Important Economic Update

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Davies alerted King World News that his firm is seeing crash signals similar to those of 2008!

When asked about these signals, Davies responded,

We’re seeing that lending spreads are widening. Certain rates are starting to look stressed. Clearly there’s a funding issue brewing within the banking sector with what’s happening in Europe. High yield spreads are beginning to widen as the corporate sector is getting crowded out by the needs of the sovereign nations, who keep issuing unbelievable amounts of capital or pseudo capital.

Ben Davies continues:

They need to keep rolling that over. Just take Italy alone who’s got nearly $350 billion to do next year, that’s just one country in a 1.9 trillion debt market. Over the next four years they will have to recycle 60% of their debt and this is the problem here. So these crash signals are just showing us that there are severe stresses in the system and they are starting to get to the extremes that we saw in 2008, just before the Lehman crisis. What is potentially different this time, is the Lehman crisis, in many ways, although we were building up to it, no one thought that they would actually let a bank go under at that stage because JP Morgan effectively had to buy out Bear Stearns. So I think the difference now is that we all understand that Greece is effectively defaulting, whether it’s orderly or disorderly is another matter and that the contagion is happening. We can see it. And policymakers are really at a loss for what to do. Take the Germans, do they really want to go into a fiscal union and pay for profligacy of the periphery? This is the ultimate question. Although I see these crash signals starting to go off, I cannot again get too bearish on risk assets because I really feel, at this point, that the ECB is going to acquiesce….
I think they are going to go into full monetization. I mean for all intents and purposes they have expanded their balance sheet over the last few years. They may not be doing tacit purchases, but as far as I’m concerned they have been doing stealth QE for a long time. But I think they are going to be overt this time and I think they are going to say, just like the Fed, ‘Look, we’ve got real deflationary pressures.’ A bit like the RBA cut rates, citing deflationary pressures. Now I think that means they will come and buy bonds across the curve in the secondary market. I’m talking here about Europe coming in and starting their official program of quantitative and potentially qualitative easing. Should they (the ECB) not do anything, the Fed will have to step in. I think they would want to stabilize the threat to the banking system over there in the US. I think there will be a form of QE coming in the US. So they are going to have to introduce some financial repression tactics, which just means they will do some money printing. Now if that happens I cannot be short risk assets, I cannot be short silver and I cannot be short gold.

Davies also noted,

There is no doubt that we are hitting monetary and fiscal constraints. The balance sheet of the Fed is 50 times levered relative to 2007 when it was 25 times levered. That means that effectively 2% down on that portfolio and you wipe out all of the equity. Effectively, without printing more money, they (the Fed) would be insolvent.
The KWN interview with Ben Davies is available to listen to by CLICKING HERE. If you have time while you are at the KWN website, be sure to also listen to Eric King’s interview of Jim Rickards from last Friday. FutureMoneyTrends.com staff is almost finished with his new book Currency Wars, Mr. Rickards is one of the most credible forecasters in the world today. In fact, when the Defense Department needed someone to help them with financial war games, they chose him to lead it.

The Great Super Congress Deception

Last week, Defense Secretary Leon Panetta sent a letter to lawmakers describing the potential cuts “devastating,” saying the impact would be substantial and seriously damage our defense readiness.

And so the circus begins, this week the “all so important” deadline of the super congress to come up with proposed cuts and tax increases in order to reduce deficit spending. This entire debate is a joke, the White House and Congress have shown little will to actually cut into spending or reduce the actual budget. Yet here we are facing another downgrade and circus in D.C. that will effect everyone in the world.

When it comes to the B.S. from the defense department, yesterday morning on CNN, Senator Rand Paul said,

The interesting thing is there will be no cuts in military spending. This may surprise some people, but there will be no cuts in military spending because we’re only cutting proposed increases. If we do nothing, military spending goes up 23% over 10 years. If we sequester the month, it will still go up 16%. So spending is still rising under any of these plans. In fact, if you look at both alternatives, spending is still going up. We’re only cutting proposed increases in spending.

his is called “fuzzy math” and is exactly what the entire debate is in D.C., not whether or not we should shrink government, but if we should just slow its growth. Meanwhile we will continue to borrow money from China and the Federal Reserve in order to bailout the wealthiest individuals in this country and expand our entitlement programs for everyone the banks screwed when the economy blew up in 2008.

Now when the super congress fails this week, 1.2 trillion in automatic spending cuts will start in 2013. At least that is how the debt ceiling increase was set up. Of course remember, in 2013 we will have a new congress that could possibly change the balance of power, and we could also have a new President. So in reality, even the automatic cuts aren’t really automatic, and in 2013 could totally be revised by the next congress and president who are in charge of 2013 spending.FutureMoneyTrends.com believes it is highly likely that the automatic cuts will NEVER take place and that this is simply window dressing in order to buy time before another downgrade happens. In fact, already Senator Jon Kyl of Arizonahas stated that they would look for a way “to work around” some of those automatic spending cuts.

Euro Debt Crisis

As far as this week goes, FutureMoneyTrends.com sees no real impact on the markets coming from the U.S., volume is light and may have large swings, but the reaction will not mimic what we saw in August. However, this doesn’t mean we might not see some major news, it will just come out of Europe. In Europe, we are literally looking down the barrel of a bond crisis. Right now investors are fleeing Italian bonds, literally, this is a full blown bond dump, kind of like the movie Margin Call where major hedge funds are trying to find suckers to buy bad debt, only this is the real world. Where you don’t have to find a sucker to buy Italian debt, you simply have to contact your nearest insolvent Italian bank or the ECB. Yesterday, ZeroHedge.com had a great post with the full break down, here is an excerpt:

ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks), have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%.” As said earlier – nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions.

And that’s it really right there, at some point in the very near future, like days or weeks, the ECB is going to start aggressively buying the sovereign debt of Italy and others. This is how these people think, if borrowing didn’t help, borrow more, if stimulus didn’t help, stimulate more, and if bond buying from central banks didn’t fix it, then print more money to buy more bonds. The ECB will attempt to end the bond crisis with debt monetization, however,FutureMoneyTrends.com believes that when they do, that is when the real crisis begins. Just like when the FED’s QE1 and QE2 caused price inflation, so will the ECB’s, and just like the FED, the ECB will find that the market will become dependent on this type of liquidity. This will also devalue the Euro not just through inflation, but perception as well, the ECB has always been more disciplined then the FED. The ECB’s only actual mandate is price stability, by creating trillions of Euros to purchase the worst debt, this will not only cause price instability, but rising tensions amongst the savers and nations that have been more fiscally prudent.

Remember, the Italian bond dump started after the deal with Greece. As usual, government has taken stability out of the markets, investors are now asking themselves who’s next for a voluntary 50% haircut in value of their bonds? If it can happen to Greek debt, then why notSpain, Italy, or another Euro nation. It’s now pointless owning credit default swaps, all the counter party has to do is call it a voluntary loss. Look at this chart below from the CMA, this is after the Greek deal was set up in such a way that it didn’t trigger credit default swaps due to the “voluntary” loss.

The Greek deal made the CDS market unreliable when trying to hedge European debt, which has now added even more pressure to dump bonds.

Last week Italy’s 10 year yields rose to over 7%, Spain’s traded over 6%, and the CDS spreads across Europe jumped.

To sum it up, the global financial system is dealing with epic deflationary forces and at the same time central banks are pumping out massive inflation. We guess the only question left to ask is, GOT GOLD?

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