Even U.S.-Based Investors Need To Know

The markets in Europe continue to rally hard despite the fact that Europe’s financial system is totally insolvent.

At the center of this mess is Spain, which now barely functions as a country. Spanish pharmacies, owed $500 million by the government, are running out of medicine in Valencia. Strikes have resulted in trash not being collected for 20 days in Jerez. Over 2.2 million children live in poverty in Spain (the countries entire population is just 47 million). In the region of Andalusia some government workers haven’t been paid in eight months and are working for free while begging for food.

Spain's Garbage Debt
The banking system is in even worse shape. Having experienced a housing boom that made the U.S.’s look small in comparison, Spain’s banks are packed to the brim with garbage debts which are worsening by the month.

Spanish housing prices saw their biggest quarterly drop since the crisis began, falling an average of 15% in the third quarter. Spain’s number of bad loans has hit a new record, moving up at the fastest pace since June 2012 when the entire Spanish system almost imploded. The default rate on real estate loans is an astounding 30%.

On Life Support
The Spanish Government’s response during the crisis has been to merge one totally insolvent regional bank or caja with another. Bankia, the large bank that had to be nationalized last June was in fact the product of a merger of seven bankrupt cajas.

Spanish banks are drawing over €365 billion from the ECB to keep the system afloat. The entire market cap of the Spanish banking system is only a little over €100 billion. We’re talking about an entire banking system that is bust and on life support from the ECB.

And yet, somehow, the investment world is convinced that there is a way out of this mess. Spanish yields are falling. The Spanish Ibex rallies. Spanish bank stocks are up over 10% in the last month and a half. Why? Because of more money from the ECB and EU? Short-covering? Who knows. But there is absolutely no fundamental improvement to Spain’s finances, its economy, or its banking system.

And sometime down the road, this whole mess will come crashing down.