OUTSIDE THE BOX
GROWING up in California, the old-timers would talk about a condition called “earthquake weather,” the belief that you could tell if an earthquake was coming by the weather. Actually this myth has been around since the 4th century before Christ. Both Aristotle and Herodotus wrote that the weather would be hot and the air calm before an earthquake.
There is no such thing as “earthquake weather.” Statistically, there is approximately an equal distribution of earthquakes in cold weather, hot weather, rainy weather, etc.
However, probably all of us have had a “feeling” when something important was going to happen. We sometimes use the word “intuition” to describe those times that we know something, have a perception, outside of our normal rational thought process.
So I am going to go with some “financial-earthquake weather” predictions for the coming months.
The events of the last weeks regarding the European debt problem have made fairly clear how deeply serious the problems are and what the so-called solutions are going to be.
We need to start by understanding how governments, central banks and the global banking industry operate. This might be best summed up by a statement from the US Federal Reserve Board Vice Chairman Alan Blinder on the financial news program Nightly Business Report in 1994: “The last duty of a central banker is to tell the public the truth.”
Based on that statement, the financial condition of the European and US banking system is much, much worse than generally realized. And if the problem is greater than the public is being told it is, then logically, the solutions being offered are not as wonderful and effective as we are told.
That is like the doctor not telling you your disease can be fatal and then not telling you that the treatment usually does not work well. A double whammy.
In a story that is still developing at this time, one of the largest global financial brokers, MF Global, is going under. MF Global was spun off from MAN financial in 2007 and did the third largest initial public offering in New York Stock Exchange history at $30 per share. Its share price fell more than 60 percent last week on a debt rating cut to junk status to about $1. The company also reported its largest quarterly loss in history. MFG is a huge clearing broker (responsible for guaranteeing transactions) in the commodity and foreign-exchange trade. Tens of thousands of smaller brokers pass their client’s business through MFG. This is a big deal.
Why is MFG going under? The major reason is that they are overleveraged just like Lehman and Bear Sterns were in few years ago. The stock market value of MFG is about $200 million; the company owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt.
That $6.3 billion illustrates the problem. What about the solution?
The solution is that the debt holders are going to take a 50-percent loss on the bonds that they purchased in good faith. The issuing countries will borrow “new money.” Problem is, private creditors are going to want a much, much higher interest rate, and these countries cannot afford it. How bad is Greece for example?
Greece’s debt to gross domestic product is forecast at 170 next year and the “solutions” will bring it down to 120 percent by 2020. A goal of 120 percent by 2020 just guarantees further defaults. Already there is increasing hunger among the Greek population and a shortage of medicines. This is ridiculous. They cannot pay the debt. No country really could. What is needed is for the banks to lose 80-90 percent. That pretty much destroys the banking system.
Therefore, the central banks will ride to rescue by printing money and buying the debt just like in the US. Estimates are about $2 trillion for Europe. The negative effect on Western currencies is already occurring. Japanese yen hit another all-time high against the US dollar forcing the Bank of Japan to spend billions to sell yen after they announced a $725-billion stimulus plan.
Earthquakes occur suddenly without warning as seismic pressure builds up slowly over a long period of time and then goes bang in a few seconds.
Failing banks and failing nations being saved by printing more worthless money. What possibly could go wrong?
When the earthquake starts, expect a 15-percent to 20- percent move on the Philippine Stock Exchange. Expect as large as a 10-percent move in the peso.
This will not happen instantly, of course. This scenario will take several weeks to play out. However, the first rumblings will happen before the end of 2012.
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