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Dear Investor and guest,

Even if you’re not interested in investments or finance … and no matter where in the world you may live, this news will in fact change your life, one way or the other. It marks the end of government bailouts and the beginning of a new Great Depression – not only in Europe but also in America …Read below…

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German Chancellor Angela Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

Euro bonds are “not needed and not appropriate,” Merkel said today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. She said euro bonds would “level the difference” in euro-region interest rates. “It would be a completely wrong signal to ignore those diverging interest rates because they’re an indicator of where work still needs to be done.”

Merkel, the leader of Europe’s biggest economy, has so far backed a focus on debt reduction and closer economic coordination, calling for a revision of European Union treaties, a move that threatens to bog down in a multiyear negotiation, as core euro economies risk succumbing to the contagion that began in Greece in 2009.

German analysts, newspaper editorials and opposition politicians stepped up calls for Merkel to shift from an incremental approach after the government sold a fraction of the bonds it auctioned yesterday.

“As the crisis deepens with yesterday’s bond auction, the veil has been torn off Merkel’s policy of muddling through,” Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin, said in a telephone interview. “It’s only got us closer to the end-game, either the breakup of the euro or euro bonds. The strategy has failed.”

Losing ‘Sex-Appeal’

“The flop shows that bunds are losing their sex-appeal as an extremely secure investment,” Germany’s Handelsblatt business newspaper said in a commentary today. “This shows the crisis has reached the entire euro-zone core. France, Finland, the Netherlands and Austria have to pay more interest for their bonds than just a few months ago.”

German bunds fell a second day. The 10-year bund yield rose as much as 12 basis points, or 0.12 percentage point, to 2.26 percent, the highest since Oct. 28, and was at 2.19 percent at 12:55 p.m. London time. Bids at yesterday’s auction of 10-year securities amounted to 3.889 billion euros ($5.2 billion), out of a maximum target for the sale of 6 billion euros.

Handelsblatt said the shortfall was a “wake-up call” for Merkel’s government, which opposes both issuing bonds for the entire 17-member euro region and allowing the ECB to buy unlimited amounts of euro-nation bonds.

Germany Rejects

The German government stood by its rejection of any common bonds for the euro bloc following a report in Bild newspaper that Merkel’s coalition is concerned it may have to agree to euro bonds under certain conditions. The newspaper didn’t say where it got the information.

“We say ‘no’ to euro bonds,” Economy Minister Philipp Roesler, who is also vice chancellor, said today in parliament in Berlin. “A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany.”

That contrasted with Handelsblatt’s view. “The ECB remains the only investor that can keep down the interest rates of bonds from euro states in the short-term,” Handelsblatt said. “In the long-term, there’s no getting around the necessity of creating fiscal union with at least partial euro bonds.”

The Frankfurter Allgemeine Zeitung newspaper said that while the low demand for German bunds was “no reason to panic” it shows that “around 2 percent interest for investors in these uncertain times is simply not enough.”

‘Moment of Truth’

“Pressure is growing on Merkel,” said Die Welt newspaper. “Up until now she managed to steer the nation through the crisis so that the people didn’t really notice the turbulence.”

Merkel now faces a “moment of truth” in the crisis as her opposition to ECB bond purchases and euro bonds “is being challenged,” Die Welt said.

German opposition parties ratcheted up calls for euro bonds. Frank-Walter Steinmeier, parliamentary leader of the Social Democratic Party in parliament, said on Nov. 21 that his party wants euro bonds as part of a solution to the crisis.

“A model using euro bonds that links European bonds to a reform program is the better alternative,” Juergen Trittin, a co-leader of the opposition Greens party, said in an N24 television interview today.

In Paris, the French government underlined calls for giving the ECB a bigger role in fighting the crisis.

“What’s not working is confidence and that’s what we must restore,” French Foreign Minister Alain Juppe said today in an interview on France Inter radio. “I hope that reflection will move forward that the ECB should have an essential role to restore confidence.”

Have a Good & Safe Trading

Erik

Main Input Source: Bloomberg, Tony Czuczka

In this financial market, it’s easier than ever to be confused. I say that because Wall Street pundits and European technocrats keep telling you that “All is well.”

They keep saying that stocks have to rise because it’s the end of the year.

They keep saying they have the sovereign debt crisis licked.

They keep announcing bailout plan after plan after plan, promising that this time, it will really work.

And frankly, what would you expect them to say? They need YOUR money to pay THEIR salaries and bonuses!

Well I don’t have those conflicts. So I’m going to give you the plain, unvarnished truth: Things aren’t getting better. They’re getting much, much worse … and it’s only a matter of time before the unfolding crisis in the CREDIT market spills over in a major way to the STOCK market! Or in other words, the sell off of the past couple of days could be just a sneak preview of a much worse meltdown to come!

Borrowing Costs Surging!
Bailouts Failing!

Sometimes a picture is worth a 1,000 words, so I’m going to let the charts do the talking. First is one showing the three-month euro-dollar, cross-currency basis swap (interest). Don’t let the fancy name fool you. This is simply a way to track how expensive it’s getting for private European banks to fund their dollar-based loans and investments.

As you can see, that cost is exploding to levels not seen since the worst days of the LAST phase of the credit crisis. The reason: Nobody wants to lend to European banks because they’re worried they won’t get paid back!

Next up is a chart of the yield on Belgium’s 10-year note. Yes, I said Belgium. You already know from my previous updates perhaps ? that the PIIGS countries — Portugal, Italy, Ireland, Greece, and Spain — are in dire serious trouble. They’re having to pay through the nose to borrow money, and their economies are stumbling as a result.

But now, the crisis is spreading to several other European countries you may not be aware of. As you can see, Belgium’s government note yields just hit a multi-month high of 4.88 percent. The cause: Concerns over the stability of its government (no real government since election last summer) and costs associated with its proposed bailout of mega-bank Dexia.

And it’s not just Belgium, either. Austria is one of the AAA-rated countries in the euro zone that’s supposed to help support its weaker brethren. But contagion selling is now spreading to that country’s debt market, driving the yield on its 10-year notes to double the yield level on comparable Germany notes!

Speaking of contagion selling, here’s the last chart. It shows the spread — or difference — in yields between French 10-year notes and German 10-year notes. As you can see, it just exploded to 190 basis points (1.90 percentage points). That’s a fresh euro-era record … and proof that investors are increasingly worried France will lose its AAA rating.

These aren’t small peripheral nations like Greece we’re talking about. They’re huge countries like Spain and Italy, and even “core” European nations like France, whose bond markets and economies are now tanking.

Even in the U.S., short-term borrowing costs are rising steadily as banks find it tougher to find other banks willing to lend to them. Three-month LIBOR just hit 48 basis points, the highest level since last July.

Plus, the 2-year swap spread is blowing out. It hit 53 basis points this week, the highest level in 17 months. That’s an indicator that banks don’t trust other banks, and are demanding they pay much more if they want to enter into derivatives transactions.

Bottom line: Credit markets are going nuts! Several indicators are at levels not seen since the depths of the 2007-2009 crisis, or headed in that direction. Others are much WORSE now than they were then. These were clear LEADING indicators of a stock market collapse back then, and I believe they are clear leading indicators of a stock market collapse now.

The only thing propping up stocks was the “year end” effect … the need for bullish portfolio managers to juice stocks in order to pad their own bonuses. But I don’t think that one minor positive is enough to offset the complete collapse of the global credit markets. In fact, the next major leg down may now be getting underway.

This is all for now, please stay tuned as this crisis unfold in the near future.

Good trading and invest safe.

Erik

Of the four biggest economies – the US, China, Japan and Germany – the US is the oddball. The only debtor in the bunch. The other three run huge surpluses each and every year.

In fact, apart from size, you could argue that the US has more in common with Greece than it does with the other major economic powers. Like Greece it can’t meet domestic demand for goods and services from its own factories and companies.

And, of course, we can’t forget this: The US is dependent on other countries to finance their annual deficits, just like Greece is.

Greece has depended on European banks, the US on China. In the excerpt below, Mr. Martin Wolf from the Financial Times argues that it’s the debtor, the US, that rules its relationship with China: “If [China] stops buying [US bonds], it imposes a shock on itself.”

Wolf is saying nothing new here. But he says the same is true about Greece. Little Greece has the ability “to inflict a great deal of damage on everybody.”

The US and Greece are both victims of global imbalances in trade. Asia and China are way overbuilt. To prosper their factories need markets like the US’s. Germany is also overbuilt and needs markets like Greece’s to prosper.

From the Financial Times…

Three of the world’s four largest economies — China, Germany and Japan — are creditors: they run current account surpluses, in good and in bad times. They believe they are entitled to lecture debtors on their follies. China, an ascendant superpower, enjoys berating the U.S. for its imprudence. Japan, a U.S. ally, is more discreet. Germany’s ambitions are closer to home. It wishes to turn its euro zone partners into good Germans, instead.

Yet creditors are vulnerable. Their economies have a capacity to supply goods and services that borrowers desire far larger than their own residents will ever buy. Deficit economies are mirror images: their capacity to supply such goods and services falls short of their demand. These surpluses and deficits are embedded in both kinds of economy.

Within creditor countries, the producers of tradeable goods and services are a powerful lobby for the supply of credit to debtors. Private funding will halt once financiers realize how bad their lending has been. Policy makers are then caught between throwing good money after bad or tolerating brutal adjustment, as their markets disappear. In punishing profligate borrowers, they also damage their own citizens.

This story lies behind what is happening to the world. It is behind the agenda of the European summit of last week and that of the Group of 20 leading economies this weekend. As Mervyn King, governor of the Bank of England, stated in a recent speech, it is the story behind all the crises since 2007: “Persistent trade surpluses in some countries and deficits in others did not reflect a flow of capital to countries with profitable investment opportunities, but to countries that borrowed to finance consumption or had lost competitiveness. The result was unsustainably high levels of consumption (whether public or private) in the U.S., UK and a range of other advanced economies and unsustainably low levels of consumption in China and other economies in Asia, and some advanced economies with persistent trade surpluses, such as Germany and Japan.” In brief: everybody helped make a mess and everybody has to play their part in fixing it.

Greece is taking the brunt of the world’s anger right now. But one of these days it will be the US, even though as Wolf puts it, it’s “a trap of creditor countries’ own making.”

Good Trading

Erik