Our calls for crisis are answered... Treasury yields turn negative... Europe banks to 'extend and pretend'... Spain's hidden real estate bomb... China's first audit... Wall Street is bullish... 'The best 10 minutes of my day'...
In the June 17 Digest, we predicted "a return to crisis conditions." In that issue, Porter noted three reasons to be wary – the tightening credit markets, the crisis in Europe, and a slowdown in China.
Well… we were right. While the market hasn't crashed yet, crisis conditions are here. Browsing today's economic headlines, you have your choice of crisis scenarios...
First and most shocking, one-month Treasury bills traded negative today for the first time in a year and a half. The one-month rate on the bill hit negative 0.0051%, down from the most recent high of 0.1562% in January 2010. When people talk about "holding cash," they're referring to one-month T-bills. Today, people are paying the government to hold cash...
Last week, ratings agency Standard & Poor's released a report saying a U.S. downgrade would cause $100 billion in losses for U.S. debt holders. "What we're really trying to do is give people in the marketplace a prism... to what the effect [is] of something they've never really bent their minds to," said Michael Thompson, managing director of S&P's valuation and risk strategies (a separate division from its credit-rating business). "People never really went down this analysis because they just thought it was an impossibility. That's starting to erode a little bit."
While the market is just now waking up to the possibility of a U.S. default, longtime S&A readers know we've been warning of this scenario for years… most notably, in our video called The End of America...
The S&P report also warned what would happen to the U.S.'s ability to fund its debt if it had to pay real interest rates... "You think the deficit's bad now? Wait until you actually have to pay real interest on your debt," Thompson said in an interview with the politics-focused newspaper The Hill. Digest readers know our opinion of the rating agencies... They're lagging indicators.
Turning to Europe... The market is focused on Greece. The Greek debt crisis will play out one of two ways. First, Greece could reject the proposed austerity cuts and default on its debt. This would destroy the European Union and the euro.
Or… under the more likely scenario, major holders of Greek debt (the European banks) will "extend and pretend" – or roll over their Greek debt. Already, French banks "voluntarily" chose to roll over about $30 billion of Greek debt. We can't say when Europe will crumble under that scenario. But we do know "extending and pretending" debts doesn't change any of the fundamental issues.
Staying in Europe... A Boston Consulting Group report (covered by Bloomberg via the Spanish newspaper El Confidencial) says Spanish banks have 50 billion euros ($70.7 billion) in unrecognized, problematic real estate assets. The study estimates Spanish banks need an extra 20 billion to 30 billion euros to plug the hole and that nation's bank rescue fund, the FROB, could end up controlling 20% of the banking industry.
Let's turn to China… In the June 20 Digest, we wrote…
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We've long suspected at least some of China's supposed economic might would be revealed as nothing more than a new credit bubble. And now, we're more certain than ever that's the case. Furthermore, we're more and more convinced the next big blow to the world economy will be the growing recognition that China's banks are thoroughly corrupt. Given the huge expansion of the banks' asset base since the fall of 2008, that's going to be a big problem. – Porter Stansberry, June 20, 2011, S&A Digest |
China makes up 9.4% of the world's economy. But it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of the world's coal. It must slow down.
The country recently performed its first audit of local government debt. The audit shows $1.7 trillion of debt at the local level at the end of last year. It also warns of repayment risks and an over-reliance on land sales (overvalued land) to bridge the gap. The audit showed 80% of the debt was bank loans and 70% will mature in the next five years. "Some local government financing platforms' management is irregular, and their profitability and ability to pay their debt is quite weak," Liu Jiayi, the country's auditor-general said in a speech published today.
Considering the major Chinese banks are arms of the government, they should have no problem extending loans to the local government – loans the central government likely ordered in the first place. Oh… and this audit was ordered by Chinese Premier Wen Jiabao, so you know it's legitimate.
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New 52-week highs (as of 6/23/11): None.
Surprisingly positive feedback in today's mailbag considering the bad news we've been delivering lately. Send us your thoughts here... feedback@stansberryresearch.com.
"I am amazed at value-added here [the June 23, 2011 S&A Digest] for the price of a couple of good, but inexpensive newsletters. This issue was especially instructive, easily worth the tuition." – Paid-up subscriber Bill Gray
"The best 10 minutes of my day are when I talk to my wife on the phone in the morning and before bedtime. The next best 10 minutes of my day are reading your e-mails.
"In June 2004, my wife inherited $200,000 when her mom passed away. After researching for 6 months on what to do with that money, we bought into a franchise. By June 2009, just five years later, we were $500,000 in debt, owing family, back taxes, student loan companies and more than $100,000 to credit card companies. We were all but bankrupt. No sob story, no pointing fingers. It was just 5 very difficult years.
"So we sold the franchise and I did the one thing I swore I would never do. I took a job that required me to travel extensively and spend 3 weeks every month away from my wife. The pay is good enough for us to have paid back our family, most of what we owe to the IRS, multiple other creditors and we should have the credit cards paid off in the next few months. My wife and I are good, hard working people both with master's degrees. We don't want or expect a bailout. We incurred our debt and we will pay it off. We have stopped everything that is not required spending and are paying off debt as quickly as possible.
"I subscribed to your newsletter not because I have the money to invest nor because I have any skills in investing. I don't. I have never owned an investment portfolio. I never was exposed to the idea of investing until my adulthood. It was 'rich people' did. (I grew up in a loving yet poor family. When I was in 5th grade we were homeless.) The reason I subscribed is because I want to change my consciousness about money, investing and creating wealth. Hopefully, I will soon have money to invest and due to my subscription to your services, I will have the knowledge and skills to do it effectively. The 10 minutes each I spend reading your emails are changing my life. I look forward to doing things with the information soon. Thank you for all you do." – Paid-up subscriber Jim Cristopherson
"I am a new subscriber, and have been reading with much interest your commentaries and those of several of the other newsletter writers linked on your website and newsletters.
"It is fascinating to me how many intelligent and educated financial professionals are all saying the same dire things about the future of the dollar and euro, and therefore the world's financial system. Yet, the mainstream (or 'lamestream,' per Sarah Palin) media has very little coverage of these issues. If they report on them at all, it is without analysis and projections of future outcomes. I am stunned.
"As I think about it, I can only come to two conclusions: one, your conjectures are wrong, or two, the media is unable or unwilling to go into detail on the truly disastrous course of current and future events. After carefully examining the charts and figures and integrated thought processes of all the newsletter writers, I conclude that you are NOT all wrong, and that the media is failing to put these things together in a way that can help protect the common people. The current and future course of events has been clear to some for years, through several different political administrations, yet the media has failed to put it out there for everyone to evaluate.
"I am taking immediate action to protect my family and our physical and financial futures, and would encourage all your readers who are on the fence to do the same thing – we can take action now to provide 'insurance' by restructuring our savings and investments, and by storing items needed for physical well-being in case of a collapse of the financial and social worlds (long term storage of food and vital personal medications, investments in hard currencies, steps toward better personal and physical security, etc.). I am not sure when the collapse will happen, but I am pretty sure it will happen in the near term, ten years or less. I don't see any politicians out there who possess the courage ad charisma to make the hard choices that must be made, or the Congressional backing to carry them through.
"By the way, I would like to thank subscriber Todd Selle for his comments. His are the most cogent, compassionate, well-thought-out views I have seen on any newsletter concerning the issues facing our country today. I found myself agreeing out loud with each sentence he wrote. Well done, Todd." – Paid-up subscriber Buck Lansford
Regards,
Sean Goldsmith
Baltimore, Maryland
June 27, 2011