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Starting back in August, I began suggesting that we were approaching a Systemic Crisis/ Crash scenario in the markets.

The technical and fundamentals both supported this forecast, but I completely underestimated the degree to which the Central Banks and EU would attempt to prop up the market.

At that time, I thought it likely we'd see a Crash, which would then be met with another round of stimulus, which would push the economy temporarily into the green. It seemed the most logical outcome given that we were heading into an election year with a President whose ratings were at record lows.

Instead, the Federal Reserve, particularly those Fed Presidents from Financial Centers (Charles Evans of Chicago and Bill Dudley of New York) began a coordinated campaign of verbal intervention, hinting that more easing or QE was just around the corner.

These verbal interventions coincided with coordinated monetary interventions between the Federal Reserve and other world Central Banks: first on September 15 2011 and again on November 30 2011.

The effects of both coordinated moves were short-lived in terms of equity prices, but they did send a message that the Central Banks were willing to intervene in a big way to maintain the financial system. This in turn helped to ease interbank liquidity problems in Europe (more on this in a moment) and maintain the belief that the Fed backstop or "Bernanke Put" was still in effect.

Another issue that served to push the markets higher was European leaders' decision to go "all in" on the EU -bail out project. I've tracked those developments closely in previous articles.

Regarding this factor, I also underestimated the extent to which leaders would push to hold things together. After all, Greece had already received bailouts in excess of 150% of its GDP and still posted a GDP loss of 6.8% in 2011. It's hard to believe they'd want to accept more austerity measures and more debt.

Moreover, political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble as Nazis while the Germans referred to Greece as a "bottomless hole" into which money was being tossed.

Looking back on it, the clear reality was that Germany wanted to force Greece out of the EU but didn't want to do it explicitly: instead they opted to offer Greece aid provided Greece accepted austerity measures so onerous that there was no chance Greece would go for it.

Well, Greece surprised many, including myself, and went for it. And so the EU experiment continues to exist today. However, before the end of this issue I will make it clear precisely why this will not be the case for much longer and why we are on the verge of a systemic collapse in Europe.

For starters, unemployment in Greece as a whole is now over 20%. For Greek youth (aged 15-24) it's over 50%. The country is in nothing short of a Depression.

Indeed, Greece has now experienced five straight years of contraction bringing the total contraction of Greece's GDP to 17%. To provide some historical perspective here, when Argentina collapsed in 2001 its total GDP collapse was 20% and this was accompanied by full-scale defaults as well as systemic collapse and open riots.

With new austerity measures now in place there is little doubt Greece will see a GDP contraction of 20%, if not more. I expect we'll see other "Argentina-esque" developments in the country as well. Put mildly, the Greek issue is not resolved.

The one thing that would stop me here would be if Greece staged a full-scale default. While the political leaders and others view a total default as a nightmare (and it would be for Greek pensions, retirees, and many EU banks), it is only a total default that could possibly solve Greece's debt problems and allow it to return to growth.

Defaults are akin to forest fires; they wipe out all the dead wood and set the stage for a new period of growth. We've just witnessed this in Iceland, which did the following between 2008 and 2011:

1. Had its banks default on $85 billion in debt (the country's GDP is just $13 billion).
2. Jailed the bankers responsible for committing fraud during the bubble.
3. Gave Icelandic citizens debt forgiveness equal to 13% of GD.

Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland's recovery.

Now, compare this to Greece which has "kicked the can" i.e. put off a default, for two years now, dragging its economy into one of the worst Depressions of the last 20 years, while actually increasing its debt load (this latest bailout added €130 billion in debt in return for €100 billion in debt forgiveness).

Iceland staged a REAL default, and has returned to growth within 2-3 years. Greece and the Eurozone in general have done everything they can to put off a REAL default with miserable results. I'll let the numbers talk for themselves:

* Data from EuroStat

The point I'm trying to make here is that defaults can in fact be positive in the sense that they deleverage the system and set a sound foundation for growth. The short-term pain is acute (Iceland saw its economy collapse 6.7% in 2009 when it defaulted). However, a combination of defaulting and debt forgiveness (for households) can restructure an economy enough for it to begin growing again.

However, EU leaders refuse to accept this even though the facts are staring them right in the face. The reason is due to one of my old adages: politics drives Europe, NOT economics.

And thanks to the Second Greek Bailout (not to mention the talk of a potential Third Bailout which has already sprung up), we now know that EU leaders have chosen to go "all in" on the EU experiment.

Put another way, EU leaders will continue on their current path of more bailouts until one of two things happens:

1) The political consequences of maintaining this strategy outweigh the benefits

2) The European markets force EU leaders' hands (hyper-inflation or widespread defaults and the break up the EU).

Regarding #1, this process is already well underway for those countries needing bailouts. Investors must be aware that the Governments of Ireland, Portugal, Spain, and Italy have all watched/are watching the Greece situation closely.

Moreover we can safely assume that the topic of defaulting vs. asking for bailouts in return for austerity measures has been discussed at the highest levels of these countries' respective Governments (more on this in a moment).

These discussions are also underway at those countries that are providing bailout funds. German politicians have won major political points with German voters for playing hardball with Greece. As I've stated before Germany may in fact be the country that ends up walking if EU continues down its current path of bailout madness.

With that in mind, there are three key political developments coming up.

1) Ireland's upcoming referendum

2) Greece's upcoming election

3) France's upcoming elections (April and May)

Regarding #1, Ireland will be staging a referendum regarding the new fiscal requirements of the EU sometime before October. While the actual date has yet to be set, Ireland will likely stage its referendum after the French elections in (April and/or May... more on this in a moment).

Ireland has already staged two referendums which Irish citizens voted AGAINST until various concessions were made. This time around the primary concession being discussed is potential debt forgiveness (the country definitely needs it). Indeed, according the Boston Consulting Group, Ireland needs to write-off some €340 billion in debt just to make its debt levels "sustainable."

So Ireland could easily be a wildcard here. The country is already in recession. So we need to monitor developments there as this referendum could go very, very wrong for the EU.

However, the BIG election of note is that of France where the current frontrunners are Nicolas Sarkozy (Angela Merkel's right hand man in trying to take control of the EU) and super-socialist 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.

Currently polls have Sarkozy and Hollande securing the top slots in the first round of the election on April 22. This would then lead to a second election in May which current polls show Hollande winning (this has been the case in all polls for over two months).

However, there's now another leftist wildcard coming into the mix: communist Jean-Luc Mélenchon who is now taking 11% in the polls (he was at 5% last month). And Mélenchon's primary campaign message? Rejecting austerity measures completely via "civic uprising."

Now, Mélenchon could end up taking votes away from Hollande therby allowing Sarkozy to win. It's difficult to say how this will play out. But if Sarkozy loses to either of these candidates, then the EU in its current form will crumble as Germany loses its principle ally in pushing for fiscal reform and austerity measures.

Finally, let's not forget Greece where politicians are now pushing for an election on April 29 or May 6 (the Second Bailout was passed based on new parliamentary elections being held soon after).

This could be yet another wildcard as it is around the time of the French elections, which Greek politicians will be watching closely. Remember, the key data points regarding Greece's economy:

1) A 20% economic contraction over the last five years

2) Unemployment north of 20% and youth unemployment over 50%

3) Unfunded liabilities equal to 800% of GDP courtesy of an aging population and shrinking working population (which is shrinking all the time as youth leave the country in search of jobs)

These facts will not play out in a victory for "pro-bailout" politicians. So the Greece deal, which is supposed to solve Greece's problems, could actually be in danger based on a change in politics.

Remember, as stated before, politics rule Europe, not economics. And Europe now appears to be shifting towards a more leftist/ anti-austerity measure political environment. If this shift is cemented in the coming Greek, French, and Irish elections/ referendums, then things could get ugly in the Eurozone VERY quickly.

That's the political analysis of Europe. Now let's take a look at what the various EU economies/ markets are telling us.

Spain's current economic condition matches that of Greece... and it hasn't even begun to implement aggressive austerity measures. Unemployment is already 20+% without any major austerity measures having been put in place.

Anecdotal reports show Spain to be an absolute disaster. Spanish banks GREATLY underplay their exposure to the Spanish housing market ("officially" prices are down 20% but most likely it's a lot more than that).

In simple terms, things are getting worse and worse in Spain... and the market knows it. Indeed, the charts of most EU indexes, particularly Spain, are telling us in no uncertain terms that the markets are expecting a truly horrific collapse sometime in the not so distant future. Timing this precisely is difficult but the window between May-June is the most likely time, as it will coincide with:

1) The end of seasonal buying (November-May)

2) The French, Greek, and Irish elections/ referendums all of which could go very wrong for the EU (April-May)

3) The end of the Fed's Operation Twist 2 Program (June).

Now, having said all of this I have to admit I have been very early on my call for a Crash. I'm fine with admitting that. Calling a crash is difficult under normal conditions, let alone in a market that is as centrally controlled as this one.

Indeed, going back to March 2009, it is clear that the Fed has been the ONLY prop under the markets as QE 1, QE lite & QE 2, and now Operation Twist 2 have all been announced any time stocks staged a sizable correction (15+%).

In fact, on a weekly chart of the S&P 500 going back four years, we find two items of note:

1) The Fed will only tolerate a 15% drop or so in stocks before it announces a new monetary program

2) Each successive Fed program has had a smaller and smaller impact on stock prices (QE 1: 44%, QE 2 and QE lite: 33%, Operation Twist 2: 22%).

Aside from these monetary interventions, we also have to deal with the Fed's verbal interventions: every time stocks start to break down some Fed official (usually Charles Evans or Bill Dudley) steps forward and promises more easing... or the Fed releases some statement that it will maintain ZIRP an additional year... and VOOM! stocks are off to the races again.

With that in mind, I will admit I've been caught into believing a Crash was coming several times in the last few years. In some ways I was right: we got sizable corrections of 15+%. But we never got the REAL CRASH I thought we would because the Fed stepped in.

So what makes this time different?

Several items:

1) The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.

2) The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).

3) The Fed's resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.

Let me walk through each of these one at a time.

Regarding #1, we have several facts that we need to remember. They are:

1) According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans... the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.

2) The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).

3) 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).

4) 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.

Labels: Banking crisis, Crash, Default, depression, Greece, Spain

# posted by Generalfoundation @ 5:48 AM 0 comments

Even more strangely, they keep pulling out bazooka after bazooka, first unveiling the EFSF which was supposed to raise €1 trillion but failed to raise even €10 billion without having to intervene in its own bond auctions.

Then came the ESM, which was supposed to be another mega-bailout fund, which as before, is having trouble raising funds. After all, if one bailout fund is a dud, why would launching another fix anything?

Oh, and I forgot to mention that both bailout funds will be leveraged... which Europe obviously doesn't have enough of already (the EU banking system as a whole is leveraged at 26 to 1. Lehman Brothers was at 30-to-1 when it imploded).

Indeed, you don't even need to look at the math (though the math is impossible and makes the premise of "saving Europe" even more insane) to know that this can't work. Which is why the idea that the EU as a whole can create mega-bailout funds to put up a "firewall" around its banking system is outright absurd.

The EU is 27 countries. Of these, only 17 use the Euro. And these countries have a long, bloody history of political conflicts with one another. We've already seen hints of this with Germany calling Greece a "bottomless hole" to which Greece responded by portraying German politicians as Nazis.

Spain, France, and the others aren't exactly the best of friends either. And as their respective economies collapse at varying speeds (even Germany posted negative QoQ GDP for 4Q11), political tensions will rise even more rapidly.

So in the end, Europe's bazookas will be firing blanks (assuming they even can fire at all, which their respective efforts to raise capital call into doubt). Which brings me back to one of my central themes for Europe: that you cannot band together such disparate economies and cultures in one monetary union and expect it to work.

Again, this is common sense. And when we add in the math, it becomes even more clear just how insane these political proposals are.

Consider Germany, for instance. As I've noted for months now, that country sports a REAL Debt to GDP of 200% (from former Bundesbank officials' own admissions) when you include unfunded liabilities. And Germany is somehow going to bailout Italy or Spain (which both sport REAL Debt to GDPs north of 300%)?!

Again, the whole thing is absurd. The entire European financial system is just one big house of cards, propped up by the hopes that the ECB can hold this thing together.

But it can't. Europe isn't the US. And the ECB isn't the Federal Reserve. What I mean is that you can maybe fool investors into believing that a financial system is fixed if you're only dealing with one country and one Central Bank. But when you're dealing with 17+ countries, many of which have their own national Central Banks, and you're trying to save this system with a larger regional Central Bank (the ECB) the whole thing is impossible.

Indeed, because of its interventions and bond purchases, the ECB's balance sheet is now PIIGS debt AKA totally worthless junk. And the ECB claims it isn't going to take any losses on these holdings either. No, instead it's going to roll the losses back onto the shoulders of the individual national Central Banks.

How is that going to work out? The ECB steps in to save the day and stop the bond market from imploding... but the minute it's clear that losses are coming, it's going to roll its holdings back onto the specific sovereigns' balance sheets.

So... PIIGS debt is essentially just a monetary "hot potato" that the various Central Banks in Europe are tossing around? And this is supposed to save Europe? Good luck with that.

On that note, I fully believe the EU is heading into a Crisis in the May-June window of time. We have a confluence of negative factors (monetary, political, technical, etc.) hitting during that window of time, which is unlike anything I've ever seen before. And unlike the 2008 Crisis, the Central Banks won't be able to rein this one in.

Why? Because Europe's banking system is $46 trillion in size. And the Fed and ECB are already leveraged to the max having spent all their ammunition combating the Crisis this far.

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

# posted by Generalfoundation @ 10:25 AM 0 comments

Labels: europe, Greece, Greece Arms, Greece bailout

# posted by Generalfoundation @ 9:20 AM 0 comments

The big fat Greek lie being spread throughout the financial community is that "Greece has been saved". It's a lie for the following reasons:

1) Greece did in fact default.

2) Greece now has more debt than it did before the bailout (how does writing off €100 billion Euros in debt and taking on €130 billion Euros in more debt improve this situation?)

3) The Greek economy continues to implode (youth unemployment over 50%, one in ten Greek youth looking for jobs abroad, Greek GDP fell 7% in 4Q11)

4) This Second Bailout was indeed a "Credit event" which the markets have yet to discount (though German investors are already lining up litigation)

5) Germany's finance minister has already admitted Greece may need a third bailout.

Anyone who thinks that Greece is better off, let alone "saved" is out of their minds. The Euro may have been saved for a few more weeks/ months. But Greece is in worse shape than ever.

Indeed, if anything, the Greek situation has made it clear that the whole "give up fiscal sovereignty and implement austerity measures in exchange for bailouts" formula is a waste of time and money. Let's take a look at the progression here.

1) Greece claims it doesn't need a bailout at all (January 2010-March 2010)

2) Greece begins to ask for a bailout (April-May 2010)

3) Greece gets a bailout equal to 57% of its GDP (May 2010)

4) Greece posts a GDP of -4% in 2010

5) Greece announces it won't be able to meet budget requirements/ payback the first bailout on time and asks for an extension (January-February 2011)

6) Greece asks for another extension (May 2011)

7) Talk of Second Greek Bailout begins (July -October 2011)

8) Greece posts a GDP of -6.5% in 2011

9) Second Greek bailout announced/ finalized (February/March 2012)

10) Talk of third Greek bailout begins (March 2012)

No other EU country could look at this progression and think "this looks like a good approach." Indeed, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures or not?

Labels: Crash, crisis, Debt crisis, depression, Euro Collapse, Greece, Greece bailout

# posted by Generalfoundation @ 6:37 AM 0 comments

1. [A]lthough the ECB has made a reasonable fist of complicating its subordination of the private bondholders – money out, profits redistributed, local central banks reinvesting and so forth – it remains a preferential deal done outside this so-called ‘bailout with PSI’. The IIF creditors have sort of voluntarily taken the extra 3.5% hit, but the coupon they’ve been offered is worth less than the original. In a statement issued by representatives of private bondholders, the new interest rates – 2% for the first three years, 3% for the next five, and 4.2% thereafter were described as “well below market rates”, and the creditors will lose money on them. The tone of the statement screams ‘involuntary’. In English, all these factors spell default.

2. Nobody has actually signed up to anything yet: as usual with all things EuroZen, the bankers are alleged to be on-board, but the IIF statement made after the press conference suggests otherwise: ‘We recommend all investors carefully consider the proposed offer, in that it is broadly consistent with the October agreement’. That’s not true for one thing: but as a recommendation, it’s somewhat limp. Further, there is still a body of hardline ezone sovereigns who don’t want to do the deal – and in Germany itself, a growing rearguard campaign to stop it. (See this morning’s Spiegel for immediate evidence). And finally, most Greek citizens themselves will react violently to some of the more pernicious clauses.

3. The ‘agreement’ contains almost a full bottle of poison pills: Berlin has got its debt Gauleiters in the end, only 19 cents on the euro will go to the Greek Government itself, 325 million euros in additional spending cuts have been found, Athens has agreed to change its constitution to make debt repayment the top priority in government spending, the escrow account must have three months debt money in it at all times etc etc. The idea that Greece can now toddle off and have a liberal democratic general election without any of these being issues is Brussels space-cadet stuff at its most tragi-comic. (An opinion poll taken just before the Brussels deal showed that support for the two Greek parties backing the rescue package had fallen to an all-time low while leftist, anti-bailout parties showed gains.)

4. Several Grand National leaps lie ahead before the default is avoided. Parliaments in three countries that have been most critical of Greece’s second bailout – Germany, the Netherlands and Finland – must now approve the package. In Greece itself, further violence will test political resolve about yet more cuts in wages, pensions and jobs. Greece’s two biggest labour unions have already lined up protests in the capital tomorrow. Very significantly, Jean-Claude Juncker of Luxembourg and the IMF’s Christine Lagarde stressed at the press conference that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. If ever I saw a get-out clause, that’s it.

5. Other loose ends are left hanging everywhere. Nobody has elicitied any response so far from the Hedge Fund creditors. Entirely absent from comments was the IMF’s contribution to the €130bn bail-out. Christine Lagarde would say only that the contribution would be ‘significant’, but my information is that she’s lying through her $240,000 teeth as usual: the IMF will only contribute €13bn to the in new Greek funding. Not exactly a resounding vote of confidence for the deal. Juncker said he was optimistic that ezone members would cough up more cash at the EU summit in March, but this too simply doesn’t bear examination: Portugal is broke, Spain is technically insolvent, Italy has asked to be excused from this dance, and Germany has already shown extreme reluctance to to increase its exposure further still. Fritz Schmidt in dem Strasse isn’t too keen either. Finally, as Bruno Waterfield notes in his latest column at the London Daily Telegraph, the agreement remains ‘overshadowed by the pessimistic debt sustainability report compiled by the IMF, ECB and Commission, that warned of a “downside scenario” of Greek debt hitting 160 per cent of GDP in 2020 – far higher that the agreed 120.5 per cent target’.

6. This is where we get to what the MSM will largely dismiss as ‘conspiracy theory’….but for which the circumstantial and corroborative evidence gets increasingly compelling: whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition: they have factored in a Greek default, and believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth.

The cast of players who think this include David Cameron, Mario Monti, Mario Draghi, Wolfgang Schauble and most of the German Finance ministry, Christine Lagarde, probably Angela Markel herself, Tim Geithner, huge swathes of the German banking community, The White House – and elements in both Beijing and Tokyo.

( Emphasis added.)

Labels: Crisis Crash, Default, Euro Collapse, Euro finished, Greece

# posted by Generalfoundation @ 9:53 AM 0 comments

One of the key items that few investors seem to be focusing on is the fact that while the system is awash with liquidity, there is very little capital available. Indeed, the great irony of central bank policies in the post-2008 era is that despite flooding the system with cheap easy money, they've not actually done anything to lower leverage or raise capital.

Case in point, the European Financial Stability Facility (EFSF) which is supposed to be the ultimate backstop for the European banking system, is in fact nothing more than a super-leveraged investment vehicle backstopped by bankrupt nations.

In plain terms, certain less insolvent nations (Germany and France) are supposed to bail out more insolvent nations such as Greece and Ireland. Common sense tells us this can't possibly work.

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.

Again, while the system is flooded with liquidity, actual capital that can be put to use is virtually non-existent. The entire financial system is built up on leverage and easy credit, NOT capital.

This is why the bailouts cannot work. You cannot solve a leverage problem with more cheap debt. Just look at Greece. That whole mess started in January 2010... two bailouts and a number of write-downs later the country is still broke.

And somehow this policy is going to work for other countries such as Italy or Spain? Give me a break. The Euro in its current form is finished. The credit markets are already pricing in more Greek defaults. And Italy's now lurching towards its own default.

Ignore stocks, they're ALWAYS the last to "get it." The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.

Labels: Euro default, Greece, money, rescue

# posted by Generalfoundation @ 6:57 AM 0 comments

So the financial world has collectively woken up and realized that the latest EU bailout scheme is fraught with problems and loose ends. Amongst the various problems are:

1. The Greek private bondholders are furious that the ECB isn't taking a haircut on its bonds too.
2. German courts and voters aren't too pleased with Merkel's decision to go "all in" on the Euro experiment.
3. The Greek default isn't nearly large enough to render Greece solvent again
4. The default has set a precedent for the other PIIGS countries to follow
5. The CDS/ derivative issue regarding Greece's default is not over by any stretch
6. The entire EU banking system remains far too leveraged (26 to 1) and needs another $1.5+ trillion in capital at the minimum.

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.

Again, the primary issue for the EU is a lack of capital. There is TOO MUCH debt there. And issuing more debt, no matter how cheap, is not going to help. Especially when your strongest member (Germany) sports a REAL debt to GDP above 200% and hasn't recapitalized its banks.

So the EU will be crumbling in the coming weeks. This was the final hurrah for the EU and the Euro in its current form. On that note, the Euro was rejected at resistance at 142 and has already taken out support at 140.

Once we take out 139, look for this breakdown to pick up steam (pulling stocks with it).

Indeed, the financial world is talking about how this was the biggest move in stocks since 1974. Unfortunately, few remember that after that move in 1974, the markets cratered.

Some thoughts on stocks... isn't it a little strange that the market fell exactly 20% (the "official" bear market level) before kicking off the biggest ramp job in 30 years? How about the fact that this move came for no real reason other than rumors of another bailout (what are we on #3 for this?).

Can this move really be attributed to Euro choosing to let Greece default (which is what happened in reality)?

Regardless, stocks were deflected from resistance at 1,275 or so. They're now on their way down again. The market is extremely overbought and susceptible to a fast violent move downwards.

Indeed, the credit markets remain jammed up and are anticipating even more haircuts from Greece. And the rest of the PIIGS will be following suit in the default game.

Ignore stocks, they're ALWAYS the last to "get it." The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.

Labels: Crash, Default, Euro default, Greece

# posted by Generalfoundation @ 11:17 AM 0 comments

The markets are exploding higher this morning on news of the expanded Euro Bailout. The numbers at the moment are

1. A 50% haircut for private Greek bondholders
2. European banks have eight months to raise about $147 billion in capital
3. An expansion of the European Financial Stability facility to $1.3 trillion.

First off, let's call this for what it is: a default on the part of Greece. Moreover it's a default that isn't big enough as a 50% haircut on private debt holders only lowers Greece's total debt level by 22% or so.

Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it's expected to bring these levels to 120% by 2020.

And the IMF is giving Greece another $137 billion in loans.

So... Greece defaults... but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.

Forgetting that any and all official estimates for Greece's financial condition have been off by a mile, not to mention that Greece still hasn't paid back its first round of bailout funds, this move is nothing short of moronic.

The reasons are:

1. The default is not big enough (I expect Greek bondholders to get 20-30 cents back on the Dollar at best in the future)
2. It accomplishes nothing of significance (Greece is still broke), and...
3. It will trigger a credit event and has the makings of systemic risk.

Let's put some of the other numbers from this deal into perspective. According to the agreement, European banks are supposed to raise $147 billion in new capital by June.

Well, German banks alone need to raise $173 billion in new capital. So... this new capital "requirement" from the deal is pointless.

Indeed, the European banking system as a whole is insolvent.

Consider that with leverage levels of 26 to 1, European banks in general need to raise capital equal to 46% of ALL banking assets to bring their leverage levels in line with those of the US banking system (13 to 1).

With OVER $46 trillion in assets outstanding, this means that European banks would need to raise $21 TRILLION in capital to bring their leverage levels down to 13 to 1.

Yes... $21 TRILLION... an amount greater than one third of TOTAL GLOBAL GDP.

Now you see why the extra $147 billion in new capital is pointless. It's like pouring a bucket of water into a desert and expecting it to sprout a jungle.

Folks, let's get honest here. This deal accomplishes nothing. It's just more "kicking the can" to avoid the reality. The reality is that the entire European Banking system is leveraged at near Lehman Brothers levels. And European banks need to roll over between 15-50% of their total debt (depending on which country they're in) by the end of 2012.

The credit markets know this, which is why they're predicting more Greece haircuts in the future. It's also why IMF has decided to lend Greece another $137 billion... right as the country defaults.

Ignore this latest pop in stocks and the Euro. This mess isn't over... not by a long shot. And before the smoke clears, much of Euro will be in default/ banking collapses.

Labels: Default, europe, Greece, risk

# posted by Generalfoundation @ 11:13 AM 0 comments