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The Daily Reckoning | Thursday, April 12, 2012
Joel Bowman...with a quick reminder before today’s regular reckoning...
Joel Bowman
A Dangerous Game of Chicken Unsettling News on the Unresolved Eurozone Crisis
Eric Fry
Here’s Your Personal Invitation to “Join” Me on a Free Worldwide Guided Investment Adventure As We Search For...
— Clues behind the gold legend of El Dorado, along with ways to play a brand new gold boom... — Investment opportunities along revived trade routes stretching from the Middle East to China... — The No. 1 inflation-beating asset of the rich and famous... and more.
The adventure begins today at 3 PM.
No fees, passports or credit cards required. And you won’t have to wait in customs or airport security lines.
For details, see your invitation right here.The Daily Reckoning Presents The Unsolved Euro Crisis
Dan Amoss
It took the earth 300 million years to make the oil we burn.
Imagine if we could squeeze that whole process into just a few months... a few weeks... or even a few days. Because that's exactly what could be happening.
At least a half-dozen labs and companies are working on this, right now.
If they get it right, we could literally "make" as much gas for your car as you need. We could make fuel for planes, trains, and diesel trucks this way too.
Find out more by clicking here. A Shout-Out to Myanmar!
Dan Denning
Thursday, 12 April 2012
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The Mother of All Financial Bubbles is Just Now Starting to Pop...
It’s time to learn the truth...and to get prepared. If you have the right plan set up, you won’t suffer when this bubble fully bursts.
But — and this is the most important point — you must have a plan. And you must be prepared before this epic crisis hits. Click here now.
If you haven’t done so already, you have just an hour or two to claim your e-ticket to this afternoon’s big event. At 3pm EST, author Chris Mayer will sit down with Laissez-Faire Books editor, Jeffrey Tucker, to discuss his new book, World Right Side Up.
We’re calling it a Digital Launch Party...and you’re invited. Tune into the exclusive interview and you’ll also discover Chris’ insights on...
There’s a world of opportunities out there...and we don’t want you to miss a single one of them. So please, before reading on, send us an R.S.V.P. to this event here, and be sure to join us later today for the big event.
Cheers — Joel.
And now over to Eric Fry, reporting today from Laguna Beach, California...
We are not entirely sure what a “resolved” Eurozone crisis is supposed to look like, but we are pretty sure it is not supposed to look like the chart below...
A resolved crisis is not supposed to feature soaring Spanish bond yields and rising credit-default swap prices. In fact, the squiggles on this chart below may be the most disturbing images to emerge from Spain since Salvador Dali’s melting clocks.
Less than two months after the financial leaders of the Western World — you know who you are — informed the rest of us that they had vanquished the euro crisis, it has flared up anew in the “peripheral” credit markets of Europe. Peripheral is the polite term for the P.I.I.G.S. nations of Portugal, Italy, Ireland Greece and Spain.
In Spain, the yield on 10-year government bonds jumped to nearly 6% Tuesday — the highest level since early December. Meanwhile, the price of insuring a 5-year Spanish government bond against a default (i.e. the 5-year CDS price), jumped to within a whisker of a new record high.
These are not the data points of confidence and comfort; these are the data points of resurgent distress. Bond yields don’t soar when investors trust the borrower; and default insurance doesn’t jump to near-record levels when investors are confident they will be repaid.
Bond yields and CDS prices are climbing throughout the financial markets of the peripheral European nations. Meanwhile, share prices on the European continent are tumbling. Despite a brisk start to the year, several European bourses have slipped into the red for 2012.
Perhaps this rocky price action reflects some “healthy” profit- taking and nothing more. On the other hand, healthy profit-taking can easily morph into a great big bear market when the underlying fundamentals are as suspect as the balance sheets of the PIIGS governments.
In other words, as we have mentioned more than once in this column, bankrupt entities tend to go bankrupt. So any time an investor lends money to an insolvent entity, he is playing a game of chicken...or as they would say in Spain, un juego del pollo.
Seven weeks ago, Dan Amoss, the editor of the Strategic Short Report, predicted that this particular juego del pollo was far from over. Even though the mainstream financial news agencies were busy cheering the end of the euro crisis, Dan was warning his subscribers to prepare for the next phase of it.
In light of this week’s dismal price action in Spain and elsewhere, Dan’s comments from March 2 seem both prescient and pertinent.
The Euro crisis is not “solved.” Not by a long shot. Yet Bloomberg reports this morning (i,e, March 2nd) that European leaders “declared a turning point in the Greece-fueled debt crisis.” The next project for the busybodies: a commitment to a “pro-growth agenda.” This agenda, we can be sure, will involve the few remaining creditworthy EU governments borrowing even more money for stimulus plans.
But aren’t the problems in Europe rooted in spending more than incomes and tax revenues and having to borrow the difference? Yes. Europe has already run out of money — that is, money defined as having a certain amount of purchasing power today. But what about paper money that will buy less goods and services in the future? Isn’t there plenty of that? Sure, there is! In fact, [in order to finance its Long-Term Financing Operation (LTRO)] the European Central Bank printed about 1 trillion euros in just the last few months.
But this much-heralded LTRO isn’t fueling purchases of risky assets — at least not yet. If investors follow the money, they’ll discover that banks are depositing the three-year euro loans they borrowed from the ECB right back at the ECB! These banks are, obviously, not in a hurry to speculate with the cash proceeds from their three-year LTRO loans.
Here’s the part about EU bank behavior that should terrify anyone basing an investment strategy on the fact that the PIIGS governments will continue to enjoy lower and lower yields at sovereign bond auctions: The banks that borrowed three-year money from the ECB at a cost of 1% per year are willing to redeposit the cash at the ECB for a 0.25% per year return. In other words, banks are willing to suffer a “negative carry” of 75 basis points just to have cash available to satisfy depositors at a moment’s notice.
The most plausible explanation for this behavior: Banks will use this cash to satisfy their own lenders and depositors, many of whom will decide not to roll over their loans to these banks. EU banks are, in short, replacing private-sector funding with ECB funding.
Here is the consequence: the slow-motion nationalization of many European banks. When the LTRO loans mature in three years, many of them will not be able to go back to the private-sector funding model. This will ultimately force the ECB to indefinitely roll over the LTRO loans to insolvent banks. A better name for the “long-term refinancing operation” would have been “infinite refinancing operation” (for as long as the euro exists) — or, for the acronym fans, IRO until RIP EUR.
As European investors realize this LTRO cash will be used simply to satisfy maturing liabilities, we’ll probably go right back to the market environment we saw in July-September 2011. The situation in Europe is as fragile as ever. Political change in Greece has the potential to bring about a messy default, and the April election in France has the potential to spark the end of the euro by ending the Merkel/Sarkozy “bailouts at any cost” status quo.
The euro crisis is about as “solved” as the US financial crisis was solved after the March 2008 Bear Stearns rescue. I remember spring 2008 well, having spent hours identifying the next banking victims of the US mortgage crisis, while the consensus breathed a sigh of relief (as it is today), that the Fed rescue of Bear Stearns “solved” the mortgage crisis.
The only thing these central bank rescues accomplish is to impose the cost of bank bailouts onto the holders of paper currencies. That’s why the S&P 500 Index remains 50% below its 2008 peak in real (gold) terms, even though the index is only 12% below its all-time high in nominal terms.
All the cash the central banks are printing is dry tinder for a great explosion in consumer prices that should, unfortunately, more than offset any meager gains in the S&P 500 that have the talking heads in the financial press so excited.
Here’s the good news: By the end of this bear market, the S&P will be an even tinier fraction of gold prices. If you save heavily in the form of gold, your buying power when the next great stock buying opportunity arrives will be that much greater.
As central banks prop up bankrupt governments with newly created money, an ocean of paper money will be desperate to own gold, bidding it up in the process.
Over the next few years, I expect that as consumer prices rise, investors will greatly hike the rate at which they discount future corporate cash flows, which will result in much lower price-earnings ratios for most stocks.
The list of negative market catalysts is long and scary. The list of positive market catalysts is nothing to get excited about. The most- important positive catalyst to drive the market up from here is an old standby: “Stocks offer a better total return, including dividends, than 2% Treasury bonds and 0% bank CDs.” This meme is ready to celebrate its second or third birthday, by my calculations. It’s front-page news. It’s a talking point for financial advisers and Wall Street strategists. So it’s hard to argue that this well- worn debating point of the bulls is not already reflected in stock prices.
Regards,
Dan Amoss,
for The Daily Reckoning
Congratulations to Myanmar (or Burma, as many of us still call it)! The country held elections last week for 45 of the 664 seats in its Parliament. Aung San Suu Kyi’s National League for Democracy won 43 of the 45 contested seats. The decision to gradually democratize Burma’s political process was made by Burma’s ruling generals.
Burma’s generals, supported by their patrons in China, are probably not opening the country up out of the kindness of their hearts (although we concede this is possible). They’re doing it because there is probably more money in running the country at a profit than in exploiting poor people through force and coercion. This more or less supports the point we were making a few days ago: profit IS socially responsible, as it lifts standards of living and allows people to pursue their own interests.
We’ve never been to Burma. But we had dinner with our friend, Doug Casey, in Sydney last year when he was in town for a conference. We asked him where he would go if he was a young man just starting out in life looking for fame, fortune, and adventure. He said Burma. The map below begins to tell you why.
The city of Mandalay isn’t on the map above. But Mandalay is more or less in the middle of Burma. If you took a 700-mile-long piece of string, held an end in Mandalay, and then rotated it around 360 degrees, you’d have 700 million people living inside the circle you’ve just drawn. That’s over 10% of the world’s population. Mandalay is a place you’d want to avoid if you don’t like crowds, in other words.
But if you see Burma as the crossroads between India and China, and if you see the Bay of Bengal as a vast new source of oil and gas for the Emerging Markets, and if you see that Burma is the same size as Thailand, but has a GDP one-tenth the size, you start to see how much could happen there in the next 50 years. And that’s not even mentioning the beaches, temples, and islands that are sure to attract tourists from all over the world, including the new middle class of China.
In the meantime, we’ll note that international oil companies have only been awarded 16 exploration blocks off-shore of Burma since 1960. That will probably change in the coming years.
Keep your eye on Burma!
Regards,
Dan Denning,
for The Daily Reckoning
Joel’s Note: Trouble for Old Europe...opportunities and excitement for new Burma. This is exactly the kind of “World Right Side Up” investment conversation Chris Mayer and Jeffrey Tucker will be having just a few hours from now.
If you haven’t yet R.S.V.P.ed to this special digital book launch party, be sure to do so here. Time’s a wastin’.
Ed. Note: Dan Denning is the author of 2005’s bestselling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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