Midas Letter's James West on the Global Debt Crisis: Here Comes the Hyper-inflationary Bailout Endgame
(Thomson Reuters ONE) -
By James West
(New York - June 27, 2012) In 2009, I wrote that the stimulus, tarp, and zero
interest rates were going to result in a rally in the stock market, but that the
fundamental causes of the 2008 financial crisis, of which the housing bubble
collapse was only one outcome, were still present, and that the financial
stimulus, which is effectively a tax on future generations, would compound those
symptoms.
As our markets slowly melt down again, and we head back towards the 2008 lows in
market values, there is no consolation in being correct. Portfolio values
continue to degrade, and disinvestment en masse is incrementally moving the
world economy back into the state paralysis it entered in September 2008. The
TSX Venture market - in my opinion, the purest indication of risk sentiment
there is on the planet - is now within 500 points of its 2008 record collapse,
and the only question is: "How fast will we blow through that record?"
The fuse that will ignite the hyperinflation of G20 currencies is smouldering,
still damped by the suffocating effect of mass disinformation replicated and
broadcast from the centrally owned mainstream financial media. But ignition is
approaching, and that is the event that will catalyze the coordinated collapse
of all currencies currently labouring under the duress of excess.
Some people think that the idea of the mainstream financial media being a
mouthpiece for illegal activities by government and banking is ridiculous. Harry
Markopolous, the gentleman who tirelessly pursued the truth behind Bernard
Madoff, knows very well how willfully ignorant we can choose to remain in the
face of overwhelming evidence. I'm not going to try to change any minds in that
regard here. The thing about willful ignorance is its resolve hardens in direct
proportion to the evidence with which it is confronted.
As predicted, Greece has led to Spain just as certainly as Spain will lead to
Italy, and the half-baked bailouts that are insufficient because the sums they
seek to alleviate are themselves wishful thinking on the parts of government.
George Soros on June 24 called for the creation of a European-backed bond fund
that would stand as lender of last resort against any and all union debt crises.
He suggested that the yield would be 1% percent because the entire region stood
behind them.
Billionaire investor George Soros called on Europe to start a fund to buy
Italian and Spanish bonds, warning that a failure by leaders meeting this week
to produce drastic measures could spell the demise of the currency.
Policy makers should create a European Fiscal Authority to purchase sovereign
debt in return for Italy and Spain implementing achievable budget cuts, Soros
said in an interview in London yesterday. Funding for the purchases would come
from the sale of European Treasuries, which would have low yields because they
would be backed by each euro member, he said. (Bloomberg Businessweek, June
24, 2012)
This would essentially be the equivalent of the Fed buying its own Treasuries,
which it does as a self-awarded license to print money ad infinitum. That's why
the U.S., despite its unsustainable debt and anemic economy, can still hold
yields well below 2%. All the banks they bailed out are obliged to hold
treasuries as Tier 1 capital to some degree, while the sovereign buyers are
forced to participate in the ruse just to keep the value of their sovereign
reserves buoyant.
With the United States approaching another debt ceiling in the last quarter of
this year, and with Spain and Italy pointing the way firmly to France, Germany,
the U.K and the United States, its time to stop pussyfooting around and make a
big statement. The only options at this point are either 1) A massive global
stimulus package and bailout fund that will unequivocally mitigate any sovereign
debt crisis (even the U.S.), or 2) An orderly "restructuring" of the entire
global financial system.
Since the immediate past demonstrates a predilection towards the easiest path
regardless of long term negatives, mightn't one of these summits conclude with a
$10 trillion IMF-BIS administered Global Credit Facility that will put the
markets back into the gleeful end of their natural bi-polarism? That way, we
meaningfully defer the burden of repayment until a distant future date, instead
the perpetual near-term date. Then at least, all that fresh capital can
stimulate a market rally that will broadcast the perception that everything is
okay again.for a while.
There is a high potential for congress and/or the president elect (assuming its
Romney) to cancel the automatic spending cuts that were the solution to last
year's debt ceiling date, as a measure to soften the blow and likelihood of
default after the election in November. But we have observed that the debate on
whether or not to raise any such limit is really just political theater, and
when it comes right down to it, there is never any doubt that it will be raised.
Its this pattern, both in the U.S. and in Europe, that needs to be decisively
ended, to bring a measure of confidence back to markets.
If Obama prevails, he can't really cancel the automatic cuts without appearing a
waffler. But in the current climate, nothing is impossible. We permanently
entered the fairy tale realm with the issuance of trillions in new capital by
global central banks to perpetuate that feel-good delusion.
The fact that the only option is to fabricate money in one way shape or form is
fundamentally positive for gold, but unfortunately, due to the high degree of
government-sponsored manipulation in precious metals markets, a rising gold
price cannot be expected until the apparatus that supports such market
interference is somehow defeated.
Let's be clear: the mainstream financial media has failed to accurately portray
the level of desperation that characterizes each country's successive bailout
requirement, whether they are Euro zone countries or not. Starting with the
United States who tops the list of unsustainably indebted countries, and
including Iceland, Ireland, Portugal, Greece, Spain, Italy, France, and through
the process of financial osmosis, Germany - all these nations turn out to have
been in far more desperate circumstances than have been reported in mainstream
financial media. As a result, we can deduce that even now, the level of
reporting should be discounted.
The result is value destruction as disinvestment, deleveraging, and flight to
cash, since all of the real asset markets are so thoroughly compromised. There
is no longer a sense that the markets operate in anything remotely close to
freely, and their regulation is so tremendously partisan that unless you're in
with the Too Big To Fail institutional or sovereign club, you can't possibly use
technical or fundamental analytics to invest safely or successfully.
The very coincidental confluence of the Mayan end-of-days misinterpretation that
according to some versions will see the world come to an end on December
12, 2012 and the next moment when the United States will once again confront a
debt ceiling is eerie. The world is coming to some kind of inflection point, to
be sure, but it is unlikely that an aligning of celestial bodies is going to be
our undoing.
More likely, the synchronized collapse of our financial system will catalyze a
new era. What exactly that entails is unknown. Its not going to be dull though.
James West is the founder of Midas Letter Financial Group Ltd., a financial
publisher and institutional investment advisory consultancy, as well as the host
of Midas Letter Money, a Reuters Insider platform-delivered HD show that
features guests from the world of Canadian public companies and resource
exploration firms, as well as the companies who finance them. Write to him at
midasletter(at) midasletter.com
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Source: Midas Letter Portfolio Advisors AG via Thomson Reuters ONE
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