Friday, November 18, 2011

Global Sovereign Web Of Toxic Debt

The BBC put together an excellent interactive tool this week showing how much sovereign debt the major insolvent countries owe to each other.  It creates an excellent view of the web of toxic debt.  The countries they used in their circle of death:

Greece, Ireland, Portugal, Italy, Spain, France, Japan, UK, United States.

All of these countries will face a government debt crisis this decade so it is important to understand how each default will impact the others in the web.

We will come back to these pictures many times but today we can look at the two major countries infected first to see who will be hurt most by losses on their bonds:

First up is Italy where you can see the brunt of the pain is directed at France (France purchased a tremendous amount of toxic Italian debt).  This is the reason why the major French banks, as well as the credibility of French government debt itself, are both plunging.

Next up we have Spain who is rapidly approaching their "Greek" moment right behind Italy.  Their debt is spread out more evenly around the world providing the opportunity for all countries in the web of toxic debt to experience massive pain together.

While they are not on the radar just yet, I want to take a quick look at two upcoming blockbuster sovereign credit disasters (kind of like previews for the new Harry Potter or Twilight movies)  The first is Japan.  Their story is interesting because at first glimpse it appears that their debt problem may only be as large as an Italy or Spain.  Why?  The Japanese people own the majority of the Japanese government debt.  The nuclear sovereign debt bomb is actually sitting in their own country, which you cannot see on this graph.

Finally, we have the United States, which almost makes you laugh when looking at it because it is so terrifying.  The United States is in the exact opposite situation as Japan.  They are in just as much (far worse) trouble in terms of the size of their sovereign debt crisis only the majority of Americans do not own the debt; it has been purchased by other countries both in the web of death and in other areas around the world (you cannot see poor China on this picture - they own the majority of the toxic bonds).  When our toxic debt begins to implode it will not only ignite a financial explosion in our own country like Japan, it will also create a global financial nuclear holocaust around the world.

There is some great news behind all this coming destruction.  When the dust has settled, and it will only take a few more years, it will be the greatest buying opportunity for assets that the world has every seen.  Those who have portfolios still standing after the coming winter storm will have the opportunity to buy stocks and real estate at once in a life time bargain values.

You can see the complete interactive graph here: Eurozone Web Debt

Thursday, November 17, 2011

15,000,000,000,000 Crossed

What if the interest payments on $15 trillion began to rise?

Gold's Coming Revaluation

Great chart below showing gold as a percent of total global financial assets from 1968 through today.  Even with a 5 fold rise in the gold price from the year 2000, its percentage of total assets has remained less than 1%!  Why? 

The amount of paper assets flooding the system has dwarfed the size of gold's price rise so far. 

I believe gold will make up a larger percentage of global assets moving forward but it will not be because of a large increase in gold supply.  It will be the paper value of gold re-valuing itself higher to account for the increase in global paper assets.

Then we have the percentage gold or gold mining stocks in a typical pension fund, which is the only picture you need to show anyone who tells you that gold is in a bubble.

Kyle Bass Discusses What Comes Next

Overnight the Spanish government bond auction was a complete disaster sending their rates rocketing up to 6.6% and closing in on Italian bonds which were 7% overnight.  The European Central Bank (Their Federal Reserve) stepped in with force this morning to purchase bonds in both countries to try and stop the bleeding.  Unfortunately, right next door France is collapsing as well.

We have a clear understanding now that the European Union is finished.  This is the here and now and you can find the headlines on every paper or article around the world.  With the EU burning, we can now take a moment and try to determine what (or who) comes next.  In order to do that it is always helpful to look to someone who both predicted the current crisis and also has an opinion on what is coming in the future.

Fortunately, we have that in Kyle Bass.  When the story of this global credit crisis is complete years from now, Kyle's name will be one of the very small group that saw the complete picture (and profited massively every step of the way).

To re-cap briefly, Kyle was one of the handful of investors that saw the housing crisis coming and purchased insurance against the debt (CDS).  In 2008 when everyone rushed to purchase CDS contracts on US mortgages, he sold his contracts and purchased insurance on a country called Greece.  During that time, Greece's debt essentially traded for the same price as Germany's - risk free, just as subprime debt traded at risk free prices in 2006.

Fast forward 3 years later and Kyle has sold his Greece insurance to investors rushing in to buy.  In Michael Lewis' book Boomerange he described the payout back in 2008 if he was correct about Greece: every $1,000 invested would turn out to be $700,000 in profit.  The question is where is he looking now?  The answer?


Japan's debt currently trades at risk free prices.  Their bonds are at close to all time record lows.  Kyle feels that Japan's government balance sheet is the most toxic in the world. (They have a debt to GDP ratio of over 220%)  They have a declining population, which Bass refers to as "the trigger to end the ponzi scheme."  A staggering statistic from Bass:

Half of Japan's annual debt payment goes exclusively toward interest payments.  If their bond yields were to rise only 2%, they could not even cover the annual interest payments on their debt.

This week, Kyle Bass provided the investment world with a must watch 24 minute interview with the BBC.

Wednesday, November 16, 2011

Mr. 999 Talks Libya With Jon Stewart

Yesterday I posted the full, gut wrenching video clip of Herman Cain's Libya debacle in Say Goodbye To Herman Cain.

Tonight we can say goodbye to the 999 in a more humorous front with Jon Stewart who is giddy over the endless stream of Republican shame.

French German Spreads Explode: US On Deck

The chart of the day today is once again dominated by the news out of France.

For the past 14 years, every trading day, French government bonds have traded alongside German bonds under the same status: risk free.

Then something changed this week.  The bond market woke up and decided this was no longer the case causing yields to diverge dramatically.  Contagion has now crossed the French borders, and it appears to be unrelenting as Bloomberg described the European government bond market as "frozen."

I have continuously discussed for years that when the debt markets move against you it happens in the blink of an eye, like a light switch being turned off.  Then the world you lived in the day before is gone.

This is coming for Japan, the UK, and the United States.  Every night Americans go to sleep not protected means they run the risk of waking up the next morning with a significant portion of your wealth gone (when bond yields rise bonds lose principal value).  This happened three weeks ago in Italy.  It happened this week in France.

As middle class America has spent 4 long years transferring their 401k's out of the stock market and into the "safety" of the bond market, which can be tracked every month through tic flows, they are now perfectly positioned to be destroyed by the bursting of the current bubble in bonds.

The herd will once again be slaughtered.

Tuesday, November 15, 2011

European Debt To GDP Map: French Contagion

The contagion is spreading so rapidly through Europe now that is is almost impossible to keep up with.  Rates are now rising across the board in Portugal, Italy, and Spain.  In addition, the markets have now turned on France, one of the few remaining AAA rated nations that currently backstop the European bailout.  France is now seeing interest rates and their CDS (cost to insure the debt) rise simultaneously.

The chart below from the Economist provides a great visual for those more color coordinated on who is in the most danger by looking at debt to GDP (the total size on an economy which is used to determine the ability to pay off the debt).

As you can see, France is already in a danger bracket in terms of debt to GDP, and the market has taken action with punishment.  The world now waits for the ECB to decide if they will step in and monetize (print money to purchase) the debt, or let the house of cards collapse Lehman style. 

My money is on coordinated action from the ECB, the Fed, and a new participant (the IMF) to backstop the financial system; after an initial major deflationary downdraft.  Every day the ECB waits to step in, however, makes it more likely they will lose control of the contagion spreading through the financial system.

This morning CNBC interviewed Blackrock's CEO Larry Fink, who said liquidity is vanishing everywhere in Europe.  He sees a major crisis erupting in the markets in the next two weeks if major action if major action is not taken.

Say Goodbye To Herman Cain

Last week the country waived goodbye to Rick Perry's presidential run after his now famous 1, 2, 3 catastrophe.

This week, not to be out done, we have Herman Cain providing the next round of hope for the future of our country in what may be the final nail in his run for president.  Please look away if you do not have a strong stomach.

I discussed the candidates last week in 2012 Election: Romney Vs. Obama.  Nothing has changed.

Monday, November 14, 2011

CNBC Interview: Mark Cuban

One of my favorite business people, Mark Cuban, stops by CNBC to discuss purchasing the Dodgers, investing in start ups, buying stocks, and the percentage of his portfolio in cash.