Home > Why New Danger Of A Systemic Collapse Is Far Greater Today Than At Almost Any Time (TZA, FAZ, FAS, TNA)

Why New Danger Of A Systemic Collapse Is Far Greater Today Than At Almost Any Time (TZA, FAZ, FAS, TNA)

December 14th, 2011

Martin Weiss: Some stock investors never seem to learn. They hope and pray for a new government rescue from Washington or Brussels. They wait with bated breath for each official sign of money printing, interest-rate cuts, or financial bailouts.

Then, as soon as something is finally announced, they breathe a sigh of relief, applaud with enthusiasm, even buy a stock or two.

But it’s a fool’s game.  Because within a few months — or even just a few days — the government rescue crumbles, investors run for cover, and, ironically, they begin a whole new cycle of hoping and praying for the NEXT big rescue.

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Just this year alone, European authorities have held 19 high-level emergency meetings … proposed dozens of rescue packages … and delivered an endless stream of promises.

Since the crisis began, we’ve seen four PIIGS bailouts (Greece twice, Ireland and Portugal) … the creation of two European bailout funds (ESFS and ESM) … plus countless central bank interventions to buy sinking PIIGS bonds.

What have they gained from all this? Nothing! In fact …

The Danger of Systemic Collapse Is Far Greater Today Than at Almost Any Time Since the Debt Crisis Began

The European Union is the biggest economy in the world — close to $15 trillion in GDP. When it sinks, so does the U.S. and much of the world.

European banks (NYSEARCA:EUFN) are roughly THREE times larger than U.S. banks (NYSEARCA:XLF). When they’re forced to cut their lending drastically,  global capital shortages hit hard.

Most frightening of all, the U.S. has committed most of the same mistakes as Europe — the same kind of massive debts, deficits, and failed bailouts.

And now the European Union is crumbling, threatening a systemic collapse far larger than the near  meltdown witnessed in the wake of the Lehman Brothers collapse in 2008.

My Debt  Danger Index

How do I know a dangerous new meltdown is so likely?

Because that’s what the objective data proves. In fact, to measure and track this danger as accurately  as possible, I’ve created a new barometer — my Debt Danger Index for Europe.

This index is based on  the total cost of insuring against sovereign debt defaults in each of five key  countries — Belgium, France, Germany, Italy, and Spain.

So it directly reflects the danger of European debt disasters, regardless of the sentiment in the stock market.

Reason: Unlike stock  market investors, sellers of these specialized insurance contracts see through  the hype and hoopla of government bailouts and rescues.

If the danger of debt default is rising, they charge a higher premium for the insurance and my index goes up.  If the danger of default is subsiding, they charge a lower premium and the index goes down.

Now, just look at how my  Debt Danger Index has surged:

Four years ago, before the U.S. housing bust and the Greek debt crisis, the sovereign debts of large European countries were considered beyond reproach.

Default was unthinkable.

And any talk of wholesale collapse was considered science fiction.

So the cost of insuring against default was a pittance:

To insure  a $50-million portfolio — allocated equally among sovereign bonds of Belgium,  France, Germany, Italy, and Spain — the total cost was a meager $28,649 per  year.

Care to venture a guess as  to how much it costs now?

The cost  of insuring the same $50-million portfolio today is a whopping $2,258,200 per year, or 78.8 times more!

In other words, based on the market for these insurance contracts, the danger of a wholesale European debt disaster — with the potential to melt down the global banking system — is  now nearly 79 times greater today than it was four years ago.

Massive Policy Failure

What about all the  trillions of dollars and euros committed to money printing, bailouts, and  guarantees?

What did they do to stem the crisis?

Nothing, absolutely nothing!

Quite the contrary, even the most massive and dramatic government interventions only made the crisis  worse.

What proof?

Then take a look at my timeline in the chart below. It’s the same Debt Danger Index I showed you in the previous chart, but this time zeroing in on just the last two years:

Here’s a timeline of the four most important government actions:

April 2010 — the first Greek bailout. What did it do? Nothing! My Debt Danger Index was rising at a steady pace before the bailout announcement  … and it continued to do so after the announcement.

May 2010 — the $1 trillion European bailout fund (EFSF). Now, THIS was supposed  to be the be-all, end-all Mother of All Bailouts. Instead, it was the cue for a  whole new wave of the crisis … and my Debt Danger Index promptly resumed its steep rise.

July 2011 — the second Greek bailout. Finally a solution? Of course not! Instead of reducing the Debt Danger Index, it merely helped drive it sharply higher.

This past Friday, December 9, 2011 — Europe’s “new fiscal pact.” The grand bargain that markets were praying for? Far from it!

The European Central Bank will NOT provide the money printing that investors were hoping for.

England will NOT sign on to the deal.

And even most of the countries that DO  join the pact — including big movers and shakers like France and Germany — are  merely making the same old promises that they’ve already broken repeatedly in  the past.

Bottom line: The European sovereign debt crisis is barely beginning. It will strike our shores directly and massively in 2012. And you must do everything possible to prepare.

Related Tickers: iShares MSCI Europe Financials Index (NASDAQ:EUFN), Direxion Daily Small Cap Bear 3X Shares ETF (NYSEARCA:TZA), Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA),  iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ),  Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS).

Good luck and God bless!

Written By Martin D. Weiss From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.



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Facebook Comments


  1. Shasoc
    February 28th, 2012 at 08:56 | #1

    Very good data. It shows the real market story. Currently its like both EU & US are sliding down deeper into recession with each trying harder than other to slow down the slide. I think EU will survive this crises and the focus will soon shift back to dollar and US economy.

  2. The_Extremist
    December 26th, 2011 at 10:37 | #2

    Extremist Forecasts and fear mongering are almost always wrong. If at all, the US is going to benefit from all of this Euro instability. Flight of capital from the Euro area to the US, might be what saves the day for the US of A. So buy American Stocks and Bonds would be my bet.

    To answer Syrin’s question – Mr.Weiss wrote this article so that he can trade some of his advice for your valuable dollars. Give me your valuable money for my shitty advice, is always the motto of extremists and fear mongers.

  3. December 21st, 2011 at 14:47 | #3

    These so called news letter writers say one thing publicly and then behind our backs do the exact OPPOSITE thing privately. I don’t trust this free advise nonsense…there are no free lunches.

    I never act on any of these so called tips/quick buck trade ideas…it is better to buy Index mutual funds with low expense ratio for the long term, trade as little as possible, the lesser the better.

  4. Syrin
    December 15th, 2011 at 13:41 | #4

    “The European sovereign debt crisis is barely beginning. It will strike our shores directly and massively in 2012. And you must do everything possible to prepare.”

    Agreed. I arrived at that conclusion two years ago. I see the same prognostication from other bright economic minds. However, I see very little info regarding what one must do to prepare. If you could elaborate more on that, I would be very grateful.

    What I have done to prepare is buy a great deal of physical gold and silver, stockpiled food, water and ammo. Further suggestions? Some suggest buying farmland.

    What do you think the collapse looks like? Mad max world as in “The Road Warrior”? Argentina from a decade or so ago? Zimbabwe? Fourth Reich created here in the US?


  5. Fab
    December 14th, 2011 at 22:15 | #5

    Based on this report, which I find to be very accurate, what are your theories on the performance of the VIX these days? A supposed measure of fear in the market.

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