Private Wealth Advisory A Phoenix Capital Research Publication December 14, 2011 Europe’sLehmanEventDeflation,particularlythedreadeddebtdeflationthatCentralBanksfear,isfastspreadingthroughoutthefinancialsystemastheEuropeanbankingsystemcollapses.Indeed,theEU,initscurrentform,ismostcertainlyinitsfinalchapterasboththepoliticalenvironmentandmarketconditionshaverenderedallproposed“solutions”tothecrisismoot.Towit,themostrecentproposalsfromEUleadersare:
1) TodraftnewbudgetaryrequirementsforEUmembers.
2) TomovethelaunchoftheEmergencyStabilityMechanism(ESM)oneyearaheadofitsoriginallaunchdatetoJuly2012.
3) TosendtheIMF200billionEurostouseasaidindealingwiththeEUCrisis
ThemediahailedtheseproposalsasaboldsteptowardssolvingthecurrentEUCrisis.Howeverpoliticalandmarketrealitiesshowalloftheseproposalstobeabsurd,ifnotimpossible.Regarding#1,theEUalreadyhadbudgetaryconstraintsviathe1991ratificationoftheMaastrichtTreaty(allmembersweretomaintainDeficittoGDPratioslowerthan3%andDebttoGDPratioslowerthan60%)whichNOONEhasfollowed(notevenGermany).Sohowdoesanewsetofbudgetaryrequirementschangeanything?Secondly,inordertoenactthesenewbudgetaryrequirements,thereneedstobeunanimousconsentfromallEUmembers.Eveniftherewasunanimousconsenthere(thereisn’tnorwilltherebe),basicmathshowsthesenewbudgetaryrequirementstobepointless:howonearthdoesanyoneexpectacountrylikeGreece,whichisstillbankruptaftertwobailoutsandquiteabitofdebtforgiveness,togetitsbudgetundercontrol(hint:itwouldhavetowipeoutataminimum50%ofALLofitsoutstandingdebt).
ShortTermTrends‐Deflationistheprimaryrisktoportfolios.‐TheEUinitscurrentformwillsoonbebrokenup.‐TheFedcannotactuntilweseesystemicriskoramajorbankcollapse.IntermediateTrends‐MorePIIGSdefaults.‐Systemicdeleveraging.‐Extremevolatility.LongTermTrends
‐Globaldebtimplosion. ‐Newalignmentof
politico‐economicpowers.
‐TradewarsandverylikelyREALwarfare
AsfortheproposaltothemovethelaunchoftheESMayearearlier...theEUhasalreadyfailedtofundONEbailoutfund(theEFSFhasn’tbeenabletoraiseeventenbillionEurosincapital).Sotheideathatlaunchingasecondbailoutfundearlierthanoriginallyintendedispointless.ThefinalandmostabsurdproposalconcernsEUnationssending200billionEurostotheIMFforuseincombatingtheEUCrisis.Settingasidethefactthatthisiscompletelyinsane(bankruptEUcountriesaregoingtogivemoneytotheIMFtobailoutotherbankruptcountries?!?!),thepoliticalenvironmentinEuropewon’tpermitthistohappen.Caseinpoint,Germany’sBundesbank(itscentralbank)whichistherealdefactomonetarybackstopfortheEUtoday,hassaiditwillsendadditionalfundstotheIMFONLYIF:
1) TheGermanparliamentagreestothemove(itwon’t)2) OtherEUmembersdothesame(whohasthefunds?!)3) Other,non‐EUmembersdothesame(howcouldthiswork?Nooneinthe
G20letalonetheEUwantedtosendmoneytotheEFSF!!!)Insimpleterms,theBundesbankiswillingtogivemoremoneytobailoutEuropeifeveryoneelseinthedevelopedworlddoesthesame.ThisisastrongsignalfromGermanythatthemoneytapisbeingclosedoffandadditionalfundsarenotforthcoming:theGermansknowtheredemandsareimpossibletomeet.WegetconfirmationofthisfromrecentdevelopmentsintheGermanlegislature:
GermanparliamentwantsmoresayoverEUdeals:reportGermanlawmakersfromAngelaMerkel'scoalitionwantmoresayinagreementsmadewithEuropeanpartners,apapertobepresentedtoMPssays,firingawarningshottothechancellorthatallmajordealstosavetheeurozonemustgopastthemfirst.Thepaper,approvedbyparliamentaryfloorleadersfromMerkel'sChristianDemocrats(CDU),theChristianSocialUnion(CSU)andFreeDemocrats(FDP),callsonthegovernmenttoinformandconsultparliamentwhentheydealwithEUissuesorinvolvetheuseofEUinstitutions.http://www.reuters.com/article/2011/12/12/us‐eurozone‐germany‐parliament‐idUSTRE7BB1RV20111212
SowhileGermanleaderAngelaMerkeltalksaboutmovingforwardtomaintaintheEuro,theGermanpoliticallandscapeisrapidlybecominglessconcernedwiththeEUandmoreconcernedwithdomesticissues.
Indeed,inthelastmonth,Germanyhas:
1) Askeditsmajorbankstoraisecapitalassoonaspossible2) IntroducedlegislationtonationalizeitsmajorbanksintheeventofCrisis3) IntroducedlegislationallowingittoleavetheEurobutstayintheEU
Thesearesmartmoves.GermanbankspostsomeofthehighestleveragerationsinEurope:higherthatItaly,higherthanIreland,evenhigherthanGreece.Infact,GermanbanksareactuallysportingleverageEQUALtothatofLehmanBrotherswhenitwentbust.
Tomakemattersworse,Germanyhasyettorecapitalizeitsbanks.Indeed,bytheGermanInstituteforEconomicResearch’sOWNadmission,Germanbanksneed147billionEuros’worthofnewcapital.Mindyou,thisisjustNEWcapitaldemands.Inadditiontothis,Germanbanksneedtorollover40%oftheirtotaloutstandingdebtwithinthenext12months.Insimpleterms,GermanyhasbegunfocusingmoreonitsownproblemsratherthanEuropeanproblems.ThisindicatestomethatMerkel’sstatementsandproposalsaremerelyverbalinterventionsandlittleelse.TheGermancentralbankhasshownitselfunwillingtocommitmorefundsunlessthewholeworldjumpsinaswell.AndGermanlawmakersaremovingtoconstrictMerkel’sauthorityregardingadditionalbailouts.
Againstthisbackdropofpoliticalintrigue,EuropeancorporationsaremovingquicklytopreparefortheendoftheEuro:
EuropeanCEOsMoveCashtoGermanyInCaseofEuroBreakup
GrupoGowex,aSpanishproviderofWi‐Fiwirelessservices,ismovingfundstoGermanybecauseitexpectsSpaintoexittheeuro.GermanmachinerymakerGEAGroupAGissettingmaximumamountsheldatanyonebank…“AcoupleofweeksagoIwouldneverhavethoughtabouthavingconversationsontheprobabilityoftheeurodisappearing,butnowthereismorespeculationonsuchascenario,”WoltersKluwerNV(WKL)CEONancyMcKinstrysaidinaNov.29interviewatthecompany’sheadquartersoutsideAmsterdam…KingfisherPlc(KGF),Europe’slargesthome‐improvementretailer,hasconsideredplansforthepossibilityofacollapseoftheeuroregionandwillfocusoncashgenerationtoaccountforthatpossibility,ChiefExecutiveOfficerIanCheshiresaid.http://www.bloomberg.com/news/2011‐12‐09/wary‐european‐ceos‐move‐cash‐to‐germany‐to‐protect‐against‐breakup‐risk.html
Therearesignsthatthesemovesaretheresultofwarningsfrompoliticalleaders.Britain’sPrimeMinister,DavidCameron,walkedoutofEUdiscussionsonFriday.WhiletheUKneverformallyadoptedtheEuroasitscurrency,thisdecisiontowalkwillhaveasignificantpsychologicalimpactforpoliticalleadersofmoreinvolvedEUcountries:itsetsaprecedentforchoosingtoopt‐outofnegotiations.CameronalsoappearstobewarningUKbanksthattheEurowillbebrokenupinthenearfuture:
PREPAREFORENDOFTHEEURO,BANKSTOLDALARMattheeconomicturmoilinEuropeintensifiedlastnightaftertheGovernmentadmittedpreparationsforthechaoticcollapseoftheeurowerebeing“steppedup”.DowningStreetisunderstoodtobeembroiledinintensive“contingencyplanning”forGreeceandpossiblyItaly,SpainandPortugalquittingtheeurozone.BritishbankshavebeenurgedbytheCity’swatchdogtobracethemselvesforthecollapseofthesinglecurrency…
FollowingtheFSAwarning,thePrimeMinister’sspokesmansaid:“WehavebeensteppingupourcontingencyplanningbutIdon’twanttogetintodetailonthat.” HesaidtheGovernment,theBankofEnglandandtheFSAwereworkingtogether“ensuringtheyhavethecapacitytotakeaction”intheeventofGreeceorothercountriesquittingtheeuro.LastweekAndrewBailey,aseniorexecutiveattheFSA,said:“Wemustnotignoretheprospectofthedisorderlydepartureofsomecountriesfromtheeurozone.”ButthedecisionofMrSantstointervenebyorderingBritain’shighstreetgiantstoincreasetheirpreparationsforaeuroexitwasseenasasignificantescalationofthecrisis.http://www.express.co.uk/posts/view/287039/Prepare‐for‐end‐of‐the‐euro‐banks‐told
Centralbanksarealsoexploringthepossibilityofprintingtheiroldpre‐Eurocurrenciesinanticipationofthisevent: BanksPrepforLifeAfterEuro:
CountriesStudyPrintingTheirOwnNotesinCaseMonetaryUnionUnravels
SomecentralbanksinEuropehavestartedweighingcontingencyplanstoprepareforthepossibilitythatcountriesleavetheeurozoneorthecurrencyunionbreaksapartentirely,accordingtopeoplefamiliarwiththematter.Thefirstsignsaresurfacingthatcentralbanksarethinkingabouthowtoresuscitatecurrenciesbasedonbanknotesthathaven'tbeenprintedsincethefirsteuroswentintocirculationinJanuary2002.http://online.wsj.com/article/SB10001424052970203413304577084483874422516.html
Connectingthedots,Ibelieve:
1) PoliticaldiscussionstoendtheEurohavealreadyoccurredatthehighestlevels(Germanyismostassuredlyinvolvedhere).
2) Politicians,whileverballypromisingtosupporttheEuroinpublic,havewarnedleadingfinancialinstitutions,corporations,andCentralBankstopreparefortheendofthecommoncurrency.
Truly,theendoftheEuroistheonlyviableoutcome.Whenpushcomestoshove,thereareonlytwowaystodealwithadebtproblem:
1) Massivemoneyprinting(alaWeimar)2) Default
GermanywillnotpermittheEUtopursueoption#1.Sooption#2isallthat’sleft.Withthatinmind,weopenedourEuropeanbankingshortsagainthismorning.Indeed,thelong‐termchartsforallofthemindicatewehaveofficiallyenteredCrisismodeandareheadingdowninabigway.
Havingbeenrejectedbykeyresistanceat$40,DeutscheBankislikelygoingto$30inthenearfuture.ActiontoTake:ShortDeutscheBank(DB)ifyouhaven’talreadydoneso.
InSantander(STD)’scase,$8wasthelineinthesand.We’renowgoingto$7then$6.ActiontoTake:ShortSantander(STD)ifyouhaven’talreadydoneso.
QuitesimilartoDeutscheBank,HSBC(HBC)hasbeenrejectedbykeyresistanceat$40andisgoingto$35then$30inthenearfuture.ActiontoTake:SHORTHSBC(HBC)ifyouhavenotalreadydoneso.
Thisisperhapstheugliestchartofthefour.Weareliterallyontheledgeofacliffhere.Andoncewetakeout$10,we’regoingto$5innotime:ActiontoTake:SHORTBarclays(BCS)ifyouhavenotalreadydoneso.WhileIbelieveEuropeisonthevergeofabankingcollapse,IWOULDNOTputalotofmoneytoworkshortingthesebanks.ThereasonisthatpoliticalleadersandcentralbanksBewilldowhatevertheycantostaveoffabankingcollapse.Sowhilewe’reultimatelyheadingdowndownDOWN,weWILLseesharpmovestotheupsideintheprocess.Anyonewhowasshortfinancialsin2008willknowwhatI’mtalkingabout.Collapsesneverhappeninastraightfashion.Soexpectavolatileridedown.Andkeepyourpositionrelativelysmall.Onafinalnote,I’vebeeninformedthatsomebrokerswillnotshortthesebanks,whileotherswill.Idonotknowthereasonforthisinconsistency,butIdoknowthatoptionsxpressisonebrokerwhoWILLshortthesestocks.AsdebtdeflationgripsEuropeandtheEUbreaksup,wewillseetheEuroplungetonewlows.Indeed,themarketsarealreadyanticipatingthis:
WhentheEurobrokedownbelow133orso,itofficiallyenteredlevelsnotseensincetheEuroCrisisof2010.Putanotherway,theEuroisnowofficiallytradinginCrisismode.AndonceitbreakstheFINALlineofsupportat130(we’rejustaboutthere),wearegoingtonewlows,beloweventhe2010lowof118.ThismovewillresultintheUSDollarexplodinghigher.
Thischartforecastsamovetothemid‐80s.WealreadyhaveexposuretothesetwocurrencieswithourPowerSharesDBUSDIndex(UUP)andUltraShortEuroETF(EUO).However,giventhenatureofwhat’shappening,I’dliketoaddabitmorejuicetoourDollarlongs,soIsuggestRydexStrengtheningDollar2xStrategy(RYSDX).RYSDX,returns2XtheDollar’sperformance.SoiftheDollarrallies5%,RYSDXrallies10%,andsoon.It’sessentiallyaplayontheDollarwithalittleextrajuice.ActiontoTake:BuytheRydexStrengtheningDollar2xStrategy(RYSDX).AstheUSDollarrallies,wewillseeweaknessinthecommoditiesspaceincludingpreciousmetals.Indeed,Goldhasrecentlybrokenitstrendline.Oncewetakeout$1600,wewillseeasharpselloff.
Indeed,theweeklychartshowsweareonthevergeofbreakingbelowthe34‐weekexponentialmovingaverage:thesamemovewesawbeforethe2008collapse:
Forthisreason,weopenedaGoldShorttodaywiththeUltraShortGoldETF(GLL).ActiontoTake:BuytheUltraShortGoldETF(GLL)ifyouhaven’talreadydoneso.WhilethesituationisrelativelyuglyforGold,it’sdownrightbrutalforSilver:
Herewe’vealreadytakenoutthe34‐weekexponentialmovingaverage.Oncewetakeout$30we’regoingto$20inshortorder.ForthisreasonweopenedaSilverShortintheformoftheUltraShortSilverETF(ZSL).ActiontoTake:BuytheUltraShortSilverETF(ZSL)ifyouhaven’talreadydoneso.Othersignsofdeflationtobeawareof…Copperisonthevergeofbreakingalargetrianglepatterntothedownside:
$3isthelineinthesandhere.Oncewetakethatlevelout,we’reheadinginto2008Crashlevels.
AgriculturalcommoditiesarealreadyinCrisismodeandheadingtowardstheir2008‐2009lows.ThisisimportantasagriculturalcommoditiesanticipatedQEliteandQE2beforeallotherassetclasses.Theyalsoanticipatedthecurrentroundofdeflation/economiccollapseasfarbackasFebruary2011.Sothefactthey’reat2008levelsshouldbeamajorwarningthatotherassetclasseswillsoonfollow.
BacktoEurope…I’vesaidbeforethatIbelievewewillseeacollapseofthebankingsysteminEurope.Bythelookofthings,theEUbankingsystemisrapidlyapproachingits“Lehmanevent.”
Eurozonebankingsystemontheedgeofcollapse
Ifanyonethinksthingsaregettingbetterthentheysimplydon'tunderstandhowseveretheproblemsare.Ithinkamajorbankcouldfailwithinweeks,"saidoneLondonbasedexecutiveatamajorglobalbank.Manybanks,includingsomeFrench,ItalianandSpanishlenders,havealreadyrunoutofmanyoftheacceptableformsofcollateralsuchasUSTreasuriesandotherliquidsecuritiesusedtofinanceshort‐termloansandhavebeenforcedtoresorttolendingouttheirgoldreservestomaintainaccesstodollarfunding.http://www.telegraph.co.uk/finance/financialcrisis/8947470/Eurozone‐banking‐system‐on‐the‐edge‐of‐collapse.html
Indeed,Germanyjustformallypassedlegislationtopermitittonationalizelargebankstoday: Commerzbankfacesbailoutbystate
TheGermangovernmenthasbegunpreparationsforapossiblestatebail‐outofCommerzbankifitfailstopresentaconvincingplanbyJanuary20tofilla€5.3bncapitalgapidentifiedbyregulators.GermanchancellorAngelaMerkel’scabinetonWednesdayagreedabilltoreinstateastate‐backedbankrescuefundnextyear,amovethatcouldpavethewayforstateaidtoCommerzbank,Germany’ssecond‐largestbankbyassets.
http://www.ft.com/intl/cms/s/0/94e6388c‐2652‐11e1‐85fb‐00144feabdc0.html#axzz1gYUYyiYA
AstheEuropeanbankingcrisisspreads,USBanks,particularlytheTBTFswhichhavethemostderivativeexposure,willbedraggeddownaswellduetotheinterconnectednessofthefinancialsystem.I’vepostedtheirchartsbelowaswellasthekeysupportlines.Oncewetaketheseout,it’stimetoshorttheTBTFs.
TheugliestchartofthebunchisBankofAmerica(BAC)whichcouldenteradeathspiralifitbreaksbelow$5pershare:manyinstitutionscannotinvestincompanieswithsharepricesunder$5,soifBACbreaksbelowthisleveltherewillbeINTENSEsellingpressureandliquidations:
Here’sCitigroup:
GoldmanSachs(GS):
AndJPMorgan(JPM):
Onafinalnote,manycommentatorsseemtobelievethatBenBernankeisliterallyonthevergeoflaunchingQE3.Idonotthinkthisiscorrect.AsI’venotedin
previousissuesofPrivateWealthAdvisorythepoliticalclimateintheUShasgrownincreasinglyagainstBernankeandhisloosemoneypolicies.Indeed,we’venowgonefromPresidentialcandidatesmakingsnideremarksaboutBernanketooutrightsuggestingthathebefired:
GingrichwantsBernankefiredandChrisDoddandBarneyFrankimprisoned
FormerHouseSpeakerNewtGingrichonTuesdaysaidheunderstoodtheangerexpressedbytheprotestorsonWallStreet‐butsaidtherealculpritswhoshouldbethrownfrompowerareinWashington."Iftheywanttoreallychangethings,thefirstpersontofireis(FederalReserveBoardChairmanBen)Bernanke,whoisadisastrouschairmanoftheFederalReserve,thesecondpersontofireis(TreasurySecretaryTimothy)Geithner,"GingrichsaidintheRepublicandebatesponsoredbyBloombergandtheWashingtonPost.
http://www.cbsnews.com/8301‐503544_162‐20118945‐503544.htmlInthisenvironment,BernankeandtheFedaregoingtobeindamagecontrolmode.We’veseenthisinBernanke’sdecisiontoopentheFeduptoQ&Asessionswiththepressaswellashimholdingtown‐hallmeetingsinwhichheactuallyaddressesthepublic.HeevenwentsofarastowritealettertoCongresswhiningthatthemedia’srecentportrayaloftheFed’sactionshavebeenunfairandinaccurate.Morerecently,weseevariousFedmouthpiecespromotingthenotionthatBernankeisanormalguyjustliketherestofus: BernankeJoinsBargainHuntersWhoRefinance
BenBernankelivesinathree‐bedroom,2,100‐square‐foot,attachedtownhouseneartheCapitol.Ithasanappraisedvalueofroughly$850,000,notfarfromthe$839,000hepaidforitin2004.Apublicrecordsearchshowsheowes$672,000onthehome,afterrefinancinghismortgagetwice.Onerefinancingwasinlate2009.TheotherwasinlateSeptember,shortlyaftertheFedannouncedanewprogram,knownas"OperationTwist,"whichaimedtodrivedownlong‐terminterestrates.Mr.Bernankeholdsa30‐yearmortgage.Hewasrequiredtosendproofofemployment,includingpaystubs,beforethebankapprovedtheloan,accordingtoapersonfamiliarwiththematter.
AfteradecadeinWashington,Mr.Bernankedoesn'tseemtohavebeensweptupbythenation'scapital.HeoccasionallyshootsbasketsintheFed'sdreary,undergroundgym.TheclosesthecametoshowingawildsidewaswhenhewasaprofessoratPrinceton:HeboughtaChryslerSebringconvertible,accordingtosomeonewhoknowshim.Onmostnightshe'shomewithhiswife,Anna,readingonhisKindleafterdinner,saypeoplewhoknowhim.Inthepast18months,hehastoldothers,hehasread200booksontheKindle.
http://online.wsj.com/article/SB10001424052970204336104577094700478530784.html
ThearticleiswrittenbyJonHilsenrath,BernankeandtheFed’sfavoritereporter/leak.Overthelastthreeyears,theFedhas“testedthewaters”regardingthepublic’sreactiontotheirintendedmonetarypoliciesbyleakingstoriestoHilsenrathinadvance.SothislatestarticleattemptingtohumanizeBernankecanbeseenasapseudo‐pressreleasefromtheFedandBernankehimself:noticehowHilsenrathemphasizesthatBernankehastakenadvantageoftheFed’spoliciestorefinancehismortgage,portrayingBernankeasamanwhopracticeswhathepreaches.Inanenvironmentsuchasthis,theFedwillNOTbeabletoenactanylargemonetaryschemeswithoutsomekindofLehmanEvent/systemiccollapsehappeningfirst.Thepoliticalenvironmentandthepublicsimplywillnotpermitit.SotheideathatQE3iscomingiscompletelymisguided.UntilBankofAmericacollapsesorsomeotheritemofhugeimport,theFed’shandsaretied.FedPresidentswillinterveneverballytotryandpropthemarketup,butwewillNOTseemoremoneyprinting/interventionwithoutsystemicriskfirstrearingitshead.Investorsshouldrealizethisandpositiontheirportfoliosaccordingly.Thisconcludesthisweek’sissueofPrivateWealthAdvisory.Torecap:
1) ThemostpressingissuetodayisdebtdeflationinEuropewhichcouldquicklyspreadthroughouttheFinancialSystem.
2) ThisisDollarpositiveandEuro/commodities/stocksnegative.3) EUleadershavenorealsolutionstotheCrisisandarejustplayingfortime.4) Europeancorporationsandbankshavealreadybeenwarnedtopreparefor
theendoftheEuro.5) EuropeisontheeveofitsLehmanevent.6) BernankeandtheFedwillnotactdecisivelyuntilweseesystemicriskora
majorbankcollapse.
We’vepositionedourportfoliotoprofitfromallofthis.I’mwatchingthemarketandpoliticalarenacloselyandwillissueupdatesasneeded.Barringanynewdevelopmentsyou’llhearfrommeintwoweeks’time.Untilthen…GoodInvesting!GrahamSummersOPENPOSITIONSInflationPortfolio(OPENBUYSNOW)Company Symbol BuyDate BuyPrice Current
PriceGain/Loss
Goldbullion N/A 3/17/10 $1,120 $1,579.00 41%Silverbullion N/A 3/17/10 $17.50 $28.98 66%CentaminMining CEE.TO 5/25/11 $2.01 $1.33 ‐34%DeflationPortfolio(OPENBUYSNOW)Company Symbol BuyDate BuyPrice Current
PriceGain/Loss
DollarETF UUP 5/23/11 $21.79 $22.62 4%RydexStrengtheningDollar2xStrategy RYSDX 12/14/11 $14.39 NEW
BUY!
UltraShortEuroEUO 9/21/11
$19.13 $20.20
6%
UltraShortChina FXP 11/2/11 $32.64 $31.89 ‐2%UltraShortMaterials SMN 11/2/11 $20.23 $20.44 1%DeutscheBank* DB 12/14/11 $35.33 $35.49 0%Santander* STD 12/14/11 $7.11 $7.11 0%HSBC* HBC 12/14/11 $37.07 $37.16 0%Barclays* BCS 12/14/11 $10.65 $10.64 0%UltraShortGold GLL 12/14/11 $19.76 $19.69 0%UltrashortSilver ZSL 12/14/11 $15.57 $15.39 ‐1%*Opened12/14/11at11:13AM
RECENTLYCLOSEDPOSITIONSCompany Symbol BuyDate BuyPrice Current
PriceGain/Loss
UltraShortEmergingMarketsETF*
EEV11/2/11 $34.78 $37.16 7%
*Soldremainingposition12/14/11at11:41AM
