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The Biggest lie in Stock Market History Revealed

Greece Exit, Euro-Zone Collapse, Spain and Portugal Will Follow Within 6 Months

Interest-Rates / Eurozone Debt Crisis May 12, 2012 - 10:30 AM GMT

By: Nadeem_Walayat

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleThis analysis continues on from my last article in light of the recent French and Greek elections where voters rejected economic austerity in favour of money printing Inflation stealth debt default as politically an smoke and mirrors Inflationary depression is being seen as far more palatable for populations than a deflationary depression slow motion economic collapse. However to be able to print money inline with the true state of the respective competitiveness of euro-zone economies, then these countries governments have no choice but to exit the euro-zone, or be forced out as they one by one fail to follow through on agreed austerity measures.


Greece Slow Motion Economic Collapse in Progress

What may be lost in the noise that is the mainstream press is the fact that Greece has not been in a recession or even a depression, Greece has been in a state of slow motion economic collapse on the scale of past economic collapses such as that of Argentina but so far without the ability to default, devalue and inflate.

As the below graph illustrates that following the financial crisis of 2008, Greece had been following a similar economic trend trajectory to that of most western economies including that of the UK, US and Germany, however the real crisis began in late 2009 when the economic recovery from the pit of the Great Recession of 2008-2009 evaporated and the Greek economy began a slow motion collapse that has so far seen Greek GDP in real terms contract by 16% since the 2008 peak, with no end in sight Unlike the V shape of the more regular debt default economic collapses such as that of Argentina's of 2001 and more recently Iceland.

The reason for this is solely due to Greece's membership of the eurozone which has prevented Greece from defaulting on its debts since early 2010 and engaging in a sharp currency devaluation as markets would have corrected for the fact that Greece cannot compete against other countries. However instead of getting a grip on approx Euro 300 billion of public debt at that time, the Euro-zone despite since a 50% stealth default on private debt has still increased Greece's total public debt burden by a further Euro 280 billion of 2 scheduled bailouts to stand at a total of over 400 billion Euro's, leaving Greece far more indebted than where it were in late 2009 when economic collapse began, which is made infinitely worse as a consequence of the fact that Greece's ability to service this debt has fallen as a consequence of the economic contraction.

Similarly Greece as member of the Euro-zone has NOT had the option of experiencing a severe competitive devaluation of its currency of as much as 50% which would have instantly turned Greece's trade imbalances around as Greece would no longer be importing goods and services from Germany that it could not afford as well as what little it does manufacture would have become far more attractive to export markets and especially its large tourism sector, which in fact as a consequence of a drop in demand suffered an increase in prices as a consequence of fixed euro costs's which resulted in further reduction in demand and hence Greece has been in an economic death spiral.

The situation has now reached a critical point (though it has been at a critical point for a good 18 months now) where in my opinion Greece now has no alternative but to exit the Euro-zone (not European Union) and it will exit the Euro-zone sooner rather than later i.e. I would be surprised if Greece is still in the Euro-zone by the end of this year and most probable expect Greece to exit during the next few months (Summer 2012).

Last weeks Greek elections have set in motion a chain of events that virtually guarantee a Greek exit from the euro-zone as another election in Mid June is a near certainty that looks set to elect an anti-austerity government headed by the inexperienced Alexis Tsipras of the Syriza party, who's rhetoric that Syriza both wants to remain in the Euro-zone with a continuation of mainly German financing of Greek government expenditures to the tune of Euro 100 billion a year whilst stating that they will embark on an anti-austerity government spending spree without any consequences in terms of bond and currency market reaction because Greece neither has access to the bond market (currently financed wholly by Euro-zone institutions and the IMF) or a currency.

Mechanisms for Greece Euro-zone Exit

Following the election of the new Greek government in mid June 2012, Greece will default on its debts as a consequence of the resistance to release further bailout funds due to its anti-austerity programme. This will probably trigger a series of Euro-zone summits during July and August where the terms for exit from the Euro-zone will be agreed upon. What is unknown at this time is whether Greece will also have to leave the European Union as the Lisbon Treaty suggests. My opinion is that Greece will be allowed to remain in the European Union, however the solution will be legally very messy.

Hyperinflation Consequences for Greece

In conjunction with the summits formulating the mechanisms for Greece leaving the euro-zone there will be real world consequences for Greece in terms of the currency in circulation as a new currency would need to be printed and distributed (we may in the interim see vouchers or even photocopier paper currency used to pay public sector wages) causing chaos across Greece in terms of the standing of contracts such as Mortgages made in Euro's but no longer honoured in Euro's triggering a collapse of its banking system as no one will want to hold its new currency. This would result in plunge of the existing Euro and a collapse in the value of the new currency (when eventually printed) in the form of an hyperinflation panic event, i.e. we will see the Greek inflation rate soar as a consequence of Greece no longer being able to buy any goods or services from abroad due to the capital markets being closed to Greece. I had previously estimated that Greece could experience an annualised rate of at least 30%, which given the nature of the new government that would do nothing to address the requirements of capital markets could probably soar far higher amidst panic driven spike as any money left in Greece flooded out of the country before capital controls came into force.

This is the true state of the Greece economy that the Euro-zone in its ignorance has been delaying and worsening the realisation of, and so will the pain delivered be intense as the markets act to make the correction in valuations that lie at the heart of the Euro-zone crisis.

Greece Exit Consequences for the Euro-zone

All of the weak euro-zone countries are waking up to the fact that they have been in a state of denial because they are NOT Germany they cannot compete against Germany and therefore are only delaying the inevitable by remaining in a currency union with Germany that ensures their economies are also in a state of slow motion death spiral of economic collapse. In which respect they are in fact making the economic pain of their populations far worse as a consequence of dragging out economic collapse over many years rather than months as would have been the case had they had their own currencies and money printing presses such as that deployed by the UK that has successfully used smoke and mirrors inflation to mask the truth that Britain is in a far worse state in terms if indebtedness than most of the euro-zone countries.

Greece exiting the Euro-zone would crash the banking system as banks across the euro-zone start to fail domino style as a consequence of their direct exposure to 400 billion of Greek debt and counterparty risks which will put immediate pressure on all of the other weak Euro-zone members, with Spain and Portugal the next targets for exit as a consequence of these countries being on the same unserviceable debt fuelled economic collapse trajectories as Greece. In my opinion Spain and Portugal will both exit the Euro-zone within 6 months of Greece leaving so depending on the timing of Greece's exit Spain and Portugal could also both leave the the eurozone this year.

The following list suggests the probable order of Eurozone exits from the single currency based on debt to GDP coupled with the the level of economic contraction to date.

  • Greece
  • Spain
  • Portugal
  • Italy
  • Belgium
  • Ireland
  • France

The wild card is Germany for as I originally speculated over 2 years ago (May 2010). Germany may decide to alleviate pressure on the rest Eurozone by planning its own exit. However all this would amount to a desperate belated attempt to buy more time to slow down the rate of collapse of the Euro-zone so as to allow the financial system to better survive a breakup of the whole eurozone.

Consequences of Euro-zone Collapse

Whilst contagion amongst euro-zone members may be a slow motion affair as countries one by one line up for exit, however the contagion amongst the banking sector will be immediate and europe wide as credit markets freeze, that has the potential to accelerate the collapse of the euro-zone as the potential bailout costs for preventing financial armageddon soar far beyond the means of any of the euro-zone member states to cover.

Off course the worlds central banks will do their utmost as they did during 2008 to prevent financial Armageddon by trying to contain the damage through a myriad of means that they are now well rehearsed in such as bank capitalisation's, providing foreign currency swaps, and in the final instance introduction of capital controls.

Over the past few years, I have several times touched upon strategies for protection against a euro-zone triggered collapse of the financial system and much of the conclusions remain just as valid today as excerpted below -

03 Dec 2011 - How to Protect Your Bank Deposits, Savings From Euro-zone Collapse Financial Armageddon

Steps You Need to Take Now !

The following are my updated lists of tasks you need to do to protect your deposits because you are NOT being paid to carry the REAL RISK OF LOSS OF FUNDS ON DEPOSIT in Nominal Terms.

1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safer bank such as HSBC.

2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.

3. Now group your accounts by banking sector group (see list here as a guide).

4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately! and Especially if it is a Eurozone bank

5. Small banks and building societies are at greater risk than larger banks and building societies because the government is the larger banks such as HBOS pose a greater risk to the financial system and economy so the government will be more reluctant to let them fail, but that does not mean they will actually cover deposits beyond £85k in the event of a collapse, so you still need to limit exposure to £85k

6. Consider transferring funds to your spouse so as utilise their compensation limit across banking groups, so you can double your compensation coverage by opening an account for your spouse with each bank.

7. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account. This is an imperative - NS&I is the safest bank in the UK, use it for short-term insurance - NOW!

Instant Access Savings Accounts with Lower Risk banks

  • NS&I - 1.75% - Government 100% Guarantee
  • Tesco - 2.90% (includes 1.65% bonus for 12 months)
  • HSBC - 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)

Higher Risk banks

  • Barclays - 1.25% (includes 0.35% bonus when you do not withdraw in a month).
  • SMILE (Co-op) 0.25%

Extreme High Risk Banks

  • Santander - 3.1% (includes 2.6% bonus for 12 months) - Euro-zone Bank
  • ING Direct - 3% (includes a 2.46% bonus if you do not withdraw in a month) - Euro-zone Bank
  • Halifax Online Saver - 2.8% (includes 2.7% bonus for 12months).

All accounts pay significantly less than current CPI Inflation of 5%.

8. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

9. Avoid exposure to Euro-zone banks and at the very least PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to the likes of Santander depositors will also significantly rise.

10. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).

11. Utilise instant transfer accounts between spouses, i.e. if you have accounts with the Halifax then you can instantly transfer funds between one another, therefore during a crisis you can instantly reduce the exposure if one person is above the £85k compensation limit at that time.

The best strategy remains as I have been advocating for a while to continue to cycle out of fiat currency assets and into harder assets such as UK property, for which I have at times had a healthy debate with many readers as I am fully aware that signs for positive trend for the UK property market are far and few between but the key point is that you want to be in assets that cannot be easily printed or that are leveraged to Inflation and fairly priced, and in that respect UK property as well as other assets such as consistent dividend paying stocks and after the recent sell off commodity stocks in general tend to fit the bill as well as index linked corporate bonds.

What is Probably Likely to Happen IF the Euro-zone Collapses

The fragile european banking system will fall like dominoes and not be limited to just the euro-zone for it will reverberate across the globe within a matter of hours as the value of greek and other peripheral government bond markets crash and the banking system literally freezes, especially as most of Greece debt (approx Euro 250 billion) is now is the direct liability of other governments.

I expect governments such as the UK would immediately step in to nationalise the bankrupting banks either in part or full as they did with Northern Rock, Lloyds and HBOS, for if depositors in any significant number actually started to lose access to any of their deposits then that would result in a catastrophic loss of confidence in the whole financial system and spark runs on all banks.

My best minimum advice is to prepare for the worst rather than leave it to chance, because if the government is facing an out of control bank run that potentially runs in the trillions it may decide that the pain of closing the banking system for a few weeks (Extended Bank Holiday Month) is better than the implications of more than doubling the national debt which would make George Osbourne's £130 billion annual deficit look like peanuts.

A closure of the banking system (Bank Holiday Month) will result in a huge drain on cash in the economy as cash machines would have stopped operating, therefore I suspect the Bank of England has already secretly prepared itself for this eventually by printing a huge quantity of actual bank notes by the container load, ready to ship out as soon as the crisis bites, which would be necessary to cover a closure of the banking system the effect of this would be highly inflationary, because printing actual bank notes is the same as that which happened during Weimar Germany sparking hyperinflation when people ended up buying loafs of bread with Wheel barrows full of worthless currency, inflation would go through the roof, forget 5% per year, we would be looking upwards of 5% per month!

But whatever you do, know this that the crisis in the Euro-zone CONTINUES TO DETRIORATE, this is not a new trend but one that has been in force since at least late 2009 and which in my opinion is approaching the end point that will prompt huge amounts of money printing that will detonate the Inflationary Time-bomb, because in the face of crisis, the only thing the governments can do is to print money and the bigger the crisis the more money will be printed.

Greece Black Mailing Eurozone?

As mentioned above most of the Euro 400 billion of Greek debt is now owed to other euro-zone member state institutions and the IMF, therefore a Greek default will have a double whammy on the Euro-zone as institutions such as the ECB will be sitting on huge losses that would require a bailout from member states even before it attempted to rescue the euro-zone wide banking system from collapse. Clearly the Greek politicians are using the losses the euro-zone would directly suffer were Greece to default as a blackmail tool to try and evade any responsibility. However the problem with the Greek strategy is that if Greece is allowed to successfully black mail the Euro-zone then so will other larger countries such as Spain and Italy eventually engage in similar tactics to evade economic austerity pain as their populations also demand a similar solution to economic austerity as Greece were being allowed to get away with.

European Union Collapse?

A collapse of the Euro-zone does not mean the same as a collapse of the European Union, it should not be forgotten that the EU survived for a good 40 years before the Euro-zone came into existence. The primary purpose for the creation of the E.U. was to prevent Germany from starting World War 3, which remains the primary objective that goes far beyond economic considerations, therefore even a collapse of the single currency would not be enough to bring about a collapse of the E.U., and as I stated earlier, I expect a Drachma Greece to remain within the E.U., just as will an Lira Italy, Pesetas Spain and even Frank France remain within the E.U.

Final comment on Alexis Tsipras and Syriza. If the Greek default and euro exit play out roughly as illustrated above then Alexis and his party will probably become the most hated government in Greek history, whilst watching their smiling faces on the TV, I can see that they have no idea of what's in store for Greece, the collapse will be a nightmare for ordinary Greeks, especially as it was only until relatively recently Greeks were living amidst a debt fuelled boom and the collapse has the potential to spiral out of control as we are already seeing with the blame being laid at the foot of immigrants, which is not many steps removed from spiraling towards a military conflict with neighbouring states such as Macedonia and Turkey.

Your analyst seeing continuing signs of a Euro-zone wide bank run underway.

Source and Comments: http://www.marketoracle.co.uk/Article34625.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2012 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Michael
13 May 12, 00:00
Effect of collapse on gold

Would this effect a bottom in gold and cause a rally back to $2000?

Many gold stock have been heavily solid off over he last 6 months, is now the time to start buying glad stocks? Is this what you meant by commodity stocks? Any general thoughts appreciated by you or other readers. Thank you.

Regards

Michael


A Greek
13 May 12, 00:26
With allies like this who needs Nazis

Nadeem Walayat

"Macedonia"? Seems to me some of the so-called experts constantly "forget" to mention this slight historical detail. Small wonder many greeks are being pushed to nationalism. Apparently ethnically erasing Greeks is human rights now.

"This (US) Government considers talk of Macedonian "nation", Macedonian "Fatherland", or Macedonia "national consciousness" to be unjustified demagoguery representing no ethnic nor political reality, and sees in its present revival a possible cloak for aggressive intentions against Greece" - US State Department Dec, 1944 (Foreign Relations Vol. VIII Washington D.C. Circular Airgram - 868.014/26)

http://tinyurl.com/nel46d


manny
13 May 12, 01:41
Food+water+gold

Hi Nadeem, do you advise on stocking up on essentials as a lot of commentators advise? or is this ott. Also is not gold the ultimate way of storing wealth, rather than property.I think you have mentioned it in the past but not lately. And could you tell me what you think is a reasonable % of wealth to store in gold.

Thanks for your work as always


Nadeem_Walayat
13 May 12, 02:52
Macedonia

Hi "A Greek"

If you look on a map, you will see the country north of Greece is called Macedonia, and I understand that Greece disputes this country from using that name because of a region of Greece also utilising that name harking back to Alexander the Greats reign. Hence it has potential amidst crisis to flair up into conflict.

I think the problem is that Greece sees it self mistakenly as a North West European Nation when it has always been a Balkan State, which is one of the problems why it is in this mess.

Though, I agree that Greece needs to do what's best for Greece, and the only way out I see is going through the pain of exiting the Euro-zone, which means 1 or 2 years of severe pain followed by recovery instead of the current situation of perpetual slow motion economic collapse.

Best NW


Nadeem_Walayat
13 May 12, 02:56
Protection

Hi

Eventhough I periodically ride the Gold and Silver trends, I am no gold bug, The most Ive ever held in gold and silver is about 5%, and my current holding is about 1% in gold coins (just in case).

What would be wiser would be utilisng your garden i.e. planting fruits and vegs. Good excercise and good knowledge to have in how to generate a ton of free fresh food.

Also some renewable energy would be useful i.e. solar panels are hyped in the UK that they will deliver xthousand profits when they won't but they are a good insurance in case of SHTF.

Best

NW


Peter Maddalena
13 May 12, 05:04
Mortgages with Santander

Great post.

I know you cover those with deposits and protection.

What about those with mortgages with PIG banks?

Any advice as to what we should do to protect?

Fix, variable or move - if paying down is not an option...

Thanks

Peter


Bill
13 May 12, 14:08
Currency wars

Hi Nadeem,

Great article once again. Well done for telling it like it is.

I have a couple of questions if you don't mind.

1. If the above were to happen, what currencies other than sterling would you recommend exchanging into before inflation were to really take off (assuming the BofE did in fact produce huge amounts of fiat during a banking holiday).

I noticed Citibank now charge for currency accounts unless certain conditions are met.

2. Yes, I agree with your analysis about inflation and hard assets and yes it has been a healthy discussion in the past with regard to housing.

May I ask how long do you think the cycle (top to bottom) is for house prices?

My studies show that the housing cycle is one of the longest cycles out there (e.g. averaging 72 years) and the peak of the cycle often turns into a decline of approximately 20 years i.e. a real terms decline on balance of just over 20 years. I am not saying that housing prices decline each and every year, but on balance they decline for the aforementioned time.

Also, in a situation like you may be describing above, what would happen to people's mortgages? Surely, in such a situation their mortgage debt would be almost wiped out? Do you think "they" would allow this to happen?

Lastly, if for example Spain pulled out the euro, what would happen to euro spanish mortgages? Would contract law prevail and the spanish have to pay much larger interest payments due to the higher currency exchange between pesetas and the stronger nordic euro in a similar situation to the Icelandic mortgages taken out in CHF?

Would appreciate your thoughts on the above.

Many thanks,

Bill


Sally
13 May 12, 14:49
Inflation

Nadeem

Why would distribution of newly printed notes increase the current inflation if they were replacing £ for £ digital money ?

Yours

sally


strike
13 May 12, 14:49
Santandar

All quite sound, except for your reference to Banco Santander as an "extreme high risk bank". After all, it's the world's 15th largest bank, it has over 65 % of its earnings outside Spain and has a highly discounted P/E and BV, all because of the Spain Fear Factor. Also, the Management (Botin and Saenz) is excellent and studiously avoided U.S. derivatives pre-2008. (Botin said, literally, that he avoided derivatives because even though his bank's whizz-kids explained them to him on numerous occasions he still didn't understand how you can get "something for nothing" and forbade their use).

Anyway, I don't know about the other banks but I'm sticking firmly with Santander.


Christer
13 May 12, 14:51
USA Crisis

Hello Nadeem

I am surpriced that you fokus so much on the Euro -crisis and so little

on the USA-crisis.

I agree that Greece is in a collapse and could be that also Spainish or

Portugise economies are bad but they are not in worse trouble than USA

is. California has a catastrophic economy as well as USA in total, much

worse than the average European country.

From your point of view it looks like Europe is soooo much worse than

USA, quite biased is my opinion. It would be appreciated if you could

write a bit more balanced or if you are of another opinion please show

by comparison why and how Europe is so much worse than USA.

That would be an interesting article indeed.

Up here in Scandinavia we still have seen nothing of a crisis, I was in

Munich this week and it is definitely not a crisis there.

Last week I was in Milano and Genua in Italy and they do not seem to have any problem either.

Besty regards

CHrister Norway


Garrett
13 May 12, 14:58
re: Greece Exit, Euro-Zone Collapse

What's the ripple effect going to look like in the U.S. stock market and banking system?

Thanks,

Garrett


jason
13 May 12, 16:11
@garrett

More likely a 30% decline in U.S. stocks and utter collapse of banks on wall street again. Which means HUGE BAILOUTS are on the way and you can ride the wave back to the top once they are announced. THIS IS GOING TO BE THE BUYING OPPORTUNITY OF A LIFETIME.


Steve
13 May 12, 18:11
British Pound

Nadeem,

Do you think the pound is likely to become a 'safe haven' of sorts, if Greece exits, despite the state of the UK economy?

I have had savings locked up in pounds since returning to NZ in 2010, but need the rate to drop from it's current cross of .48 NZD/GBP to low .40's in order to avoid significant losses.

Kind Regards

Steve


John
14 May 12, 05:38
Australia

Hi,

Im curious about your opinion on the safety of Australian currency investments such as cash, Australian property and Australian Stocks. Can you make some comments please.

Thanks

John


Nadeem_Walayat
14 May 12, 06:14
Money Printing Inflation Mortgages, Currency Wars, Santander, USA Crisis...

Hi All

Mortgages with PIIGS
The risk is in change in the terms of your mortgage i.e. when your mortgage is sold on by bankrupting PIIGS banks. It would probably be very wise to move your mortgage to a wholly UK bank.

Currency Wars

Yeah citibank are making people jump through hoops. Currency market volatility will be high, so the safest place is in sterling because then you don't experience currency volatility, however some exposure to a basket of currencies could be beneficial, with the dollar a prime candidate because that would be expected to be the last currency to fall. That and say the Chinese Yuan amongst other emerging markets.

Mortgages - They will change the terms, they won't let you off so easily they will find a way to make you pay.

Housing - I have yet to do the analysis, but pre-lm analysis points to rising prices in nominal terms, yes it will be difficult to rise on real terms amidst financial armageddon but it could as it would be seen as the ultimate safe haven in the UK by most.

Printing Bank Notes Causes Inflation

I could write a mini ebook on this but concisely - Because the velocity of money would go through the roof as the amount of goods and services in circulation remains the same but people have more cash that they are more willing to spend, which unlike debt money i.e. created electronically by banks cannot be easily destroyed, so central banks lose control of inflation . Which is why european central banks have been busy limiting the value of transactions that can be done in cash because they know its consequences is rapid inflation. A recent example of money printing inflation is Zimbabwe

Look, if the government hands out bank notes then people rush to spend that money on the same goods and the shop then quickly recycles the money IN cash and so soars the velocity of money because no one wants to hold onto cash that is fast losing value and hence we end up with inflation rates of 5% or higher PER MONTH. Whereas QE is more concerned with monetizing government debt via banks so you the people don't get the paper money in your hand, this is still inflationary but not on the same scale as printing and handing out actual bank notes. It's all about control, with government spending they retain control, with bank note money printing they lose control.

Santander

When countries go bankrupt then so do all of their banks. Santander would not survive Spain going bankrupt regardless of what is written because Governments have a habit of changing the law.

Off course all banks are at risk

USA Crisis

I have stated the reason many times why Euro-zone crisis is infinitely greater, because the UK and US can print money and stealth default by means of high inflation, whereas the euro-zone members cannot so they can explode whilst we just simmer.

You have the look at the trend trajectories for real GDP, unemployment, inflation and debt, which clearly say that most of the euro-zone is in a far worse state than the UK and USA. The problem is the trend, for instance Italy perhaps has a couple of years of slow motion meltdown before it gets to where Greece is, but it is in on the same trend trajectory because it cannot print money.

Ripple Effect

Market Panic (buying opportunity), followed by rampant money printing (QE)

British Pound

The British Pound has enjoyed safe haven status for 2 years as a consequence of the euro-zone crisis. Though you have to realise that all currencies in perpetual free fall and the exchange rates are just volatility in the differing rates of decent. Sterling has so much safe haven priced into it that I just cannot see it benefiting much further, I am leaning towards sterling falling against the dollar which is the cross that i track, perhaps to as low as £/$1.50.

Australia

I don't track australian indices close enough to comment, but expect over the long-run Australia to continue to outperform the likes of the UK.

Best All

NW


Sarah
15 May 12, 02:49
Gold Price Falling

With regards your May 14th newsletter, if the Eurozone is about to collapse in the foreseeable future, why is the price of gold going down so much. Is it because the dollar is strong? Or, iS it being manipulated? Or is it a natural correction? I understand it will continue to go down until Bernanke announces QE3.

What do you think?

Sarah


Nadeem_Walayat
15 May 12, 02:55
Gold

Hi Sarah

It's been a while since I analysed gold, so I will take a look at gold in my next article, as it may turn out to be a good trend buying opportunity.

But my instincts on seeing Gold below $1600 is to buy some more physical bullion, just enough to keep my holding at a touch over 1%.

Perhaps thats what the meaning of "the 1%" should really be ?

i.e. Hold 1% of your wealth in physical gold bullion, if nothing else it helps one sleep well knowing that one has some insurance in case of financial armageddon.

Best

NW


Kelvin
17 May 12, 05:00
Help (again)

Nadeem,

I need to ask you a few questions. I would be grateful if you could supply full answers.

1. EUR/USD - this seems to be in a downtrend right now, possibly going lower than the crash event of 2009. If the euro makes up approx 60% of the USD index, how will this affect the very beaten down commodity stocks. Normally, commodites rise on dollar weakness. Are we going to witness a commodity sell off far greater than the previous crash of Ocober 2008? If so, how can this be justified whilst we currently have very high levels of inflation, historic low interest rates and central banks in europe, Japan, UK and America printing money in obvious and disguised ways? I am trying to see how everything fits together. The currencies suggest that capital is fleeing into the USD in anticiaption of a euro collapse. Is it possible to have much higher commodity prices with a much higher USD and a lower euro? Please advise.

2. If the eurozone does collapse, do you agree that USD will be the last to fall? I was thinking about capital flows and what happened in the previous great depression. It would appear that capital is pulling out of europe, then UK/Japan and finally America - the world reserve currency. I would imagine that when it is America's turn, capital will flee back into hard/private assets (e.g. shares, commodities, gold etc.) after a fantastic bond market bubble based on fear capital fleeing risk. Would you agree with this and if not, why not?

3. You mentioned that you expected the DOW to make all time highs this year before falling back to approx 12000 for a few years. Do you still think we will see this in the short term over the next couple of months? How does the US elections impact the need for a short term rally? Is there any hope for a rally soon, or is this the beginning of a vicious bear market?

4. You mentioned it was possible we might see USD strengthen over the next two years. I stress you said "may". Do you still think this and if so, how would this affect the above (e.g. stock market, commodities, risk assets)? Would you advise people holding USD as opposed to any other currency in this climate?

Many thanks,

Kelvin


Wassim
17 May 12, 13:03
Pesion Funds

Hi Nadeem

would you think it's a good idea to sell pension funds which are invested in stocks and buy index linked UK gilt funds instead. If yes, what would be your split ? 60/40 in favour of gilts?

Thanks


Nadeem_Walayat
17 May 12, 13:21
Crisis Investing

Hi All

Without indepth analysis I won't make specific forecasts, but I will let you know what I am doing to protect my wealth.

1. Bought UK property. I may buy more but it is a very time consuming

2. Cash holdings are now 80% sterling, 20% dollar, no other currency, my aim is to build a larger dollar holding of about 25%.

3. Stocks portfolio is down to about 10% of assets. I am gearing up to buy back into the stock market, though will only act following in-depth analysis to confirm when.

4. Pension SIPP holdings are 45% cash, 15% stocks and 40% bonds - mainly index linked bonds. NOTE - I never invest in bond funds, but in the actual bonds themselves.

I have also very recently been buying more gold and silver bullion, to nudge me above 1%, I may buy a little more, but not much more.

My main aim has been to limit losses in case of financial armageddon of which there is a real risk. Compared to where my portfolio was 6 months ago, I now sleep relatively easily :)

Best

NW


Siddharth
21 May 12, 01:33
India

NW,

Have you any insights on the South Asian region, specifically India?

Do you see any Indian banks that are dangerously exposed to the Eurozone?

Would be glad if you can point me to some sources related to India.


Jack
22 May 12, 06:40
Financial Armegeddon

Please would you publish your next article "financial armegeddon" asap.

Thank you.


DRS
22 May 12, 19:06
Tescobank, gold and land

Hi - If holding just 1% of your wealth in gold gives you financial security then you must be very rich.

I am considering putting most of my cash in Tesco-bank because I no longer trust the government regarding NS&I; Am I being to cynical? In fact I do not trust anything that anyone says these days.

So, land, cash ($ & £) & gold are the future? I would possibly add Swiss Francs & Japanese Yen. Apparently, Japanese companies are cash rich so shares in these may be safe.

Thanks for informing us about the possibilities and providing economic insight through your analysis.


Nadeem_Walayat
22 May 12, 19:26
NS&I and Gold

Hi

NS&I can't go bust because they can print unlimited currency to cover its libailities, that and there will be a flood of money INTO NS&I so they may STOP people from depositing any more funds into NS&I.

Gold bullion 1% is in case of financial armageddon. Holding gold carries its own risks apart from price. For me, Gold bullion is not an investment, just insurance that I will probably only call on when fiat currency has gone up in smoke, so not of much practical day to day or year to year use, i.e. its not a trade, if I want to trade gold I buy futures or utilise a bullion trading service, but trading gold is not insurance because they can go bust too.

Best

NW


Shelby Moore
22 May 12, 19:51
gold an investment

Nadeem,

Gold is an investment during periods of negative real interest rates. This is because interest bearing investments and cash are yielding a negative real (i.e. negative purchasing power) rate of return. Silver is an amplified gold, and is not a commodity. There is sufficient proof that silver price is being driven by marginal demand (what economics 101 taught me), which is the investment demand. I could give you an education on the demonetization of silver, which failed in 1999 when the governments ran out of silver to sell into the markets. What they did next was hedge the by product silver from base metal mines, and sell that into the OTC, which the BIS reports is $93 billion of open interest. They hold back the demand for silver, but they are going to be overwhelmed as the global economy heads into the end game.


Nadeem_Walayat
22 May 12, 22:47
Gold Insurance / Investing

Hi Shebly

You misinterpreted my comment.

I treat gold bullion, yuou know, the 1oz bars and soveriegn coins in my pocket as insurance, not an investment, something if SHTF gives me some immediate leverage in a bankrupt hyperinflating world, though not much as food would be more prized asset.

If I were to invest in gold on the basis STHF then the obvious risk is that gold would be stolen by the company holding it or the government.

So yes, one can trade and invest in gold, but it won't be insurance if it is held in the hands of others.

Best

NW


DRS
23 May 12, 06:18
HSBC under scrutiny

Hi,

What do you make of this report:

http://www.realecontv.com/videos/banking-malfeasance/massive-money-laundering-scam--alleged-at-hsbc.html


Shelby Moore
25 May 12, 08:28
confiscation

Nadeem, thank you, I understand now.

http://silverstockreport.com/2010/confiscation.html

May I suggest the preceding thoughts about confiscation. Gold has never been confiscated door-to-door and never will be.

We still have our guns in the USA.


Simon
05 Jun 12, 21:24
Clarifications

Hi Nadeem, under the section: Inflation or Deflation Matters - you write: 'I know from my experience that Inflation or Deflation is the most important economic factor, because everything ELSE in the economy and markets is LEVERAGED to Inflation.'

I'd really like to grasp your insight - but at present, am not able to do so. I'd therefore like to request this subject matter & insight of yours be dealt with in more detail in further articles.

Where you write: 'the fact that Greece has not been in a recession or even a depression, Greece has been in a state of slow motion economic collapse.'

I think I understand from this, that you are saying because Greece cannot devalue using it's own currency, that it's economy is fracturing. What I don't follow though is how the US is able to harmonise disparate states (for many decades at least) & exactly why (on a nuts & bolts level) EZ countries can't make it work in the same way.

Regards,

Simon


Nadeem_Walayat
07 Jun 12, 15:40
Inflation Deflation

There are many aspects to why Inflation - deflation matters more, such as Inflation results in Greed, whilst Deflation in Fear.

As Gecko said Greed is good, it's what creates mania's.

The USA works because there are perpetual transfers of wealth taking place between the rich and poor states.

I.e. tax payers of rich states are paying for the the lifestyles of the poorer states in perpetuity, and it is taken as normal.

This how taxes work, they tax everybody, take your money then give you some back, but give more back to others and you don't notice it. I am sure if you look at statistics on federal spending per capita you will see the truth of certain states recieving far more in federal spending than the taxes paid and other states recieving far less. Thats how all countries internally work, The UK does it as the South East subsidises most of the rest, where Northern Ireland benefiting from a huge internal transfer of wealth.

The EU could achieve the same if they became the United States of Europe.

Best

NW


Simon
07 Jun 12, 16:58
Re: Thanks, very clear

Thanks Nadeem. Very clear & helpful explanation.


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