Posts Tagged ‘debt roll-over’
This will unfortunately be a very short note, because I am out traveling with very limited internet connection. This is a little unfortunate because there is a lot to write about right now, but I will come back with more as soon as I am settled in a location with steady internet access.
The market is acting pretty much according to what I predicted in my last update from September 4th: That after that downturn we entered into that day we would likely get a bounce back maybe as far as into next year. The bounce is what the model confirms right now. The model actually switched to a cash signal right after the market barely undercut its August lows, but in order to keep these email updates at a minimum I decided from the very start that I would not send out notifications of cash signals, only the start of uptrends and downtrends.
The reason why it has taken the model so long now to confirm the recent uptrend is because the bounce have until now been exceptionally weak. The beginning of the move up was strongly influenced by short covering. The bounce has furthermore been led by companies that have been underperforming in the last years uptrend, and it has gone up on very low volumes. The market has anticipated a resolution of the Greek debt crisis, which is actually more correctly a European banking crisis. How long this uptrend will last and how high it will go will depends on governments’ and central banks’ willingness to print money.
This last resolution of the European debt problem came by finally accepting that private lenders had to take a write-down on Greek debt, which is the same as a the Greek government defaulting on its debt obligations, which I for a long time have written in these newsletters is an inevitable outcome. In the newsletter from June 3rd, 2010 I for instance wrote that “…Greece will probably not be able to meet the requirements set by the ECB and IMF, and go bankrupt soon…” Very few people agreed with me on this prediction and actually just until very recently did this become apparent to most market participants. The reason why this, in my mind, has been obvious and inevitable is because this is a systemic crisis that will not be fixed until we correct the underlying factors which make the whole global system unsustainable. Those factors include too high budget deficits, too high debt levels, including private-, corporate- and public- debt, and a chronic tendency over the last four decades to revert to money printing for any little bump we have met in the road.
The recent effort from European officials is once again an effort to solve a problem of too much debt with adding more debt. They are in addition forcing private investors to take a 50% write-down of their Greek debt positions. This is not going to do anything but buy us a little bit more time and cause the stock market to go a little higher, due to massive capital injections from UK and Europe, before the eventual, unavoidable, massive crash comes. This last “solution” will, as all other attempts in Europe, Asia and the Americas, in addition only make the inevitable crash deeper.
After this write-down, Greek debt to GDP ratio is still at 130%, way too high to handle for a country with a contracting economy. The Greek economy is so insanely poorly managed that I cannot come up with a single viable solution besides a full-blown default and ensuing depression that can get that society back to a state were rational economic thinking once again exists. Read Michael Lewis’ Boomerang: Travels in the New Third World for an exceptionally well written take on some of the reasons why Greece is where it is today and its challenges going forward.
If you think that Greece is a stand-alone case in Europe, you are wrong. The reason why Greece is being bailed out is not because Germany feels sorry for their fellow Europeans; it is because the rest of the European banking system is in just as bad a shape as Greece, and Greece was the domino that would make the whole system collapse. In an effort, it seems more to calm the public than anyone else, 90 European banks went through a stress test during the summer 2011. These 90 banks need to repay or refinance €4.8 trillion worth of debt between 2011 and 2013. This equals 51% of Eurozone GDP. In France, Italy and Germany the two largest banks alone need to find financing for amounts equal to 6, 9 and 17% of national GDP, respectively, in the same time-period. I don’t think I am even close to sticking out my head by saying that this amount of debt will never be refinanced—at least not in an un-depreciated currency. European banks are in addition, according to Graham Summer, leveraged 26 to 1, which is close to the same level as Lehman was just before it collapsed. U.S. banks are in comparison leveraged 13 to 1. This last effort from European governments to try to establish trust in the financial system will, like previous efforts, evaporate very soon. Hardly any amount of government intervention will be large enough to create stability in Europe by this point.
So in order to protect your wealth, you should, as I also mentioned in my last update, use this uptrend to exit your stock market positions because when the rest of the investment world as well starts to realize that what the governments are trying to do right now by “shoring up the financial system” will never succeed, the stock market crash will be fast and furious, and by that time, whenever it will happen, you will be very glad that you are far out of the stock market with your savings.