The
Big Turning Point Has Finally Hit
Graham
Summers
30
November, 2012
I
believe we are at a major turning point for the financial system.
For
nearly four years, the entire financial system has been held together
(just barely) by extraordinary interventions on the part of the
world's Central Banks.
These
interventions have resulted in capital fleeing the markets (hence the
low trading volume), moral hazard becoming the norm and a marketplace
in which hope of more intervention has a greater impact than the
actual intervention itself.
The
problem with this, from day one, was that eventually we would reach
the point at which additional intervention no longer had any effect.
This would come about due to:
1)
Investors having grown so accustomed to Central Bank intervention
that they no longer respond to additional measures.
2)
Central Banks facing a problem so massive that it is beyond their
power to stop it.
Few
people understand just how close we came to #2 early this past
summer. Indeed, there was a brief period there, where we were
literally on the verge of systemic collapse courtesy of the Spanish
banking system imploding.
It
all started with the collapse of Spain's Bankia in May 2012. Bankia
was formed by merging seven smaller bankrupt banks. In early May 2012
Bankia had to be nationalized. This was a potential Lehman moment
that kicked off a massive bank run and resulted in the ECB putting
the entireSpanish
banking system on life support to the tune of over €300 billion
Euros (the entire equity base for every bank in Spain is only a
little over €100 billion).
At
that time, the Spanish Ibex (stock
market)
broke out of its 20-year bull market and nearly took down all of
Europe with it.
market)
broke out of its 20-year bull market and nearly took down all of
Europe with it.
The
one thing that held the system together was ECB President Mario
Draghi promising that he may provide unlimited buying (which would
give Spanish banks a chance to dump their assets in exchange for cash
to fund liquidity needs… they were in that bad
a shape). That pulled the system back from the edge and things
rallied.
The
ECB did indeed announce an unlimited bond buying program on September
6 2012. The Federal Reserve then announced an open-ended QE program a
week later on September 13 2012.
And
that's when everything changed.
Instead
of blasting off into the stratosphere, stocks fell soon after this
announcement. That was the first sign that the game has changed:
after every other
announced program in the past four years, the markets fell briefly
but then rallied hard and didn't look back.
Not
this time.
And
so we experienced the first item I listed above (investors grew
accustomed to Central Bank intervention that they no longer respond
to additional measures).
We
now are also experiencing #2 (Central Banks are facing a problem so
massive that it is beyond the power to stop it). That problem is the
fiscal cliff which Bernanke himself has admitted that the Fed cannot
contain. "I
don't think the Fed has the tools to offset (the fiscal cliff)."
This
is Ben Bernanke, arguably one of the most powerful if not the most
powerful man in the Western financial system, admitting that the Fed
doesn't have the tools to address an issue. This has never happened
before. For every single issue that has arisen going back to 2006,
Bernanke claimed he had things under control.
Not
this time.
So,
we have investors now so accustomed to Central Bank intervention that
even the promise of unending intervention doesn't appease them… at
the exact same time that an issue so great (the fiscal cliff) appears
that even the Fed has admitted it cannot manage it.
No
one is picking up on this because everyone is focusing on Black
Friday and the Santa rally which I mentioned in last issue. But
things have changed.
And they have changed in a big way.
And
no one has a clue how to deal with what's coming.
If
you're an active investor looking for investment ideas
on how to play this, I've recently unveiled a number of back-door
plays designed to produce outsized gains from Europe's next leg down.
They're available to all subscribers of my Private
Wealth Advisory newsletter.
To
find out more about Private
Wealth Advisory (a
bi-weekly investment advisory that focuses on the global economy and
outlines which investments will do best in various environments)
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