Thanks to the blizzard, holidays, and so forth, EVERYTHING that occurs in the markets this week is largely irrelevant. Once the holidays end, we’ll be back to reality in short notice.
The reality is that the situation in Europe has literally reached a fever pitch. We have now progressed to the “contagion” point in which the entire system is at risk versus individual countries. To whit, Ireland has only just been bailed out and already Spain, Italy, Portugal, and Belgium.
What’s truly odd is the fact that anyone is surprised by this turn of events. We played out this exact same drama from 2007-2008 in the US. Throughout 2007 to 2008, Ben Bernanke and Hank Paulson assured us that the Financial Crisis was largely “contained” and would not “spill over” into the US economy.
This charade was maintained even as contagion spread. I recall (as I’m sure you do), that with each successive bailout the problems were deemed solved. At one point, we had weekly proclamations that “the worst [was] over” from various Wall Street CEOs.
Then the whole thing came crashing down.
The clear conclusions to draw from that period in the US are:
1) Each successive bailout will produce smaller and smaller effects until systemic risk hits all at once
2) The world’s central banks are in fact powerless to stop systemic risk once contagion hits
3) The powers that be will do everything they can to maintain the illusion of control despite the clear fact contagion is spreading
4) To the unthinking masses, things will appear to be alright right until we’re literally in the eye of the storm
We now see the same drama unfolding in Europe. It is clear to anyone with a thinking brain that Greece, Ireland and the like will never pay their debts off. Moreover, the European Central Bank (ECB) will not be able to do anything to stop the now accelerating collapse.
Indeed, consider that while Greece and the ECB proclaimed “all is well” for five months, the Euro nose-dived from December (when Greece first caught headlines) until June, when the ECB announced a $1 trillion bailout.
This $1 trillion bailout kicked off a relief rally from June to early November. However, at that point it was clear that:
1) The European situation was much, much bigger than just one country
2) $1 trillion would not be adequate to solve the problem
Since then, the Euro has begun to breakdown in a major way. Timing this breakdown will not be easy. The powers that be will do all they can to intervene and attempt to stop this from happening. However, these interventions ultimately do nothing to change the big picture.
The big picture is that the Euro is on the verge of entering a “systemic risk” period similar to what happened in the US in Autumn 2008. This period will feature accelerating contagion combined with panic selling that will push the Euro down to test its June 2010 low and potentially break it. The long-term Euro chart makes this clear:
This break-down in the Euro will coincide with a rally in the US Dollar and a drop in stocks and commodities across the board. If this sounds like 2008 all over again, you’re right, we’ve essentially re-entered that exact environment.
The only difference is that after the collapse is finished, investors will then set their sites on the US Dollar as the next currency to fall. That’s when inflation will accelerate as the US Dollar collapses, destroying purchasing power while inflation hedges EXPLODE higher.
Some, like the most popular picks (Gold and Silver bullion), will records strong gains. However, others, (the ones that 99.9% of the investment world are currently clueless about), will go absolutely parabolic.