Let’s face it, European countries are bankrupt. First it was Greece and Ireland. Now it’s Portugal. Pretty soon it’ll be Spain and Italy.
Politicians will never admit there’s a problem. Portugal’s prime minister just said that they don’t need any financial assistance. Just like Greece’s prime minister said last March, he claims they want to help themselves out of this mess. And like Ireland’s minister of foreign affairs said last November, there’s no need to panic. Of course a couple of weeks later both prime ministers came begging for aid. Portugal will probably do the same.
Everyone wants someone else to bail them out, and pay for their transgressions. And other nations are rushing in to buy the sovereign debt – using freshly minted money of course. Maybe these saviors know that their own balance sheets are somewhat murky and hopefully someone else will return the favor in the future?
After all, printing more money to buy another country’s debt is a splendid idea. Keeps the world economy chugging along without having to deal with any of the difficult issues. Like reducing debt. I’ve never quite understood the notion of solving a country’s excessive debt problem by rolling it over in to more expensive debt. But financiers make money selling debt, so that’s what economists (who secretly harbor dreams of working on Wall Street) will advise the governments to do. But there is a crisis of sorts and whenever there is a crisis anywhere, people flock to the US and to the relative safety of US treasuries.
Everyone and their mother seem to be making financial and investment predictions for the rest of 2011. So I’ll do the same.
1. For the first half of the year the US dollar and government bonds will appreciate – especially against the Euro.
2. Also during the first half of 2011, Gold and Silver prices will drop from their spectacular highs as the US dollar appreciates. But I think Gold prices will stay above $1000/ounce.
3. But eventually, probably during late-summer, people will realize that all the major countries are printing money and using it to prop up failing countries and companies by buying debt, the US dollar and treasuries will slide. And Gold and Silver prices will start to rise again.
4. This collapse in treasuries will be precipitated by multiple bankruptcies in the municipal bond markets.
In the past 2 years, 15 municipalities have filed bankruptcy. According to a recent article in WSJ:
Mr. Bernanke downplayed the notion that many state and local governments run the risk of defaulting and that the municipal bond market could be headed for turmoil. The muni market, he says, has been functioning “reasonably well,” with lots of bond issuance and liquidity in trading. “We’re not seeing extraordinary stress,” he says. Some analysts have been warning that a crisis is looming in the muni market. Mr. Bernanke described these warnings as overly pessimistic. He also said the Fed, which has some limited authority to buy short-term municipal debt, has “no expectation or intention to get involved in state and local finance.” If states are to be bailed out, he said, “it would have to be Congress.”
Isn’t that exactly what he said right before Fannie Mae and Freddie Mac went bankrupt? Let’s face it. There will be a muni-bond meltdown, and Bernanke will scare congress into bailing them out. Bernanke is just a bare-faced liar. Actually, he got tired of being called a bare-faced liar which is why he sports a beard. But regardless, the only reason he brought it up is because it is an issue that will become pertinent within the next 18 months.
Incidentally, previous Fed Chairman, Alan Greenspan, said exactly the same about the housing bubble back in 2005. That it wasn’t an issue and there was nothing to be worried about. As an economist, he should have seen it was a bubble, of his own creation.
This collapse of muni-bonds will scare the pants of regular Americans and foreign investors. As the last bastion of fixed income for the retired, the wealthy and global pension-funds, muni-bond defaults will trigger a major panic. Citizens and investors will realize that they’ve been hoodwinked by the government and Wall Street, and they can’t trust either of them.
5. This will cause a flight to gold and silver, possibly the last and most intense run in this bull market.
I predicted back in December 2005 that “the US is going to enter a period of inflation and recession brought on by the trade & budget deficit and precipitated by the devaluing dollar” and that at $508, it was a great time to buy gold. I still believe it is. If you haven’t already established a position, make sure you buy both gold and silver on dips. If you don’t know how to buy, read through the previous posts on gold and silver. Hopefully, this major rush in gold will not trigger the complete collapse of global currencies. And if it does, it’s still a few years away, so it’s not an 2011 prediction.
Disclaimer: I’m short a Euro ETF, long gold and silver (bullion and mining stocks). None of this should be construed as investment advice.