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We now face the growing danger of a new financial megashock that could strike at almost any time.
It has the potential to be larger than the Lehman Brothers shock of 2008.
It could precipitate a market paralysis much as it did back then, freezing trading in critical debt instruments such as bank CDs, commercial paper and even the government securities of major nations.
It raises the risk of failures that could be more dangerous than those of Fannie Mae, Washington Mutual, AIG, Merrill Lynch, Bank of America or Citigroup.
And it could prompt governments on both sides of the Atlantic to launch countermeasures that are even more radical — and riskier — than anything we’ve seen so far.
Typically, a financial megashock of this magnitude would come as a great surprise to nearly everyone. What’s most unusual about this round of the crisis, however, is that it’s not conforming to any typical pattern:
The next big megashock is both quite
predictable and virtually unstoppable!
Like a giant asteroid speeding on a direct path toward Earth, most financial experts and political leaders can see it coming.
But seeing it is one thing. Preventing it is another.
You know what I’m talking about. So does almost anyone watching the news.
It’s the crisis now erupting in Europe.
But I repeat: That knowledge alone does nothing to reduce the potential impact of this impending megashock.
Why? Because even though major bankers and policy makers see it coming, it has not prompted them to change their ways. Nor has it motivated the majority of investors to run for cover — yet.
Instead, they’ve done precisely the opposite, doubling down on their risky investments or maneuvers.
The end result is an explosive combination of extreme danger AND extreme complacency at the same time.
Moreover, the dangers we face today are actually GREATER than those of 2008 in SIX key ways:
ONE. Before the Lehman collapse in 2008, it was strictly individual financial institutions that were on the edge of collapse.
Today, entire nations are on the brink — starting in the cradle of Democracy (Greece) … spreading to a great former superpower (Spain) … engulfing the world’s largest economy (the EU) … and striking the world’s largest financial capital (New York).
TWO. In 2007, the last full fiscal year before the Lehman collapse of 2008, the U.S. federal deficit was $161 billion. That was already excessive by most historic comparisons. But it was small enough to allow room for more deficit spending to stimulate the economy — without causing wild inflation or panic in government bond markets.
Today, the deficit is $1.327 trillion, or 8.2 times larger, and any major expansion of this red ink could set off a chain reaction of untold adverse consequences.
THREE. In 2008, most of the megabanks at the epicenter of the crisis were in the United States, where even the largest among them are smaller than their European counterparts.
Today, although some U.S. megabanks (such as JPMorgan Chase and Bank of America) are still taking excessive risk, it’s primarily the largest European banks that are in the most trouble: Banco Santander, Barclays, Crédit Agricole, Lloyds Bank, Royal Bank of Scotland, Société Générale, and UniCredit SpA.
In fact the weak European banks are so large, their total assets are greater than the total assets of ALL U.S. commercial banks combined.
FOUR. In 2008, governments had not yet deployed their “big gun” cures for the debt crisis. So they still had the firing power to squelch the crisis with a series of unprecedented rescues.
Today, we have seen rapidly diminishing returns — or outright failure — with nearly every possible stimulus plan, bailout deal or austerity measures known to man.
FIVE. In 2008, governments encountered little public resistance to major new policy initiatives.
Today, millions of citizens are rebelling at the polls — or on the streets — in France, Greece, Portugal, Spain, Italy, and even Germany.
SIX. Most important, before 2008, central banks were largely restricting their role to traditional manipulation of interest rates.
Since then, four of the most powerful central banks in the world (the Fed, ECB, BOE and BOJ) have departed radically from tradition and embarked on the greatest wave of money printing in the history of mankind.
Still not convinced?
Still thinking you have plenty of time to prepare?
Then, just take a closer look at the drama that has unfolded just in the last few days …
Start with Greece.
Any government that has to pay more than 7% to borrow long-term money nowadays is widely believed to be in the “red” danger zone.
The central government in Athens now has to pay FOUR times that much.
Any government that’s rated double-B or lower by the major rating agencies is considered very risky.
Greece has just been downgraded to triple-C, meaning that default isn’t just a possibility — it’s very likely.
Any banking system that has even $1 more in withdrawals than it gets in new deposits is in grave danger.
Greece’s banks are now suffering MASS withdrawals that are similar to the U.S. banking panic of the early 1930s!
Any federal government suffering political gridlock during a financial crisis is unable to take the needed steps to end it.
Greece doesn’t even have a government. It’s under the auspices of a caretaker president who is, by definition, not empowered to make any policy changes.
Next, look at Spain’s economy, which
is five times larger than Greece’s …
Any country with unemployment over 10% is obviously in the midst of a great recession or even a depression.
Spain’s latest tally of official unemployment (for the fourth quarter of last year) was 22.9%. And, based on a record new surge in registered job seekers reported on Friday, it’s now probably much higher.
Any bank that suffers big withdrawals and has to be taken over by the federal government is obviously in serious trouble.
But it’s far MORE serious when, despite a government takeover, depositors pull even MORE money out of the bank. It sends the message that they trust the government’s management even LESS than the bank’s. Yet, that’s precisely what happened last week in Spain, as you can see from this AP report:
“Confidence in Spain’s banks and its teetering economy was shaken Thursday after a newspaper reported that depositors were rushing to withdraw their money from Bankia, a troubled bank that was effectively nationalized just one week ago.
“Adding to the anxiety, rating agency Moody’s downgraded its credit ratings on Spanish banks. The banking sector has been hit hard by a collapse in the Spain’s property market and is facing tough funding rules that many analysts fear it can’t afford.”
“Bankia SA, the country’s fourth-largest lender, saw its shares fall as much as 27% during trading in Madrid after the El Mundo newspaper reported the bank was hit with more than €1 billion ($1.27 billion) of withdrawals since the government announced the takeover.
“The amount taken out by bank customers is equivalent to all withdrawals made from Bankia in the first three months of the year.”
Or consider the drama now
threatening the entire EU …
Until now, it’s been hard enough to prevent a dismemberment of the euro zone, and its leaders have only been able to do so thanks to a strong alliance between the leaders of its two largest countries — Sarkozy of France and Merkel of Germany.
But now, with the fall of Sarkozy, that alliance is history, and Europeans who favor a Greek exit from the euro zone — no matter how dangerous — are clearly gaining the upper hand.
Until recently, global investors apparently believed euro-zone leaders when they agreed to a great “fiscal pact” — when they vowed austerity and promised tough cuts to their giant deficits.
That’s why these global investors declared a “cease fire” in their attacks on the sovereign bond markets of Greece, Spain, Italy and France: They stopped dumping their bonds. They stopped forcing governments like Greece’s and Italy’s to fold their tent. And they waited.
But now, in the wake of new elections in Greece, France and Germany, political support for any form of austerity in Europe has collapsed; and even its staunchest supporter, Angela Merkel is buckling.
Therefore, global investors are beginning to attack again, threatening to crash most European bond markets and cut off the vital flow of cash that governments need for their day-to-day survival!
What will they do? As we’ve seen so blatantly in recent months, these governments have one last recourse: A tidal wave of money printing.
Still wondering how this will unfold? Still uncertain as to how to protect yourself and profit?
Then stand by for our next issues with instructions on your next steps.
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 13 comments }
I could not agree more, the problem rests with politicians who move at a snail’s pace compared to private companies / organizations. Politicians are disadvantaged because they have to pander to the people whereas private companies can wield the big stick and take decisions that benefit the short and long term running of a business. Sure, they will all print more money and when the EU three year cheap money deal nears its end they will extend the repayment period by another two years. Meanwhile top tier bank bosses will feather their own nests in preparation for the final meltdown.
I’ve retired and live in Eastern Europe where families have carried on the tradition of growing their own produce and taking steps to survive the winter months on minimal incomes. Western Europe has all but lost these skills and will not survive the downturn when it comes as it surely will.
But eastern Europe may want to prepare for the rise of the new Hitler and the forth Riech, as this will surly happen right along with the crash. The precedants for this are being set up right now…and the Germans still see eastern europe as dead weight. Growing one’s food in eastern europe just simply is not enough, u need a hideaway/hidden bunker, or even a fool proof plan to escape EU all togather, when the time comes…..and it will, so it seems now to the enlightened veiwer.
Your dead-on Mr Tasker. My wife is from the Ural Mountains of Russia. The lastest trip to visit her parents brought sadness. The older generation there in her old town is still trying to maintain most of these gardening/survival traditions, but in the last decade the younger generation has been obsessed with easy money, and the latest fashionable trend. And it is not pulling weeds and maintaining their own valuable food source. I am constantly reminding my inlaws over there NOT to sell there garden plots like the rest of them. I can see a major catastrophy looming concerning food supplies. The day will come when it will be the best investment we have.
Fred
I guess this is the point where we learn if one of the cornerstone theories of free-market economics works or not. Will creative destruction save capitalism when the whole Euro Zone collapses or not? Stay tuned we don’t have to wait much longer to find out.
I understand that there is an even greater problem ready to explode–derivatives.J.P.Morgan’s 2 billion loss is the tip of the iceberg
Martin , for most of the last forty years you have been in the business I have been listening. You and your team have kept me safe from the many crises and i truly appreciate that .But, because I am a timid/conservative investor, is it possible that some day i to will have that confident , relaxed and care-free look I see on your face preseeding this newsletter?? Or, do I need to change who I am and become aggressive across the board? Any suggestions? Thanks Garyd
You underestimate the problem left by President Bush. You state that the deficit was a manageable $161 billion. The only number I look at to determine the deficit is the change in the National Debt. We added $500 billion in 2007 and for each of the five years prior. We added over $3 trillion from 2001 through 2007. And this was during a prosperous economy. It left us in very poor shape to handle the huge economic recession that followed the Lehman collapse. starting with a $500 billion deficit, the recession alone will push the deficit to a trillion without any new programs.
Congressman Ryan said he voted against sending Simpson Bowles to the full congress because it did not go far enough. So instead of having a good starting point, we got nothing. In this partisan atmosphere of my way or nothing, I am reminded of what Benjamin Franklin said coming out of the constitutional convention. He said in effect, it does not have everything as I might have wanted it, but I think if we or another group negotiated for another year, we would not do any better.
Hy Parker, think back to those years that you are referring to. Wake up and realize that the dems were in charge of both houses. They piled on the entitlements and spending. THe dems were the ones who kept saying that everything was just fine at FNMA and FREDDIE. They were the ones who were happy with the crook, Franklin Raines wo presided over FNMA. The man who was paid $90 M
to cook the books. You need to be more informed and come into reality.
Every reference I see to the level of sovereign debt – whether by reporters, politicians, or even economists – defines the measure in terms of the ratio of “debt-to-GDP.” The use of this term, I believe, is deliberately intended by those who are knowledgeable on the issue, and simply parroted by those who are not, to mask the severity of the problem. Since GDP tends to grow over the years with the debt, that ratio has tended to grow at a much slower pace than the true measure of repayment ability – debt to revenue – thus concealing the urgency of this nearly-unsolvable situation. The federal government doesn’t have the use of GDP to repay its debt – it can only repay debt from its revenues and revenues have grown much more slowly than GDP – therefore the real measure of repayment ability has deteriorated much more rapidly than “debt-to-GDP†would indicate. Beginning right now, let’s all focus on speaking accurately and honestly about the debt!
Please check my facts if there’s any doubt at all: The U.S. Federal debt is now seven times its total annual revenue. Federal revenues have grown 8% since 1999 but the debt has tripled! Each year for at least the past three years we have added another $1.2 trillion or more to the debt! In order to balance the Federal budget (which would simply mean breaking even – not paying back nor adding a penny of debt), we would have to either raise taxes or cut federal spending (or some combination of the two) by 39%. The political will to propose, and the practical ability to pass, such legislation is unimaginable (think: riots, civil war, etc. – Greece is seeing a huge revolt in response to relatively small austerity measures which would look like a Sunday picnic compared to the U.S. cutting 39%).
The problem is enormously larger than people realize. During the good times we used our naïve belief in eternal growth to borrow our way into oblivion, in greedy hopes of even better times. Instead of paying down debt with our “artificial†prosperity, we borrowed ourselves beyond the point of no return. Now, any politician who would actually be willing to tell the whole truth would never be elected! Because sadly, we spoiled Americans have not been willing to sacrifice current ‘wants’ to preserve tomorrow’s needs, we are now in a position where we must sacrifice today’s needs to preserve our entire system. No one has proposed an even remotely workable solution. The problem is so large that we ignore it – we just shut it out (while we still can) and then go on to get our cappuccinos for today’s next “fix.†Another shot of morphine….. the Dow is up….. …. Life’s good!
Some say we should just “grow our way out†of this mess. How?? Should we all just go borrow more and spend more? Just do more of what we did to get ourselves into our current predicament??
The Feds have pushed interest rates to the lowest levels since the late 1940s. Trillions of stimulus dollars have been poured into the economy. Endless bailouts have become legendary. The stock market has almost recovered to its pre-recession levels. Inflation is as low as it has been since the 1950’s. Consumer confidence is improved. The government effectively gave salaried workers a 2% raise two years ago by reducing social security taxes. In addition, the government’s $1.2 trillion annual deficit represents excess money going into the economy each year. All the morphine we could ever want! Yet with all these positives, credit is sluggish, home values continue to decline, unemployment remains high, businesses are still struggling, bankruptcies are up, and more people are on food stamps than ever. The Feds already have “the pedal to the metal,†and we are still just barely limping along…..
So, what happens when taxes go up and/or spending goes down (to balance the Federal budget), social security tax withholdings are restored, the stimulus money runs out, consumers continue reducing their debt load, and interest rates go up (basically when economic conditions return to normal)? Where will the growth come from? We mortgaged our future, the future is now – and the bills are due!
All this sounds really bad for one simple reason – it’s not the latest movie thriller showing on tonight’s streaming video – it is REALITY! Without a solution, the U.S. will eventually default on its debt. As Mr. Andrews said on the Titanic, “It is a mathematical certainty.â€
Each DAY we wait to take action multiplies the price we will all pay ($2.28 billion in additional government debt each day, to be exact). Our only hope: The government must freeze all spending immediately – everyone must contribute! A plan must be implemented to gradually reduce spending (sorry Democrats!) AND increase taxes (sorry Republicans!), across the board, so that the budget is balanced within a reasonable period (3 – 4 years at most). The public must be told the truth and the solution – and that our economic survival depends on these measures! A safety net must remain in place for those dependent on government and all non-essential spending (not picking on them, but “e.g. the artsâ€) must be halted immediately. If politicians tell the truth and take action, that action just might – just might – inspire enough confidence to really help jump-start the economy.
Our economic survival depends on honest communication, quick action, and material sacrifice – and MUST be more important than partisan childishness and special interests!!
5/22/12
yep
I am seriously thinking that if the J.P.Morgans deficate is just the tip of the iceberg, I need sell all my stock positions and soon, or put stop losses in place. Also I bank at U.S.Bank and carry a hefty checking account. Wouild I be better off reducing to a safe level and invest in gold or silver instead?
LOL! I think you meant deficit, but this is funnier (and more accurate): “J.P.Morgans deficate” (pretty close to defecate…LOL!)
A little physical gold or silver (as a percentage of your total net worth) is safe IMO. I think you’ll be able to get a better price if you wait at least 2-3 weeks. I’m about 13% in physical gold and silver…I’m looking forward to picking up some sweet stocks (including mining related stocks) much cheaper later this year.
Volatility is coming back.
it is known history kind of repeats. This is a remake of the fall of Roman Empire. Unimaginable come true, this time, in minutes. Given the ever widening gap between haves and havenots, the outcome is Lenin-predictable : the fed-up supressed middle class shall either perish in war, or will cut the balls of “global” investors and government whores on their payroll off. Then. New cards, please. That is, how it has always worked and nobody has ever invented anything more feasible than that. That is how Mother nature works. She loves balance and mercilessly destroys anything and anybody acting Wise Ass God.