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Weekend Edition

Porter Stansberry's predictions are coming true
Saturday, September 17, 2011

Earlier this week, French President Nicolas Sarkozy and Germany Chancellor Angela Merkel said they're "convinced" Greece will stay in the euro. They issued a statement following a phone conversation with Greek Prime Minister George Papandreou, who agreed to meet the deficit-reduction targets demanded as a condition of a bailout. The euro rose after the news, then retreated. While the French and German leaders are "convinced" Greece will honor the austerity measures, the market, it seems, is not...
 
For a wonderful explanation of why any austerity in Greece will be difficult, you should read an article Michael Lewis wrote last year for Vanity Fair. In short, he says the country is a bastion of socialism... And other governments should take notes from Greece's leaders when it comes to corruption.
 
It's no surprise a verbal reassurance wasn't enough to prop up the euro. The implementation of Greek austerity is the difficult part. On Wednesday night, riots broke out in Rome over Italy's 54 billion-euro austerity package... We'll see what happens in Greece.
 
The Greek disaster is causing liquidity issues for European banks. Nobody wants to send U.S. dollars abroad (as we predicted)...
 
Worst of all, much of the funding for Europe's banks comes from U.S. money-market funds and the interbank market. Only about 54% of their capital comes from their customers. A large amount of their capital – 33% – comes from sources that would transmit the crisis to America. The wholesale credit market in Europe comes from U.S. money-market funds. Europe's interbank market touches major U.S. money center banks.
 
How will American creditors respond to the crisis? By the end of 2012, Europe's banks will have to refinance more than $8 trillion in wholesale funding, mostly from U.S.-based money market funds.
 
What if the crisis in Greece spills over into European banks? Will these lenders be willing to lend into a crisis, where there's so little equity remaining in the books and so little political confidence in the European Central Bank? My bet is no. – Porter Stansberry, September 2011, Stansberry's Investment Advisory
 
We believed all this would lead to global central banks (in particular, the Federal Reserve) working together to bail out Europe...
 
The next major step in this crisis is for the Fed to announce, in partnership with other major central banks, a huge campaign to buy European sovereign debt and bank debt. If UniCredit fails, Italy will fail. If Italy fails, the euro will collapse. If the euro collapses, the entire Western financial system will fall – GE, for example, would be left insolvent, along with dozens of other major international financial companies.
 
The world's central bankers and governments can't allow that to happen in an uncontrolled way. So they will print, print, print... – Porter Stansberry, August 2011, Stansberry's Investment Advisory
 
Markets were worried about U.S. dollar funding problems for eurozone banks. European banks borrow dollars from the swap markets. The premium they pay is near its highest level in nearly three years. On Thursday, the European Central Bank – in conjunction with the Federal Reserve and other global central banks – took preventative measures. From the official announcement...
 
The Governing Council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year. These operations will be conducted in addition to the ongoing weekly seven-day operations announced on 10 May 2010.  
 
The measures will take the form of repurchase operations... The ECB will borrow U.S. dollars from the Federal Reserve and buy longer-term debt from troubled banks. Then, the banks will use the cash to meet short-term obligations. As noted in the first Stansberry's Investment Advisory excerpt above, European banks must refinance more than $8 trillion in wholesale funding by the end of next year. Banks soared on the news. National benchmark indexes climbed in all 18 Western European markets, except Greece...
 
As we've been predicting since the first signs of a European banking crisis, the ECB will "print, print, print." We're not the only ones who think so. This week on CNBC, hedge-fund manager and short-selling whiz Jim Chanos said, the "ECB will pull out all the stops." Chanos also agrees that loss estimates are too optimistic, saying "recoveries [for euro banks] are still assumed to be way too high."
 
Markets also expect China to buy loads of European bonds, as Europe is China's largest trading partner. But on Thursday, Chinese Premier Wen Jiabao made it clear his country will not blindly funnel cash to troubled economies...
 
"Countries must first put their own houses in order," Wen said this week at the World Economic Forum in the Chinese city of Dalian. "Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe."
 
China will eventually backstop Europe (and is likely doing so right now despite its stern warning). But according to a European Union document dated September 13 that was leaked to the news service Reuters, fear of "further spread" of the sovereign crisis is too late. The document, which European Union officials wrote for a September 16-17 meeting, says, "While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic."
 
Again, this negative news is no surprise to you, as we've been warning of a systemic crisis from Day 1. In his latest issue, Porter again sums up our views of the euro crisis...
 
The world's largest economic area – the eurozone – is in the midst of a serious sovereign debt and banking crisis. I believe these problems will, eventually, be tackled by the equivalent of a massive devaluation. The size of the euro float will expand dramatically in support of a huge euro-bond issue to restructure Europe's sovereign debts and prevent a full scale European banking panic. This, too, is massively inflationary... And I can't imagine how it's avoided. – Porter Stansberry, September 2011, Stansberry's Investment Advisory
 
For Porter's latest update on the European crisis – and how he recommends protecting your portfolio from the downfall – read his latest issue of Stansberry's Investment Advisory. You can access it here...
 
Regards,
 
S&A Research




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