Tuesday, May 22, 2012

May 22, 2012 Neither the Fed Nor the ECB Will Be Able to Stop What's Coming

Today, we are witnessing the investment world's slow awakening to the fact that the monetary actions taken by the world's Central Banks have not in fact solved the issues leading up to the 2008 Crisis.

In point of fact, the Central Banks' actions have exacerbated pre-existing problems (excessive leverage) while simultaneously creating new problems (inflation).

This slow awakening has taken much longer than I would have expected, but with tens of thousands of careers on the line (financial professionals) as well as tens of trillions of dollars in portfolios at risk, the vast majority of professional market participants were highly incentivized not to realize these issues.

However, at this point, it is becoming clear that not only are financial professionals slowly realizing that 2008 was actually "the warm up," but that Central Banks themselves are aware that they've:

1) Failed to solve the issues leading up to 2008.

2) Created other unforeseen problems.

Indeed, this process of realization first began in the US where we had signs as far back as April 2011 that the Federal Reserve was aware that QE (AKA monetization of US debt) was less "attractive" as a policy (read: not such a good idea).

The vast majority of the media and Wall Street analysts failed to recognize this, though Bernanke himself admitted it in public:

Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? -- Michael A. Kamperman, Waco, Tex.

Mr. Bernanke: "Going forward, we'll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate...

"The trade-offs are getting -- are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It's not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we're going to have success in creating a long-run, sustainable recovery with lots of job growth, we've got to keep inflation under control. So we've got to look at both of those -- both parts of the mandate as we -- as we choose policy"

http://economix.blogs.nytimes.com/2011/04/28/how-bernanke-answered-your-questions/

This admission marked the beginning of a process through which the US Federal shifted its policies from those of aggressive monetization to those of verbal or symbolic intervention.

I addressed this at length in previous articles. But the main issue is that the Fed backed off from rampant monetization and began to simply issue verbal statements that it would ease if needed, thereby getting the same impact (boosting stock prices) without actually having to monetize debt/ print more money.

Indeed, the only monetary change the Fed has made in nearly a year was the launch of Operation Twist 2 in October 2011. However, even this policy was more about meeting immediate debt issuance needs in the US rather than printing money to prop up the market.

Operation Twist 2 was a policy through which the Fed would sell its short-term Treasury holdings and use the proceeds to buy longer-term Treasuries. The purpose of this policy was two fold:

1) To make up for the lack of foreign demand in long-term Treasuries.

2) To provide capital to banks by permitting them to unload their long-term Treasury holdings in exchange for new cash.

Regarding #1, the Fed is now obviously aware that the policies it has pursued in tandem with the Federal Government, namely maintaining low interest rates while running massive deficits and increasing the Federal Debt to the tune of $100-200 billion per month, have severely damaged the US Treasury market.

This is only common sense. By running Debt to GDP and Deficit to GDP ratios that are on par with the European PIIGS, the US has made it clear that those investors who lend to it for the long-term (20+ years) are likely going to experience a haircut or bond restructuring much as Greece bondholders recently experienced.

Because of a lack of foreign interest in long-term Treasuries, the Fed decided to step in to pick up the slack. As a result of this, the US Federal Reserve has accounted for 91% of all new debt issuance in the 20+years bracket. Put another way, the US Federal Reserve is now effectively the long-end of the US debt market.

Operations Twist 2 has also allowed US commercial banks to unload their long-term Treasury holdings in exchange for new capital: something most of the Primary Dealers are in dire need of. This in turn helps to explain why the US stock market has advanced despite the fact that retail investors have been pulling out of the market in droves.

Put another way, the markets have been ramped higher by more juice from the Fed (and corporate buybacks). However, the fact remains that this juice has come from the Fed reallocating its current portfolio holdings, NOT printing more money outright to monetize US debt via QE.

So while the media and 99% of analysts believe the Fed is and can continue to act aggressively to prop up the markets, the fact is that the Fed has been reining in its monetary stimulus over the last nine months, largely relying on verbal intervention from Fed Presidents to push stocks higher.

We have known this for some time. But the general public and financial media are only just starting to realize that the Fed, in some ways, is at the end of its rope in terms of monetary intervention. This has become increasingly clear in the Fed FOMC statements.

Consider the latest FOMC statement released a few weeks ago...

Fed Signals No Need for More Easing Unless Growth Falters

The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.

"A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below" 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC's January meeting in which some Fed officials saw current conditions warranting additional action "before long."

http://www.bloomberg.com/news/2012-04-03/fomc-saw-no-need-of-new-easing-unless-growth-slips-minutes-show.html

Ignore the verbal obfuscation here. The Fed knows that inflation is higher than 2%. It also knows that US growth is faltering. The above announcement is the Fed essentially admitting its hands are tied regarding more easing due to:

Gas being at $4 and food prices not far from record highs.
This being an election year and the Fed now politically toxic.
Growing public outrage over the Fed's actions (secret loans, etc.) in the past.

Again, we are in a process of slow awakening to the fact that the Fed has not solved the problems that caused 2008. Instead, the Fed has exacerbated these problems (excess leverage) and created new problems in the process (inflation).

Fortunately for the Fed, the European Central Bank has picked up the intervention slack since the Fed began pulling back in mid-2011. Indeed, between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed's QE 2 and QE lite combined (and in just a nine month period).

The two largest interventions were the ECB's LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively.

As a result of this, the ECB's balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.

This rapid and extreme expansion of the ECB's balance sheet (again it was greater than QE lite and QE2 combined... in nine months) indicates the severity of the banking crisis in Europe. You don't rush this much money out the door this fast unless you're facing something very, very bad.

This rapid expansion has also resulted in the ECB obtaining a similar political toxicity to that of the US Federal Reserve. Indeed, those European banks that participated in the LTRO schemes have found their Credit Default Swaps exploding relative to their non-LTRO participating counterparts.

The reason for this is obvious: any bank that participated in either LTRO implicitly announced that it was in dire need of capital. As a result of this the markets have stigmatized those banks that participated in the schemes, thereby:

1) Diminishing the impact of the ECB's moves.

2) Indicating that the ECB is now politically toxic in that those EU financial institutions that rely on it for help are punished by the markets.

Thus the two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!

Labels: collapse, Crash, credit, Crisis Crash, Debt crisis, Default, Dollar, Euro Collapse, Euro crisis, Euro default

# posted by Generalfoundation @ 4:19 AM 0 comments

Monday, April 23, 2012

Here Comes Spain, be aware!

As expected Francois Hollande won the first round of the French elections. He and Nicolas Sarkozy will run against each other in the second round, which will occur on May 6th.
The Euro isn't taking this news well. As I write this Sunday night the Euro currency futures have gapped down. I've added this move to the chart below.

130 remains the line in the sand for the Euro. If we take it out with conviction then we're in BIG trouble.

I believe we're at most a month or so away from this. Spain has now stepped center stage in the Euro Crisis. And the Spanish Ibex has just taken out its 15-year trendline:

This spells MAJOR trouble for Spain and the rest of the EU. Unlike Greece, (which has its own elections, which could go very wrong for the EU, on May 6^th by the way), Spain is too big to bail out. Indeed, the Spanish banking system is a toxic sewer of bad mortgage debt: over half of all mortgages were generated and owned by the unregulated cajas. If you're unfamiliar with the caja banking system, let me give you a little background...

Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits). They didn't have to reveal their loan to value ratios, the quality of collateral they took for making loans... or anything for that matter.

As one would expect, the cajas have been collapsing like dominos in the last few years. Spain's been trying to prop them up by merging them with larger (likely equally insolvent) banks with no success (the merged banks have all collapsed to new lows in the last month).

On top of this, Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).

Things have gotten so bad that Spanish citizens are pulling their money out of Spain en masse: €65 billion left the Spanish banking system in March 2011 alone. And all of this is happening at a time in which relations are breaking down between Germany and the ECB as well as between Germany and France.

In other words, the EU collapse is about to enter its next round. Remember, all collapses follow the same pattern:

1) the initial drop
2) the re-test/ attempt to reclaim upwards momentum
3) the roll-over/ REAL fireworks

The most money is made during #3. Right now we've finished #1 and are now ending #2. When #3 hits (likely after the French election on May 6th), is when the REAL Fireworks will begin (assuming Spain's collapse allows things to hold up that long).
So if you're not already taking steps to prepare for the coming collapse, you need to do so now.

Labels: collapse, Crash, crisis, Default, Euro crisis, Spain

# posted by Generalfoundation @ 4:59 AM 0 comments

Monday, March 26, 2012

A Tenuous Balance is in Place

The markets will likely try to rally this week based on the following items:

1) End of quarter performance gaming

2) Last week's weak stock performance

3) Angela Merkel signaling that Germany will increase the pointless "firewall" around Europe's banking system

4) Bernanke's hint that more QE is coming in April in this morning's speech

#1 is a regular phenomenon in the markets and needs not be explained. #2 is closely tied in with the latest policy of verbal intervention on the part of the Fed: any time stocks weaken some Fed official, usually Charles Evans of Chicago or Bill Dudley of New York, gives a speech suggesting more easing is just around the corner and VOOM! stocks take off again.

#3 is just the next step in Germany trying to hold the EU together long enough to see how the French elections turn out in April/ May. Given that Merkel's political ratings drop like a stone any time she spends more German money and explode higher any time she plays hardball with the EU, we can take this move to be mainly posturing and playing for time.

Indeed, France is now a wildcard in the great EU bailout scheme. Most polls show a socialist winning in the second round of the elections. And not just any socialist, but François Hollande.

A few facts about Hollande:

1) He just proposed raising tax rates on high-income earners from 41% to 75%.

2) He wants to lower the retirement age to 60.

3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.

So Merkel knows that if Hollande wins in France, her campaign to turn the EU into a fiscally responsible German-led group of colonies will be over. Europe could very well collapse before then as the Spanish and Italian bond markets are flashing danger signs again (despite the world believing LTRO's 1 and 2 solved everything). And the facts remain that the entire EU banking system is a disaster waiting to hit (anyone notice that EU banks continue to park cash at the ECB like there's a systemic catastrophe looming?)

Finally, Bailout Ben Bernanke just hinted at more QE in his speech at the National Association for Business Economics this morning. With gas prices at $4 and food prices not far off from their all time highs, I cannot see how Bernanke can possibly unveil more QE without unleashing major political outrage and destroying Obama's chances at re-election (Obama did re-elect Bernanke as Fed Chairman).

So I view this hint as more posturing from Bernanke. He likely is aware that seasonal adjustments have made all economic data from the last three months look better than reality and is simply trying to prep the markets for what's likely going to be a slew of bad data started in 2Q12. We also have to note that stocks took it on the chin last week, so Bernanke could very well be maintaining item #1 on the list above: verbally intervening to keep the markets up.

Big picture: the markets are being held together via a very tenuous balancing act on the part of EU leaders and the world Central Banks. The short-term bias will be bullish due to the factors listed above. But big trouble is lurking just beneath the surface. And should anything upset the current balance being maintained, we could see some real fireworks in the markets in short order.

Labels: collapse, Default, disaster, Euro Collapse, Euro crisis, France crisis

# posted by Generalfoundation @ 8:01 AM 0 comments

Thursday, February 16, 2012

Greece is Not Lehman 2.0... As I'll Show You, It's Far Far Worse...

Investors simply do not understand the significance of Greece. Comparisons are being made to Lehman, but these comparisons are moot for the following reason: Greece is a country not a private institution.

This is not a subtle difference. True, Lehman's derivatives were spread throughout the global financial system just as Greek sovereign debt is. However, investors are missing the true scope of the fall-out a Greek default would create.

First, let's think about Lehman. When Lehman went under, half of the other institutions that were in trouble had already been merged with larger entities (Bear Stearns, Merrill Lynch) or had been nationalized (Fannie and Freddie). Those that were still standing after Lehman went under, changed to bank holding companies (Morgan Stanley, Goldman Sachs) in order to receive special access to Fed lending or were nationalized (AIG).

None of these options exist regarding the sovereign crisis in Europe today. If Greece defaults, Portugal can't merge with Spain. And Italy can't be nationalized by Germany or suddenly change itself to a new type of country that gets special treatment from the ECB (it's already getting special treatment from the ECB by the way).

This cuts to the core issues for sovereign defaults in the EU. Here are the facts regarding those EU countries on the verge of collapse:

1) You cannot solve a debt problem with more debt

2) Austerity measures slow economic growth which in turn makes it harder to meet debt payments

This is simple basic common sense. But these are the policies being promoted by EU leaders: we'll give you more money if you implement more austerity measures to get your finances in order. (Stupidity!)

The fact of the matter is that there is simply no way on earth that Greece can get its finances in order (short of a massive default). Greece has terrible age demographics, a lack of economic growth, and cultural issues (e.g. paying taxes is for suckers) that make it impossible for the country to solve its financial problems.

In plain terms, Greece racked up too big of a tab and simply doesn't have the means of paying it. End of story. The world needs to realize this. Because Greece will default and it will default in a big way!!!

The impact of this will be tremendous. For one thing, pretty much everyone is lying about their exposure to Greece. Consider Germany for instance. According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).

This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros' worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.

But even these numbers are far below the mark. By my own analysis one of the "strongest" banks in Germany alone, by its own admission, has twice the exposure to Greece that the Guardian claims. And this is one of the strongest banks in Germany.

So, when Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.

Secondly, when Greece defaults, the other PIIGS (Italy, Ireland, Spain, and Portugal) will have to ask themselves... "do we opt for austerity measures and more debt which obviously didn't work for Greece and will only stifle our economies more? Or do we also default?"

That's a very tough question to answer. But I'd wager more than one of them will opt for default. And if you think European bank exposure to Greece is understated, you don't even want to know how bad exposure to Italy and Spain is (to give you an idea, the German bank I referred to earlier, again by its own admission, has total PIIGS exposure equal to 60% of its equity)!

Folks, the European banking system is literally on the edge of the abyss. This won't be Lehman 2.0. This is going to be something far, far worse. Some of these countries are already sporting unemployment of 20%. What happens when their largest banks go under?

Also, remember that the EU is:

1) The single largest economy in the world ($16.28 trillion)

2) China's largest trade partner

3) Accounts for 21% of US exports

4) Accounts for $121 billion worth of exports for South America

The global impact of an EU banking Crisis will be tremendous. And it's clear the EU is already heading into a recession without a banking crisis hitting. What do you think will be the impact when Europe as a whole experiences its own "2008" only on a sovereign level?

The answer is: we are literally on the eve of a Crisis that will make 2008 look like a picnic.

On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.

Labels: Collaps, Crash, crisis, Default, Euro Collapse, Euro crisis

# posted by Generalfoundation @ 9:19 AM 0 comments

Wednesday, January 18, 2012

Germany's Fed Up and Getting Ready to Walk

For months I've been warning that when push come to shove Germany will bail on the Euro.

The reasons for this are simple:

1) The German public and court system won't stand for QE from the European Central Bank

2) Issuing Euro bonds goes against the German constitution

3) Germany has its own share of domestic problems with a REAL Debt to GDP ratio north of 200% and its banks needing tens of billions of Euros in new capital

All of these factors lead me to believe that Germany would refuse to be the ultimate backstop for the EU. You could also see Germany preparing the legislation to allow it to walk if it wanted to:

German Chancellor Angela Merkel's Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.

http://www.bloomberg.com/news/2011-11-11/german-cdu-is-set-to-back-motion-allowing-euro-member-exit-1-.html

The resolution reads:

"Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily--according to the rules of the Lisbon Treaty for leaving the European Union--leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro."

I believe Germany implemented this legislation for itself... not some other country. And by the look of things, Germany's getting a lot closer to walking.

BBK Thiele: Current ECB Government Bond Buys Violate Treaty

The European Central Bank's government bond buys are a violation of the Maastricht Treaty, Bundesbank board member Carl-Ludwig Thiele said Monday.

Thiele's comments depart form the official Bundesbank line. While the German central bank has warned that larger purchases may be illegal, it has said that current purchases do not violate the prohibition of monetary financing.

Thiele recalled that the decision to buy Greek government bonds had found no support from German ECB Governing Council members. "Germany was over-ruled on the Council," Thiele said.

"These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state," Thiele said in a speech text provided by the Bundesbank.

https://mninews.deutsche-boerse.com/index.php/bbk-thiele-current-ecb-government-bond-buys-violate-treaty?q=content/bbk-thiele-current-ecb-government-bond-buys-violate-treaty

Bundesbanker says euro zone must forget idea of QE

Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis, Bundesbank board member Carl-Ludwig Thiele said on Monday.

Thiele called for euro zone countries to exercise fiscal discipline and said that boosting the resources of Europe's rescue funds would buy time to address the bloc's debt woes.

"But lasting confidence cannot be bought with money alone," he added in the text of a speech for delivery in Hamburg.

"One idea should be brushed aside once and for all - namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank."

http://www.sharenet.co.za/news/Bundesbanker_says_euro_zone_must_forget_idea_of_QE/d02483d59237b6eb2c6ae98f17b3e1ce

These are extremely strong statements coming from the Bundesbank. Remember, Merkel is the German political leader, but she doesn't control the purse strings to Germany: the German courts and Bundesbank do. And if they don't support more bailouts, there's nothing Merkel can do.

We see similar warnings coming out of German CEOs:

Linde CEO says Germany should mull euro exit-paper

Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.

"I fear the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in," Linde's chief executive Wolfgang Reitzle was quoted as saying.

"If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.

http://in.reuters.com/article/2012/01/15/eurozone-linde-idINDEE80E07Z20120115

I firmly believe Germany is already makings moves to prepare for precisely this outcome. No EU member state is going to submit to German authority regarding fiscal policies. Indeed, virtually every EU legislation passed in the post-WWII era was aimed at limiting Germany's power.

And Germany isn't going to simply prop up the EU out of the goodness of its heart. As I mentioned before, Germany has its own domestic issues to deal with. And when push comes to shove, Germany will look after its own interests rather than Greece's or Italy's.

With that in mind I believe it's only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults.

When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.

Many people see their portfolios go up in smoke with this. Don't be one of them. The time to prepare your portfolio for the collapse is NOW before it starts.

Labels: Crash, Default, Euro Collapse, Euro crisis

# posted by Generalfoundation @ 4:35 AM 0 comments

Wednesday, December 21, 2011

We've Reached the End Game for Central Bank Intervention.

When confronted with excessive debt, you can either "take the hit" or you can try to inflate the debt away.

In 2008, the Central Banks, lead by the US Federal Reserve, decided not to "take the hit." They've since spent trillions of Dollars propping up the financial system. By doing this, they've essentially attempted to fight a debt problem by issuing more debt.

The end result is similar to what happens when you try to cure a heroine addict by giving him more heroine: each new "hit" has less and less effect.

Case in point, consider the Central Banks' coordinated intervention to lower the cost of borrowing Dollars three weeks ago. Remember, this was a coordinated effort, not the Federal Reserve or European Central Bank acting alone.

And yet, here we are, less than one month later, and European banks have wiped out MOST if not ALL of the gains the intervention produced.

Here's the Irish Bank Allied Irish Banks:

GPC 12-21-1.png

This is actually the best of the bunch I'm going to show you (by the way, this was a $4 stock at the beginning of the year).

Here's the Spanish Bank Santander:

GPC 12-21-2.png

And lest you think it's only the PIIGS banks that are in trouble, here's French bank Credit Agricole:

GPC 12-21-3.png

And here's Germany's Commerzbank:

GPC 12-21-4.png

In plain terms, the Central Banks are losing their control of the markets. Given that they are the only thing that stopped systemic collapse in 2008, this does not bode well for the markets.

Labels: Collaps, Crash, crisis, Debt crisis, Euro crisis

# posted by Generalfoundation @ 4:26 AM 0 comments