I’d love to tell you that last week’s coordinated central bank action would help Europe solve its financial crisis once and for all. And that last week’s upside market action was the real McCoy.
But the simple truth of the matter is that Europe’s crisis is far from over … and virtually all markets remain vulnerable to additional sell-offs, some of which will be very frightening.
I’ll get to the markets in a minute. First, some important observations I think you need to be aware of.
Last week’s coordinated central bank intervention did absolutely nothing to solve Europe’s financial crisis. It did not address the cause.
It did not change the European Central Bank’s (ECB) policies of refraining from bailing out member states. It did not change Germany’s Chancellor Angela Merkel’s mind that bankrupt European nations must be crushed into a depression in order to pay off their debts. And more.
In short, it did absolutely nothing to solve the problem. All it did was provide some short-term liquidity for Europe’s financial institutions, many of which are bordering on collapse.
In other words, it addressed symptoms, not causes.
This is why Moody’s Investors Service, the ratings agency, has warned about the growing risk of sovereign defaults in the euro area.
It’s why Belgian bonds have been downgraded. It’s why Portuguese and Hungarian bonds have become “Junk.” It’s why Greece’s one-year bond yield has gone up more than 300%.
It’s why Spain is reportedly seeking a bailout from the International Monetary Fund (IMF). And why Italy is still struggling with a debt load of $2.1 trillion, equivalent to 120% of its gross domestic product — and two-year interest rates that have shot up from 4.63% last month to more than 7% now.
And it’s also why there is a possibility that Austria and even France might lose their triple-A rating status.
And if you think that the IMF may end up solving Europe’s crisis, think again. The IMF just does not have the money. Not even close. Most of the IMF’s major shareholders are broke. Especially the United States.
Only China and Germany have the ability to lend money to Europe through the IMF. Germany won’t. And China won’t lend money to Europe directly or indirectly via the IMF either.
And to top it off, the IMF cannot print money. So there is simply no way it can solve Europe’s sovereign debt crisis.
The bottom line is this: As I’ve said all along, one or more countries will end up defaulting and leaving the euro.
The November 26 issue of The Economist summarizes what defaults in Europe and a breakup of the euro will mean …
“The prospect that one country might break its ties to the euro, voluntarily or not, would cause widespread bank runs in other weak economies. Depositors would rush to get their savings out of the country to pre-empt a forced conversion to a new, weaker currency.
“Governments would have to impose limits on bank withdrawals or close banks temporarily. Capital controls and even travel restrictions would be needed to stanch the bleeding of money from the economy. Such restrictions would slow the circulation of money around the economy, deepening the recession.”
Will it get that bad? Very possible. So the next big question is why wouldn’t that send gold and other natural resources higher?
My answer: In the long run, it probably will. Not based solely on Europe, though. It will send tangible asset prices through the roof when it becomes abundantly clear that the United States is just as bankrupt as Europe is.
But that time is not yet here. In the meantime, very real and high odds remain that …
One, the worsening problems in Europe will cause most investors and most money to either flee to the sidelines or park their money in more-liquid investments such as pure cash and U.S. Treasury securities.
Two, additional liquidity problems will arise that even the central banks won’t be able to address, causing more asset liquidation by investors.
And …
Three, there is a very real chance that you will see the IMF and some European countries start selling gold to free up cash.
You heard that here first. And as hard as it is to believe, especially when other central banks are buying gold — you need to understand how politicians and central bankers think about gold.
To them, gold is a dinosaur — at best, another asset class. It is not money. So if it has to be sold to free up money, then so be it.
Whether you like it or not, agree or disagree, that’s how most central banks and governments view gold these days.
Technically and cyclically, as I said at the outset, there have been no trend changes in any of the key markets I follow …
As long as the Dow Industrials remain below 12,498, at a minimum, on a closing basis, it is poised to head much lower.
As long as gold remains below $1,830 on a closing basis, it too will remain poised for much lower prices.
As long as silver remains below $38.88, it also remains vulnerable, very vulnerable, to a major sell-off.
The euro remains in a very bearish mode.
And crude oil, despite its recent strength, remains poised for a major decline as well.
I wish, again, I could tell you otherwise. But I can’t and I always call them as I see them. Bottom line: If you acted on any of my recent suggestions in the above markets, stick with them!
Best wishes, as always …
Larry
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