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Looking for Hints

Folks, as you may have heard, there was some good news out of Germany earlier today. Chancellor Angela Merkel approved giving new power to the European bailout fund—what they’re calling the European Financial Stability Facility. It still has to get through parliament, but it’s a baby step.

This measure certainly isn’t going to end the debt crisis over there, but I believe it’s a strong indication of where things are heading. Germany is the key to Europe, and Merkel is a strong leader. I believe that her renewed commitment to the EU—which includes all that distressed debt in the PIIGS nations—will help to clarify the direction things are headed in the minds of portfolio managers.

Is the debt crisis in Europe still worrisome? Of course. But with this action by Merkel, it seems to me all but inevitable that Germany is ready to come to the rescue. They know very well that a unified Europe is an amazing economic force, and they’re ready to help this experiment through these growing pains.

Gold is still testing that 61.8% retracement level we talked about the other day. It’s having a debate between the reflation trade and being overbought. This is a tricky situation—if the equities continue to go higher and gold continues to fail at that retracement level, we could very well see it get clobbered. Keep an eye on this—the gold story is absolutely fascinating right now.

I’ve been talking a lot about inflation lately, both on the show and on the blog, but I wanted to quickly put a point on something before I go today. This whole exercise with quantitative easing and artificially low interest rates—what I call being force-fed the inflation pill—is aimed at one thing: helping the housing market.

Think about it: if you have a $500,000 mortgage on a house that’s worth $400,000, that’s bad. But as inflation occurs, you now have a $500,000 mortgage on, say, an $800,000 house. That’s exactly what the Fed chair is trying to do—take debt on the books lower in percentage terms.

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