Michael Campbell: What’s really bubbling below the surface is this huge need to finance more debt in western Europe and in the United States coming up in the second half of the year when the rubber’s going to hit the road. One of the things that you said is that you’re looking for a deflation, a decrease, is the bottom line that we should be very careful in the stock market now?
Greg Weldon: Absolutely, I think it’s a very dangerous time here for global equities. If you listen to the pop media here in the US about what’s happened in Europe you hear a level of complacency and denial, that we are going to be able to bail out Greece and everything’s going to be fine. While it allows me to create a business where we dig into the facts and produce research that tells it like it really is, it also makes me cringe. It does such a disservice to the public to put out stuff that is blatantly fraudulent.
Your customers best interests now, in my opinion, is that stocks are very, very dangerous here.
Full Interview: “It’s a Very Dangerous Time”
“All Asset Prices are at Risk”
Michael: I want to talk about the Greek situation up front. That the Greek situation is unfolding in a very negative way.
Greg: Absolutely and it’s been unfolding in a negative way for the better part of two years. We can even go as far back as to when the Greek Drachma was incorporated into the euro, a time that we knew the euro was being watered down simply because of the Greek deficit dynamic.
It’s coming to a head as they can’t continue to kick the can down the road. If we go back to the fourth quarter of ’09, when we first started to really focus on Greece, continually officials down there kept coming up with these “bail outs”. You know it’s like the movie Animal House when the guy is in the middle of the road as the crowd approaching him is about to stampede and he says “remain calm all is fine.” This has been the ECB, the EU finance ministers, even the head of the finance ministers Juncker actually admitted to lying to the public and the media recently simply because they are willing to do whatever it takes to try and maintain the single currency. I just don’t see how that’s going to be possible. I don’t see how there’s any way out of this. They can’t paper it over, the way out is austerity and the public’s not going to stand for that. We see the unions rallying in the streets, threatening to blockade parliament and so on and so forth. The next thing is going to be the power company which is saying they are going to start selling off assets to rectify the situation. It’s not nearly enough money that they are going to be able to raise.
I wrote a piece this week called Garage Sale, that you don’t find anything of value at a garage sale. What you do find other people’s used stuff that’s really decrepit, no good, and this is the situation in Greece. They are saying that they are going to sell the public power company and the union begins to plan rolling 48 hour power outages. This is the intensity that the social discord in the country has reached, and it is going to come to a head here in the second half of the year when the bulk of the debt begins to mature. Further this not only applies to Greece Michael, as you and I both know. This applies more specifically to Spain, Belgium and Italy where they’ve gotten a free pass because the majority of their debt has not yet begun to mature. That changes as in the second half of this year and into next year as hundreds of billions of dollars of debt begins to mature in those three countries. We see them trying to get out ahead of this a little bit by also coming up with plans to sell assets. There’s already union strikes in countries like Spain and this is just the beginning, not an end game there. How do they save Greece, because they are not going to be able to do it.
Michael: Why should we care about this? What implications does it have for us North Americans and Canadian investors?
Greg: There’s several reasons people should care, the first one is it will impact stock markets globally. You are not going to see European stock markets go into a swoon without seeing other markets go into a swoon. The reason for that is this is it doesn’t just apply to Europe, it applies to the US as well. The US has again gotten something of a pass here in the first half of the year as the Fed has been buying about $25 billion worth of treasury securities a week, something that’s going to come to an end, we know that. They have over a trillion dollars to finance in the second half of the year, plus the deficit here in the US which they’ve been funding. The Fed has essentially funded 100% of the US treasury deficit in the first half of this year, and they have funded about 65% of all of the bonds and notes and bills that the treasury has had to sell. We know how this has an impact on Canada given the geographical and the trade relationship between Canada and the US. But frankly it’s also a function of the dollar. When we see stock markets begin to deflate again on the back of this debt deficit debacle in Europe but the US as well, that impacts the dollar. A dollar rally here could really be very negative for asset prices including Canadian stocks. When we see a breakdown in the Canadian indexes that frankly over the last two weeks has been pretty severe, actually a little more severe than the break down in the US, this is the function of the fact that the Canadian dollar has wobbled. If commodities come off we would expect, those two things, the Canadian dollar decline and how that spreads into the Canadian stock market, we expect that this is the beginning of something bigger in nature.
Michael: I think the Audience is getting a hint of why I thought it was so important to get Greg on the air with us, because my job here is to protect your money, protect your capital protect your standard of living, this is what we want to do. You’ve got to know the context that we are living in right now. What’s really bubbling below the surface is this huge need to finance more debt in western Europe and in the United States coming up in the second half of the year when the rubber’s going to hit the road.
One of the things that you said Greg, is that you’re looking for a deflation, a decrease, is the bottom line that we should be very careful in the stock market now?
Greg: Absolutely, I think it’s a very dangerous time here for global equities. If you listen to the pop media here in the US about what’s happened in Europe you hear a level of complacency and denial, that we are going to be able to bail out Greece and everything’s going to be fine. While it allows me to create a business where we dig into the facts and produce research that tells it like it really is, it also makes me cringe. It does such a disservice to the public to put out stuff that is blatantly fraudulent.
Your customers best interests now, in my opinion, is that stocks are very, very dangerous here. Getting to the German Dax, I ask why has the euro currency not getting whacked on this situation in Greece, and how that might extend to Spain and Italy? The reason is that it’s tied more closely to Germany and the German stock market than any other thing; the correlation is highest with the DAX. The DAX has wobbled but it’s held in pretty well, it almost looks suspicious frankly, how well it’s held in at 7,000 level (looking at the DAX futures contracts which trades in the Eurex). A penetration of that level would be a major technical breakdown. You have trendlines going back to the secular low in 2009, key moving averages there and you have a shelf of support. You have all kinds of technical patterns that suggest if the German stock market cracked about 150 points from where it is right now that would really be a problem, and therein would be a problem for the euro currency. A problem with the Euro Currency would then have a knock on impact on the US dollar.
Its interesting to note how much divergence you see in the dollar here. I have not believed that this latest decline in the dollar over the last six to eight weeks was the beginning of a new dollar debasement. I just don’t buy into that, particularly when you tie it into the fact that the Fed’s QE2 is running out here as we speak in the next two weeks. So I think you have a convergence of events, of timing, fundamental dynamics and technicals that really suggest that you are going to experience another round of deflation in all asset prices. A deflation in asset prices that runs a gambit from equities to commodities, and frankly at this point on a shorter term basis, potentially even the precious metals.
Michael: That raises the question how is the Greek situation going to be resolved? What’s the level of contagion? Is Belgium, Italy, Spain all next on the burner? When is the US debt situation going to become front and center in a much more dramatic and profound sense? I don’t know how those things are going to turn out, but that gets me very, very cautious right now and has for several weeks.
Greg: We’ve had this kind of sweet spot here for the last 6 to 12 to 18 months. Some of the people that we talk to that are so tied into their vested interest in the US stock market they repeatedly tell us things are fine, things are fine because stocks are up. Well you know what, the Fed has very succinctly and successfully reflated the stock market with their quantitative easing program. The problem with that is they have fixed nothing in terms of the fundamental problems that caused this crisis to begin to unfold in 2007 and 2008. Housing in US is still a disaster, I mean you have some stabilization in prices, but you have no transactions taking place with those prices, which suggests when you see asset prices begin to decline in other areas, i.e. stocks and commodities, you are going to get another down turn in the US housing prices. Same thing in the labor market here, again how the pop media as I like to call them in the US wants to champion the labor market data every time it shows a positive number on headline payroll employment. Well guess what, that belies the continued erosion that is taking place under the surface. At the core the US labor market continues to deteriorate rather significantly and this is a chronic problem. You need to create million of jobs just to get back even and it’s not going to happen. So I think within that context, yes the Fed has created this window of opportunity where it’s been a sweet spot for asset investors. But again the convergence of timing, fundamentals and technicals right in here, for the second half of this year, is what has me really concerned that you’re going to have a kind of a renewal. Its not like a new crisis, it’s almost like a potential renewal of this crisis that’s already been kind of underway here.
Michael: I think people knew intuitively that if we have a big problem with debt we are going to solve the problem by borrowing. Intuitively it never made sense.
Greg: Well what’s amazing about that, and that’s a great point, it’s so particularly applicable to Europe because what they are suggesting to do is bail each other out. The problem is that 25 out of 27 EU member nations are in violation of the Maastricht Treaty rules on debt and/or deficits and in most cases both. So beggar thy neighbour, how that’s going to work when my neighbour is a beggar is very difficult to envision. The central bank there is constrained with different rules than the Fed is, so that really restricts their ability to paper over this problem as if it could be papered over. It would have to be a massive debt monetization in Europe that would have to take place, with many countries involved and many hundreds of billions, upwards of trillions of dollars involved, and just doesn’t seem that’s a likely outcome at all. So very difficult to see how this is going to be reconciled without some kind of more draconian, dramatic, types of new founded ways of printing money, buying debt and the impact going out. I hate to be so negative, we’ve been bullish on stocks for the last 18 months. This is a turning point for us, it’s not like we’ve been bearish for 18 months.
Michael: If you had to guess, are you looking at the demise of the euro as a currency?
Greg: Yes, I think that three to five years now, potentially significantly sooner, the euro currency will look significantly different down to core countries like Germany, France and some of the periphery that is not saddled with the same level of debt to GDP. So it’d be interesting to see how that plays out because that would be actually bullish for the euro longer term, but it would probably take some kind of cataclysmic decline first to initiate that type of dynamic and then back to the up side.
Michael: Will euro instability push money into the US and force the US dollar up?
Greg: Absolutely, I think that’s the scenario we are facing in the near term. I think again looking at the German DAX, below 7,000 would spark a run on the euro currency in my opinion. You’re pretty close to it, 140.50 is the key downside level in the euro against the US dollar. You take that out, and again with lot of divergences in the dollar, I think it’s bottoming here, and a rally in the dollar that gets above 76.50 in the US dollar index would be a key break out. That will have significant implications for global asset prices to the negative side.
Michael: I see an opportunity there as an investor to short the euro and take advantage of that. Greg Weldon is the only guy I’ve read who is talking about this link which I think made eminent sense when I first read from Greg to keep an eye on what’s going on in Germany in the German DAX. Why. because it’s the dominant country within the euro region. We already know that Greece is screwed, but we have to keep a close eye Germany for that. Greg, what are the implications for the Canadian dollar as this scenario plays shorter term, over the next year or two?
Greg: I see the Canadian dollar being vulnerable here. It has this US dollar connection first and would naturally decline as the dollar rallied. But it also has the commodity connection as a commodity exporter, particularly with tight trade with the US, and on the economic side of the equation as well. So frankly you are close to a break down in Canadian dollar, Canadian stocks are underperforming now and that’s another sign of this kind of forewarning of the potential problems in the commodity markets . I hate to get too ambitious but I see something along the lines of an 8 to 10% downside for the Canadian dollar, down to around the 90 level.
Michael: I recall a conversation you and I had right in the crunch of the credit crisis in January of ’09. Many people saw big rises in interest rates, even hyper inflation, and I remember you just being stone cold and said absolutely not. Not going to happen that way. This debt crisis is going to influence interest rates for a long time. I don’t see anything in the scenario you’re painting that would lead me to think, that except for countries like Greece, there’ll be a significant jump in interest rates.
Greg: Yes, one of the things is the German/EU bond market has remained very calm as money flows out of these peripheral countries into the “safety” of not only Europe but also the US. But I think it’s very critical to differentiate when we talk about interest rates. You have the treasury market the bond market the euro bond market the Canadian bond market which is linked to governments. There has been some slight push upwards in those yields, its been receded here as we face the end of QE 2 and what that might mean economically, which would be negative economically which could be positive for bond markets outside of the fiscal mess which is a little bit on the backburner in places like the US. That may change quickly at some point but right now it’s not. But the key to watch is the short term funding rates, stuff like LIBOR, dealer commercial paper rates, and really specifically the overnight repurchase rate in the US. This is the tool the Fed has said they would use when they tighten which again we don’t think we see that happening any time soon. However, the removal of $100 billion of fresh liquidity every single month in the US could have an impact on stuff like LIBOR which is basically almost back to the crisis lows. I mean a six month LIBOR is basically 35 basis points. If that changes that could have a knock on impact on the economy specifically and how that relates to housing and US consumers and labor markets not only in the US but also in Canada, where again short term funding rates, not bond market rates but funding rates, have remained what I call artificially low based on this quantitative stimulus which ends pretty much within the next two weeks. So really need the key on those rates, if they rise that creates more of a problem.
Michael: What we are talking about here is the rate at which banks lend to each other, and if you remember in the credit crunch after the Lehman Brothers mess, banks just said I don’t even want to lend to anybody because I don’t know what’s on their balance sheet. I don’t know if they are going to pay back. That came directly out of the Lehman Brothers and did that ever bring the world to a halt because that’s a lot of how the economy works is on credit and the banks, as I say, didn’t even want to lend to each other. So that’s what Greg’s saying is keep an eye on that rate.
Greg: It was a freeze, was a freeze in those markets that caused the Fed to become so aggressive at first. So you really need to watch that, because if that changes it impacts the consumer, a lot of housing loans linked to LIBOR, LIBORs remained very low, if that changes it’s a whole other dynamic we got to deal with.
Michael: Obviously you have certainly given me no reason not to be cautious here and make sure my portfolio looks correct in terms of the amount of risk I want to take, the exposure I want, and cash equivalents. Anything else along that line that you suggest people should do with their money, until we see the firm direction we are going?
Greg: I think you’ve got to be very cautious, this is a time where to me all asset prices are at risk, even including precious metals. So I think cash is not so bad right now, or having active fund managers. We offer a commodity trading program as well. But really having someone that could be flexible, long, short, in currencies, commodities, bonds and stock indexes that can take advantage of the opportunities to potentially be short some of these markets. Then at some point when you do have another round of deflation, and when it becomes politically feasible for the Fed to come back into play at some point in the future, that may be a buying opportunity for us, prices in the next round of quantitative easing and reflation and asset prices and so on and so forth.
Michael: Greg Weldon is my guest you can find him at www.weldononline.com; Again you’ve an idea now of why I thought it was so important to get him on the air with us. My job here is to protect your money, protect your capital, and protect your standard of living and Greg Weldon helps explain the context that we are living in right now. He’s also the author of The Gold Trading Boot Camp this is going back several years ago when Greg was telling his subscribers you’ve got to get into the gold market. He also does the ETF Play Book, the Money Monitor and Metals Monitor, Global-Macro Discretionary & Commodity Long-Short
Greg: My pleasure Michael as always.