The Dow dropped nearly 1,000 points (5%) and the London FTSE dropped 10% after the Brexit vote surprised the markets on June 23. After two days though, markets are marching back up again.
That’s just like markets on “crack!†They react to political events, but totally miss the fundamentals.
Yes, Brexit is important. Years from now it will be recognized as the beginning of the end for the great Eurozone experiment.
It isn’t just about the renegotiations on trade agreements with Britain and initial slowing of GDP. It’s also about the threat that more countries will choose to exit the economic bloc. The euro and Eurozone have 40%-plus unfavorable ratings in polls in France, the Netherlands and Italy. That many areas within countries will break free of their overlord. And then this rush for nationalism will spread across the globe like wildfire.
But here’s the 800-pound elephant in the room (I talked about this in detail in the February issue of The Leading Edge). The one Wall Street seems blind to at the moment…
Italy is the next Greece! It’s bad – non-performing bank loans have risen to 18%. At 10%, most banks are technically bankrupt. That’s the percentage of capital and pledged deposits they have against bad loans. Our pledged deposits, not theirs. At 18%, they’re no longer “technically†bankrupt. They ARE bankrupt!
Greece still has bad or non-performing bank loans of 34%, Ireland 19% and Portugal 12%. And we haven’t seen the next serious financial crisis yet.
Yet nothing has been done to seriously restructure debt in southern Europe. The EU just bailed out Greece to stop the dominoes from hitting other countries. They’re pumping in heavy doses of QE to keep the banks and economy temporarily liquid and solvent. But the problems are growing even worse. The blood is getting harder to hide…
Just look at Deutsche Bank (DB). It had its largest loss in history in the fourth quarter of 2015: $7 trillion, without any help from the next financial crisis!
