Sunday, May 16, 2010

Debt Panic Right Around the Corner?

After seeing the futures tonight(Sunday) I thought I would hop on with a warning. Please be very careful out there and prepare your IRA's for a potential financial panic over the next few weeks.

Europe is setting up for an absolutely horrifying opening. The futures of the major stock market in Europe are all down about 3-4% across the board. The dollar is soaring vs. the Euro and gold is rising once again. US futures are down 13 handles which is nothing to sneeze at. The British Pound is getting absolutely crushed versus the USD.

It's becoming pretty obvious that the trillion dollar bailout basically did nothing to settle the markets. PIMCO(the smartest guys in the room IMO) came out with a warning on Saturday that the bailout might be backfiring. Here is the article from the FT:

“We think it is too risky to buy Greece and Portugal,” said the head of one of the largest US asset managers. “The chance of restructuring is too high. When there is default risk, you scale your exposure differently. There is no value. But even if there was value, our investors still don’t want us to invest.”
Ramin Toloui, a senior portfolio manager at Pimco, said the European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said."

Bloomberg is out tonight talking about a large rise in Libor rates due to a lack of trust in the system:

May 17 (Bloomberg) -- Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro.

Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show.

The cost to hedge against losses on European bank bonds is 63 percent higher than a month earlier. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the prior period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars is the highest in nine months, even after a government-led rescue designed to prevent Greece from defaulting on its debt and a new financial crisis.

The euro is trading at its weakest level versus the dollar since the aftermath of Lehman Brothers Holdings Inc.’s collapse, and stocks tumbled.Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”

The three-month London interbank offered rate in dollars, or Libor, rose to 0.445 percent last week, the highest level since August, from 0.428 percent on May 7 and 0.252 at the end of February, according to the British Bankers’ Association."

My Take:

Gee does any of this look familiar? 2008 anyone? Europe is on the verge of a financial meltdown folks. What scares me most about their debt crisis is that they don't have the resources that we have over here to try and stop it.

They can't inflate the Euro and there are 16 different countries that are involved here which makes it very difficult to react swiftly because you need to get everyone on the same page.

When the banks stop lending to each other you need to really take notice. The rising Libor rate is another really bad sign. Remember, the European banks leveraged up even worse than our banks did. Some were reported to be leveraged up to 60-1. Bear Stearns was at about 34-1 when they went under.

The worst part about this crisis for me is I really don't see a solution here. I am sure the banks are afraid to lend to each other because they don't know how much PIIGS exposure each other has.

This could begin to unwind very rapidly folk,s and don't think for a second that we won't be effected over here if it does. The financial world is very intertwined globally at this point which makes us all vulnerable if Europe can't find a way to contain this funding crisis.

I haven't felt like this since 2008 from a fear standpoint. Bill Fleckenstein's "Lord of the Dark Matter" source had a great quote about this crisis: "the issue in Europe is not "Too Big to Fail" its "Too Big to Bail."

Europe can bailout Greece, but it cannot afford to bail out the rest of the PIIGS. Spreads on all of the PIIGS debt are blowing out once again which means a default of one of these countries is quite possible. There was also talk this weekend of a possible downgrade of France by our credit ratings agencies!

The problem with rising interest rates is it forces a countries borrowing costs to soar. Here is an example of what could happen here(and is beginning to happen right now over there) in the US if we get called out on our deficits like Greece has. Hat tip to Casey for the chart.

My Take:

As you can see above, the cost to finance our debt will soar from $400 billion today up to a whopping $1.8 trillion by 2020 if rates rise just 1% a year based on our overwhelming debt load.

This type of funding problem is what's currently happening to the PIIGS in Europe. When you don't have the money to fund your deficits you are pretty much screwed and eventually you will be forced to default on your debt. The way I see it, a default by one or more of the PIIGS is not out of the question is in the very near future.

If a default occurs, the question will then be who's next? This is where things can fall apart in a hurry. The potential of a stock market crash would not be out of the realm of possibility here folks if a default occured.

The United States debt problems have really benefited by the blowup in Europe because its forced the bond vigilantes to focus on the European funding issues versus our own. We are also getting a nice boost in our debt markets as Europe continues to flock to US Treasuries as a flight to safety from Euro.

However, don't think for a second that the same debt crisis will not hit the US eventually. It's a matter of if not when. We have successfully kicked the can down the road for now.

The Bottom Line

It's time to play some serious defense with your portfolios. I was hoping for a bounce tomorrow because I want to get short.

Europe is seriously starting to unwind here, and I am really concerned that it's starting to spiral out of control. If the banks get toasted in Europe due to one or more of the PIIGS defaulting then Wall St is screwed as well. This whole rally has been nothing but an illusion that was orchestrated perfectly thanks to the political and financial elite.

Debts to not go away and they get larger and larger the more you ignore them. The whole world Ponzied up and now the bills are due.

Everyone just wants to throw these debt skeletons away in the closet and forget about them and take the DOW back up to 14,000. The problem is it doesn't work that way. The debt problems as a result of our global Ponzifest keep rearing their ugly head because the issue of paying them back hasn't been addressed or solved.

The US did nothing but transfer our debts from the private sector over to the public sector which is of course the taxpayer. This has changed who's responsible for it but its stils sitting there rotting as I type.

If Europe rolls over then the US and Japan are next. Sit back and enjoy the fireworks. It appears all hell may break loose on Monday.

Disclosure: No new positions at the time of publication.


getyourselfconnected said...

Why panic about debt, we can always print our way out or inflate it away. Jeff, you have to stop trying to scare people!
Sarcasm ON

jeff said...

Whoa Get

We were down 184 at one point and stared over the cliff before rallying back.

Watching the volatility is wild.

David Rosenberg was talking about how unhealthy the 400 point move higher was last Monday. Something like 12 of the last 19 400 point rallies came right before the market rolled over if you look at history.

Europe rallied back hard today. The rest of the week should be interesting.

getyourselfconnected said...

What a crock today was. Down huge on mega volume then up to even on no volume. Whistling past the graveyard.

jeff said...


I loved the headline I caught on CNBC today "stocks recover from a 184 point drop as investors go bargain hunting".

Yeak ooookkk.....Keep drinking the koolaide!

getyourselfconnected said...

If there was real journalism:
"Stocks collapse on heavy selling pressure but recover after everyone went home for the day on 3 shares traded"