Major Economic Dominos Falling: World Government Bankruptcies

Who cares what happens to the European economy? Actually, all Americans should as it directly impacts the US and portends our country's future. What we are witnessing right now is the toppling of economic domino #13- Government Bankruptcies Around the World; one of 23 dominos that have or will yet fall.

To the right is an interesting graphic that basically sums up the European economic dominos that are lining up to, essentially, topple the European Union and Euro.

After months of denials and failed fixes, the political and economic leaders of the European Union are still wrangling over what to do about Greece's debt. However, simply put, there is no way the EU authorities can stop the first domino--Greek default or equivalent write down of its impossible debt load--from toppling the over-leveraged banks which will be rendered insolvent when forced to recognize their losses.

Greek Haircut

If banks and bondholders are forced to accept a 50%-75% write down in Greek debt, then the other debtor nations will be justified in demanding the same write down for their crushing debts. This dynamic leads to estimates that more than 3 trillion euros will be needed to bail all the players out. The alternative is to deal with losses of 3 trillion euros, wiping out banks and bondholders of sovereign debt.

Germany Key, But Limited

The fact remains, the German economy is simply not big enough to fund a 3 trillion-euro bailout. Germany has 81 million people and

its GDP is $3.3 trillion; the EU GDP is roughly $16 trillion. Compare statistics with the U.S., with 315 million people and a GDP of around $14.6 trillion.

Several European nations have already been downgraded and if several nations begin defaulting on their debt, the results could be devastating.

That devastation would first drastically impact the European countries, then soon burst its way into our own nation. According to Douglas J. Elliott - fellow at the Brookings Institution - a European recession would have a domino effect and create a similarly dismal situation right here in the U.S.

Greek Tragedy Impacts US

These four crucial American sectors would be greatly (and quite negatively) affected in the aftermath of defaulting nations in the euro zone:

Business and consumer confidence: Good luck finding any business owner, employee or consumer who isn't already frightened about what's lurking ahead. If the worst-case-scenario does occur, our economy would surely experience even worst consumer spending cuts and job losses.

There's still hope, but not much. CNNMoney reported that there is a 25% chance of that worst-case scenario coming to fruition. That process would bring about a series of defaults in nations including Portugal, Greece, Ireland, Italy, and Spain.

Trade: If Europe falls into any deeper of a recession, the US $400 billion in exports would be slashed badly as well. Until Europe could afford to pay for those U.S imports, America would suffer the loss in sales and, subsequently, be forced to cut jobs in related fields.

On a international scale, other countries who rely heavily on exports to Europe would face the same situation - leaving the global trade market in shambles.

Investment: Economic data shows that American firms have more than $1 trillion of direct investment in the European Union. A major hit to Europe's economy would slash through investor profits. US investments in other countries would also be affected because of the overall domino affect in the global investing community.

Financial flows: Banks and bank subsidiaries have about $2.7 trillion in loans and commitments to corporations, and governments in Europe. An additional $2 trillion more of exposure to the United Kingdom.

The progress the United States has made in dealing with its own financial crisis thus far would not fare well if additional losses were heaped on a still-struggling economy.

The technical details of the European recapitalization will matter as well. If designed badly, the plan could even do harm by encouraging European banks to cut back on lending and to sell existing assets. A serious credit crunch would likely tip Europe into recession.

Finally, strong-arming investors into voluntarily accepting losses of 40% to 60% on their Greek government bonds will certainly add to the risks of contagion if market concerns about other troubled eurozone countries spike again in the future.

Whatever happens, the U.S. government would be wise to prepare and encourage the Europeans to take the necessary steps. Not to mention the International Monetary Fund that could continue assisting a bailout in Europe.

Here's the point: Though the mix of debt is different from one country to another, all of Europe, and indeed the developed world, is overloaded with debt: state, bank and private.

The idea that leveraging more debt can resolve this monstrous over-indebtedness is beyond fantasy.

There is a day of reckoning ahead and we believe European economic bankruptcy dominos will fall...with worldwide consequences.

Sources: Wealth Wire, Businessweek, Financial Times, IMF, CNNMoney

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Pension Bankruptcy Domino Falling

Pension liability for private and public pension funds is soaring!

If you're betting on a private or public pension fund being there when you retire, you could be in for a rude awakening. There is a pension liability/bankruptcy domino that has been wobbling back and forth for several years. And it's getting worse, not better.

Mitchell Interview By Forbes

As part of an intriguing interview, September 7, 2011, between Steve Forbes, editor-in-chief of Forbes magazine, and Olivia Mitchell, director of the Pension Research Council at The Wharton School of the University of Pennsylvania, both public and private pensions appear to be in "grave trouble."

Mitchell estimates State pension liabilities alone, for example, are under-funded by nearly $3 Trillion or approximately 69%. Note: How much is a trillion? Counting to 1 trillion would take approximately 30,000 years!...not a typo.

Pensions Overly Optimistic

Further, many pensions are overly optimistic in terms of growth rates (pegged at 7-8%) and don't adequately address increased longevity. Healthier living and better medical solutions have increased longevity one month per year for the last 30 years. Many pensions are based on outdated longevity tables according to Mitchell.

Big Promise Pensions May Take Decades to Fix

On the Public pension side, some states are raising contributions. However, many states have pension-packages that are collectively bargained which will take a long time to unwind. Constitutionally, it may take 20-30 years to address shortfalls and get them under control. States and unions may end up going to the US Supreme Court to determine how to handle contracts that cannot be paid. If you're counting on a monthly check to come out of a court battle that could take years or decades to resolve, it could not only dramatically affect your retirement, but literally destroy your way of life..

Some states are going for broke with risky investments in order to make up lost ground—but it's like playing the lottery. Given the volatility of the stock market, the short fall could turn catastrophic.

Mitchell predicts by 2020 most state and some city pension funds will be exhausted aka, bankrupt. No, this pension shortfall didn't happen overnight. In fact, according to Pew Research 31 states were only 78% funded in 2009. And the Great Recession has made things worse.

News Headline:
Battle over pension costs in Montgomery

Maryland's Montgomery County pension and retiree health accounts are facing a long-term shortfall of more than $4.8 billion, and officials repeatedly have pulled back from difficult decisions needed to close the gap.

The pension programs for the county and the school system are underfunded by about $1.3 billion, and retiree health funds are short by $3.5 billion, county records show.

County agencies have set aside just 3 percent of what they will need to cover health care for retirees. The pension funds, which have been in place much longer, are significantly underfunded.

Source: Washington Post, March 22, 2011

News Headline:
State Pension + Debt = Big Numbers

States' debt loads are high enough, but when you combine them with their pension obligations, the numbers are really eye-popping.

Hawaii's debt, for instance, is $5.2 billion. But so is its pension obligation. Combined, the dual obligations make up 16.2% of the state's economy, according to a report released Thursday by Moody's Investors Service. That's the nation's highest total liability as a share of the state's gross domestic product.

With state economies continuing to reel from the Great Recession, their pension and debt loads are garnering greater attention. States are having a hard enough time just paying for schools and social services, leaving many struggling to make big pension payments as well.

"These are expensive obligations," said Robert Kurtter, Moody's managing director for public finance. "Not crushing burdens, but they add to states' financial stress at a very difficult time."

Just how deep states are in the hole for their pension payments is a matter of debate. A Pew Center on the States report last year pegged the figure at $452 billion. Overall, state pension systems are 84% funded.

Other experts, however, have said the unfunded liability is much greater. Even Kurtter acknowledges that the pension hole is likely understated because of the rules governing states' accounting for retirement benefits.

Source: CNN Money, January 27, 2011

News Headline:
Moody's to Factor Pension Gaps in States' Ratings

States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.

Source: Reuters, January 27, 2011

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Major Economic Dominos Falling: Prime Defaults

Written by Hank Brock, President & CEO

I have been a keynote speaker at a number of conferences in the last year such as The MoneyShow, FreedomFest, Live and Invest Overseas, TTP and several offshore venues. The topics have all centered around a number of documented dominos in the inevitable worldwide economic collapse and why the wealthy will be impacted most.

Though the general public is slowly getting more familiar with the dominos/terms such as derivatives, falling dollar, U.S. debt and world reserve currency, no one is connecting the dominos the way we do. My new book Dominos of Destruction chronicles 14 of some two dozen economic dominos that have or will yet fall. Admittedly, it's a bit scary, but staying aware of world economic conditions is a powerful way to remain prepared.

Domino #4: Prime Borrowers Default

For example Domino #4 Prime Borrowers defaulting is wobbling as we write this issue of the newsletter.

Mortgage defaults are a typical outcome of recession. The rising unemployment and flat-to-declining property values eat away at homeowners' ability and desire to continue making those monthly payments. In previous recessions, however, the defaults have been focused on prime borrowers. This is because subprime borrowers weren't able to buy homes before 1999; there was no such thing as subprime mortgage borrowers, and so they didn't default.

Massive Prime Defaults

In this current cycle, we are just beginning to see massive prime borrower defaults. Prime borrowers have been hanging on, despite job loss, by burning through their savings. They are liquidating their own assets just to maintain that credit rating. Unfortunately, this is not a long-term solution. The rising and/or the persistent unemployment trend has dragged on for months and shows no signs of appreciably changing for the better. In no uncertain terms, continuing unemployment will cause a wave of prime borrower mortgage defaults.

Default Trend Started in 2009, continues

In September of 2009, The Wall Street Journal reported that this trend had already begun. Prime borrower delinquencies had already shown a marked increase. This news was followed by a December, 2009 report from regulators. The Office of the Comptroller of the Currency and the Office of Thrift Supervision indicated that 60-day past-due prime mortgages had doubled in the third quarter of 2009. Also in that quarter, one of out every six FHA-backed loans was at least one payment past due. Further, the economists behind the S&P/Case-Shiller Home Price Index and Credit Suisse Loan Performance report suggest the foreclosure crisis continuing well into 2014 or 2015. (see chart)

According to Greg Fielding, a contributing writer to The New York Times and real estate expert, "Because mortgage interest rates are low, ‘resets' are less of a problem right now. Today, ‘recasts' are the real threat. A recast refers to the changing of payment options for Option-Arm loans. Many borrowers bought the biggest home they could "afford", using minimum payments to qualify. When the minimum payment option disappears, their monthly expense will "recast" to a substantially-higher amount, regardless of what interest rates do.

Strategic Defaults

During the last 12 months a new kind of Prime Borrower default/foreclosure has emerged: The strategic default. This is a highly qualified borrower that is so far underwater with his mortgage that he views it taking 5-10 years before his house will be valued at the loan amount once again. They CAN pay, but choose not to. The cash they save continuing to live in their house while the lender figures how and when to boot them out. Plus, making a lower rent payment less than their mortgage means they can potentially have a pile of cash to buy back into the housing market 1-5 years downstream. Shocking? Wait, there's more. There is an entire new industry emerging helping homeowners facilitate strategy defaults. Companies like www.youwalkaway.com and www.strategicdefault.com are helping people navigate the process. There are even major movies built around the theme i.e. Tom Hanks and Julia Roberts in Larry Crowne-a movie about a home center executive who loses his job and home, then discovers a new life and love after strategic default. My guess, you've not seen anything yet.

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Downgrade to Disaster

Think the US bond downgrade is no big deal. Think again.

For years, all of Hank's public presentations have included a slide that read "...Bottom-line: U.S. to be downgraded." On August 5, 2011, Standard and Poor's finally downgraded the United States credit rating from AAA to AA+, for the first time in history putting the financial strength of America below that of even some companies. This was S&Ps response to Congress "cutting $2.1B from the deficit over 10 years" which is farcical reporting by the press in collusion with Washington. That report was like a pouting child saying "Mom, let me put $600 more on the credit card at the mall this afternoon!" and mom putting her foot down and saying, "No! no! no! I'll only let you put $550 more on the credit card!!!" It was merely a reduction in the amount of debt increase. Any parent knows that with that kind of negotiations, all the child has to do is ask for $50 more than he wanted in the first place.)

Indeed, a recent report showed Apple Computer with more cash on hand than the U.S. Treasury ($76B to $74B, and of course some companies have much more). This is no indicator that future federal deficit spending will be reduced, as politicians and the liberal press are retorting to "See? Nothing happened!" reporting, and keeps the public rhetoric low for an election year and diffuses public pressure for any real spending controls Washington does not want. But make no mistake: it raises borrowing costs for the U.S., is a major blow to national sovereignty (how can we be sovereign when in debt to foreigners? And foreigners can dictate what they will and won't finance? A war? A spending program?), gives impetus to world-wide voices to scrap the Dollar as the world's reserve currency, and the implications go on-and-on. Greenspan's retort was, "we can always print more," which is simply signaling bankruptcy (printing/inflation/paying off debts at pennies-on-the-dollar, which is bankruptcy, and smart foreigners understand this).

Fortunately, China is forced to buy the very bonds it despises to forestall wrecking its own economy, but even China has dropped its financing of U.S. Treasury notes from over 20% of our deficit in 2008 to about 5%. Quantitative Easing 3 (QE3, more printing) is on its way, as the Fed prints money from thin air to buy the bonds no-one else will at today's artificially low interest rates, hoping to keep our economy from wrecking during an election year, which the Fed has committed to do until 2013. All this serves to devalue the dollar, inflation, and more pent-up problems behind the dam ready to burst.

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The Yen Warns Of The Crashing Dollar

Written by Hank Brock, CPA, MBA, CLU, ChFC
Wednesday, 30 September 2009 09:28

Remember I have told you that the Japanese Yen is the ONE currency that will go inversely to the dollar?  Unlike all the other currencies, there are major reasons why the Yen will see appreciation in years ahead, while ALL other currencies will fall. The dollar will fall the furthest of 1st world nations, with only the currencies of 2nd and 3rd world countries, perhaps, collapsing more.

I could explain this in greater detail, but basically it is because of Japan's deflation of the 1990's when it went for over a decade with their central bank at a zero-near zero interest rate, so people around the world borrowed trillions of Yen at zero, and then invested it elsewhere (especially the U.S. Stock Market and U.S. real estate) to make money on the spread between what they borrowed at and what they could earn.  Now, with the dollar plummeting against the Yen, those people have to sell their dollar-denominated assets and buy back the Yen to pay off their debts now, because if they wait until later, they will get squeezed on the currency exchange rate when they reconvert to Yen.  This puts an escalating cycle of selling pressure on the dollar, and buying pressure on the Yen, driving the Yen up, and the dollar down still further.  No such thing has occurred with any other country or currency over the past 2 decades, and so no other currency will appreciate. And because those investments were primarily in the U.S., no other currency will be sold more as those borrowers rush to pay off their Yen denominated debts.

This is just one more of the dominoes I have been referring to for months.  I guess there are more than 8-9 other major dominoes yet to fall, because as I listed them the other day, they still have yet to make their impact known to the general markets. There are SO many things intertwined, and as one domino falls, it tips the other, and they all go in the SAME direction for the greatest debtor nation in the world (U.S.):  Down!

Let me discuss briefly a number of things that have happened with the Yen in the past couple of months.  Of major political significance was the election on August 30th.  Japan had one of the most significant party changes in 50 years with the election of Yukio Hatoyama.  This election marked a change of the ruling party to the left-of-center Democratic Party of Japan.

As little as a month later, we are seeing the Yen make significant movement against the U.S. Dollar.  Last week we saw the U.S. Dollar drop from 91.27 Yen to 89.63 Yen, or by more than 1.81% in just 24 hours.

I need to emphasize a point here.  When the value of the U.S. dollar crashes globally, your purchasing power falls locally.  We are all intertwined.  The decreased dollar raises the cost on all of the imports into the country, and we are a debtor country.  This means that prices will rise in all major areas of your life.  You will see increases at Wal-Mart, Best Buy, the gas station, and almost everywhere else that we depend on imports.

As the dollar decreases, these countries also begin to pull their money out of our markets.  They begin to look for more attractive investments elsewhere.  When they pull out the markets, what happens to your investments?

I've found that most people missed the two articles published the week before last that: (a) Warren Buffet has used the most recent market climb to sell-off TENS of Billions worth of stocks, to buy fixed investments and gold/silver, and (b) the comment by a repentant former Fed Chairman Alan Greenspan that he now sees a pending world-wide "economic implosion."  As I have been saying for 18 months, the problem is too big for all the world governments to solve. And as Warren Buffet commented a few weeks ago: the worst is still yet ahead of us, the stock market will be up 10 years from now, but for now he sees "very significant" inflation ahead

We have met with many of our clients about how to protect themselves against this, and even profit from it in the months and years ahead. But, there are FAR many more and people that have attended our workshops that we have not met with yet.

Many of them are believing their "money managers" and leaving their dollars in the U.S. stock and real estate markets. They don't understand how those assets, and even CDs, fixed annuities and other dollar assets will be impacted. 

Hank Brock is president of Brock and Associates, LLC, a fee-based financial planning firm specializing in retirement, estate, and tax planning.  For more information on how to protect yourself in the volatile years ahead, we encourage to your schedule a time to meet with our qualified financial advisors.

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