Friday, 23 September 2011

Transcript: Emergency Global Forum: Will This Debt Crisis Be Worse Than 2008? (Edited, as needed, for clarity)


Martin D. Weiss, Ph.D.

Martin Weiss: We stand on the threshold of one of the most dramatic financial disasters of our lifetime: The default of the oldest democracy in the history of Western civilization — Greece — is threatening the largest economies in the history of civilization — the European Union and the United States.

I’m Martin Weiss, and this is the Weiss Research Emergency Global Forum. We’re here today to tell you what the consequences will be and what to do about it.

With me today are two Weiss Research experts with boots on the ground in Europe — Kevin Kerr, who lives in Estonia, and Claus Vogt, who lives in Berlin.

And to dissect the impact of this great crisis on the United States and on currencies, we also have on this call Safe Money editor Mike Larson and Weiss Research currency expert Jack Crooks.

Gentlemen, here are the questions we’re going to cover today …

Will this be 2008 all over again? Or worse?

What do you need to do now to protect your wealth?

And, what are the profit opportunities it can generate?

Kevin Kerr: Martin, this is Kevin Kerr speaking. I’m in transit between Europe and the U.S. right now. So let me jump in first to answer the last question. The European debt crisis is here. It’s massive. And it’s generating equally massive profit opportunities which we’re taking advantage of in my Master Trader service:

First, bank stocks are getting killed globally, and with the instruments we use, the more they fall, the more money you can make.

Second, frightened investors are rushing to the last true bastion of safety on the planet — gold; and there are some very powerful new ways to leverage your gold investments to take advantage of this unique situation in a big way.

Third, to combat this crisis, the European Central Bank and the Fed are going to do the same thing they did after the Lehman Brothers failure three years ago. They’re going to flood the economy with paper money like there’s no tomorrow, and that’s going to drive other commodities through the roof, especially essential commodities like food.

So before the end of this call, I want to give out three basic picks for each of those opportunities.

Martin: Yes, please do! But first let’s zero in on what’s happening right now and what the impact is likely to be.

Claus Vogt, you’re in Berlin right now, at what could be ground zero of the next major phase of this crisis. What do you see happening?

Claus Vogt: More and more German politicians and European central bankers realize that Greece is long past the point of no return. Greece is actually bankrupt — it does not just have a liquidity problem, but a solvency problem.

A recent poll in Germany showed that 76% of the German population is opposing further rescue packages for over-indebted EU members. That 76% may be enough to convince even Chancellor Angela Merkel, who certainly does not want to lose the next election because of Greece.

The Greek government has constantly cheated — first, to enter the European Union in the first place and now by violating the terms of the first bailout agreement. Frankly, the country has no chance of meeting those terms. The economy is much too weak after years — or decades — of mismanagement. The austerity measures needed would throw this country into a horrible depression.

Yes, the German federal court ruled a few days ago that bailouts with German taxpayer money are actually legal. But they also ruled that the Parliament will have to be fully involved in the future. There’s seems to be no majority anymore for further bailouts in the German Parliament. So I really doubt Chancellor Merkel will risk breaking up the current coalition that she’ll need in the new elections just because of Greece.

It looks like the German government is preparing for a change of course and making preparations to finally abandon Greece and let it default. It may be a matter of a few weeks or even days.

Martin: So in just a few days Greece could default and Germany could just throw in the towel and say, “Forget it.”

Claus: Definitely, it looks like that’s the way things are headed.

Martin: Kevin, do you agree with that assessment?

Kevin: I absolutely do, Martin. It’s interesting being in a country that’s just adopted the euro. Estonia is one of the most disciplined countries in Europe and worked hard to get the euro. So for Estonia, it’s like being invited to a wedding and finding out it’s a funeral! But what’s most important is that the entire marketplace now agrees. Based on the astronomical premium cost of insuring against a Greek default, the market is saying that there’s a 98% probability that this disaster will happen!

Martin: Claus, now for the $64 trillion question: Compared to the aftermath of Lehman Brothers’ failure of 2008, is the impact of the Greek default going to be less severe, equally severe or more severe?

Claus: More severe!

First, the banks here in Europe, and probably also in the United States, have never really recovered. So the banking sector and the whole financial system is even more susceptible now than in 2008 or 2009.

Remember: Our central bank never solved the solvency problems we had in 2008 and 2009. All they did was buy some time. But the solvency problems remained — especially among the biggest banks of Europe, in France. The three largest French banks are on the brink of major downgrades by Moody’s this week.

Meanwhile, the French government just said it may be too early to go for nationalization of some of the largest French banks. Whenever you hear something like that you can be sure there is a huge fire there. And based on my analysis, the French banking sector is an accident waiting to happen. Their bigger problem is the threat of outright insolvency.

Martin: But the G-7 countries just announced they’re not going to let them fail. Are the G-7 countries going to step in and protect French banks?

Claus: Maybe, maybe not. Maybe they would like to protect them but they don’t have the means anymore. But the next question is: Who’s going to save the G-7 countries? Even if they were willing to rescue the banking sector, maybe they can’t — at least not in the way it was rescued in 2008 and 2009. Because governments themselves are much more strained!

That leads me to my second point: It’s not just the banks anymore as it was then. Now entire governments are going bust as a consequence of how they dealt with the crisis in 2008/09. They now have huge deficits they didn’t have then. And the European Central Bank is already loaded with toxic assets on its balance sheets it didn’t have then.

Martin: So not only do the banks have toxic assets, but now the central banks have toxic assets too, which makes it more difficult for them to respond.

Mike Larson, in the Safe Money Report, you’ve called the shots on this crisis play by play, naming the companies and the countries well ahead of time. So paint the scenario for us in the wake of a default by Greece.

Mike Larson: You’re going to see interbank lending freeze up with leading European and U.S. banks unwilling to lend to each other at almost any price. I think you’ll also see the private credit markets freeze up, with companies and consumers unable to obtain the loans they need to spend and grow. And finally, I believe you are going to see the stock markets worldwide respond by falling sharply.

This isn’t just some possible future scenario. It’s precisely what we saw happen after the Lehman failure and we’re already starting to see it now — just in anticipation of a Greek default.

A few examples that I have seen already in the markets: The cost of short-term loans between European banks just hit its highest level since 2009, while the amount of money banks are parking at the European Central Bank just hit its highest level in 14 months. These are credit market indicators — signs that European banks just don’t trust each other.

Martin: Credit default swaps also.

Mike: Yes, credit default swaps! If you’re a bondholder who owns bonds in a European bank, your cost of protecting against default is exploding to new highs. Even here in the U.S., the cost of making these interest-rate bets — bets the banks make in the derivatives market — is surging just like it did in 2008 and 2009. So you have clear, concrete signs that even our banks don’t trust each other.

One last point I want to make and that’s WHY U.S. stock market investors should care what’s going on. My answer is simple and very clear: Because credit markets always lead equities. They did so in the first phase of this crisis and they will do so this time around. So anyone who ignores these bright red warning signs is going to get killed.

Martin: Mike, another point you make in your Safe Money Report is that the authorities are running out of bullets. Please explain.

Mike: The last time the markets collapsed both fiscal and monetary policymakers flooded the economy with paper money. The Fed rolled out QE1 and QE2, and the ECB did something very similar. Meanwhile, the Obama administration rolled out a massive $800 billion stimulus program that was packed full of goodies for anyone and everyone. And Congress willingly went along.

This time, what is the Fed going to do for an encore? If they do the same thing, investors are going to say: “It didn’t work last time. Why is it going to work this time?”

If they do less, investors will be even more disappointed.

And even if they roll out QE3, QE4 or QE-1,000, the fact remains, all they can do is print paper money. They can’t print jobs. They can’t create wealth out of thin air. In the end, they just trash paper currencies and destroy the monetary order.

As for the fiscal policy, Obama knows he can’t ram another $800 billion package through Congress. So he’s trying to thread the political needle with this $447 billion package of tax cuts and expenditures. But even that has no chance of passing because of how he’s proposing to pay for it.

He’s trying to pay for it by raising certain taxes in a manner Republicans have already rejected. The whole exercise is a political farce.

Martin: Kevin, chime in here because I think this leads into a topic you like.

Kevin: We’re going to start seeing some printing in Europe immediately — they’re taking some lessons from Ben Bernanke. This is why I love gold. Gold isn’t just a hedge against the falling dollar anymore. It’s a hedge against the falling dollar OR the falling EURO — against falling currencies in general. It’s protection for investors; it’s one of THE places they can go.

Plus, gold isn’t just a hedge against falling currencies. It has also now emerged as THE go-to investment for safety in ANY crisis. As we see more defaults, we are going to see investors shifting. I really think this could be a parabolic move for gold. We’ve seen the price climbing up, but now this could be the real shift as we see investors flock into gold.

Martin: So if the central banks try to rescue the global financial system like they did last time, then what happens to gold?

Kevin: Gold goes higher just like it has done since 2008. Investors are going to flock to the quality vehicle and that has become hard assets. And, of course, gold is the most accessible to investors.

Martin: And if they FAIL to rescue the system?

Kevin: Then that’s all the more reason for investors to rush to gold. It’s a win-win for gold and other precious metals. The dollar used to be that, but we can’t rely on it anymore. The future of the euro is also too uncertain. So certainly, gold is where investors are going to go.

Martin: Let’s talk about the future of the euro because that seems to be at the core of this; and that’s why we’ve invited Jack Crooks to join. Jack, you’ve been predicting the break-up of the euro from the outset. What do you see happening to the euro now? Your forecasts are beginning to unfold.

Jack Crooks: I’d probably describe it as a best-case or worst-case scenario. In the best-case scenario, we see a rabbit pulled out of a hat. Germany, for some reason decides to commit more of its wealth to keeping this system alive — becoming a major paymaster and being able to call the shots from a fiscal standpoint across the euro zone.

If something like that takes shape — and I don’t know if it’s possible — I think the euro still falls to one-to-one against the U.S. dollar.

You have to look at it this way: Say they save this thing, you may get a bounce in the euro. But then you have to look at it and realize the euro-zone countries are still spiraling down into deflation — some of them into depression. The European Central Bank is ahead of itself on interest rates and I think they are going to cut rates at the next meeting anyway. So the yield expectations are going to change for the euro and the relative growth expectations are going to change for the euro.

We see the euro sinking. A falling euro in this situation is not a bad thing for the countries in Europe. They need a lower euro on the export side to help them create some wealth anyway.

Martin: So what happens in the worst-case scenario?

Jack: Worst-case scenario, it just breaks up. Someone leaves the zone — Greece is prospect number one to leave but it could be Portugal, Spain or Italy. I think if one leaves it could create a domino effect. If that’s the case, the euro goes away and everyone goes back to their old currencies. Which wouldn’t be a bad thing for currency traders because we’d get to trade everything again.

Martin: But what is the euro going to be trading at that point? You have no way of estimating that. I assume it would be at lower than par with the dollar at that point.

Jack: It would be. You’ll see it go back to at least 80 against the U.S. dollar if that happens. Remember: The euro initially came out back in late 1999 at the 100 to 110 range. It quickly fell to 82 against the U.S. dollar and it’s been in a broad bull market against the U.S. dollar ever since. So even a fall to 82 just gets us back to where it once was. Obviously if the break-up scenario is in play, it has a lot lower to go before it breaks up.

Martin: My next big question for everyone: What do investors need to do to protect themselves from this crisis. Mike, we’re talking about safety here. And you edit our Safe Money Report. So why don’t you take this one?

Mike: I think investors need to do three things urgently.

First, reduce your exposure to everything that can fall in value. Real estate is already down, but can fall even further. Most U.S. stocks, especially financial stocks are down, but can fall a lot further. Get rid of the most vulnerable ones.

Second, move your money to safety. That used to be just Treasury bills. But Treasury bills alone won’t cut it anymore. You also need gold.


Third, for real estate and stocks that you cannot sell, hedge with inverse ETFs. And by the way, you can also use inverse ETFs to profit handsomely from declines in virtually any sector or region of the world, including banks, and including Europe.

Martin: Which is what you’re doing in the Safe Money Report.

Mike: Right.

Martin: And, Kevin, you’re doing something similar in Master Trader, right?

Kevin: Same idea, yes! But with a different instrument and far more leverage. My view is that you don’t get these kinds of dramatic, revolutionary changes every day. They happen only once in a lifetime — or even just once in TWO lifetimes. So with money you can afford to play with, why not play it to the max and get the most out of it while you can, using this leverage and with limited risk?

Martin: What are you recommending then?

Kevin: Let me tell you about the ETFs I’m looking at. These are NOT the instruments I’m using for leverage. But for more timid investors who do not want to use leverage, it’s a good place to get started. I want investors to begin to protect themselves and to begin to get into these hard assets.

I recommend you look at GLD, the most popular ETF that’s tied to gold bullion.

I also recommend you consider MOO for a play on agricultural commodities. This week we’ve been seeing more and more reports on the destruction of the crops.

And I recommend you look into inverse ETFs on key stock sectors.

Martin: Which ones?

Kevin: I’m in the process of picking the right ones right now, while we wait for a new selling opportunity. There are several on U.S. bank stocks. And there are a couple on European stock indexes you can look into.

Martin: That’s without leverage. What do you do for leverage?

Kevin: I use what I think are the ideal instruments for leverage in the world today.

Martin: I have just one more agenda item — and that is to thank everyone for joining. Claus, Mike, Jack, Kevin, let’s stay on top of this. If something major breaks in the coming weeks, I hope you’ll be available to jump on the line again, just like we’ve done today, even with short notice.

Thank you, gentlemen! Let’s talk again soon!

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