I recently had the honor of being asked to make a presentation at the Casey Research Summit in Weston, Florida. While Bruce Springsteen was not in attendance, many stars of the investment world were there– Doug Casey and David Galland, Lacy Hunt, John Mauldin, Gordon Chang, Harry Dent, James Rickards, Porter Stansberry, Rick Rule, Greg Weldon, John Williams, and last but certainly not least, David Stockman. I must admit that, at times, I wondered why they hadn’t handed out sedatives at the door since the general tenor of the conference was decidedly downbeat, but from an intellectual standpoint the sparks were flying.

In the May 2012 issue of The Credit Strategist, “Ponzi’s Children,” I discuss Europe and the United States and why investors need to pay close attention to the accelerating deterioration of economic conditions in Europe. The world seems to have forgotten that there are tens if not hundreds of trillions of derivatives contracts outstanding that are held by the world’s largest financial institutions. For example, JPMorgan Chase holds $71 trillion, Bank of America holds $69 trillion, and Citigroup holds $49 trillion. Does anybody believe for a moment that Jamie Dimon, Brian Moynihan or Vikram Pandit has any idea what are in these contracts? They will tell us that these are gross, not net exposures, and that they therefore overstate the risk of non-payment, but even their net exposures are in the trillions. Moreover, in a crisis it will be the gross and not the net exposure that will matter since many counterparties will fail and be unable to honor their sides of these derivative trades. Four years after the last financial crisis we are no better off from a systemic risk standpoint than we were before. Actually we are worse off because the risk is more concentrated in fewer institutions (the crisis having knocked out three of the U.S. investment banks who leveraged themselves into oblivion).

The reason to worry about Europe is that the global financial system is interlinked. Failures of European banks or sovereigns will trigger losses at U.S. institutions. If enough European entities fail, it could cause significant losses here. The consensus is that nothing of the kind will happen. It is the job of The Credit Strategist to look beyond the consensus. We did that in 2001 and 2007 and our readers (and those for whom we managed money) were served very well. Our subscribers understand that. If you are not one of them, you are missing the best bargain in the financial world. Subscribe today.