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With Ireland in the
throes of an IMF-style bailout, we are being told not to worry about Portugal
and Spain, since they are supposedly in significantly better shape. To be
sure, Portugal is already living under stringent austerity measures, and
Spain’s sovereign borrowing is nowhere near that of Ireland, let alone
Greece, as a percentage of GDP. So why are lenders imposing punitive interest
rates on these two, latest countries to get on the ropes? Simply because they
smell blood. Not only are private lenders unwilling to help, they are
actively betting against Spain and Portugal with credit default swaps that
will effectively raise the likelihood of a collapse when oddsmakers
run out of room to lay off the action.
Opportunity moves to size, as traders like to say, and when they have
something as large and juicy as a transnational bailout fund to target, it is
all but guaranteed that they will. After all, there is a huge payoff if they
stick with the bet until Europe breaks.
How do you think George Soros got so rich?
Meanwhile, the very
assurance from Brussels that Iberia can get by without a bailout probably
ensures the opposite. Only thing is, when Spain and Portugal reach that point
– meaning, when currently punitive borrowing rates become literally
prohibitive – the jig will be up for Europe. It is one thing to pretend
that Greece and Ireland’s boats have been floated, since they were
initially alone in needing a rescue. But when Spain’s broad stern
starts to slide into the deep, sucking Portugal into the vortex, the pretense
that Europe’s nearly trillion dollar rescue fund can turn back the
financial mob will evaporate entirely. For now, it doesn’t help
perceptions that Spain and Portugal are themselves guarantors of the current
rescue package, which is worth nearly one trillion dollars. That’s like
having California be a guarantor of New Jersey’s debts.
Germany’s
Resistance
There are other
factors at work that raise the specter of cascading failures somewhere down
the road. For one, Germany has vetoed the idea of boosting the sum pledged to
the European Financial Stability Facility (EFSF). The rest of Europe, it
seems, would like to see it doubled to two trillion dollars. However, Germany’s obstinate
resistance to this idea is understandable, given that it is the only country
with deep enough pockets to have any real skin in the game. Another problem
is that even those seeking to double the EFSF must doubt in their hearts that
any sum of ginned-up money, no matter how large, will suffice to turn back
the tide. For in fact, even a two trillion dollar credit facility – and
all attempts at fiscal austerity, for that matter -- represent just a drop in
the bucket compared to the imploding, quadrillion-dollar derivatives bubble
that is sucking the world’s financial system into a black hole. Spain’s plight illustrates this,
since it is its derivatives exposure, not its budget deficit,
that has caused lenders to wax extortionate.
America’s
Day of Reckoning
And what of the U.S.,
which is arguably in worse shape than Europe? Some might say we’ve been
whistling by Euroland’s graveyard, but the
truth requires a more cynical observation. For in fact, the Fed and the White
House have a strong motivation to play up Europe’s problems as much as
possible, since greater scrutiny of our own problems can only bring on
America’s financial day of reckoning more quickly. To be even more
cynical about it, Moody’s increasingly frequent downgrades of sovereign
eurodebt seem timed to intercept cycles of weakness
in the dollar. If such collusion exists, however, it has barely slowed the
rise of gold, the financial system’s polygraph, even on days when the
dollar appears to be “strong.” Since the first week in November,
the Dollar Index has risen by nearly seven percent while Comex
decline has fallen by about 4%.
While it’s possible that carry-trade unwinds will cause the
dollar to rise even more in the days and weeks ahead, we should not mistake
this purely technical action for strength. On fundamentals, the dollar can
only head lower over time, and we therefore see little reason to fear
overweighting in bullion. In
assessing the condition of the world’s currency system, and judging the
odds of its failure, gold is manifestly incapable of error. As such, we
shouldn’t doubt that it enjoys enormous support from buyers around the
world, especially those with large dollar reserves..
For that reason, and innumerable others, periods of weakness in gold and
silver assets should be regarded as buying opportunities.
Rick Ackerman
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Rick Ackerman is the editor of Rick’s Picks, a
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