by Phoenix Capital Research
I want to issue a major warning to investors: the EU Crisis is going to get worse in the coming months.
I realize that most investors and analysts believe that the EU Crisis is over. Then think that because the S&P 500 is closing in on its all-time highs that things are fine in the system.
They are wrong.
The only item that held Europe together in 2012 was the credibility of EU politicians and ECB President Mario Draghi. Please note that nothing fundamental improved for the EU’s financial system: EU GDP has since re-entered a recession and EU unemployment has a hit a new record.
Indeed, the only reason things even looked better was because various Government engaged in massive interventions. In the case of Spain, this included raiding 90% of their social security fund to buy Spanish bonds so that yields would fall.
So… when you entire financial system is held together by the credibility of the political class… corruption scandals can implode the system.
MADRID — Spain’s governing Popular Party was drawn deeper into a web of corruption scandals this past week, after the Swiss authorities informed the Spanish judiciary that the party’s former treasurer had amassed as much as 22 million euros, or $29 million, in Swiss bank accounts.
The treasurer, Luis Bárcenas, resigned from his job in 2009, after being indicted in the early stages of an investigation, which is still ongoing, into a scheme of kickbacks and illegal payments allegedly involving other conservative party politicians…
Nonetheless, the revelations have brought a fast-growing list of corruption investigations, which have unspooled across Spain, to the doorstep of the conservative government of Prime Minister Mariano Rajoy, who has so far remained silent. About 300 Spanish politicians from across the party spectrum have been indicted or charged in corruption investigations since the start of the financial crisis. Few have been sentenced so far.
Source: NY Times
The above story illustrates some key elements that all investors need to be aware of:
1) EU politicians are so corrupt they make their US counterparts look clean by comparison.
2) Having been put off for years, investigations into corruption are now reaching the point at which the rich and powerful are actually at risk of serious consequences.
Note in the above story that former Spanish Treasurer Luis Bárcenas has been under investigation since before 2009. The fact that the real smoking gun (his hidden Swiss bank account containing over $29 million) is only just coming to light should give you an idea of how corrupt the system in Europe has become (there is no way on earth it would take four years to find this information).
That this information is coming out now also tells us that things are getting so bad in Spain that heads are going to start to role. As we stated earlier, corruption only works until the consequences outweigh the benefits of being “on the take.” The above story tells us that we have finally reached that point in Spain. It’s taken five years for this to happen (the Crisis begin in 2008). But the system has finally reached the inflection point at which key players will face real consequences for their corruption.
With that in mind we can expect more and more such cases to begin to emerge in Europe. The fallout from this will be major both for the political class and for the financial markets.
Indeed, later in the same story we find the following tidbit:
On Wednesday, amid another property investigation, the president of Madrid’s regional government, Ignacio González, revealed that he and his wife purchased a penthouse last month in the holiday resort of Marbella for 770,000 euros, or more than $1 million. Mr. González, who earns 4,800 euros a month, about $6,380, is denying any wrongdoing, as well as any link between his acquisition and the property investigation undertaken by a local judge.
A regional President, earning less than $80K a year just bought a $1 million penthouse in a country where youth unemployment is above 50%, workers have gone over six months without being paid, and pharmacies are running out of medicine due to having not been paid some €500 million by the government.
The reason this is so important is because politics, not economics, drives everything in Europe. Please note that the entire EU banking system was pulled back from the brink of collapse last summer by Mario Draghi and other EU officials promising to do whatever it takes to end the crisis.
Since that time, the economy has actually worsened in Europe. Unemployment has hit a new record and the vast majority of the EU has re-entered recessionary territory. Thus, it has been the credibility of various EU officials, not any fundamental improvement in things that has made the whole system work.
Now that major corruption scandals are breaking out regarding key EU figures, it’s going to be increasingly difficult for the EU political class to continue to convince the markets that the “everything is OK.”
Indeed, it’s time that we get really honest about things and state that Europe is done. Finished.
The powers that be over there are rapidly losing control of the system. Spain’s banking system is collapsing at a rate worse than that of the Asian nations during the Asian Contagion of the late ’90s. Italy’s bonds are imploding. Germany is finding its economy teetering on the edge of a cliff. And France is seeing auto sales and apartment deals collapse at a rate just as bad as that of 2008.
And that’s just the tip of the iceberg.
The debt contagion has now spread to Spain, Italy, and even France: all three of them are countries too big to be bailed out.
Which means… it’s the End Game. No matter what, the defaults are coming and the Euro will implode.
This is the reality for Europe. The whole system will be going down, it’s only a matter of time. And when it does collapse, it’s going to make Lehman Brothers look like a joke.
I know the markets have yet to fully realize this…the S&P 500 is approaching its all-time highs. But back in late 2007, the last time the markets were at this level… did stocks get what was coming then too? Nope. And by the time stocks “got it” things moved VERY quickly.
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into EU banks right now trying to stop this from happening.
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