The three main credit rating agencies have been downgrading government debt at an alarming rate, which confirms our computer models, albeit a tad late. The first half of 2016 has seen more sovereign downgrades since the crash of 2009. The first six months of last year saw Moody’s downgrade 24 governments, Standard & Poor’s 16 governments, and Fitch 14. This has included Saudi Arabia and Brazil.
The world financial crisis that is unfolding post-2015.75 is different from that which followed the 2007.15 peak in the ECM. As stated countless times, each event is a crisis in a different sector. The 2007.15 crisis was the over-leverage in real estate that the bankers created. This time, we are looking at the demise of governments. Under normal conditions, bond prices would be falling with interest rates in the public sector rising. We still see this unfolding in the peripheral markets. The markets where central banks have been buying government bonds to try to stimulate the economy has utterly failed and created a crisis beyond contemplation. We are looking at the collapse of government’s ability to issue debt as we move forward into this cycle. The only buying will be central banks at the end of the day – totally insane.
The Sovereign Debt Crisis of the 1840s was the demise of the states, thanks to Andrew Jackson shutting down the Bank of the United States. This led to a banking crisis with individual states trying to support their banks. Because the states could not create money. The states issued debt to bailout the banks, but the crisis was far too massive, and as a result, the banks took down the state governments, which had no choice but to permanently default on their debt. This time, governments are trying bail-ins and this is causing confidence to collapse. Why should people trust banks at all? Once they hoard cash; that is it. The velocity of money implodes and you end up with an economic depression.
To answer all the questions about whether this will be covered at the World Economic Conference — of course. And to answer why we did not hold one in Berlin, yes, our models were warning about significant civil unrest in Europe as a consequence of the complete fiscal mismanagement of the ECB. It appears that the negative interest rates are totally insane. This is the complete incompetence of those who think they know how to manipulate society from Larry Summers to Mario Draghi.
These people will never admit a fatal mistake. Thus, we have to stand by and what Rome burn.
Germany’s obsession with anti-inflation policies inspired by the Hyperinflation of the 1920s is so misguided that it is not threatening to collapse all of Europe. Former ECB banker Lorenzo Bini Smaghi has now even called to rescue the Italian banks with European taxpayers’ money. He is correct in warning that the insistence of Germany on the prohibition of state funding bailouts could evolve into a threat to the entire European financial system. The ECB is desperately trying to support the euro, but a strong currency only promotes deflation – not recovery.
The German hypeinflation was the result of a collapse in confidence because of the 1918 Communist revolution in Germany. Nobody would lend the government money after they invited the Russian communists to take over Germany. This had NOTHING to do with printing money. That was the result of the collapse in confidence, not the original cause.
This misguided interpretation of the German hyperinflation is causing the exact same response. People are hoarding cash, not investment, and banks are collapsing. Deutsche Bank says it need 150 billion euros. This is a full blown sovereign debt crisis that will tear Europe apart. Negative interest rates are accelerating the process.
We have reports from readers in Italy that ATM machines are being emptied. A run on banks is beginning in Italy.
We are looking at the collapse of Europe unfold much faster than anyone suspected. I have been warning that the Continental EU banks are in serious trouble. The negative interest rates have devastated Europe. While trying to stimulate borrowers who are not interested without an opportunity to make money, the ECB has wiped out savers, pensions, and sent cash into hiding contracting the European economy – not stimulating it. I have also warned that it is the EURO which is in serious trouble and that BREXIT was the only way to save Britain from being dragged down under as the Euro sinks.
The Italian banks are collapsing and the crisis is now risking bringing down the Italian government. If they do not bailout the banks, the people will be in revolution. If they bailout the banks, they can only print Euros. The is starting to illustrate what I have been warning about. The EURO is in effect like a gold standard. When crisis hit, everyone had to suspend the gold standard for World Wars I and II and then upon the fall of Bretton Woods. The currencies were tied to gold which they could not increase its supply. This is the same crisis now with the EURO. Despite the EURO is really just electronic/paper, its quantity is still fixed by the EU membership. No single member state can just increase its supply unilaterally. That would be like trying to maintain a gold standard and one nation revalued its gold to three times that of what everyone else uses. That becomes impossible. The Silver Democrats nearly caused the bankruptcy of the USA for overvaluing silver relative to the world in the 19th century.
This is why the euro CANNOT SURVIVE. You have sovereign states with their own crisis and that demand measures separate and distinct from other members. This is how the euro system will break. It is extremely urgent that you understand the crisis ahead. This is what will send capital fleeing into the dollar. True, some will buy gold. That is generally retail investors. Pension funds and institutional investors will buy US government bonds, dollars and park them at the Fed, or jump in with both feet into the US stock market.
By the time this mess comes unraveled, we will see the world completely change. We are probably looking at a major world monetary reform come as early as 2018. The speed with which this is unfolding is rather incredible
The big US banks — JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley — have large operations employing tens of thousands of people in the UK. They have historically set up their regulated businesses in Britain and then used its right to “passport” into the rest of the 28-member bloc. Lawyers are warning that after BREXIT, they would likely need a new legal home base, so they are preparing to shift at least some work to cities such as Dublin, Paris and Frankfurt.
Meanwhile, Continental banks in Europe are in trouble. The bad loans continue to pile up and the economy simply cannot recover with negative interest rates. What is ironic here is that UK banks are not in the euro so their reserves are not falling off the cliff as those banks using the euro as its base currency. The UK banks are safer than those in Continental Europe – the ultimate irony.
Since the publication of the Panama Papers, the assets of the wealthy from around the world have been flowing into United States at a sharply increased pace. Tracking capital flows has revealed that capital outflows of liquidity from the EU have distinctly accelerated.
The United States is definitively becoming the replacement for Switzerland. The IRS has even ordered cash sales of real estate in Miami and New York to be investigated to reveal the actual beneficial owners behind corporations.
This trend should increase even if BREXIT is defeated for our models are warning of a rise in civil unrest throughout Europe, especially in that event. More member states will be driven to hold referendums by the demand of their people. The Brussels Government cannot be replaced by any democratic process in Europe and that is very dangerous for it leaves only one way for people to disagree and demand change — through means of force. Even the US Civil War was fought over the denial of the right to separate, which the Supreme Court of the United States maintains there is no “right” to break from the federal government.
We are beginning to see interest rates rise globally in the free market. After BREXIT exposed the crisis in Europe, the rates began to rise in the peripherals. That will move closer toward the core. The Fed will respond only when the capital sees what is unfolding in Europe and shifts to the States. The US will be the last to see rates rise. The Fed has recognized that it needs to raise rates to prevent a pension crisis, but the first step would be to stop paying interest on excess reserves. That would conform to a rate raise.
QUESTION: Marty
It looks like Carney and Osborne are talking the pound down in order to frighten people.
Only one of their prophesies have come true – the lower value of sterling.
But it is unhelpful that they continue to be negative – even though they’ve proved to have been wrong on all the other things [cost of borrowing, asset prices, the UK deficit, cancellation of investments].
I fear [being a Brit] that too much unwarranted negativity from their position of power will take the pound down too far. Do you agree that can achieve that and that they, representing the establishment, are trying to win back some of the lost ground? I would say that is treason [not to carney as he’s a Canadian. I’d tell him to go home].
Thanks
JF, Manchester
ANSWER: The reason “value” investing and “fair value” theories fail is because markets ALWAYS over shoot and under shoot. Our next real zone for the pound is in the mid 120 level. However, ironically, European concepts of currency value is SERIOUSLY WRONG. Post-World War II, European politicians used the rise in their currencies as proof that they did a good job. That installed this concept that a strong currency was good for the economy which in fact if you are concerned about trade, you want a weak currency. The entire reason the Swiss put a peg on to the euro was because the rise in the franc was reducing exports and major companies threatened to leave.
The decline in the pound will BOOST British exports and have exactly the opposite effect helping the British economy. The EU is doomed. Over taxes, over regulated and it has no meaningful democratic process. Worse still, just as Merkel by herself tried to help her negative image because of her harsh dealings with Greece wanted to appear reasonable, she invited the refugees in without any right of other countries to object. She made a decision as Germany, but it automatically impacts all of Europe. Under the EU, no such power should be allowed if all governments must suffer because of one leader.
The pound will drop to penetrate the $1 par level probably no later than 2018. With the political chaos of French and German elections next year, that decline can take place sooner than later. But this is what will force a monetary reform as early as 2018. The rise in the dollar will reduce US exports and that will put political pressure in the States for reform not to mention a debt crisis in emerging markets.
The peak in bonds appears to be in place. We are seeing the rates rise already in the peripheral markets. This will spread from the peripherals in toward the core. So Southern European rates will rise faster than German but when capital figures out the crisis is the EU, then German rates will rise. The Federal rates in the USA will be the LAST to rise because the initial shock will be foreign capital fleeing to the States.
The remarks of British politicians are to be seen in their context of this false perception that a strong currency is good. You hear Trump criticizing China as a “currency manipulator” implying they lower the value of their currency to increase trade. As the pound declines, this will save British jobs – it’s a good thing; not bad.
QUESTION: Dear Mr Armstrong.
I attended the Berlin conference and already enrolled for Orlando as well. I have a question regarding the EURO. It is obvious that the EU cannot be sustained as is. I think, so far, I do understand the decline of the EURO. We see it happen. But Germany and France are vigorously protecting their dream. However voices are louder for Italy to abandon the EURO, with probably more countries to follow and but with Germany and France clinging on. With weaker countries leaving, isn’t Euro starting to look more and more like a Deutsch Mark?
My question is; is the anticipated decline in the EURO to below par to the dollar the only scenario, or can the EURO recover once the weaker countries are out?
Thanks you for all you do.
FB
ANSWER: The Euro cannot become the Deutsche Mark for at the end of the day there are also conflicts between Germany and France. As I have stated before, the Federal Reserve was set up with each branch maintaining its own interest rate. That enabled a single currency to survive. The pressure was then contained in the interest rates. It was FDR who seized the Federal Reserve and imposed a single national interest rate. That was OK to work through World War II, but ever since, the pressures have not been offset in interest rates but in local economies. We always called it the New York/Texas arbitrage. The Fed would raise rate to fight speculation in stocks in NYC while putting farmers into bankruptcy. The original design was proper. What FDR created was merely copied by the EU. Hence, we see that the promises of the Euro creating one interest rates for all failed. The rates have been rising in the peripheral members.
The negative interest rates are undermining pensions throughout Europe. This will start to lead to failure in 2017. There is just no possible way these people even understand what they have done. For the Euro to survive, that would still mean the subordination of some economic conditions in one member for the benefit of another.
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