Yesterday, we discussed the liabilities on the balance sheet of the European Central Bank (ECB) – $3.2 trillion and growing. Today, the number got larger… The ECB loaned a record 489 billion euros ($638 billion) to 523 euro-area banks for three years (the longest maturity ever offered by the central bank).
So the ECB is lending a record amount of money at a record-long maturity to 523 European banks. The region is on the brink of collapse.
Goldman Sachs estimates the latest bailout amounts to nearly 63% of all European bank debt maturing in 2012. Consider the larger issue. This from Porter's August issue of Stansberry's Investment Advisory…
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In Europe, the 90 largest banks must finance 5.4 trillion euro in debt over the next 24 months – 45% of GDP. That's not counting any of the European sovereign debt that must be refinanced over the next two years, which I estimate will add another $1.5 trillion-$2 trillion euros to the credit required. |
The ECB calls the latest liquidity efforts a "Long Term Refinancing Operation." But it's quantitative easing, plain and simple. We bet it's not enough… We'll see another, larger bailout before the end of next year. Remember… we've already seen the ECB buy hundreds of billions of dollars in sovereign debt and the Federal Reserve open the dollar swap lines with the ECB. This is yet another doomed effort.
Co-chief investment officer at PIMCO Bill Gross – and our favorite billionaire bond investor who uses social networking website Twitter – was actively commenting on Europe's refinancing efforts. He "tweeted": "What does #LTRO stand for? 1. A shell game; 2. Cash for trash; 3. Three-card 'monti'; or 4. All of the above."
European leaders are hoping the emergency funds spur banks to lend. They won't. The U.S. government authorized the Troubled Asset Relief Program (TARP), a $700 billion bailout in October 2008. We're now closing out 2011, and U.S. banks still aren't lending. European leaders are also encouraging banks to use their cheap money to buy European sovereign debt to push down borrowing costs.
Remember… when the euro was created in 1999, the European Union encouraged all members to buy European sovereign debt. It did this by allowing banks to buy triple-A-rated debt without holding reserves. Look where that got us.
If the European Union really wanted to push down yields, why wouldn't it buy the sovereign debt itself, instead of giving the money to banks?
The market isn't convinced, either… The euro fell to a little more than $1.30. European markets are down. And the bond yields of Italy and Spain, the two countries that will fail next, are up (two-year yields rose to 4.93% and 3.3%, respectively).
Perhaps the only boondoggle more absurd than a eurozone bailout is solar energy. We've been bearish on solar since early 2008. We knew that margins in solar energy would plummet (increased Chinese competition caused this) and the government would eventually withdraw stimulus (the lifeline for the costly energy providers).
We were proven correct this year. First, Solyndra went bankrupt in August. Then last week, First Solar lowered its guidance for the second time in two months. The stock fell more than 20% in one day.
Today, energy giant BP announced it is exiting the solar business after 40 years. "The continuing global economic challenges have significantly impacted the solar industry, making it difficult to sustain long-term returns for the company," BP Solar CEO Mike Petrucci wrote in an e-mail to his staff last week.
A spokesman added, "Over the last six months, we have realized that we simply can't make any money from solar. It has become a commoditized business. You cannot be a specialist anymore."
So as the U.S. government continues funneling money to solar power, ask yourself who you believe… one of the world's largest energy companies, which condemned and exited the business, or a bunch of bureaucrats.
You may recall headlines of "Buffett buys solar" from earlier this month… MidAmerican Energy Holdings, a Berkshire Hathaway subsidiary, announced it would purchase the Topaz solar farm, which is under construction in California, from First Solar.
But understand… MidAmerican isn't making a bet on solar. It's investing in a power plant (which is becoming a rare commodity – more on this in a moment.) MidAmerican will sell the electricity from Topaz to the utility Pacific Gas and Electric under a 25-year agreement… as part of California's mandate to generate 33% of its power from renewable sources by 2020.
According to a recent Associated Press survey, 32 power plants will be shuttered if they're forced to meet new Environmental Protection Agency compliance by 2014. Most of the in-danger plants, which power more than 22 million homes, are coal-powered.
"Let's be clear… this is not Warren Buffett taking a bet on solar technology," said Michael Horwitz, a solar analyst for the wealth management firm Robert W. Baird & Co. "This is Warren Buffett investing in a power plant that is guaranteed to yield large cash flows for at least 20-25 years… The power plant just happens to be solar powered."
And why was MidAmerican able to buy the Topaz plant (one of the two largest solar projects under construction worldwide – both by First Solar)? The Topaz plant didn't qualify for U.S. Department of Energy financing (the same financing Solyndra received).
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New 52-week highs (as of 12/20/11): McDonald's (MCD), Altria Group (MO), Philip Morris International (PM).
Yesterday, the financial blog Zero Hedge hosted our "The Corruption of America" article on its website and helped spread this important message. For that, we thank the folks who run the site. We received lots of great feedback on the article, some of which we're sharing below.
If you've yet to read the article, you can do so here. Please, continue to forward this to as many folks as you can. And as always, send your feedback to feedback@stansberryresearch.com.
"I just finished your piece, The Corruption of America, through the link on Zero Hedge, and I feel compelled to reach out to you. That was the most brilliant piece of nonfiction writing I've ever read in my life (I'm 44).
"Your research and examples are outstanding, and your shock, dismay and disgust comes through quite profoundly without you going all Taibbi on the readers, haha.
"Thank you for all your hard work putting that report together. That is definitely something that every American should read, and it's cool that you took it 'off-copyright.' I will definitely forward the link.
"I'm a Ron Paul supporter, and I'm guessing that you might be, too?" – Paid-up subscriber Torch Pratt
"Growing up I had little interest in football and boxing until I was exposed to the genius of Howard Cossell: he brought what are essentially silly enterprises to full-blown, living, breathing life.
"How did he accomplish this? He took the apparently insipid and by humanizing the participants created vitality and drama and, ultimately, meaning. Yes, his genius was of such a high order he actually succeeded in making the meaningless meaningful: he put it all in context; no context, no meaning.
"Porter, you sir, are the Howard Cossell of the a different world, but one no less in need of what your predecesor did for his world. And since the blessed day I discovered your work, a heretofore dead world has been brought to life in a way I never imagined it could." – Paid-up subscriber Bill Porter
Regards,
Sean Goldsmith
New York, New York
December 21, 2011
The ECB's latest, lame effort… Gross 'tweets' again… BP exits solar after 40 years, and Buffett enters… Will justice find the Fannie and Freddie CEOs?… Great feedback on 'The Corruption of America'…