The World’s Largest, Most Toxic Banking System…
Stock-Markets / Credit Crisis 2012 Oct 23, 2012 - 10:22 AM GMTBy: Graham_Summers
As noted earlier in yesterday’s article, the entire European banking and corporate system is over-burdened with debt.
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.
Those investors looking for actionable investment ideas could also consider our Private Wealth Advisory newsletter: a bi-weekly detailed investment advisory service that distills the most important geopolitical, economic, and financial developments in the markets into concise investment strategies for individual investors.
To learn more about Private Wealth Advisory… and how it can help you navigate the markets successfully…Graham Summers
Chief Market Strategist
Good Investing!
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I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).
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Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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