Europe’s Toxic Debt Hits ‘Urgent, Actionable’ Levels

It’s the 30-year anniversary of Black Monday. But this week, the markets are more in-the-black than ever.

The Dow Industrials stormed past 23,000 for the first time on Tuesday. That’s the index’s fourth thousand-point move this year. It’s also a feat unmatched in the index’s 120-plus-year history.

This latest move, which took place within just 53 days, was only 4.5%. Yet, it’s inspiring people who’ve never bought a stock in their lives to pay attention to the markets.

They wonder whether we’ll see Dow 24,000 … and a tax reform package that could send it there … before year-end. And brokers are happy to drum up some new business from them.

Before this year, only six (1995, 1997, 1999, 2007, 2013, 2014) witnessed more than one 1,000-point Dow jump. And those years only saw two!

But they are all missing an even-bigger opportunity. That’s because it’s hidden in a very powerful threat that seems farther away from here than it really is.

You probably haven’t heard much about the massive debt crisis that’s brewing in Europe. The mainstream media won’t cover it until it rattles portfolios all around the world. But that will be too late to act.

And don’t count on your broker or financial adviser to clue you in. Most Wall Street analysts don’t want to talk about these potential Black Monday kinds of events, because it makes their heads hurt when they have to think about them.

But if you have even just a single dollar invested in this market, you need to know about this big black swan that is already swimming our way …

A Phenomenon Doesn’t Exist, Until It Does

On Wall Street, we call difficult-to-predict events “black swans.” This reflects the European belief that the mythical bird did not exist until the Dutch explorer Antoine Caen laid eyes on one in Shark Bay, Australia, in 1636.

What’s more, the term “black swan” is investment jargon for something that could happen — but most likely won’t. But the problem is: When a black swan event happens, all heck breaks loose.

But don’t worry, as the captain of the Safe Money ship, I’ve got you covered.

That’s because it’s my job — especially as the U.S. stock market pushes higher and higher — to stay vigilant in these times of experimental monetary policy and heightened geopolitical tensions.

You have real money at stake, every day that the markets are open. That’s why I keep an eye out for events that could cause the whole system to fall apart.

And as I look across the Atlantic, I see more and more signals that have me putting up the warning flags on the Safe Money ship.

‘Urgent and Actionable’

You heard plenty about “bad banks” during the Great Recession here in the United States. In Europe, they may soon remember that era as the good old days.

That’s because the scale of the European Union’s banking problems is reaching its own crisis levels. And it is why Andrea Enria, chairman of the European Banking Authority (EBA), decided to push the red-alert button with a new warning.

Enria says the amount of toxic debt held by EU banks has reached “urgent and actionable” levels.

If that phrase alone doesn’t make your hair stand on end, maybe this will …

France’s debt is almost four times — yes, that’s four times — its GDP. In Spain and Italy, it’s more than 3.5 times; and in Germany it’s about 2.75 times. That’s shocking!

Click image for larger view

As I have said before, and this chart confirms, the Eurozone is indeed mixing a toxic cocktail. One that could create a second debt crisis that, if it hits, will dwarf the subprime catastrophe. This could send the world’s entire financial system into a meltdown … far worse than we experienced in 2009.

What happens if the EU does indeed fracture? And, more importantly, how you can protect yourself and potentially profit if the Eurozone collapses?

The chain reaction will probably begin with a default in the south (in either Greece or Italy). The European Central Bank would, in turn, struggle to meet its obligations to the more-stable northern bloc (primarily Germany, the U.K., the Baltics, Benelux and Nordic countries).

This would likely set off a tidal wave of capital flows from the south to the north, and cause the EU banks to fall like dominoes.

That would force the ECB — if it’s still a functioning entity at that point — to issue a code red alert. It would have to cut off funding to “irreparably insolvent” central banks, in order to protect itself.

This all goes to show that “Super” Mario Draghi’s ECB has no sovereign entity standing behind it at all. It is indeed an orphan. And ultimately, an orphan with empty pockets and with a hole in them so big that it could bring down the entire global banking system.

That’s why I’ve been recommending that my Safe Money Report subscribers maintain a healthy position in the iShares 20+ Year Treasury Bond ETF (TLT) to protect their portfolios and most likely see a nice profit if Europe does indeed fracture.

That’s because there will probably be a flight-to-safety if the global debt market melts down. That would in turn cause U.S. Treasuries to skyrocket in value.

In the meantime, while the investment seas remain calm, TLT investors can collect a cash-on-cash annualized dividend yield of approximately 2.6%, paid on a monthly basis.

What’s happening in Europe is only part of the story. Come back next week, when I’ll pull back the curtain and show you why China has been a willing co-conspirator in mixing up this toxic soup as their banking sector has recently been on a lending tear — one that’s left the entire Asian region swimming in a sea of debt.

Best wishes,
Bill Hall

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Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.