financial System collapse and a new system put into place.
This will mean:
1) Many major banks disappearing, as well as
numerous potentially lengthy bank holidays (think
2) Multiple sovereign defaults as well as broad
economic contractions and their commensurate unemployment/ civil unrest/
erasure of retirement accounts/ pensions (this process has already begun in
some US municipals, e.g. San Bernandino and Stockton
California as well as Harrisburg Pennsylvania).
3) Possibly new currencies being introduced or new
denominations of currencies (say one new unit being worth 1,000 of the old one)
4) Massive wealth destruction to the tune of tens of
trillions of Dollars (think MF Global i.e. the money is gone… only systemically… in fact we just
had another such instance with PF)
5) A global contraction that will result in new
political/ power structures being implemented as well as the breakup of various
countries/ unions.
6) Very serious trade wars to begin (see Obama’s
recent attack on
If the above make you frightened, you’re not alone. As I’ve dug
deeper and deeper into the inner workings of the global financial system over
the past months, the information I’ve come across has only gotten worse. I’ve
been holding off writing all of this because up until roughly April/May it
seemed possible that the world might
veer towards another outcome.
I no longer view this to be the case. I am almost certain that
what I’ve written above will come to pass. I know that much of what I’ve
written to you in the past could be labeled as “gloom and doom.” However, I
want you to know that I do not use the words “systemic collapse” lightly. Indeed, I wish I wasn’t
mentioning them now, but I’d be doing you a disservice not to bring them up
because we’re well on our way towards it.
So buckle up and let’s dive in.
In order to understand why we’re at risk of the financial system
collapsing, you first need to understand how the global banking system works.
When you or I buy an asset (say a house, or shares in a stock, or a Treasury
bond), we do so because we’re looking to increase our wealth through either
capital gains or through the income that asset will pay us in exchange for us
parking our capital there.
In simple terms, you’re
putting/ lending your money somewhere (especially if you’re buying a bond) in
the hope of increasing the value or your money.
This is not how banks work. When a bank buys something,
especially a bond, it parks that bond on its balance sheet as an “asset.” It
then lends money out against
that asset. This in of itself is not problematic except for the fact that the
financial modeling of 99% of banks base assume that sovereign bonds are “risk-free.”
Put another way, these models assume that the banks will always get their money back on 100 cents
on the Dollar.
Yes, you read that correctly, despite the fact that world
history is replete with examples of sovereign defaults (in the last 20 years
alone we’ve seen more than 15 including countries as significant as Russia,
Argentina, and Brazil), most banks assume that the sovereign bonds sitting on
their balance sheets are risk free.
This phenomenon occurs worldwide, but given that it will be
Europe, not the
You may or may not be familiar with EU banking law. EU banks are
meant to comply with
In terms of capital ratios,
However, the term “risk weighted assets” destroys this premise
because it means that the bank’s loan portfolio and ultimately its leverage ratio are based on the bank’s in house models/ assumptions concerning
the risk of its loans.
Let me give you an example…
Let’s say XYZ Bank lends out €50 million to a corporation. The
bank won’t necessarily claim that all €50 million is “at risk.” Instead, the
bank will claim that only a percentage of this €50 million is “at risk” based
on the company’s credit rating, financial records (debt to equity, etc), and
the like.
Thus, based on “in-house” risk modeling, European banks could in
fact lend out much, much more than the
Indeed, 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
You can only get
bubbles of this magnitude if you’re lending to literally anyone with a pulse. And you can only lend
that much if your in-house risk models believe that the risk of lending to anyone with a pulse is much, much lower than
reality.
Hench, EU banks are likely leveraged at
much, much more than 26 to 1. Indeed, considering how
leveraged and toxic US banks’ (especially the investment banks’) balance sheets
became from the
This fact in of itself makes the possibility of a systemic
collapse of the EU banking system relatively high.
With that in mind, I’ve begun positioning subscribers of
my Private
Wealth Advisory for the next leg down in the markets. We’ve
already locked in over 30 winning trades this year by finding “out of the way”
investments few investors know about and timing our positions to benefit from
the various developments in
Indeed, we just locked our 72nd winner yesterday: a 9% gain in
less than a month
To learn more about Private Wealth Advisory and
how it can help you get through the EU Crisis with gains… NOT pains…
Best Regards,
Graham Summers
Chief Market Strategist