Germany sports a real Debt to
GDP of over 200% (this from the former head of the Bundesbank), and the rest of
Europe is in even worse shape.
Indeed, Jagadeesh Gokhale of the Cato
Institute puts the situation as the following, “The average EU country
would need to have more than four times (434 percent) its current annual gross
domestic product (GDP) in the bank today, earning interest at the government’s
borrowing rate, in order to fund current policies indefinitely.”
Suffice to say, no EU country has that
kind of money lying around.
Moreover, the argument that the ECB or
Federal Reserve could stop this from happening is misguided. True, the Central
Banks have managed to prop up the markets for several years now.
So what makes this time different?
Simple: the Crisis coming from Europe
will be far, far larger in scope than anything the Fed or Central Banks have
dealt with before.
Let me walk through each of these one at
a time. We have several facts that we need to remember. They are:
1) The European Banking
system is over $46 trillion in size (nearly 3X total EU GDP).
2) The European Central
Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than
Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from
the inflationary and systemic risks this poses (the ECB is now leveraged at
over 36 to 1).
3) Over a quarter of the
ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses
from onto national Central Banks (read: Germany)
So we’re talking about a banking
system that is nearly four times that of the US ($46 trillion vs. $12 trillion)
with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for
the US), and a Central Bank that has stuffed its balance sheet with loads of
garbage debts, giving it a leverage level of 36 to 1.
And all of this is occurring in a region
of 17 different countries none of which have a great history of getting along…
at a time when old political tensions are rapidly heating up.
To be clear, the Fed, indeed, Global
Central Banks in general, have never had to deal with a problem the size of the
coming EU’s Banking Crisis. There are already signs that bank runs are in
progress in the PIIGS (Spain has lost 18% of deposits this year alone) and now
spreading to France.
Thus, the World’s Central Banks cannot
possibly hope to contain the coming disaster. They literally have one of two
choices:
1) Monetize everything
(hyperinflation)
2) Allow the defaults and
collapse to happen (mega-deflation)
If they opt for #1, Germany will
leave the Euro. End of story. They’ve already experienced Weimar and will not
tolerate aggressive monetization.
So even the initial impact of a massive
coordinated effort to monetize debt would be rendered moot as the Euro currency
would enter a free-fall, forcing the US dollar sharply higher which in turn
would trigger a 2008 type event at the minimum.
In simple terms, this time around, when Europe goes down (and it will at some point in the no so distant
future) it’s going to be bigger than anything we’ve seen in our lifetimes. And
this time around, the world Central Banks are already leveraged to the hilt
having spent virtually all of their dry powder propping up the markets for the
last four years.
I’ve said this before many times, but it
cannot be overemphasized… everything I’ve been writing about for nearly a year will
still happen. The fact that I was early and we were stopped out of our
Euro Crisis trades because the ECB promised “unlimited” bond buying right
before the Fed announced QE 3 doesn’t change the ultimate outcome: the
EU breaking up and a global financial meltdown.
On that note, if you are not preparing
for a bloodbath in the markets, now is the time to do so. The reality is that
the Central Banks are fast losing their grip on the markets. They’ll never
admit this publicly, but I can assure you that Bernanke and pals are scared
stiff by what’s happening in the banking system right now.If you’re looking for
someone who can help you navigate and even profit from this mess, I’m your man.
My clients made money in 2008. And we’ve been playing the Euro Crisis to
perfection, with our portfolio returning 34% between July 31 2011 and July 31
2012 (compared to a 2% return for the S&P 500).Indeed, during that entire
time we saw 73 winning trades and only
one single loser. We’re
now positioning ourselves for the next round of the Crisis with several targeted
investments that will explode higher as the EU crumbles.To find out what they
are, and take steps to protect your portfolio from the inevitable collapse…Click Here Now! Graham Summers