The Evolving Credit Crisis #2 –May 2012

Daryl MontgomeryMay 22, 2012

Copyright 2012, All Rights Reserved

The contents of this presentation are not intended as a recommendation to buy or sell any security.

Europe on Verge of Implosion

• Debt/Banking Crisis in Europe accelerates and is now moving to Spain.- Spanish 10-years have hit 6.35%, Italy hits 6%- Runs on entire banking system in Greece, Bankia in Spain (+JPMorgan problem)- Moody’s downgrades Spanish banks.- Spain nationalizes Bankia.

• New Greek election in June, anti-bailout party likely to win. Socialists win in France.

• LTROs have filled the EU banks with junk debt of peripheral countries (PIIGS).

History of EU Country Borrowing Rates

Economies Faltering• Official GDP growth for EU in Q1was 0%.

• UK and at lease 8 other EU countries are officially in a recession.

• China GDP 8.1% in Q1, 7.9% predicted for Q2.

• Japan GDP up 4.1% in Q1 (gov’t auto subsidies).

• U.S. GDP up 2.1% in Q1 (subtract 3%).

- April Jobs up 115,000, unemployment 8.1% (labor force down 10 million in 5 years).- Retail Sales up 0.1% in April (with inflation).

- ISM Manufacturing up, Services decrease.

Monetary Policy Worldwide

• Central Bank Interest Rates:- U.S. and Japan close to 0.0%- UK at 0.5%- ECB at 1.0%

• Fed doing Operation Twist and dollar swaps.

• BOE still on QE2.

• ECB balance Sheet increases more than Fed’s (China bigger still, cuts bank reserves).

• BOJ bought record amount of ETFs.

• U.S. Monetary Base pauses after 3 exponential increases, money supply keeps rising.

Summary of 2012 Monetary Policy

Debt by Country

U.S. Monetary Base

Money Supply MZM

Dollar Swap Lines

Demand coming from EU and Japan.

ECB, Fed, China, Japan Balance Sheets

ECB, Fed Balance Sheets vs S&P 500

Fed Balance Sheet

• National Debt: $15.7 trillionState and Local Debt $2.8 trillionUnfunded liabilities $119 trillion.

• Debt to GDP ratio >104% (actually much greater).• Debt doesn’t include Federal Reserve or Fannie

Mae, Freddie Mac and FHA obligations. • Debt Ceiling at $16.4 trillion. Will be hit in

September/October (not after election). • Federal budget deficit for 2012 at least $1.3 trillion.

California at $17 billion. • 2012 Trade Deficit could reach $700 billion.

U.S. Fiscal State

This Year’s GDP Revisions Compared to Last Year

Blue line original numbers. Red line revised numbers.

Shadowstats.com and Reported U.S. CPI