Yesterday, French President Nicolas Sarkozy and Germany Chancellor Angela Merkel said they're "convinced" Greece will stay in the euro. They issued a statement following a phone conversation with Greek Prime Minister George Papandreou, who agreed to meet the deficit-reduction targets demanded as a condition of a bailout. The euro gained after the news, then retreated. While the French and German leaders are "convinced" Greece will honor the austerity measures, the market, it seems, is not...
For a wonderful explanation of why any austerity in Greece will be difficult, you should read an article Michael Lewis wrote last year for Vanity Fair. In short, he says the country is a bastion of socialism... And other governments should take notes from Greece's leaders when it comes to corruption. We covered the article in the September 8, 2010 Digest.
It's no surprise a verbal reassurance wasn't enough to prop up the euro. The implementation of Greek austerity is the difficult part. Just last night, riots broke out in Rome over Italy's 54 billion-euro austerity package... We'll see what happens in Greece.
The Greek disaster is causing liquidity issues for European banks. Nobody wants to send U.S. dollars abroad (as we predicted)...
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Worst of all, much of the funding for Europe's banks comes from U.S. money-market funds and the interbank market. Only about 54% of their capital comes from their customers. A large amount of their capital – 33% – comes from sources that would transmit the crisis to America. The wholesale credit market in Europe comes from U.S. money-market funds. Europe's interbank market touches major U.S. money center banks. |
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How will American creditors respond to the crisis? By the end of 2012, Europe's banks will have to refinance more than $8 trillion in wholesale funding, mostly from U.S.-based money market funds. |
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What if the crisis in Greece spills over into European banks? Will these lenders be willing to lend into a crisis, where there's so little equity remaining in the books and so little political confidence in the European Central Bank? My bet is no. – Porter Stansberry, September 2011, Stansberry's Investment Advisory |
We believed all this would lead to global central banks (in particular, the Federal Reserve) working together to bail out Europe...
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The next major step in this crisis is for the Fed to announce, in partnership with other major central banks, a huge campaign to buy European sovereign debt and bank debt. If UniCredit fails, Italy will fail. If Italy fails, the euro will collapse. If the euro collapses, the entire Western financial system will fall – GE, for example, would be left insolvent, along with dozens of other major international financial companies. |
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The world's central bankers and governments can't allow that to happen in an uncontrolled way. So they will print, print, print... – Porter Stansberry, August 2011, Stansberry's Investment Advisory |
Markets were worried about U.S. dollar funding problems for eurozone banks. European banks borrow dollars from the swap markets. The premium they pay is near its highest level in nearly three years. And today, the European Central Bank – in conjunction with the Federal Reserve and other global central banks – took preventative measures. From the official announcement…
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The Governing Council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year. These operations will be conducted in addition to the ongoing weekly seven-day operations announced on 10 May 2010. |
The measures will take the form of repurchase operations... The ECB will borrow U.S. dollars from the Federal Reserve and buy longer-term debt from troubled banks. Then, the banks will use the cash to meet short-term obligations. As noted in the first Stansberry's Investment Advisory excerpt above, European banks must refinance more than $8 trillion in wholesale funding by the end of next year. Banks soared on the news. National benchmark indexes climbed in all 18 Western European markets, except Greece...
Coincidentally, today is the third anniversary of Lehman Brothers' collapse. The ECB, it appears, isn't anxious to revisit that catastrophe any time soon.
Gold fell more than 2% to $1,780 an ounce today. Silver fell to $39.50 an ounce. With the ECB backstopping every bank in the eurozone – and the burden shifting from U.S. banks and money markets to the Federal Reserve – investors are willing to accept more risk.
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New 52-week highs (as of 9/14/11): None.
In today's mailbag... One reader shares his current favorite strategy. Another worries about who may be reading our work. Send your feedback to feedback@stansberryresearch.com.
"What can I say. I actually used on of your 'suggestions' of a covered call on SLV and it appears to be working well. I may buy it back early if SLV will drop a bit more and immediately sell another call at a different strike and expiration increasing my net credit. That was a good call and a well-designed play.
"However, that is probably one of the few equity trades that I will make. Formerly, I was pretty well restricted to equities and then included options more recently. However, since I have discovered Forex, I am on a new hunt and profitable one at that. I appreciate your comments that deal with country conditions and the value of currency. Though it is not like I have no other sources, however it never hurts to get another view. Shucks, I might even trade some more equities if you run at me another of those cute little recurring credit plays with little fear of a bottom. I like the SLV play because I do not mind owning the ETF on its own merits.
"Thanks for all you do and keep up the good work." – Paid-up subscriber Gary Odom
"I know you have big shoulders, which is good because you'll need them. The feds and their mouthpieces are out in force telling us to go spend, spend, spend because the fear of spending is what is holding us back economically. So when the proverbial substance hits the whirring blades, you and 'prophets of doom' like you will be blamed for stoking the fires that will bring about the 'End of America.' Being right has led many before you to their dooms." – Paid-up subscriber Charles Johnson
Goldsmith comment: At least we'll own gold.
Regards,
Sean Goldsmith
Baltimore, Maryland
September 15, 2011
Europe 'convinced' Greece will stay in the euro... Europe can't get dollars... World's central banks gather for bailout... Risk coming back to the market... Bad U.S. data... Will we be blamed?...