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I have a sinking suspicion. A feeling I just can’t shake based on multiple fundamental, technical, and timing indicators. My belief?
The end is near.
No, I’m not talking about some Mayan calendar apocalypse kind of thing. I’m talking about a catastrophic, painful, epic meltdown-type endgame for this European sovereign debt crisis. And boy do I hope you’re ready if I’m right!
Could the markets be this close
to coming totally unglued?
Why am I so worried about this kind of outcome?
Well, for the better part of two years, European fiscal and monetary policymakers have been trying everything they can to achieve the impossible. They’ve tried to hold back a tidal wave of delinquencies, defaults, recessions, banking failures, and more tied to the gargantuan build up of unpayable debts and other obligations continent-wide!
They’ve held summit after summit. They’ve cooked up plan after plan. They’ve conjured up bailout fund after bailout fund. They’ve spent hundreds of billions of euros propping up Greece, Ireland, and Portugal. Now, Spain and even lowly Cyprus are knocking at the door, seeking tens and tens of billions of euros MORE in aid.
Meanwhile, the European Central Bank steered hundreds of billions of euros in cheap money to banks in troubled PIIGS countries. Those banks took the 1 trillion euros in LTRO cash and turned around and bought the bonds of their troubled sovereign overseers.
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| The world’s oldest bank needs a government handout to plug a massive capital gap uncovered by European regulators. |
It worked for a few months. But the stopgap measure to drive down government funding costs has now failed miserably, with borrowing costs at or near fresh, pre-LTRO highs in Italy and Spain. Worse, it left those banks even MORE exposed to massive losses.
Spanish banks now reportedly need anywhere from 62 billion euros to 100 billion euros in additional funds to shore up capital, a hole that will likely only grow. And the list of banking casualties keeps getting longer.
Just this week, Italy had to bail out the oldest bank in the world, Banca Monte dei Paschi di Siena, with 3.4 billion euros in fresh funds. The Tuscan institution was founded in 1472, 20 years before Christopher Columbus first sailed to America!
All of this wasted time, money, and effort has been designed to stave off the now clichéd “Lehman Moment.” But these guys just don’t get it. It’s like standing on the beach with your palm out, trying to stop the tide from washing away your sandcastle. It simply won’t work, because the incoming waves of financial disasters are just too powerful!
How to operate without a government-
or central bank-provided safety net!
Many on Wall Street aren’t ready to admit this to themselves. But I’m not one to mince words. I’ve been saying that policymakers are out of bullets for some time, most recently a few weeks ago, when I explained why I couldn’t care less WHAT the Fed did at its June meeting.
The post-Fed reaction only confirms to me that I’m on the right track …
Ben Bernanke announced an extension of the Fed’s “Operation Twist” program after the meeting. The move will entail the Fed buying another $267 billion of longer-term Treasuries, and selling an equivalent amount of shorter-term Treasuries, in an effort to suppress long-term rates and support the economy.
What did the markets do in response?
They shrugged their shoulders and promptly rolled over! That’s because savvy investors know that “Twist 2” will prove to be just as useless as the previous $400 billion “Twist 1” program was (not to mention QE1 and QE2) in fueling a lasting economic turn.
Heck, even the “central bank of central banks” — the Basel, Switzerland-based Bank for International Settlements — is now coming around to my view. In a shocking annual report released a few days ago, the BIS concluded that “central banks are being cornered into prolonging monetary stimulus as governments drag their feet” but that “both conventionally and unconventionally accommodative monetary policies are palliatives and have their limits.”
Bottom line: I believe we are close to the point where the investing world wakes up to an uncomfortable reality. Namely, that we’re operating without an effective government- or central bank-provided safety net. Many governments are either flat broke or politically hamstrung from acting, while the vast majority of central bankers have no more tools in their toolboxes.
So if you thought the 2,000-point, two-week swoon in the Dow Jones Industrial Average last summer was bad … or if you thought the May 2010 “Flash Crash” and its aftermath was ugly … get ready. We may be very close to a replay of 2008, one that would make those declines pale in comparison. Yet complacency still reigns on Wall Street that some kind of epic “save” is right around the corner.
My advice?
Take protective steps now. Bag more profits. Add some cheap downside put options, or inverse ETF positions, for protection. Then look for more urgent warnings right here in these cyberpages. Because I really, truly, honestly can’t shake the feeling we’re on the verge of something potentially very, very big.
Until next time,
Mike
P.S. In this month’s Safe Money Report, I gave my members six specific steps to take to protect themselves from a potential catastrophe that could bring the financial world and economy to a screeching halt. To learn how you can join them for less than 14 cents a day, click here to watch my latest video.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 16 comments }
Hardee, har, har, har…..
Mike, it is time to rename the really sick European countries to PIGSIC, to include Cyprus.
I like the metaphor about the sandcastle & tide.
I would be more worried if these were real money debts.All debts today are fiat currency debts and central banks have the ability to create any amount of fiat necessary.So,in the short run,deflation may be a risk,but long term,inflation/fiat devaluation is the only risk.I believe the author is bearish on housing.Housing is coming back strong,due to the Fed’s actions.
Mike,
I think you might be wrong. What if the nations in the Eurozone get their act together and the Euro doesn’t fail? What if it sticks around for a very long time? Those nations taken collectively are the US’s biggest trading partner. What if things get better?
There is a chance that this could happen. I suggest you write a column in M&M describing a scenario if these things were to come to pass.
We are just kicking the can down the road. You can not borrow your way into prosperity.
Today’s market action looks like a major technical breakout to the upside. If the market does collapse it probably won’t happen until after the election.
Mike, I am not the Most Savvy Person when it comes to all of this Debt. Is it Possible for the US and Europe and Japan to just Run the Printing Presses and INFLATING These Debts Away, as Bill Gross talked about recently.
He basically said they have 2 Options. 1) Default (Which I think they will do Everything to Avoid) or 2) Inflate the Debts Away through Printing More Money. (Basically Trashing the Purchasing Power of the Masses).
I am trying to see the Big Picture of the Outcome if All these Debtor Nations Trashed the Value of their Currencies in Unison.
If That was the Case, wont the Excesses push the Markets Higher (In Terms of Digits, though Cheaper Ones).
I am Trying to Envision the Scenario… Since Inflation is Just Like Obamacare (Another Tax), would it be Possible that the Worlds Population will just end up with Less Money in their Savings Accounts?
I Don’t Know, I am Not an Expert on this Matter.
Thanks for Your Views on M&M. I love reading Your Friday Column, along with Martins Column on Monday.
Well…. the markets didn’t exaclty roll over on Friday. PLease advise if this has changed your opinion.
Well Mike it appears you were wrong about the municipal bond default rate last year and the collapse of the stock market due to the European dept crisis. You seem to be in denial that you were wrong, but when you finally accept the truth you can get help at: http://www.wikihow.com/Apologize
Merkel has caved in. Bull run is boutbto begin as more cheap money will be printed.
You fool. Never understimate central banks.
You silly muppet. These confereces are not to bail out countries. They are to create even more money for the banks so that they can have all the phony profits they created on paper.
your eyes. you will wonder why you were born. it will beggar you and your neighbours. its 1930 black and white photos all over again. its starting , the countdown has begun. you fool yourself at your own peril, the black swans are coming. its going to be a nightmare. depression, earthquakes, tsunamis, fires, floods, bankcrupcy , iran will start the war, russia will join in in the syrian corridor with china., i ls pray.mikey comes true . it should have happened yesterday. mikey pls post your most bearish news daily
I reco sell everything..RIGHT NOW>..Markets are collapsing upwards….UNREAIL…
No one seems to get what is happening. The bailouts are not designed to save the banks. They are designed to make bankers more wealth by ultimately taking that money from tax payers of the nations that are funding the bailouts. The banks directive is not to survive in the end. Their directive is to make as much money as they can until it is no longer sustainable. A bank is like any other business. The goal is to maximize profits for the shareholders quarter by quarter until it’s not possible anymore. Even if the banks ultimately fail like Lehman Bros. did, the primary shareholders and executives running these banks will have already made their fortune. They can live happily ever after or go start a new bank with all their money free of any prior debt the business entity had. The politicians are just pawns in their game and the voting tax payers are too naive to see what is really happening or are afraid to just say no to more bailouts for fear of economic ruin.
Here is a positive fore cast. Millions of baby boomers soon retire. This opens up millions of jobs and unemployment reaches new lows. The retirees begin to spend all their retirement money and this in turn stimulates the economy and creates even more jobs and a broader tax base. The new found taxes collected begin to pay down our national debt and narrow the deficit. Regulation put in place since 2008 and peoples new found wisdom and caution prevents any further asset bubble and busts like we’ve had. The economy becomes strong and stable for many years to come. Why can’t that happen? Why does everything have to end in a dooms day scenario?