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Some stock investors never seem to learn.
They hope and pray for a new government rescue from Washington or Brussels.
They wait with bated breath for each official sign of money printing, interest-rate cuts, or financial bailouts.
Then, as soon as something is finally announced, they breathe a sigh of relief, applaud with enthusiasm, even buy a stock or two.
But it’s a fool’s game. Because within a few months — or even just a few days — the government rescue crumbles, investors run for cover, and, ironically, they begin a whole new cycle of hoping and praying for the NEXT big rescue.
Just this year alone, European authorities have held 19 high-level emergency meetings … proposed dozens of rescue packages … and delivered an endless stream of promises.
Since the crisis began, we’ve seen four PIIGS bailouts (Greece twice, Ireland and Portugal) … the creation of two European bailout funds (ESFS and ESM) … plus countless central bank interventions to buy sinking PIIGS bonds.
What have they gained from all this? Nothing! In fact …
The Danger of Systemic Collapse Is
Far Greater Today Than at Almost Any
Time Since the Debt Crisis Began
The European Union is the biggest economy in the world — close to $15 trillion in GDP. When it sinks, so does the U.S. and much of the world.
European banks are roughly THREE times larger than U.S. banks. When they’re forced to cut their lending drastically, global capital shortages hit hard.
Most frightening of all, the U.S. has committed most of the same mistakes as Europe — the same kind of massive debts, deficits, and failed bailouts.
And now the European Union is crumbling, threatening a systemic collapse far larger than the near meltdown witnessed in the wake of the Lehman Brothers collapse in 2008.
My Debt Danger Index
How do I know a dangerous new meltdown is so likely?
Because that’s what the objective data proves. In fact, to measure and track this danger as accurately as possible, I’ve created a new barometer — my Debt Danger Index for Europe.
This index is based on the total cost of insuring against sovereign debt defaults in each of five key countries — Belgium, France, Germany, Italy, and Spain.
So it directly reflects the danger of European debt disasters, regardless of the sentiment in the stock market.
Reason: Unlike stock market investors, sellers of these specialized insurance contracts see through the hype and hoopla of government bailouts and rescues.
If the danger of debt default is rising, they charge a higher premium for the insurance and my index goes up. If the danger of default is subsiding, they charge a lower premium and the index goes down.
Now, just look at how my Debt Danger Index has surged:
Four years ago, before the U.S. housing bust and the Greek debt crisis, the sovereign debts of large European countries were considered beyond reproach.
Default was unthinkable.
And any talk of wholesale collapse was considered science fiction.
So the cost of insuring against default was a pittance:
To insure a $50-million portfolio — allocated equally among sovereign bonds of Belgium, France, Germany, Italy, and Spain — the total cost was a meager $28,649 per year.
Care to venture a guess as to how much it costs now?
The cost of insuring the same $50-million portfolio today is a whopping $2,258,200 per year, or 78.8 times more!
In other words, based on the market for these insurance contracts, the danger of a wholesale European debt disaster — with the potential to melt down the global banking system — is now nearly 79 times greater today than it was four years ago.
Massive Policy Failure
What about all the trillions of dollars and euros committed to money printing, bailouts, and guarantees?
What did they do to stem the crisis?
Nothing, absolutely nothing!
Quite the contrary, even the most massive and dramatic government interventions only made the crisis worse.
What proof?
Then take a look at my timeline in the chart below. It’s the same Debt Danger Index I showed you in the previous chart, but this time zeroing in on just the last two years:
Here’s a timeline of the four most important government actions:
April 2010 — the first Greek bailout. What did it do? Nothing! My Debt Danger Index was rising at a steady pace before the bailout announcement … and it continued to do so after the announcement.
May 2010 — the $1 trillion European bailout fund (EFSF). Now, THIS was supposed to be the be-all, end-all Mother of All Bailouts. Instead, it was the cue for a whole new wave of the crisis … and my Debt Danger Index promptly resumed its steep rise.
July 2011 — the second Greek bailout. Finally a solution? Of course not! Instead of reducing the Debt Danger Index, it merely helped drive it sharply higher.
This past Friday, December 9, 2011 — Europe’s “new fiscal pact.” The grand bargain that markets were praying for? Far from it!
The European Central Bank will NOT provide the money printing that investors were hoping for.
England will NOT sign on to the deal.
And even most of the countries that DO join the pact — including big movers and shakers like France and Germany — are merely making the same old promises that they’ve already broken repeatedly in the past.
Bottom line: The European sovereign debt crisis is barely beginning. It will strike our shores directly and massively in 2012. And you must do everything possible to prepare.
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.
{ 27 comments }
God bless all!
I go with your words. It looks like it is inevitable now.
Dear Doctor is there any whay out to save the world.
I have been following Martin for years. He is absolutely right whats developing. I would just say that his predictions of a crash were right, but timewise, a little off the mark. Why? Because of all the unprecedented government bailouts propping things up. Now the printing presses should run dry and the day of reckoning he has been talking about, should happen within 2012. Thanks Martin for your insightful views and giving the general public some BS free advice.
It seems like Obama has decided that all rich, productive people are the cause of America’s problems.He wants to indiscriminately punish all of them.This won’t work if the rich believe they are being ripped off.They will use their vast means to avoid the rip off.America will end up poorer,because there will be more income tax evasion,avoidance and non economy growing investments.What we need is a simple,honest,non discriminatory tax system that favors no one.
@jrj91620
According to Robert Shiller’s collection of data (http://www.econ.yale.edu/~shiller/data.htm), PE ratios are in a very safe range right now. For the month of Sep 2011 we were at 13.5. Even with the recent rise is stock prices, the PE is still well under 20. Shiller also gives a trailing 10-year PE that is also under 20. You can use his monthly data going back to 1871 to calculate any kind of trailing period that you want. It all looks pretty tame. Not much risk here. Martin’s assertion that the stock market investor is foolish right now is just poor and biased analysis.
At the same time corporate earnings appear to be exceeding their prior all-time high of $92.90 (adjusted for inflation). We will get the official numbers at the end of the year. In other words, corporate America is cranking out the profits! GDP is at an all-time high as well. The truth is that the wealth of our nation (in real inflation-adjusted terms) has never been greater!!
The real problem is that the DISTRIBUTION of that wealth is so skewed now that a growing number of American households are experiencing lowered wealth and income while a small percentage of households at the top are raking it in. After the cumulative effect of this imbalance hit the economy back in July of 2007 we saw the record real S&P 500 earnings peak at $92.90 from column J of Shiller’s spreadsheet. Then they went into a death spiral and hit rock bottom at only $7.35 (inflation-adjusted) by March 2009 when the Fed’s quantitative easing began and the federal budget went into massive deficits. The QE monetary policy and, more importantly, the massive deficit spending was the NECESSARY first aid for a catastrophic collapse…but it is not the cure.
BTW, column J of Shiller’s spreadsheet also shows that during the Great Depression the peak corporate earnings adjusted for inflation happened in December of 1929 at $21.33. It hit rock bottom exactly three years later in December 1932 when it dropped to $7.13. That was a 67% drop over 36 months. Our current economic crisis went from a peak of $92.90 to almost as low as the pit of the Great Depression with $7.35 in less time. We experienced a whopping 92% drop in corp earnings in just 21 months!
Then we can look at Shiller’s data to see how long it took to get back to those peak earnings. We did not see again the December 1929 peak of $21.33 until December of 1948. It took 19 years. This time around the return to peak earnings happened in less than 5 1/2 years!! What’s more, it is truly impressive that a 92% drop in earnings was resolved in only 5.5 years when it took 19 years to resolve the less dramatic 67% drop during the Great Depression!!!
Exactly the opposite of the analysis that Martin has put forth here for the last 5 years, the government’s fiscal policy and the Fed’s monetary policy applied the perfect first aid. The issue now is how to cure the economy of it REAL ILLNESS.
The cure is to mitigate the severely skewed distribution of wealth and income with the appropriate changes to TAX POLICY. The reason that I am attaching this comment to RJR’s comment is to clear up the usual propaganda about taxing the rich. Although normalizing a skewed wealth distribution is ESSENTIAL, it is also important to apply the burden of the tax on the type of wealth that is acquired by bad economic behavior. To be clear: wealth derived by adding value to the economy is good and ethical; however, wealth acquired from value-extracting behavior is bad and unethical. Inherited wealth is neutral.
Those people who add value to the economy and they take for themselves only a thin slice of that total value are to be rewarded. When they add great value, they become wealthy and, IMO, they should be put on baseball-type cards and traded as cultural heroes. Those that acquire wealth by means of extracting value from the economy are villains. Just as we have laws against laundering “dirty” money, we should acknowledge that wealth acquired by value-extraction is equally dirty.
It has been long a subject of the great economists to discuss what is value-extracting behavior. Adam Smith, David Ricardo and all of the classical economists were crystal clear that seeking and obtaining economic rent is bad behaivor. The best-selling author on the subject was, of course, Henry George. He was not an intellectual heavyweight, but his point was accurate.
Oops. I noted that it has taken 5 1/2 years to regain record corporate earnings and that it was incredibly fast from a 92% drop. I was wrong. I took only 4 1/2 years. EVEN LESS!!!
VALUE is like ENERGY, it can’t be created and can’t be destroyed, it only changes form. Even if you consider VALUE EXTRACTION, bad behavior, tell me who doesn’t put there wealth back into the economy buying houses, cars, vacations, etc, thereby creating VALUE for others?
@The John Fund
Thanks for mentioning that. I am of the position that a better theory of value in economics is long overdue. I think the folks working on the ENTROPY THEORY OF VALUE are leading the way. However, I disagree with your definition of “value is like energy.” Instead I think the better thermodynamic comparison is that value is like exergy. The reason being that the use of resource inputs in production is never perfectly efficient. There is always entropy.
You are correct that dirty money is still spent in the economy. The mistake I think you are making is that value extraction means that the person/institution that gets to enjoy the spending of said money is not the person/institution that added the value to the economy. This is a simple case of theft. Thus, as I mentioned, the nation as a whole — based on corporate earnings and GDP — has never been wealthier. The problem is that the value extractors are spending YOUR money!
These self-congratulating “people of value” are the elites who crashed the system in the first place through corruption and greed. They have no shame and have raided the treasury and plunged the nation into default and caused the lives of the lower and middle classes to be devoid of hope and filled with hunger and misery. The too big to fails should be bending over backwards to assist the American people who they have extorted funds from. However, the wealthy and powerful have no shame and persist in spewing the same tired old propaganda that somehow they are superior and deserve every cent that they earned/hijacked from their hard work/bailouts. The American people are coming out of their comas and seeing the world for what it is for the very fact that their survival is at stake to corporate and government corruption and ineptitude. Things are getting very ugly very fast and those who persist in their open beliefs of economic superiority ie. those of value versus those of no value may soon get a real time history lesson in the social dynamics of the French Revolution. Until then, let them eat cake sir!
THE BROWN LIBTURD OBAMA NEEDS TO BE FLUSHED WITH THE REST OF THE LIBTURDS IN WASHINGTON………….as I have said before in 2008 the last year of president bush the u.s. had a whopping 164 billion deficit pretty bad…. well………not into comparison with BIN LADEN OBAMAS FIRST YEAR DEFICIT OF 1.4 TRILLLION he promised AMERICA never again it was just a one time occurance and what do we get from OBAMA MAMA IN 2010 ANOHER 1.3 TRILLION DOLLAR DEFICIT AND I GUESS WERE SUPPOSED TO BELIEVE NEVER AGAIN WELL THIS YEAR IS GOING TO BE ANOTHER 1.3-1.6 TRILLION DEFICIT AND 2012 AS HIGH AS 2 TRILION DOLLAR DEFICIT lets face it the ECONOMIC SOCIALIST TERRORISTS OBAMA AND COMPANY were serious about solving this country problems they wouldnt be taking the blame game to the elections like they have been doing ……..the only thing the socialist liberals know about is raising taxes and creating new ones so they can feed their never ending socialist programs ……the liberals wan to raise taxes on the rich but lets face it what they want is to raise the short term/long term capital gains taxes and they want to create a new tax for every time we trade……… so even if you make money or lose money on a trade YOU PAY ………..YEA THANKS ALOT OBAMA maybe we can tax and spend our way out of this dilemma.
Obummer the worst POS leader ever
This problem has developed over at least the last 30 years as politicians of BOTH parties passed reckless tax cuts without offsetting spending reductions.
“You can tell more about a man from what he says about others, than from what others say about him.” -Leo Aikman
Martin, Do you feel that the fed’s intervention 2 weeks ago into the Euro crisis is a game changer in the ST? Last year Aug 2010 I was short the market and making good profits, then the Fed came out with QE2 when the market was declining strongly, which goosed the market for a 9 month rally. My concern is the Fed looks now to get aggressive again with it’s move 2 weeks ago, and if they dont see the desired affect they will jump in with their own QE3 before too long, and we could see another artifically inflated market rally that could last 6-10 months. Disclosure; currently short Europe, the Euro, our financials, and Emerging markets thru ETF’s.
Thanks.
Just a small — but important — technical point about GEOGRAPHY:
I know that Americans in general look inward, and are not too enlightened about the rest of the world, but could you folks at WEISS at least correctly name sovereign countries.
It’s NOT England; it is either BRITAIN (the island of England, Scotland, and Wales) or the UNITED KINGDOM (which also includes Northern Ireland and the Channel Islands).
@ Jackie, I just refer to it as the nation where dentistry is an unappreciated occupation. :)
I do LUV a sense of humor (that’s humoUr in England!) CHEERS! and let’s hope Martin and his crew can help both of us prosper in 2012 (that’s TWENTY-TWELVE, not Two-Thousand and Twelve!)
I am sick to death of EVERYONE jumping on the Blame the Obama band wagon game.. This problem BEGAN WITH REAGAN people and if you think for one minute that George Bush (Not the father but the son), was a gem of a leader then you people are a bunch of JACKASSES! IT took BOTH parties to get us to where we are because both parties had to agree to laws, bailout and fiscal mismanagement. TO sit at your computer and say that it was ALL THE FAULT of ONE president or ONE party is shortsighted and IGNORANT. WE are here at the brink of collapse because of the stupidity of BOTH sides of the aisle!! As Bill O’Reilly said on Good Morning America (and I watched that show) Throw them ALL out and put in average American citizens who are making ends meet with less and less. The host then questioned him at the recklessness of that statement to which O’Reilly said, and I quote, :Yes both sides, throw them out. They cant do any worse than what we have now”. THIS I agree with…GET RID OF THEM ALL!!!!
I am very impressed with you danger level chart and want to be subscribed to your newsletter on a regular basis
@ Jim, you’re right. One the one side we have Rs who controlled *both* chambers of Congress for a whopping 12 years (all the way up to 2007), plus the Executive branch for most of that period. They claim it was Ds who blocked mortgage reform. That’s just a convenient excuse when hindsight is 20/20. Rs didn’t even bring legislation to the floor! Rs say Ds would have filibustered. But, Rs have threatened the “nuclear option” on other topics. They chose not to even try when it came to mortgage reform.
Worse, Bush Jr’s HUD actually increased subprime lending. If anyone could have reigned that in through executive fiat it was him. (Rs tend to forget that it was Bush championing the “ownership society,” which was the largest reason he didn’t reign in HUD.).
On the other side we have Ds blaming Bush. They overlook the role of Clinton in quashing regulation of the OTC derivatives market (and rolling back Glass-Steigal, etc.). For a real eye-opener google for “Frontline: The Warning.”
It’s an absolute travesty. The chairwoman of the CFTC warned in ’97 that derivatives would bring down our system. She was ruined by Clinton cronies which included Larry Summers. The real travesty is that President Obama brought Summers into his administration shortly after taking office! There’s “change you can believe in.” The guy who helped kill the CFTC chairwoman a decade earlier was brought in to help fix the problem in February 2009! And then Summers received awards from business schools like the WP Carey School at ASU.
There’s something perverse about a society that lets this kind of imbalance occur — and then plays politics like a sport where the only thing that matters is rooting for your “team.”
I hate to be pessimistic, but I don’t think a society can recover from such a palsied state of virtue.
Take the money out of politics and prosecute fraud. If we want our country back, it will happen and change will come. Many people will lose a lot of wealth in the mean time.
I agree with you Mark F, this whole problem was planted and nurtured a long time ago. The thruth is that even when you change the roof, it does not mean the building is changed. Now, the building is rotten to the bone and we keep complaining about the roof.
The people who are really behind everything are there and are never replaced by people really defending human rights and popullations. They are paid enormous amount of money in secrat bank accounts to defend the interests of billionnaires.
The Greece affair has been a long planed project and I have elements to proove that it may even have its roots on Kessinger’s office. They wanted the EU down and they prepared this Greece meltdown to bring down France and then the rest.
The only solution is to play the Iceland game and start from scratch.
The problem is to get rid of these people who are not defending the people’s interests.
@Mark F At Last! The voice of reason! If you allow yourself to be driven into a foamy partisan fit by any of the 24hr cable anti-news networks, you need to adjust your television set with a BFH (Big Hammer).
All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.
John Adams
Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.
John Adams
Abuse of words has been the great instrument of sophistry and chicanery, of party, faction, and division of society.
John Adams
Watching commercial television is a really bad idea.
Me :)
WELL………….. JIM LETS LOOK TO WHERE THE BLAME LIES ………..OBAMA MAKES ABSOLUTELY NO SENSE AT LEAST TO ME……..BUT 1st of all we have social security thats facing huge future shortfalls……if anything social security taxes should be raised instead what does this terrorist do he cuts social security contributions really smart especially when were sending out more than we take in………all he is doing is trying to buy votes from the ignorant socialist masses ( his people ) AND NOW he wants unemployment extended again ……………. as if 113 weeks of unemployment checks are not enough ……….cmon……….now lets go back to social security wheres the 2.6 trillion that was supposedly left ……..BIN LADEN OBAMA HAS ALREADY MADE COMMENTS THAT ITS GONE……SO WHAT DOES THAT MAKE …..ITS BAD ENOUGH 2.5 TRILLION WAS TAKEN FROM THE SOCIAL SECURITY TRUST AND REPLACED WITH GOVERNMENT I.O.U.s so now what do we have 5.1 trillion in govt. I.O.U.s in the social security trust program, his jobs programs were a joke remember those hundreds and hundreds of billions of dollars that were supposed to go to building roads and bridges……… creating jobs ?? well it didnt work that way…. instead he put it in programs like teach a welfare recipient how to crochet a hat or a coat at 15 dollars a hour paid for by the jobs program ……..so when all was said and done 85% of the money that was supposed to go to building roads and bridges vanished and the 15% that was left that did go to building roads ONLY WENT TO MINORITY FIRMS ……….AND THE TOTAL COST FOR THAT 300% HIGHER THAN IT WAS SUPPOSED TO BE SO THE TAXPAYERS OF THIS COUNTRY REALLY ONLY GOT 5% of what we were supoposed to get …………….so lets just say it like it is THE ECONOMIC TERRORIST OBAMA BIN LADEN RIPPED OFF AMERICA
I totally agree with Mark F, and Jim.. This Fine Mess has been decades in the making! We need a CLEAN SLATE in both houses and the presidency…
I just don’t understand any of this….I’m so confooosed….
The last time Mike and Martin were so aggressive in their shorting and neg nellie prognostications, the DOW was at 10, 400….since then the DOW has risen to 12,000-plus…
1,600 points!!!!!!…….
Now…just cause the market has drop 170 points, they are even more agressive than before….the news is the same…..so??..do I short??….or?…do i go long??….if ya go both ways ya don’t make money!!…
Oh, the humanity……
Dr. Weiss,
It seems those things you’ve been writing about for years have even made it into “Mad Magazine” before they made it into Wall Street. The cover of Mad Magazine #513 (Feb 2012) features a distorted Obama on the cover swimming after a $1 bill on a fishing line. The caption is “The 20 Dumbest People, Events, and Things 2011 (The Year We Ran Out of Money!).”
In the inside, the #1 dumbest thing is “The US Debt Crisis — The Story of Owe,” which features several politicians as zombies with the caption “The Walking Debt: They Need Braaaaaaaains! [sic]”
Just thought I’d share.
– AB
Good post made here. One thing I would really like to say is always that most professional areas consider the Bachelor Degree like thejust like the entry level standard for an online college diploma. When Associate Qualifications are a great way to start out, completing your current Bachelors starts up many doorways to various employment opportunities, there are numerous online Bachelor Course Programs available through institutions like The University of Phoenix, Intercontinental University Online and Kaplan. Another issue is that many brick and mortar institutions offer Online versions of their certifications but usually for a greatly higher amount of money than the providers that specialize in online qualification programs.