Europe is approaching the end game. Credit markets and other governments know what the continent’s leaders won’t admit: The euro is failing. Gold, more than the dollar, is set to rocket in value as the crisis unfolds.
In addition to looser monetary policy (generous European Central Bank purchases of member country bonds) and austerity (higher taxes and less spending) across most of the EU states, Eurozone governments have a three-pronged policy for containing the debt crisis:
- The European Financial Stability Fund to purchase and insure bonds of troubled governments.
- International Monetary Fund supervision of finances for those governments.
- Direct loans to several — and, in Greece‘s case, a 50 percent haircut on private debt.
None of those three policies is working out.
As I‘ve been saying, we have reached a point of no return. Remember Berlusconi’s blistering attack on Merkel and plea for lender of last resort? He saw the writing on the wall. Austerity, Berlusconi’s resignation, nothing is going to appease skittish bond managers now that the insolvency card has been played. And Italy is simply too large for those mechanisms to work anyway. There are only two options left for the euro: Italian default or monetisation.
Let’s also remember that European policy makers erred in trying to shoehorn a 50% haircut into a non-default event to avoid credit default triggers. I said at the time that Europe had just eviscerated the sovereign CDS market, the likely outcome of which was going to be an increase in bond yields elsewhere in the periphery. And now the unintended consequences are plain: these CDS are now practically useless as far as bond managers are concerned. You might as well sell Italian paper now and ask questions later. That’s what has happened – and all because of the bogus ‘non-default’ deal for Greece on October 26th.
As previously discussed, it’s hard to see how anyone with fiduciary responsibility can buy Italian debt or any other member nation debt after EU officials announced the plan for 50% haircuts on Greek bonds held by the private sector.
Yes, all governments have the authority, one way or another, to confiscate an investors funds. But they don’t, and work to establish credibility that they won’t.
But now that the EU has actually announced they are going to do it, as a fiduciary you’d have to be a darn fool to support investing any client funds in any member nation debt.
Here’s the macro view to remember on gold and stocks:
… all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession… Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
-Credit Writedowns, Oct 2009
Right now everyone is looking at monetisation and thinking this will save the day. You saw the Lakshman Achuthan video; clearly punters don’t think the US is going to double dip.
Warren Mosler again:
The last buyer standing is and was always to be the ECB, which will now be buying most all new member nation debt as there is no alternative that includes survival of the union.
And when this happens there will be a massive relief response, as the solvency issue will be behind them, with the euro firming as well.
Buy gold then.
Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.
Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.
But this one might take even longer as it will be a function of blood in the streets rather than funding capacity.
Maybe traders are right about the effects of monetisation, but I see weakness ahead in 2012 and Europe is liable to turn the US to double dip. When the ongoing double dip in Europe becomes apparent, that’s when people will start thinking deflation. And we will be in a different investing climate. Stay tuned.
This post originally appeared at Credit Writedowns and is reproduced with permission.
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