Endgame Approaching In Europe and A Market Collapse Looming? (EWI, EWP, DIA, SDS, DOG)
Mike Larson: I have a sinking suspicion. A feeling I just can’t shake based on multiple fundamental, technical, and timing indicators. My belief?
The end is near.
No, I’m not talking about some Mayan calendar apocalypse kind of thing. I’m talking about a catastrophic, painful, epic meltdown-type endgame for this European sovereign debt crisis. And boy do I hope you’re ready if I’m right!
Could the markets be this close to coming totally unglued?
Why am I so worried about this kind of outcome?
Well, for the better part of two years, European fiscal and monetary policymakers have been trying everything they can to achieve the impossible. They’ve tried to hold back a tidal wave of delinquencies, defaults, recessions, banking failures, and more tied to the gargantuan build up of unpayable debts and other obligations continent-wide!
They’ve held summit after summit. They’ve cooked up plan after plan. They’ve conjured up bailout fund after bailout fund. They’ve spent hundreds of billions of euros propping up Greece, Ireland, and Portugal. Now, Spain (NYSEARCA:EWP) and even lowly Cyprus are knocking at the door, seeking tens and tens of billions of euros MORE in aid.
Meanwhile, the European Central Bank steered hundreds of billions of euros in cheap money to banks in troubled PIIGS countries. Those banks took the 1 trillion euros in LTRO cash and turned around and bought the bonds of their troubled sovereign overseers.
|The world’s oldest bank needs a government handout to plug a massive capital gap uncovered by European regulators.|
It worked for a few months. But the stopgap measure to drive down government funding costs has now failed miserably, with borrowing costs at or near fresh, pre-LTRO highs in Italy (NYSEARCA:EWI) and Spain. Worse, it left those banks even MORE exposed to massive losses.
Spanish banks now reportedly need anywhere from 62 billion euros to 100 billion euros in additional funds to shore up capital, a hole that will likely only grow. And the list of banking casualties keeps getting longer.
Just this week, Italy had to bail out the oldest bank in the world, Banca Monte dei Paschi di Siena, with 3.4 billion euros in fresh funds. The Tuscan institution was founded in 1472, 20 years before Christopher Columbus first sailed to America!
All of this wasted time, money, and effort has been designed to stave off the now clichéd “Lehman Moment.” But these guys just don’t get it. It’s like standing on the beach with your palm out, trying to stop the tide from washing away your sandcastle. It simply won’t work, because the incoming waves of financial disasters are just too powerful!
How to operate without a government-or central bank-provided safety net!
Many on Wall Street aren’t ready to admit this to themselves. But I’m not one to mince words. I’ve been saying that policymakers are out of bullets for some time, most recently a few weeks ago, when I explained why I couldn’t care less WHAT the Fed did at its June meeting.
The post-Fed reaction only confirms to me that I’m on the right track …
Ben Bernanke announced an extension of the Fed’s “Operation Twist” program after the meeting. The move will entail the Fed buying another $267 billion of longer-term Treasuries, and selling an equivalent amount of shorter-term Treasuries, in an effort to suppress long-term rates and support the economy.
What did the markets do in response?
They shrugged their shoulders and promptly rolled over! That’s because savvy investors know that “Twist 2″ will prove to be just as useless as the previous $400 billion “Twist 1″ program was (not to mention QE1 and QE2) in fueling a lasting economic turn.
Heck, even the “central bank of central banks” — the Basel, Switzerland-based Bank for International Settlements — is now coming around to my view. In a shocking annual report released a few days ago, the BIS concluded that “central banks are being cornered into prolonging monetary stimulus as governments drag their feet” but that “both conventionally and unconventionally accommodative monetary policies are palliatives and have their limits.”
Bottom line: I believe we are close to the point where the investing world wakes up to an uncomfortable reality. Namely, that we’re operating without an effective government- or central bank-provided safety net. Many governments are either flat broke or politically hamstrung from acting, while the vast majority of central bankers have no more tools in their toolboxes.
So if you thought the 2,000-point, two-week swoon in the Dow Jones Industrial Average (NYSEARCA:DIA) last summer was bad … or if you thought the May 2010 “Flash Crash” and its aftermath was ugly … get ready. We may be very close to a replay of 2008, one that would make those declines pale in comparison. Yet complacency still reigns on Wall Street that some kind of epic “save” is right around the corner.
Take protective steps now. Bag more profits. Add some cheap downside put options, or inverse ETF positions, for protection. Then look for more urgent warnings right here in these cyberpages. Because I really, truly, honestly can’t shake the feeling we’re on the verge of something potentially very, very big.
Related: ProShares Short Dow 30 ETF (NYSEARCA:DOG), ProShares UltraShort S&P500 (NYSEARCA:SDS).
Until next time,
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. 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.
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