Friday, November 11, 2011

Is Italy’s Sovereign Debt the Subprime of Europe?

The US has not been in the spotlight recently, but most who have followed the rolling crisis which started in 2007/2008 will remember this chart showing the hundreds of billions worth of subprime (US mortgage) resets that occurred over the period:


These resets were considered one of the main triggers for the US house price crash (and subsequent GFC) as borrowers who had been provided too much housing debt were thrown from artificially low fixed interest rates to much higher floating/variable levels and many were unable to meet their repayments.

Following on from the above chart showing mortgage resets, this one caught my eye on Acting Man:


It shows that Italy has a lot of debt rolling over in 2011 and 2012 or resetting if you will (like the subprime) taking on a higher rate depending on what the market is prepared to offer. That might not have been a problem except that recently interest rates on Italy’s debt have started to climb, much like they have in other troubled countries. This chart from TF Advisors (posted on Zero Hedge) shows that a 6% 10 year bond rate has been the inflection point for several of the other countries experiencing bond contagion:


Will Italy be able to reissue all this debt in a manageable fashion if their rates are out of control? Germany has already pointed out that Italy is too large to bailout… could Italy be the trigger for the next large market rout/credit event that could end in complete collapse?

A couple of thoughts from Martin Armstrong's latest:
Today, there is no plan. There is no transition, only austerity. The politicians are doing NOTHING whatsoever for any reforms they reject because it would change the way they have been doing business since WWII. Italy’s debt is bigger than Spain, Portugal, and Greece combined. It is too big to be bailed out and there is no PLAN B to even address what happens if sitting on their hands blows up in everyone’s face? Stay away from ALL government debt! This is a wave of Creative Destruction. We are in a transition to a completely new world ahead. Armstrong Economics
The crisis has morphed over the past 3-4 years. Some readers might remember I have posted this chart before, but I think it is worth sharing again. It shows the progression of events as we have rolled around from consumer, to corporate and now to a sovereign debt crisis:


I don’t pretend to have an answer to the excessive debt problems we face, but whatever outcome those in charge decide to roll with (Papandreou’s cancellation of the referendum for Greece’s ability to choose their own fate really shows what little choice the people have in these decisions) we are looking at turbulent times over the next few years or longer. There have been few assets which have been able to roll with the punches as this crisis has evolved. Gold and Silver have thrived in this uncertain environment (with setbacks along the way of course) and it's likely they continue to do so (with a medium term outlook, short term weakness always possible) until an end is in sight to this mess. I’ve got a strong pair of binoculars and I can’t see the finish line yet…


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  1. Nicely written, especially the ending.

    Good to have you posting so much again, thanks for sharing your intelligent research and analysis.

    I've had enough of the volatility and moved most of my (not self managed) super into cash. When the markets tanked in August, the press was saying: "You'd be crazy to move your super into cash." Maybe I am but there is "Huge crash that won't bounce back very quickly" written all over the majority of the stock market due to Europe. I only wish I could buy gold with my super!

  2. Thanks!

    I was away overseas for a few weeks there, hence the lack of posts. Have been meaning to write up a post with some details of my travels... will get around to it.

    My super allows ASX300, so back in May 2010 when we had the flash crash and everyone was panicking I moved around 80% of my super into bluechip Gold stocks and the account has performed superbly. On average over 5 companies the portfolio is up around 70-80% at the moment. I'm considering going self managed for even more control as well...

  3. Agree with earlier post. Nicely written & glad to see your great posts again. I've been reading your blog fairly regularly since this summer. Wish I had discovered it sooner.

    I have a modest position in Silver Lake Resources(SLR.AX) that I noticed you (and another blog I frequent) have recommended. It has performed excellently since my initial position(s) taken this summer. The only other ASX listing I own & discovered via your postings is Castlemaine Goldfields(CGT.AX). This week was a horrible week to be a CGT shareholder. I was wondering if you have any new/interesting info or perspectives on this week's news release from the company? I'm trying to decide if this position is worth holding. Any and all comments are appreciated. Thanks again for all you do!

  4. It has certainly been a rough week for shareholders of CGT (which I still am). With juniors like this I spread my risk over 8-10 stocks or so usually so that when something like this happens it doesn't hurt so much, but there's still a hole in my account here... I topped up at around 50c and 40c recently.

    CGT has always presented a pretty confident case that they will be able to mine this project profitably. As I'm not a geologist I can only run the numbers they provide and in the case of the deposits they recently mined ore from, the numbers didn't match reality.

    AAM was another (Western Australian) company who recently went through similar and I lost some $ there as well. I averaged in at 27c, I sold out 18c and today the share price is 2c. Just an example of what can happen if the Gold expected is not there.

    It all comes down to whether Mako has payable Gold.

    Even at a reduced rate of production (say 35k oz pa instead of 50k) and lower margins (say $1100oz cost), they'd still be looking at gross (annual) revenue similar to their current market cap. Will have to wait and see, I don't intend on selling until we've seen what comes from Mako.

    There is of course the possibility that CGT will need to raise capital... so risk of further dilution which shareholders need to consider.

    CGT is presenting at the Gold Symposium which I'm heading to this week, if I pickup anything worth sharing I will post it up.

  5. I'm holding 9 mid-junior miners too that include SLR and CGT.

    Bought CGT at the top when gold was 1900. I'm down 80% so don't see any point in getting out now! Will just ride it out.

    SLR is doing very nicely though and could have more to run. Could this make it up to $6 or $7 or even be taken over. I'm holding this one mid term for sure.

  6. BB- Thanks for your opinions on CGT. I'm also leaning towards holding CGT, at least until Mako results are more evident. I currently hold more than a dozen total positions in Canadian & Australian PM juniors. SLR & CGT are currently the only ASX listings I hold. I would like to expand my ASX listings over the next few months. I'm currently evaluating the price action of Kingsrose Mining(KRM.AX) as a possible holding as well.

    Any info that you can glean & that you are willing to share with us from the upcoming Gold Symposium regarding CGT (or any other interesting PM miners) would be most appreciated. Thanks again for all you do!