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Forget About The ECB Saving The Day Announcements – It Will Only Make Things Worse

|Includes: DB German Bund Futures ETN (BUNL), EUO, UDN, USL, USO, UUP

So it happened. Just as I wrote in my last article (Trading for a Dark September and a Darker Fourth Quarter, 3rd September), before Mario Draghi's announcement.

In face of the deepening of the Euro-crisis, with Spain openly heading towards the need for a full bailout, threatening to bring down Italy and God knows what else with it, and with the Euro-crisis as a whole only getting worse, ECB President Mario Draghi came to save day and made a spectacular "unlimited bond-buying program" announcement.

The markets immediately switched to 'risk-on' mode again, the EUR rallied and the bond yields of Spain and Italy fell. Also, as most traders and analysts still believe that the Fed will announce QE3 after its September 13th FOMC meeting, the USD was already falling and helping the EUR to go up a little bit - a very short-term move that got stronger following Draghi's comments. In a world where financial markets keep dancing to the tune of central bankers' music, this was as expectable as what will happen next - a major correction.

So, short the EUR, long the USD, short Spanish and Italian bonds, as their yields will come back up in full force, short German Bonds, as they continue to be in a bubble, and do not trust the recent price action in Gold and Silver as definitive - I believe they will go up a whole lot more, but not just yet, because I do not believe that the Fed will go for QE3 in September. Let me explain.

We should ask ourselves if things really changed or will change after Mario Draghi's announcements. And, more than that, we should ask ourselves if they will not indeed change but for the worse.

The truth is that what the ECB announced has solved, and will solve, nothing. It will actually make things even worse - especially for the ECB, which, if it takes this program forward, will be even more leveraged and holding even more toxic and worthless debt. It should be said that the ECB is presently already extremely leveraged, at 38 to 1, and that is before taking any of these announced measures. Also, after LTRO1 and LTRO2, a third of its balance sheet became composed of PIIGS assets. So, if Draghi does succeed in this 'unlimited bond-buying program', it will only place the very Eurozone central bank even closer to the precipice of insolvency. Furthermore, let us not forget that a program such as this adds up to the inflationary ticking timebomb that the ECB has been irresponsibly setting up.

Also, and as we should remember that Eurozone member states are financially liable for all these endless bailouts of all sorts, what will this do to Germany, which, before these measures, is already dangerously exposed to PIIGS assets? Is Germany so wealthy that it can just take on all these debt-over-debt policies? Is it growing all that much? Remember that Germany is currently paying an interest of 1.35% for its 10-year debt issuance, and that its GDP growth in 2011 was only of 3%, and it is expected to grow only 2% this year and 1% in 2013. Also, we should remember that Germany's economy greatly depends on its exports to its European partners - which are getting increasingly less able to buy German products. This is happening while the German Bunds are in a bubble. They are seen as a safe haven but their fundamentals point clearly to a very probable spike in its yields coming as soon as the markets realize that Germany is not doing all that well and that it is taking on Eurozone-related obligations and liabilities that are clearly unsustainable. Actually, opposition in Germany has been escalating against the ECB's monetary lose policies, and this last announcement by Mario Draghi will only make these tensions hotter - and will certainly put Germany one more step closer to dropping the Euro.

Now let us look at the other side of the equation.

The ECB President announced measures that, if put into practice, will only add debt to more debt. The ECB President said it will buy unlimited short-term bonds of Eurozone members which are under financial assistance, and we all know that this is mainly aimed at bailing out Spain and trying to prevent Italy from needing a similar program (but, mark my words, Italy will need one). The ECB said it will launch such a program but only under the compliance of certain austerity measures, so it will only bailout Eurozone member states which need financial assistance but which comply with a set of conditions. Up until now, there isn't really something new here. Of course it was not said if this will affect Greece, which has not really been complying with the Troika's demands. But let's forget about Greece for a while and let us focus on Spain.

Like Portugal, Greece and Ireland, Spain (and Italy, always remember Italy) also has a tremendous public debt-to-GDP ratio which has been growing tremendously, and which the bailout to the Spanish banks via the Spanish Government will only increase. Spain cannot control its budget deficit, as it spends more than it makes in taxes. And, with its economy aggressively shrinking, together with its massive unemployment (25%, the largest and scariest in the EU, not just in the Eurozone), Spain is broke. Plain and simple. Plus, it has a real estate bubble that has not fully burst yet and its autonomic regions not only have their spending out of control - they are openly saying they are insolvent. Spain's problem is not a liquidity problem - just as Portugal's, Greece's or Italy's problems isn't. They are insolvent. And you cannot treat an insolvency problem as a liquidity problem - the ECB has tried it before and it did not help. It made things worse, as it will this time again. And you should certainly not lend more money to someone or something which is already broke - if you do, chances are that you will get seriously burned.

We can see what is happening in Spain and how things will evolve there by looking at Greece and also at Portugal. The so-called 'austerity' measures, imposed by the ECB, IMF and EU through the Troika, have done nothing but deepen the recession in Portugal. As the Government started to increase the taxes on people and companies, the less money became available for people to buy products and services. So the less money was made by companies (and by the Government, which had fewer taxes to collect). So less workers were needed by companies. So the unemployment grew. So the Government had to increase its spending with social support programs, such as subsidies for the unemployed. And, with more taxes to pay and less clients to buy their products, more and more companies started to fail and go broke. So the Government was able to collect even less taxes, so its revenue decreased and its spending increased. Plus, the size of the true giant state that Portugal had and still has did not shrink all that much. The austerity measures were more based on collecting more taxes to support a big government and actually asphyxiating more the economy, than on shrinking the real size of the government. So, while Portugal has been cited as a good example of a Eurozone member state under financial assistance which has implemented even more austerity measures than those which were requested by the Troika, the truth is that the public debt-to-GDP ratio of Portugal has been growing and the budget deficit is out of control. The unemployment rises incessantly and the economy is shrinking brutally. This is a cycle that clearly is not going to stop while the same course of action is followed. Portugal was an insolvent country before the 'bailout' and now it is even more insolvent.

That is what will happen to Spain. Even before seriously considering asking for a bailout to its banking sector, since he has been in office, Spanish Prime Minister Mariano Rajoy also went through the 'austerity' path and has tried to put into practice several measures that Portugal, Ireland and Greece had already been asked to implement by the Troika. The Spanish Government, even before any bailout, started to use the Troika cure for the Eurozone weaker states illnesses - although at first it seemed that Rajoy would resist going too extreme on this. Did this help Spain? Not at all. Spain has been heavily contracting and its public debt-to-GDP has been growing. Unemployment in Spain is just a terrifying reality and nothing seems to stop it. Also, the country's budget deficit is far from the Eurozone's targets. Spain was insolvent before Mr Rajoy took office, it continued to be insolvent after he became Prime Minister, it is even more insolvent today and it will be so, even more, after this announced ECB program.

My point is not that 'austerity' is wrong. My point is that one needs to acknowledge the facts before, then make a realistic plan to try to get out of the dark hole, and then execute it. And it is just getting more and more obvious that all these bailouts and complicated intervention schemes by the Eurozone central bank, bailout mechanisms and governments are only making it all become more and more rotten. It is like a potentially deadly cancer which, instead of being acknowledged and removed as soon as possible, is just managed and treated to try to keep it under control, while it clearly just keeps growing and severely endangering the patient's life.

It is very important to acknowledge that these countries are insolvent and that they must default on their debt in some way - or even in a great way. It is important to acknowledge that the Euro is unsustainable. It is important to start over, to do a reset, to be reasonable and honest, to establish a plan that will involve a lot of pain at first but that will ultimately send these countries to a path by which they can grow again and rebuild their economies. However, I do not think that this will happen. At least, not just yet. I believe things will keep on going like this for as long as people and institutions such as Mr Draghi and the ECB can hold them, and that things will get a lot worse before they can get any better.

With this in consideration, I maintain that the EUR can only go down, even if it is now trading at 1.28. I maintain it even if this hysteria sends it to 1.30 or even 1.35. That is unsustainable and is not grounded on the currency's fundamentals. So, short the EUR. If it goes up a bit more, add more to your short position, as that will only give you a better opportunity to make more money from the fall of the Euro.

At the same time, go long the USD. I believe that the Fed will ultimately go for QE3, QE4 and endless QE, but not just now. The markets are too high - the hope that QE3 is coming in about a week is too priced in and has been making the stock market looking like it is not that bad. Plus, the US economy is still officially not in a full-fledged depression, and going for QE3 before the US election would not help Barack Obama to get reelected, as the Fed's monetary easing policies have become quite unpopular. So, go long the USD, which I believe will go up after the FOMC meeting and with the inevitable correction that the EUR will suffer.

Also, short Spanish and Italian bonds, as their yields will come back up in full force, and short German bonds, as they are in a bubble which makes shorting them a perfect trade.

Finally, I do not trust the recent price action in Gold and Silver as definitive - I believe they will go up a whole lot more, but not just yet, because, as I have stressed out, I do not believe that the Fed will go for QE3 in September, and Gold and Silver have been rising because QE3 is being widely anticipated by the markets.

If I am right and QE3 does not come in September, Gold and Silver will continue its correction, so you will have yet another great opportunity to buy more physical gold and silver bullion at discount prices. Also, if I am right, after the US election, in which I believe Obama will be the winner, more than QE3, we will have endless QE, as it is my view that not only the US economy will keep on suffering, and QE after the elections will be inevitable, but also because that there will be an American - Israeli conflict with Iran. And, when that happens, you need to have Gold and Silver, as much as Oil. This means that, while I believe that going long on the USD is a good very short-term trade, I would be prepared to short the USD once Obama gets re-elected (or Romney elected, as I do not believe that they would behave in a substantially different way when it comes to the conflict with Iran, with the US debt and with monetary easing).

So, go long Oil, and keep stockpiling as much physical Gold and Silver bullion as you can. The days of the US Dollar as the world's reserve currency, the Petrodollar and the American economic supremacy are quickly coming to an end. So, while the USD can be a good very short-term long trade, it is definitely not a good investment.

If you would like to discuss any details about these thoughts and recommendations or to get in touch with me to find out how you can better develop your trading strategy and build a true fortress-portfolio for the turbulent times that are heading our way, please write to

Miguel Mayor

CEO Tangible Wealth Investments