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The
evolving Euro crisis is expanding and deteriorating rapidly. In only one week
since the $1 trillion EU proposed bailout, the following happened:
- Merkel’s
party got creamed in the regional German elections last week. This is
paralyzing Germany politically.
- UK’s
Brown resigned and Cameron took over.
- France’s
Sarkozy threatened to pull out of the Euro and banged his fist on the
table, making Merkel blink and leading to their disastrous German
elections.
- Now Germany
bans short sales on Banks and CDS and sovereign bonds – revealing
the panic out there in the EU.
- EU is in
total chaos politically, they cannot solve this crisis with their many
nations who must approve each major fiscal measure like bailouts. The
ECB and EU are not capable of the quick unilateral action like the Fed
is capable of – meaning they are always behind the curve on this
rapidly EU escalating sovereign bond crisis, which is spreading now to
EU banks and CDS, not only sovereign bonds, and spreading to the Euro.
- They say the
Euro has never been tested severely like this since its inception in
1999/2000. The test is a huge FAIL. The Euro is falling in an out of
control way.
- ECB’s
Trichet had to relent and do the nuclear option to buy bad paper (bonds
etc) off the Greeks for starters. ECB loses huge credibility.
- Net effect
of the political and financial failures is huge uncertainty for the Euro
and the EU.
- This all
leads to a Lehman like contagion, which is now in process. It’s
all out of control.
- EU and ECB
are only reacting to this mess and are they not in control at all.
- Contagion is
spreading to all financial markets, and appears unstoppable.
- Electronic
trading and ETFs cause liquidity to dry up in minutes to zero (means
crashes are not controllable whatsoever).
- EU countermeasures
are too late and are panicky – (they have lost control of the Euro
and debt situation). Derivatives (like ETFs) have made markets highly
susceptible to huge flash crashes. Attempts to counteract this only
makes things worse. Markets are now totally out of control as circuit
breaker measures in one market are merely circumvented by others moving
to alternative markets/exchanges where they can still trade.
This
list goes on but you get the idea.
Overall,
you can say that the US housing crisis spread to the US financial system
first, The US blew up first, but now the others with the same problems (EU)
are breaking down, and as the world tried to reflate financial markets and
succeeded with public money, that is now over and the new outcome is the EU region
is the next ‘Lehman’ style crisis, but it’s a crisis of the
biggest economic aggregate in the world the EU (Yes it’s bigger than
the US).
Since
Germany just acted unilaterally to ban short sales in the Sovereign bond
market and CDS, it indicates a lack of EU financial coordination. Germany
never wanted to do this bailout, and is dragging its heels, making any
attempts at countermeasures too late to increase confidence. (CDS by
the way have been the ONLY real market with real pricing for the last several
years, and the CDS markets always led to the final deterioration and final
‘verdict’ before the crises of the day spiraled out of control.
CDS are bets on debt defaults, their prices reflect the reality. Hitting the
CDS market takes away any remaining market transparency. Now all markets are
being hidden inside huge public purses).
What
this means for markets
Overall,
this means that the EU is in serious trouble. It means the EU has shown they
cannot contain this situation. It probably means the Euro is going down to
parity with the USD at least. If the situation is not brought under control,
the EU itself is threatened, and imagine what would happen to the Euro if
Germany or anyone bolts the EMU (Euro monetary union). The Euro would
collapse.
The
USD benefits, the carry trades are unwinding (USD, Yen and others). Gold
benefits because it’s a major haven, even with the USD rallying hard
and commodities tanking. Gold can still get dragged in if there is a huge
world stock sell off, so be cautioned.
US
markets benefit as money flees into the US, but still US markets are
continuing to drop – this is hugely bearish.
Three
weeks ago, we told subscribers that the Dow peaked at 11,000. The Dow peaked
at about 11200. It looks like that call is going to hold up.
With
Asian and EU markets down, commodities tanking due to expected economic
slowing, and US markets down and looking to continue falling, and China
already in the early stages of popping their construction bubble (60% of
China GDP is construction related) there are no bright spots out there. The
US recovery will stall and is stalling now.
None
of the above trends are a surprise because the world tried to remove public
stimulus and QE (where the public treasuries buy all falling assets) at end
of March 2010. We predicted back then that taking out QE would crash markets
in two months… well, here we are. Going back to QE with the ECB now is
not working either. QE may be a dead resource at this stage. (IE we are not
going to see another big world stock rebound with new QE).
The
only remaining question here is when will markets really start a long
grinding decline, with the EU and Euro right in the middle of the storm. This
has probably already started.
The
Prudent Squirrel newsletter is our financial and gold commentary. Subscribers
get 44 newsletters a year on Sundays, and also mid week email alerts as
needed. The alerts include quick notification of important financial news
developments by email. Subscribers tell us that the alerts alone are worth
subscribing for. We have anticipated major market moves by weeks for
subscribers in the last two years.
I had
one potential subscriber ask me if the newsletter has much more content than
these public articles, ie, if it was worth subscribing. The answer is that
the public articles have less than 10% of our research and conclusions that
subscribers see, not to mention the subscriber email alerts of important
breaking financial news. We have anticipated many significant market moves in
the last year, such as imminent drops in world stock markets within days of
them happening, and big swings in the gold markets within days of them
occurring. We have also made a number of good calls on big currency swings,
such as with the USD, the Euro and the Yen.
We
invite you to stop by and have a look.
Chris Laird
Prudent
Squirrel
Chris Laird has
been an Oracle systems engineer, database administrator, and math teacher. He
has a BS in mathematics from UCLA and is a certified Oracle database
administrator. He has been an avid follower of financial news since
childhood. His father is Jere Laird, former business editor of KNX news AM
1070, Los Angeles (ret). He has grown up immersed in financial news. His
Grandmother was Alice Widener, publisher of USA magazine in the 60?s to 80?s,
a newsletter that covered many of the topics you find today at the preeminent
gold sites. Chris is the publisher of the Prudent Squirrel
newsletter,
an economic and gold commentary.
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