Hat Trick Letter – srpen 2011

Před týdnem jsem publikoval první část výňatku zaměřenou na vzájemný poměr ceny zlata a ropy. Dnes publikuji další zajímavé výňatky. Konkrétně se podívám na zoubek dvěma nejvýznamnějším zemím eurozóny.

Francie

MORE DOMINOS ARE GOING TO FALL, LIKE FRENCH GOVT DEBT, WHICH IS NOT WORTHY OF AAA RATING. LOOK FOR A SPATE OF SOVEREIGN DEBT DOWNGRADES TO FOLLOW THE UNITED STATES, AS THE DEEP DECAY MOVES FROM THE PERIPHERY TOWARD THE CORE NATIONS.

France with its undeserved AAA debt rating is obviously vulnerable after the USGovt downgrade. Not only does France look as damaged as the USGovt for its debt, but the nation looks very similar to PIGS members as to fundamentals. Worse, the French banks contribute to their national debt weakness as a direct extension of huge exposure to PIGS debt in neighboring nations. For some cockeyed insane reason, France served as a lender of last resort to Greece and Portugal. In so doing, the nation joined the PIGS to be submerged, in a grandiose haughty display of strength it does not possess. The decision by Standard & Poors to downgrade the United States has left France as twisting in the wind by comparison. It hardly merits a AAA rating either, and stands as the industrial nation most likely next to lose its top grade, according to awakened analysts. Consider its position relative to debt default insurance. France is more expensive to insure against default than governments such as Malaysia, Thailand, Japan, Mexico, Czech Republic, the State of Texas and the United States, which have lower debt ratings bestowed upon them. France must finance its own debt, nor is it treated with AAA respect in the financial markets. The core in Europe is surely shrinking. Expect France to sooner or later be subjected to an insulting shock, left to defend itself without a protector, shoved into the PIGS pen instead of held under the more staid German wing.

Consider the fundamentals, always revealing. The French Govt debt is 84.7% of national GDP, far less than Italian Govt at 120.3% of GDP. However that does not tell the full story. Focus on recent years. As a percentage of economic output, their debt has risen twice as fast as Italian debt since 2007. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France. The total debt is worth review in volume terms. The French Govt debt totaled EUR 1.59 trillion (=US$2.3 trillion) at the end of 2010. Compare to Italian Govt debt at EUR 1.8 trillion. On the basis of recent degradation slippage, France does not deserve AAA, certainly not four levels above Italy. Intense scrutiny has come by Standard & Poors, along with other nations. Their chief economist for Europe is Jean-Michel Six. He affirmed the greater scrutiny, saying „EuroZone countries like France, Italy, and Belgium, and even the United Kingdom, are vulnerable to downgrade.“

Never lose sight of the fact that German banks own 85% of French Govt debt. So they will likely continue to request French squires to carry the bags.

FRENCH BANKS ARE HIGHLY VULNERABLE TO THE PIGS SOVEREIGN DEBT FALLOUT. FRANCE LOOKS LIKE A PIGS NATION AND WALKS LIKE A PIGS NATION. CREDIT DEFAULT SWAP RATES HAVE RISEN ACROSS THE SOUTHERN EUROPEAN THEATER.

Německo

THE RESISTANCE MOVEMENT AMONG GERMAN BANKERS HAS GROWN OPENLY HOSTILE. A GRAND RIFT HAS FORMED. THE LACK OF INTERNAL GERMAN POPULAR SUPPORT WILL EVENTUALLY PROVE TO BE THE WEDGE THAT BREAKS THE EUROPEAN UNION APART, MADE FINAL BY GERMAN BANKERS. RECOGNITION IS COMING GRADUALLY THAT A FULLY FUNDED EUROPEAN BAILOUT FUND WILL REQUIRE $5 TRILLION. THAT PERCEPTION IS ENOUGH TO FRACTURE THE UNION ITSELF.

The next event in the saga was a sledge hammer tossed into the works by German bankers on August 6th. They knocked the central bankers almost into a frozen position. They objected and halted the insanity, claiming with forceful Teutonic style that Italy was way too big for the big Stability Fund to save. They refused to carry the main burden to the bailout, a common chorus coming from Berlin for a solid year or more. One should never be spared hearing that German savings has been drained by between $3000 and $4000 billion since the Euro experiment was hatched in a kooky unification of the un-unifiable continent. Alex Weber is an icon. He argued in favor of unlimited liquidity provision, but at the same time he fiercely opposed the purchase of government bonds. That seems contradictory and confusing. He warns of the EuroCB integrity at stake. The division is apparent. The Spiegel magazine ran a series of intrepid articles reporting the quickened situation in alert style, ahead of the pack. Doubts are splattered all over the walls that the EFSFund is sufficient to cover PIGS debt that links nations between Greece and Portugal. Obviously bailouts cannot succeed without a gigantic fund on the order of $5 trillion in commitments. Loading the fund would deeply damage the German finances.

A consensus opinion is forming quietly that the Stability Fund is grossly inadequate, even if funded by the incremental $1 billion or so. A fully funded EFSFund will need to issue EUR 3.5 trillion, equal to US$5 trillion in new debt or new money, which is beginning to be regarded as confetti. My prediction over a year ago was that at least $3 trillion would be needed to bail out the PIGS nations and their rotten sovereign debt. It is happening. When factoring in the stimulus urgently needed on the fiscal front in order to avert recessions that could gallop out of control, the funding requirements will be even greater. Whether new debt or new money, the effect is largely the same, hyper-inflation. An inflation zone is being created, whose alternative is a wrecking zone for the big European banks.

The stopgap announcement by the EuroCB to expand its purchases of secondary market Italian and Spanish bonds was merely as a prelude to full EFSF monetization. That largesse could be expected to come online in high volume in September. The EuroCB is daring the Bundesbank not join, to be branded the bad guys if not refuse since chaos would come. The dream is for a vastly expanded format between EUR 1.5 and EUR 3.5 trillion in the SuperFund. Methinks the Euro Central Banks have been sipping far too much cognac. Not gonna happen. A consensus opinion had been formed that the aid fund could only conceivably aid smaller nations. The warning made in the Hat Trick Letter all along was that the Big Enchalada in Spain and the Big Pasta in Italy would ruin the entire bond bailout game once they erupted in need. They have erupted in need, and the entire game will eventually see ruin. The process just needs time. The crescendo will be big European bank failures, lots of them.

The Merkel regime is in great danger of toppling. The defiance of the Bundesbank in their refusal to comply with any new Stability Fund demands could generate a complete split between the German banks and the Euro Central Bank. Some popular polls within Germany are worthy of note. Their mindset is not behind the Euro Monetary Union at all. Consider that

• 59% wish to end all bailouts of PIGS nations
• 75% disapprove of the performance by Merkel
• 58% wish to expel Greece from the Euro Monetary Union
• 86% of Germans think the Euro currency is at risk
• 71% of Germans are doubtful about the common currency viability
• 56% of Germans say the Euro has brought them economic disadvantages.

Phoenix Capital Research believes the oversized German financial backstop ends very soon. The public face is presented that  French President Nicolas Sarkozy and German Chancellor Angela Merkel share an absolute determination to defend the Euro. They are out of touch with their own people, and do not have any unified support by bankers either. They are like Anglo banker puppets on a string soon to have their strings cut or burned with fire. The European bailouts of Greece and Portugal were always ultimately constructed by Germany. Without their support, neither a bailout nor a union would exist. Recall that the Merkel political party was obliterated in the broad March 2011 elections, due to her steadfast support of bank bailouts and the Euro currency. The next round of German elections comes in September (4th, 11th, and 18th). Constitutional reform would be necessary to pull off what Merkel pursues. The deranged new concept of fresh Eurobonds serves as evidence of lunacy and desperation without political underpinnings. Austerity has not been an issue in Germany. But their economy is showing strain and sluggishness. Flat growth (accurately measured, unlike in the USA) has been led by export slide on the order of a 4% decline. A contraction will force hard decisions, a blind eye to Southern Europe, and more stubborn resistance.

The continent has turned into high drama. Phoenix calls the Euro currency properly the most heavily manipulated investment in existence. The Jackass points to the USTBond instead with its attendant Interest Rate Swap heavy lever. The dynamics among the US Federal Reserve, the European Central Bank, and the Swiss National Bank make for a maelstrom of instability and too many captains holding thick cords in helm control. Germany cannot and will not bail out all of Europe. The immediate decisions are short-term moves, mere drama. Some of the bailout loans so far might result in large collateral seizures, with more resentment and street violence. My call two months ago was that the bailouts of bankers would continue until riots occurred. They have occurred, due in part in response to collateral grabs. The EU in its current form has entered the End Game, forced by Italy on the table and Spain in the waiting room. Expect the breakup in some form to occur in the next 12 to 18 months.

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Na základě souhlasu Jima Willieho budu zde pravidelně publikovat výňatky z jeho Hat Trick Reportu, jehož jsem předplatitelem. Výňatky budou publikovány formou citátů. Vybírat budu takové informace, které nejsou běžně dostupné. Formátování textu (tučné, podtržené, kurzíva, velká písmena) je původní.

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