Little did Sprott know at the time of his latest interview, it appears the triggering event took place early this morning.
Speaking with Goldmoney’s James Turk in Munich, Eric Sprott warned of another Lehman-like event stemming from the European debt crisis, which this morning took a definitive leap forward toward Sprott’s prognostication. Sign-up for my 100% FREE Alerts!
As the bellwether 10-year Italian bond blew through 6 percent on Monday, now through 7 percent, to 7.46 percent, this morning, it appears that the ECB has either given up on containing the contagion through its Italian bond purchases (as it had threatened on Monday), or worse, has been active in the market but cannot stem the avalanche of selling.
It was all CNBC has been talking about this morning, with an audio track from the movie “Godfather” playing between commercial breaks to add to the morning discussion. Jim Rogers was there, too, providing commentary and his usual straight talk. Rogers reminded viewers he’s short European stocks while the CNBC bugs flashed big red down arrows.
Like Rogers, Sprott doesn’t believe the banks balance sheets in Europe.
Sprott points out the obvious to those familiar with the bogus accounting out of the European banking system (and U.S. system). Aside from the tier-3 assets (derivatives) not accurately reported by the banks, the tier-1 assets-to-equity that is reported reveals that European banks are grossly more leveraged than the US banks were prior to Lehman’s collapse.
“The level of derivative that are not even on the [banks] balance sheets is staggering. So even if you’re looking at 20-to-1 you don’t even know if it’s 20-to-1 anyway. It could be 50-to-1,” Sprott said, whose estimate may in fact be true given how net exposures turn into gross exposures at time of an event, to wit, Dexia and MF Global.
And Barclays Capital agrees, whose latest communique suggests that due to the collapse in Italian bonds this morning, “it seems Italy is now mathematically beyond point of return.”
Barclay’s reasoning is simple, it stated after the close of trading Tuesday, “Simple math–growth and austerity not enough to offset cost of debt,” and “reforms . . . in and of itself not enough to prevent the crisis.”
And as far as the EFSF backstopping Italy (if it can actually get funded), Barclays states, it’s “not adequate,” anyway, a conclusion FX Concepts John Taylor had drawn during the summer.
What to do? Zerohedge wrote, “Hint: Not good. Sell euro, buy gold.”
Back to Sprott, who said on Financial Sense Newshour on Oct. 19, gold has been the de facto reserve currency during the ongoing crisis, as its price has appreciated in all currencies since the Lehman meltdown three years ago.
“The markets have made gold the reserve currency. That’s what I believe, that’s gone up 100 percent against every currency in the world,” Sprott explained. “So, it is the world’s reserve currency, as far as the markets go.” “And as an offset to that, gold is not going to be a reserve currency without silver playing a hand here.”
Fast forward back to the Turk interview, Sprott, when asked about the possibility of another Lehman-like moment, Sprott said, “it almost has to occur.”
Sprott’s expected falling dominoes could be in motion now. It appears market maker LHC.Clearnet has become a little nervous about its clients holdings of European debt, issuing a notice on Nov. 8 to holders of Italian 10-year debt of a deposit hike to 11.65 percent, from 6.65 percent. After today’s rout, which by the way, has inverted the Italian 2y-10y yield curve for the first time throughout the 20-month drama (as Greece debt had, and is), we suspect LHC will issue further notices.