Sunday, 31 July 2011


Sean Egan is a credit analyst who boasts one of (if not the) most impressive records in the business.  

Back in '07 and '08 his boutique credit ratings agency Egan-Jones correctly warned its clients of the impending insolvency of a slew of large institutions, months before their more famous rivals S&P and Moody's and long before 99% of economists and so-called expert analysts grasped the scale of the crisis.

Sean Egan
Lehman Brothers, Fannie Mae, General Motors and others were downgraded well in advance of their ultimate demise, partly due to superior insight, but partly because Egan-Jones weren't hamstrung by the glaring conflict of interest which still besets the monolithic ratings agencies on Wall St, which get paid by the same organizations whose products they are supposed to rate.

This is why it behoves us to listen when Egan speaks - or, at least, when he downgrades.

He just downgraded the USA.


At time of writing, the sideshow in Washington over whether and how to raise the United States 'debt ceiling' appears to be in its final act.  Wanna know how the story ends? -  Spoiler alert! - The debt ceiling gets raised.  

But as we watch the politicians slap each other's backs in front of the cameras in a nauseating display of self-congratulation, it's unlikely many of them will realize that, far from rescuing the situation, their rush to austerity and bout of high-stakes brinkmanship just helped seal the fate of the world's economy. 

Citigroup's chief economist Willem Buiter is among a significant number who now believe that due to the reckless behaviour of the political classes and the inadequate spending restraint they've proposed, ratings agencies are virtually certain to downgrade America's AAA credit rating anyway.  The impact on financial markets, though not clear-cut over the long term, can only be negative in the short term.  

Egan-Jones however, always in the vanguard, have already dropped their grenade.  


In a display of iron cojones, a couple of weeks ago they took it upon themselves to downgrade America's debt a notch, to AA+ from AAA, the first ratings agency so to do. If this weren't enough to send a shiver down Wall Street's spine, Egan himself gave an extraordinary interview to Barron's in which he tried to refocus America's gaze toward what is the most glaring and potentially devastating threat to the world's economy: a series of European sovereign defaults.

If you haven't already I'd urge you to read the interview in full, which describes, coolly and in largely non-technical language, the intractable situation Europe's leaders now find themselves in.  This has now gone way beyond Greece.  The EU's most recent bailout for that beleagured nation firmly shut the stable door - after the debt-saddled horse had bolted.  

Contagion has not been averted - it's here.

Italian and Spanish bond yields are nearing danger levels previously hit by Greece, 

Ireland and Portugal before their 'rescues'.

Friends, all the tea in China won't help us if these two mamas need a bailout.

In effect, Egan concludes, the Euro cannot survive in its present form.  Any fix or bailout short of fiscal union will merely make the final reckoning even more painful because, as all clear-headed analysts can see, the European countries in greatest trouble cannot grow quickly enough to be able to pay the interest on their debts.

Before long, says Egan, we will be facing a series of crises in which Europe's biggest banks - German, French and British banks which are stuffed with failing bonds from the PIIGS - will require a second massive bailout if they are to survive.  They must survive, because a true Depression awaits us all if they don't.  In the maelstrom, the European Central Bank itself may ultimately prove impotent and need international help.

Here, Egan describes (from 3min 35s) how the European Central Bank, having bought up boatloads of European sovereign bonds to stave off a default and save the banks, now has limited capital and thus precious little ability to help Italy or Spain.  If these countries' bond yields cannot be swiftly contained, another truly monumental crisis awaits us.

Sean Egan discusses the probable impact of a US ratings downgrade and, from around 3min 35s, the likely genesis of the next European crisis...

(Flash Player required)


Meanwhile, with inflation still worming its way through their economy, China's manufacturing growth has now stalled and may already be in full-scale retreat.  The rocket booster they provided for world economic recovery is now out of gas, and with a property and debt bubble of gargantuan proportions having built up within their banking system, all eyes will soon turn to the all-powerful central committee.  

With just one puff of smoke from Tiannanmen Square, surely they could just bail us all out...

Couldn't they?


More than two years after I identified the beginning of our stock market recovery, and eighteen months since I first warned about the European and Chinese debt threats, I now believe we are very close to the next major turning point for the world's economy.  

I hope to navigate the turn cautiously, but profit substantially and aggressively if and when markets confirm my opinion.  Once or twice a month I'll offer a few succinct thoughts on the unfolding drama and how best to survive and, hopefully, take advantage of it.

To receive any updates as soon as they're posted, you can subscribe by email easily using the button top right, or simply add me to your rss feed.

Because, folks, if there's going to be a meltdown, you might as well make it pay.