Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
Opinion Pollsters UK General Election Seats Forecasts 2017 - 26th May 17
Bitcoin and AltCoins Crypto Price Correction - 26th May 17
Bearish Head and Shoulders in EURUSD? - 26th May 17
SELL US Stocks - Massive Market CRASH WARNING! - 26th May 17
EURGBP: A Picture of Elliott Wave Precision - 26th May 17
Credit Downgrades May Prompt Stock Market Capital Shift - 26th May 17
Rosenstein and Mueller: the Regime Change Tag-Team - 25th May 17
Stock Market Top - Are We There Yet? - 25th May 17
Should I Invest My Fortune in Gold? Inaugural Lecture by Dr Brian Lucey - 25th May 17
USD/CAD Continues Decline - 25th May 17
Bitcoin Price Goes Loco! Surges through $2,500 Despite Unclear Fork Issues - 25th May 17
The US-Saudi Arms Deal - Sordid Saudi Signals - 25th May 17
The No.1 Commodity Play In The World Today - 24th May 17
Marks and Spencer Profits Collapse, Latest Retailer Hit by Brexit Inflation Tsunami 2017 - 24th May 17
Why Online Trading Platforms Are Useful for Everyone - 24th May 17
The Stock Market Will Tank Hard - 24th May 17
It’s Better to Buy Gold & Silver When It DOESN’T Feel Good - 24th May 17
Global Warming - Saving Us From Us - 24th May 17
Stock Market Forecast for Next 3 Months - Video - 23rd May 17
Shale Oil & Gas Production Costs Spiral Higher As Monstrous Decline Rates Eat Into Cash Flows - 23rd May 17
The Only Metal Trump Wants More Than Gold - 23rd May 17
America's Southern Heritage is a Threat to the Deep State - 23rd May 17
Manchester Bombing - ISIS Islamic Terrorist Attack Attempt to Influence BrExit Election - 23rd May 17
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17
US Dollar Cycle : Deep Dive - 21st May 17
Bitcoin Breaks the $2,000 Mark as Cryptocurrencies Continue to Explode Higher - 21st May 17
Stocks, Commodities and Gold Multi-Market Status - 21st May 17
Stock Market Day Trading Strategies and Brief 20th May 2017 - 21st May 17
DOW Needs to Rally Big or Correction is Next - 20th May 17
EURUSD reaches DO or DIE moment! - 20th May 17
How to Get FREE Walkers Crisps Multi-packs! £5 to £28k Pay Packet Promo - 20th May 17
UK BrExit General Election 2017 - Will Opinion Pollsters Finally Get it Right? - 19th May 17
Gold Mining Junior Stocks GDXJ 2017 Fundamentals - 19th May 17
If China Can Fund Infrastructure With Its Own Credit, So Can We - 19th May 17
Evidence That Stocks are More Overvalued than Ever - 19th May 17
Obamacare May Become Zombiecare In 2018 - 19th May 17
The End of Reflation? Implications for Gold - 19th May 17
Gold and Silver Trading Alert: New Important Technical Development - 19th May 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Why Wall Street Can’t Escape the Eurozone Debt Crisis

Stock-Markets / Eurozone Debt Crisis Apr 19, 2012 - 09:52 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: Despite all of its best hopes, Wall Street will never escape what's happening in the Eurozone.

The 1 trillion euro ($1.3 trillion) slush fund created to keep the chaos at bay is not big enough. And it never was.

Spanish banks are now up to their proverbial eyeballs in debt and the austerity everybody thinks is working so great in Greece will eventually push Spain over the edge.


Spanish unemployment is already at 23% and climbing while the official Spanish government projections call for an economic contraction of 1.7% this year. Spain appears to be falling into its second recession in three years.

I'm not trying to ruin your day with this. But ignore what is going on in Spain at your own risk.

Or else you could go buy a bridge from the parade of Spanish officials being trotted out to assure the world that the markets somehow have it all wrong.

But the truth is they don't.

EU banks are more vulnerable now than they were at the beginning of this crisis and risks are tremendously concentrated rather than diffused.

You will hear more about this in the weeks to come as the mainstream media begins to focus on what I am sharing with you today.

The Tyranny of Numbers in the Eurozone
Here is the cold hard truth about the Eurozone.

European banks reportedly will have more than 600 billion euros ($787 billion) in redemptions by the end of the year. They come at a time when the banks have sustained billions in capital losses they can't make up.

Worse, they've borrowed a staggering 316.3 billion euros ($414.9 billion) from the ECB through March, which is 86% more than the 169.8 billion euros ($222.7 billion) they borrowed in February. This accounts for 28% of total EU-area borrowings from the EU, according to the ECB.

There will undoubtedly be more borrowing and more losses ahead as interest rates rise further.

The process will not be pleasant:

•Credit default swap costs will rise, pushing debt yields to new highs while at the same time making fresh Spanish debt cost-prohibitive;
•The Spanish government will force national banks to buy debt at higher rates, triggering capital losses on their bonds;
•Those same losses will trigger margin calls, forcing banks to unload segments of their debt and equity portfolios;
•Rinse and repeat steps 1-3 until there is no more money, the public revolts, the EU splinters, or all three.
Unfortunately, this vicious cycle is already under way.

The Big Boys Go on the Offensive
On Monday, Spanish 10-year bond yields pushed up to 6.07%. (Yields and prices go in opposite directions. If one is rising, the other is falling.) They relaxed slightly on Tuesday, but...

At the same time, Spanish credit default swaps touched record levels, reaching 502.46 basis points according to Bloomberg News. That process actually began in February when traders starting upping the ante on Spanish debt.

Figure 1: Source: Bloomberg.com - CSPA1U5: IND

Credit default swaps pay the buyer face value if the borrower - in this instance Spain - fails to meet its obligations, less the value of the defaulted debt. They're priced in basis points. A basis point equals $1,000 on each $10 million in debt.

Wall Street sells them as insurance against default.

In reality though, they are like buying fire insurance on your neighbor's house in that you now have an incentive to burn it down.

Let me briefly explain how the playbook works.

The big boys are going on the offensive and pushing the cost of insuring Spanish debt to new highs because they know that the Spanish government prefers more bailouts to pain. It's the same thing they did with Greece, Ireland and Italy.

At the same time, they're shorting Spanish debt knowing full well that there will be massive capital losses as Spanish bonds deteriorate.

What these fiscal pirates are counting on is the ECB and Spanish government riding to the rescue.

At that point, they will sell their swaps and go long Spanish bonds, thus netting themselves a two-fer.

How to Play the Eurozone Crisis
This could be a good thing for savvy individual investors-- at least temporarily.

The markets have become addicted to bad news. We cheer when central bankers step in with quantitative easing, conveniently forgetting things are so terrible we "need" it in the first place.

We'd rather take one more "hit" than step away from the narcotics of cheap money.

That's why I expect a rally when the ECB is forced to step in no later than Q3 2012.

Here's what to do ahead of time:

•Buy volatility when it's low. My favorite choices are either call options on the VIX or the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX), an exchange-traded note that effectively tracks the VIX. This will help you capture the initial downturn while also taking the sting out of your broader portfolio. At 18.85 the VIX is not as low as I'd like to see it, but not a bad entry point, either. If the VIX drops to 12-15, that's the time to be very interested in this trade.
•Sharpen your pencils and pick up shares of large "glocal" companies when they get put on sale in the months ahead. Many will actually use the downdraft to solidify their competitive positions and be stronger on the other side.
•Gold and silver are going to get whacked. This is not a problem for those with a longer term perspective - both metals are likely to be sharply higher in the years ahead. However, in the shorter term, gold is likely to trade down sharply as banks raise cash. I'll be looking to $1,500 or so as line in the sand. Silver's retracement will be more nuanced because it is a function of the perceived drop in industrial usage that will accompany an EU disintegration. In that sense it won't be as deep or probably as steep. I see $20-22 as a very attractive price.
•Short the euro. Go long German Bund futures and bonds. According to Bloomberg, the June 10-year bund futures contract is 140.43, or slightly below the record 140.51 it hit recently.
•Buy U.S. dollars. Longer term, they still stink but the world will run to them once again when the stuff hits the fan.
At the end of the day, thinking about all this is no fun. I know - I get paid to do it every day. When the fundamental environment is such a wreck, it can wear on you. It certainly does on me.

But you know what?

That's not actually so bad, because big down days are actually profits in the making; it's how you deal with them that makes the difference.

Source :http://moneymorning.com/2012/04/19/why-wall-street-cant-escape-the-eurozone/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife