As I have opined on many postings of late the situation in Europe is serious. Banks there are over leveraged and sovereign governments there are over leveraged. Earlier this year I posted about fearing that a certain Friday could bring us to our on Black Friday like 1929. That moment got delayed by the ECB via Germany chipping in some cash to feed the most debt ridden country Greece with some more drugs known as social spending as no one wanted to deal with withdrawal pains. The problem now is Greece is running out of money again and needs another fix. Add in that almost every bank in Europe will need to rollover just under half their debt in the next 12 months and nobody wants any part of re-lending those banks money. Almost every country in Europe is in the same situation as about 40% of government debt will need a rollover in the next year and nobody wants to re-lend these countries anything either. European sovereign debt is now considering toxic. The leaders in Europe and Obama want the ECB to take all the toxic debt from debtor countries and package it and rebrand it AAA and sell it to investors. Does this not remind you of the sub prime mortgage crisis in the US?
Germany up to now has been the relief value with their "bunds" or bonds. That is until last week when Germany could only sell about 60% of planned bond sales at their regular government bond auction. Investors obviously now consider German debt toxic as well at a certain level of interest rate. The ECB could begin printing money like our fed does, but they can only do that with the permission of Germany the banker for the continent. German Prime Minister Angela Merkel knows if she says print then she says goodbye to her position as prime minister since the German people are frankly fed up with working hard and then paying for everyone else in Europe to be lazy via the socialist state. Germany has a day of reckoning too, it is just longer off. Germany survives because of it's huge export driven economy. Funny thing is printing money would actually help those exports for a short time. Obama has also put the US taxpayer on the hook by letting it be known in Europe that any printing of Euros can be partially funded via the IMF. Congress should oppose this action, but I expect the US Senate stop any investigation of several hundred billion dollars in bailout.
Most US citizens do not understand that Barack Obama has taken what was already a mad mad policy of George Bush of using short term borrowing for government debt and made it worse. About half of all our debt is in 5 year or less maturities. The purpose is to mask the overspending and trillion dollar deficits. Wise policy is to spread out your maturities over time and certainly now since long government debt can be funded so cheaply. Imagine taking 8 trillion dollars at .50% interest rate and making it 1.90% and your costs of financing soar. That is why I tell my readers anything is possible when government in the US begins to be really squeezed. It is not inconceivable that US Treasury bonds could be cut to 75% or less of face value just to solve the cash flow problem. Oh, you can print and print money as we are now doing but sooner or later investors and the Chinese quit taking your worthless paper just like in Europe. My best guess is the US has around $7 trillion in free money flow out above what is justified. That is a recipe for hyperinflation when about half your GDP is coming from the federal reserve printing press . Germans still remember and tell horror stories there about the cartloads of money needed in the 1930's to buy a loaf of bread and that is what is keeping Merkel from saying print. Americans have begun to forget the real poverty, not today's implied poverty, of the 1930's. If you got someone in their 90's in your family go talk to them now about the Great Depression.
The politics are interesting as France and Germany face elections next year and both leaders want to keep their jobs. Merkel has a no win scenario and has Obama telling her to commit political suicide to save his job by allowing the ECB to print. Allowing the ECB to print might keep this house of cards up long enough to keep Obama in the White House past the election of 2012. Either way if this silliness makes it until November 2012 my fear is that Christmas of 2012 could be like Christmas of 1932. We either have a Recession or Depression soon on the way unless someone the ECB begins printing and that only puts off the problem for awhile. The US Congress and President are doing nothing but dancing around the same problems that Europe is facing now the great debt unraveling. We also have our share of entitlements and welfare that must be budgeted downward. My liberal friends are fools if they continue to believe anything else. We need a serious political leader to replace Obama who is way above his paygrade here despite what his enormous ego is telling him.
The US can reduce the pain by taking action to cut government spending and voters will get that choice in 2012. But either way we are going to see a serious recession when Europe collapses. China is taking notice too knowing that they are likely to see a recession as well since Europe is their largest importer, not the US as most people believe. Hidden beneath all this economic mess is the geo-political issues such as Iran that could drag the world into some kind of serious armed conflict in the next few years. The flash point could be upon us soon in Syria. I highly suggest keeping an eye on the Syrian situation. The US has moved a carrier task force from the Gulf into the Mediterranean Sea just for that purpose.
Quite honestly I have no idea what will be safe, I do have ideas what MIGHT be safe. US treasuries as likely safe, but bear in mind a haircut in value is an option especially if there is a President Obama in 2013 since he will see bond owners as rich and able to absorb the cut. He does not need Congressional approval to commence this action and if the economic trouble is great Congress will not rebuff him and your know the media will go along. Greek government bonds holders just took a 50% cut in value and are negotiating for more.
Ireland has already told bondholders there to expect something similar soon.
US state municipals are also likely safe and especially when issued by a fiscally sound state. States are sovereign entities and the federal government has no real power over them when push comes to shove. I continue to like very blue chip stocks with dividends, like MCD and XOM, where there is a cash cushion , needed product, and international presence. There also are the agency reits that are guaranteed to the US government and being backed by already depreciated real estate which should hold their value. Lastly one can look at GMNA certificates, but again they could be given a haircut as well.
We are following a familiar path in that Europe twice in the last century has plunged the world into chaos, could this be number three? Let's all remember that Sunday morning December 7 at 8 AM America was at peace, people were awaking in Hawaii from a night of merriment and the mainland was in process of attending church and having Sunday meals, you know the rest of the story. I pray I am wrong, but my mind tells me I am not.
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