Tuesday, September 13, 2011
Are we on the verge of a massive financial collapse in Europe? Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money. Without more bailout funds it is absolutely certain that Greece will soon default on their debts. But German officials are threatening to hold up more bailout payments until the Greeks "do what they agreed to do". The attitude in Germany is that the Greeks must now pay the price for going into so much debt. Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks. As the economy shrinks, so do tax payments and the budget deficit gets even larger. Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets. If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well. Needless to say, all hell would break loose at that point.
So why is Greece so important?
Well, there are two reasons why Greece is so important.
Number one, major banks all over Europe are heavily invested in Greek debt. Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.
Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either. It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.
If Italy or Spain were to go down, it would wipe out major banks all over the globe.
Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing....
Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.
Most Americans don't spend a lot of time thinking about the financial condition of Europe.
But they should.
Right now, the U.S. economy is really struggling to stay out of another recession. If Europe has a financial meltdown, there is no way that the United States is going to be able to avoid another huge economic downturn.
If you think that things are bad now, just wait. After the next major financial crisis what we are going through right now is going to look like a Sunday picnic.
The following are 20 signs of imminent financial collapse in Europe....
#2 European bank stocks are getting absolutely killed once again today. We have seen this happen time after time in the last few weeks. What we are now witnessing is a clear trend. Just like back in 2008, major banking stocks are leading the way down the financial toilet.
#3 The German government is now making preparations to bail out major German banks when Greece defaults. Reportedly, the German government is telling banks and financial institutions to be prepared for a 50 percent "haircut" on Greek debt obligations.
#4 With thousands upon thousands of angry citizens protesting in the streets, the Greek government seems hesitant to fully implement the austerity measures that are being required of them. But if Greece does not do what they are being told to do, Germany may withhold further aid. German Finance Minister Wolfgang Schaeuble says that Greece is now "on a knife’s edge".
#5 Germany is increasingly taking a hard line with Greece, and the Greeks are feeling very pushed around by the Germans at this point. Ambrose Evans-Pritchard made this point very eloquently in a recent article for the Telegraph....
Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been "Unconditional Capitulation", and "Terrorization of Greeks", and even “Fourth Reich”.
#6 Everyone knows that Greece simply cannot last much longer without continued bailouts. John Mauldin explained why this is so in a recent article....
It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts.
#7 The austerity measures that have already been implemented are causing the Greek economy to shrink rapidly. Greek Finance Minister Evangelos Venizelos has announced that the Greek government is now projecting that the economy will shrink by 5.3% in 2011.
#8 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.
#9 Major banks in the U.S., in Japan and in Europe have a tremendous amount of exposure to Greek debt. If they are forced to take major losses on Greek debt, quite a few major banks that are very highly leveraged could suddenly be in danger of being wiped out.
#10 If Greece goes down, Portugal could very well be next. Ambrose Evans-Pritchard of the Telegraph explains it this way....
Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany's austerity dictates in the long run. From there the chain-reaction into EMU's soft-core would be fast and furious.
#11 The yield on 2 year Portuguese bonds is now over 15 percent. A year ago the yield on those bonds was about 4 percent.
#12 Portugal, Ireland and Italy now also have debt to GDP ratios that are well above 100%.
#13 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.
#14 Major banks in the "healthy" areas of Europe could soon see their credit ratings downgraded. For example, there are persistent rumors that Moody's is about to downgrade the credit ratings of several major French banks.
#15 Most major European banks are leveraged to the hilt and are massively exposed to sovereign debt. Before it fell in 2008, Lehman Brothers was leveraged 31 to 1. Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.
#16 The ECB is not going to be able to buy up debt from troubled eurozone members indefinitely. The European Central Bank is already holding somewhere in the neighborhood of 444 billion euros of debt from the governments of Greece, Italy, Portugal, Ireland and Spain. On Friday, Jurgen Stark of Germany resigned from the European Central Bank in protest over these reckless bond purchases.
#17 According to London-based think tank Open Europe, the European Central Bank is now massively overleveraged....
"Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out."
#18 The recent decision issued by the German Constitutional Court seems to have ruled out the establishment of any "permanent" bailout mechanism for the eurozone. Just consider the following language from the decision....
"No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences"
#19 Economist Nouriel Roubini is warning that without "massive stimulus" by the governments of the western world we are going to see a major financial collapse and we will find ourselves plunging into a depression....
“In the short term, we need to do massive stimulus; otherwise, there's going to be another Great Depression”
#20 German Economy Minister Philipp Roesler is warning that "an orderly default" for Greece is not "off the table"....
''To stabilize the euro, we must not take anything off the table in the short run. That includes, as a worst-case scenario, an orderly default for Greece if the necessary instruments for it are available.''
Right now, Greece is caught in a death spiral. The more austerity measures they implement, the more their economy slows down. The more their economy slows down, the more their tax revenues go down. The more their tax revenues go down, the worse their debt problems become.
Greece could end up leaving the euro, but that would make their economic problems far, far worse and it would be very damaging to the rest of the eurozone as well.
Quite a few politicians in Europe are touting a "United States of Europe" as the ultimate solution to these problems, but right now the citizens of the eurozone are overwhelming against deeper economic integration.
Plus, giving the EU even more power would mean an even greater loss of national sovereignty for the people of Europe.
That would not be a good thing.
So what we are stuck with right now is the status quo. But the current state of affairs cannot last much longer. Germany is getting sick and tired of giving out bailouts and nations such as Greece are getting sick and tired of the austerity measures that are being forced upon them.
At some point, something is going to snap. When that happens, world financial markets are going to respond with a mixture of panic and fear. Credit markets will freeze up because nobody will be able to tell who is stable and who is about to collapse. Dominoes will start to fall and quite a few major financial institutions will be wiped out. Governments around the world will have to figure out who they want to bail out and who they don't want to bail out.
It will be a giant mess.
For decades, the governments of the western world have been warned that they were getting into way too much debt.
For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.
Well, nobody listened.
So now we get to watch a global financial nightmare play out in slow motion.
Grab some popcorn and get ready. It is going to be quite a show.
Prof. Sylla is a financial historian at New York University’s Stern School of Business, studying market behavior all the way back to 1790. By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.
I’ve looked up a few definitions of what a Ponzi scheme is. This one is from an excellent source. The Securities and Exchange Commission defines a Ponzi as:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
Does Social Security constitute a Ponzi based on that definition? I think it does.
There are two ways to look at this:
I) If there are no changes in the current laws regarding Social Security does the projected future financial results support the conclusion that it is a Ponzi?
II) If changes are made to Social Security will the consequence of those changes result in the conclusion that it is still a Ponzi?
(I) is easy to answer. Based on the SEC definition, Social Security is a Ponzi. If you want proof of that go to the Social Security Trust Fund May 2011 report to Congress. On page 10 (of the report) you find the following chart. Somewhere around 2036 (I think much sooner) SS benefits will be cut by 25%. That is the law as it is written today.
Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi.
To answer (II) requires that one make some assumptions regarding what changes to SS are coming. I rely on the recommendations from a variety of sources. Both Republicans and Democrats (including the President) have supported the recommendations made by the Fiscal Commission report. SS has it’s own set of recommendations. “Independent” private groups have made their thoughts public. While it is not clear what (if any) changes are coming at SS, the following covers the options that are being given serious consideration:
1) Gradually raise the age limit to 70.
2) Gradually increase FICA taxes.
3) Change the formula that indexes SS benefits to inflation. The consequence would be to slow the current projected growth rate of SS payouts.
4) Gradually increase the cap on incomes subject to FICA. (Currently $106,500).
Of all of these options the one that has had the most support is to gradually increase the age limit to 70. What does that do for SS on the charge that it is a Ponzi?
Assume I am 65 and getting $2,000 a month from SS. On paper I should die at age 77. By the numbers I will get 12 years of benefits.
Now assume that the age limit is extended to 70. Assume further that this will be effective is 15 years. Based on what we know today the average life expectancy of a 65 year old male will be 13 years in 2026.
This means that a person who reaches age 65 in 2026 will not get benefits for another 5 years (70). That same person will die at age 78. They will get benefits for only 8 years while I get mine for 12. I will get benefits for 50% longer than they do.
Conclusion: Anyone who is under 50 today is getting screwed when that age limit goes up. For those folks, SS meets the definition of a Ponzi.
Raising FICA makes things worse. Not only would younger workers pay more into the system as a % of their income, they will get benefits for a shorter period of time.They pay more for less when taxes are raised
Conclusion: Increasing FICA taxes is a solution that forces the conclusion that a Ponzi is afoot.
Changing the COLA formula has lots of support from the “deep thinkers”. I agree that if this were done it would have a very significant consequence to SS over a 30-40 year period.
The desired effect is to reduce the inflation adjusted cost of benefits. I get $2,000 a month. We know what that buys today. In 30 years a retiree will get $4,000 a month, but because of the changes to COLA that $4,000 will have a purchasing power equal to only $1,000 today. This is the objective of the proposed changes.
Conclusion: Changing the COLA formula devalues future benefits versus those receiving them today. Anyone under 40 is going to feel the full brunt of this. For them, SS is a Ponzi.
Increasing the wage cap is just another way of increasing the current tax burden on workers. Yes, this increase will be targeted to those who make a decent buck, so this is a popular approach. The consequences will be felt by about 10% of all workers.
Conclusion: For those in this group the consequences of #’s 1,2 and 3 are just magnified. I don’t feel sorry for those high-income earners but it’s certain that this group is facing the biggest Ponzi of them all.
SS is, and always will be, an inter-generational transfer of wealth. By itself that does not have to mean it is a Ponzi. If the total population were symmetrical across all age groups the inter-generational impact would be both fair and reasonable. But that is not what we have in America today. We have a stable population that is rapidly aging. Given that dynamic anyone who is under 55 (and especially those who aspire for a high lifetime income) are going to get hit with the biggest inter-generational wealth transfer in history. For all in that group, SS is a Ponzi. They will pay in more than they get back. The extent that each age group is impacted varies. Those who are not yet born are the ones who will feel this the most.
I’m not sure if Rick Perry is crazy or just crazy smart. There are 50 odd million Americans who are getting SS checks. That’s a hell of a lot of voters. That’s why SS is called the third rail.
But if Perry asked himself, “How do I win this election?” He could well answer with a strategy that relied on young people who would cheer/support him. He could also look to all those swing voters under 55 who pay a fortune in SS and will not get their fair share back. It's an odd political alliance. But it just might work. Mr. Romney seems to be doing well with the seniors. But he falls flat when he gets to a campus. The base that Perry is chasing after is the same one that got Obama elected.
In my definition of a Ponzi there has to be intent to defraud. I’m not sure that this condition has been met. Every year for the past five the SS Trust Fund has told Congress that significant changes must be immediately implemented. SSA has not mislead anyone, so no fraud from them. The deciders who looked at these reports and chose to ignore what has been written are probably not guilty of fraud either. But they sure were remiss in their responsibilities.
The money supply increases naturally by exactly the amount of increases in productivity in a healthy economy, notes Stansberry & Associates Investment Research Founder Porter Stansberry. He doesn't have to point out that the economy isn't healthy, nor that the money supply expands every time the printing presses run to bail out a failing business and bring on a new iteration of quantitative easing. The solution is a simple (albeit not necessarily easy) one, Porter tells us in this exclusive Gold Report interview: Return to the gold standard. That will happen, he says, when the people say, "Enough!"
Porter Stansberry: In theory, it could be, but in practice that's never happened. I suspect that the market wouldn't have much faith in such rules, and they'd be abused eventually. During the Volcker and Greenspan Federal Reserve periods, from roughly 1981– 2006, two central bankers created a de facto gold standard because they remained relatively consistent vis-à-vis money supply targets.
Volcker absolutely targeted money supply, as did Greenspan up until about 1999. He moved away from that stance due to Y2K fears and then the 2001–2002 recession. So we've seen long periods in fiat systems where money supply growth was targeted and fairly reliable.
The problem, of course, is that the gold-standard rules don't apply across the banking systems. When the Fed was targeting money supply, bankers lobbied for all kinds of changes related to reserve ratios, which allowed them to massively increase the leverage on their balance sheets. Famously, the investment banks—Bear Stearns, Lehman Brothers and others—went from, say, 15:1 to 50:1. That had a tremendous impact on the amount of credit in the economy, which ultimately led to the collapse we well remember. Then the Fed started to radically increase the money supply to help reduce the impact of those bad loans.
That's a long way of saying that efforts to mirror a gold standard by rule have never been effectual in history, and they haven't worked in America over the past 40 years.
TGR: So changing the reserve requirements, in essence, increased the money supply.
PS: Let's talk definitions. When I'm talking about the monetary base, I'm talking about the size of the Fed's balance sheet, which is the foundation of the U.S. fractional reserve banking system. When you increase the size of the Fed's balance sheet, you can have multiple increases of the actual money supply from that base. By targeting that base, Volcker restrained credit growth in the economy. Greenspan was less successful at that because he chose to expand the monetary base for political reasons.
In any case, just controlling the monetary base did not control the impact of increases to banks' balance sheets and leverage ratios, simply because they lobbied successfully to change the rules. They got permission to increase their leverage. The monetary base didn't change, but the money supply increased due to the actions of the banks. It would have been impossible under a gold standard for the simple reason that the banks would be subject to runs on their gold. That doesn't happen in a paper system.
I'm not saying that there would never be another run on a bank, but bankers would have a palpable fear of losing control under a gold standard because the market discipline is so much fiercer now. They never would have leveraged 50:1 under a gold standard. It would have been completely implausible.
But as long as there's this notion that they can get a bailout of any size by turning on the printing press, maybe the discipline isn't quite so sound. That's exactly what we're seeing. So rather than allowing runs on the bank or rather than allowing banks to default and for depositors to lose, the government is printing as much money as is required and is giving it to the banks. (more)
The mainstream press and ego driven politicians have completely forgotten about the middle class in this country, pretending as if ignoring the cacophony of discontent would simply make it go away. Both parties are simply doing the bidding of the financial upper-crust and that is why you rarely hear about household income being discussed in any television show. Yet as we are seeing with record low consumer sentiment to accompany a broken balance sheet and empty savings accounts, the public can get a dose of reality by simply examining their own life. Are things really better? What Americans should now fully realize is that the bailout schemes were nothing more than a wicked robbery and transfer of wealth from the majority to a slim connected plutocracy. Those who write and advocate for our laws, the politicians, have made sure a national thievery would go unpunished courtesy of campaign contributions. The system is completely broken and the disappearing middle class is merely a consequence of this financial plundering. Since the tech crash, the housing crash, or the energy debacles were completely missed by the media do not expect to have any guidance coming from the paid spokesmen of Wall Street. When did Wall Street and the media decide the middle class was irrelevant?
The country that debt built
The collapse of the middle class can be traced back to the 1970s. For the last 40 years this contraction has largely been hidden under the rug thanks to a large helping of deep fried debt:
The above chart is rather illuminating. What we have done is taken all the household debt in the United States and divided it by the population. Even accounting for this growth the trajectory is rather obvious. The middle class has felt less of the contraction because of access to debt. Of course this peaked in 2007 which is the first reversal in this trend since data started being gathered way back in the 1950s. Debt is not always a bad thing but when it is not accompanied by real income growth then problems start to boil to the top. The mainstream media is concerned with selling you goods and banks are more than happy to finance your buying even if you don’t have the money today. Banks got bored counting small shopping trips for clothes and decided to turn the biggest asset in housing into one giant speculative casino.
The United States population grew at the slowest rate since the 1940s and this was largely due to World War II. From 2000 to 2010 most of the growth occurred in the West and South. Only one state in the nation, Michigan actually saw their population decline. What is fascinating is that these regions are heavily reliant on automobile travel. How will high energy costs impact growth moving into the future? Just another cost that will eat away at those stagnant paychecks. (more)
The Baltic Dry Index -- which is just an index of shipping rates -- has a lore about it for being a really good economic indicator.
But in reality, it's not much of an indicator of anything beyond... shipping rates. And that's because it's idiosyncratic, moving on its own micro economic factors.
Case in point: Right now the BDI is at its highs of the year!
Here's Lazard Capital on the closely-related Baltic Cape Index:
Dry Bulk: Capesize rates are profitable for now but do not expect such to
be lasting. The Baltic Cape Index continues to hit new highs for the calendar
year with rates at ~$27,000/day on average on the back of firm Chinese
demand for iron ore and steady demand for coal supported by stabilizing
commodity prices, moderating Chinese domestic inflation and steady domestic
demand despite some overall slowing in export demand. As well, the Cape
fleet has been experiencing record scrapping this year. Still, the fleet remains
markedly oversupplied and this condition should exist well in to 2012. We
have been expecting moderate spikes in Cape rates and we feel this current
moderate spike is not the last spike that we shall see over the next 12 months
(today’s rates are still well below the $40,000/day average rates we say for
Capes in October 2010). Given that there will likely be spikes in freight rates
despite a slow GDP growth regime globally, the dry bulk market is not nearly
as out of balance as the bears would suggest.
Anyway, one other reason we point this out now is that we frequently hear about the BDI when it's down and stocks are up. People don't bring attention to it as much when it's up and stocks are down.
In any long-term bull market, we would normally expect to observe several phases. Put another way, in any long-term trend (in this case higher) we would not expect to see this entire period dominated by a single trading pattern.
In “free and open markets”, the simple dynamics of supply and demand will almost always change trading patterns as the years go by – and rising prices re-shape a market. Even in our own, heavily-manipulated markets we would expect that the combination of rising prices and time would serve to create new patterns and dynamics.
This is certainly true with precious metals markets. The gold market in particular has exhibited three, distinct phases since its massive, bull market began a decade earlier. The 10-year chart below provides us with an illustration of these phases (and patterns).
The first phase can be succinctly summed-up as the “sleeper” phase, in more than one respect. First of all, this was clearly the “stealth” segment of this bull market. Only the most-savvy gold bulls and investors were buying the yellow metal back in those days – with most of the public still “asleep”. Similarly, the bullion-bankers were smug and apathetic themselves; still not even dreaming that their multi-decade choke-hold on this market was about to be broken. The result is a very “sleepy” chart pattern: a slow-and-steady rise in the price of gold – right up to the beginning of 2006.
We can think of 2006 as either the year of “awakening” in the gold market, the year that the “war” (to control this market) really began, or simply both. Clearly, when gold sailed past the $500/oz mark without even a pause this (finally) got the attention of both significant numbers of investors and the bullion-banks themselves.
What followed over the next three years can be thought of as the bullion equivalent of “The Battle of the Bulge”. It was nothing less than a struggle for the “control” of the gold and silver markets. That infamous World War II battle marked Nazi Germany’s last major “offensive” in the West which was actually aimed at “victory” – rather than merely delaying defeat. In the gold market, it was the banksters’ last attempt to demonstrate that they still “owned” this market, and (as with the Nazis) it ultimately ended with their own, crushing defeat.
During those three years, however, we see that the bullion banks were successful in one respect: in each of those years they were able to generate at least one dramatic reversal – with the result being that the years 2006 - 2008 marked the period of most-extreme volatility over that first decade.
Following the decisive defeat of the bullion banks at the end of 2008, we moved into the third phase of this bull market: controlled ascent. Obviously the price of gold did not move in a simple, straight line from the start of 2009. However, while we see some mild oscillations in the 60-day moving average (above), they are virtually “rhythmic” in their pattern – with the result being a relatively smooth progression from roughly the $800/oz level to the $1600/oz level. (more)
Clearest support was found in the S&P. The rising channel played well as support although the declining 20-day MA is providing supply pressure.
Buying in the Nasdaq kicked off before channel support was reached. Unlike the S&P, its 20-day MA is ticking higher, although the rally wasn't enough to finish with a close above the 20-day MA.
The real action was concentrated in the semiconductors. Unlike the aforementioned indices the action is concentrated around channel resistance, not support. Today's close may be enough to register as a breakout but there was a sharp gain in relative strength to the Nasdaq 100. May's decline may now be at an end.
The focus for tomorrow should be on semiconductors. Gains in other indices are unlikely to change the big picture, but a gain in semiconductors would do a lot to kick start leadership for the next rally. Continued gains in the semiconductor index would spill over to the Nasdaq and Nasdaq 100.