Curtain of Debt Divides Europe

All aboard for today’s Markets and Money! Yes, the train is leaving the station this Monday morning. But where is it going? Gold $2,000? Collapse of the euro? Global financial Armageddon? Or miraculous recovery stimulated by far-seeing and wise politicians? Hmmn.

U.S. stocks headed lower early on Friday and liked it so much they kept on going. Investors can’t be reassured about President Obama’s plan to reduce the deficit AND increase spending. Does anyone take these kinds of plans seriously anymore?

Meanwhile, a curtain of debt threatens to divide Europe in two again, according to World Bank President Robert Zoellick. Well, he didn’t put it exactly that way. But he did say that if Eastern European banks do not get US$154 billion in recapitalisation funds from their neighbours in the West, the “crisis” would get worse.

Which crisis? Good question. There are so many to pick from these days. But in all seriousness, what do Gordon Brown, Angela Merkel, and Nicolas Sarkozy think they can do? Europe’s banks have made bad loans in emerging markets, especially Eastern Europe. Europe’s governments already have high public debt to GDP ratios. And in some places like Ireland, Spain, and the U.K. house prices are crashing.

It’s looking more and more like the euro crash will come before the dollar crash. Or maybe they’ll crash together. Gordon Brown hinted at something bigger and better than just a few major world currencies. He pointed out that nothing anyone’s done has really worked yet. So obviously, more will have to be done.

“These are testing times,” he said, while not pointing out that the test is largely being failed by policy makers who keep trying the same two things. “We’ve seen the biggest global fiscal stimulus that has ever been done. We’ve seen the biggest interest rate cut the world has ever had. Today we decided that we need to do even more than that by working together.”

Cut interest rates? Check! Rush out government checks to people who don’t pay taxes so they can spend money that’s not theirs? Check! Even more? Uh…we’ll check on that and get back to you.

Markets are clearly not convinced anyone in government knows what’s going on or can fix it. Nouriel Roubini says the U.S. is in the third or fourth inning of the crisis. For you non-baseball fans, that means it’s not even halfway over. If the U.S. adds another $4 to $5 trillion in debt over Obama’s administration, Roubini reckons the credit rating of the United States government is going down.

No wonder Hillary Clinton was over in China asking the Chinese to please buy American bonds. It’s a pretty sad state of affairs when the American Secretary of State has to go begging for money abroad. But hey, that’s life as a debtor.

She told a Shanghai TV station, “‘I certainly do think that the Chinese government and central bank are making a smart decision by continuing to invest in Treasury bonds. It’s a safe investment. The United States has a well-deserved financial reputation.”

Yes. You can say that again.

In response to all of this, gold is getting awfully popular. In Aussie dollars, the gold price has rocketed over $1,500. In the U.S., gold broke US$1,000 on Friday. It couldn’t hold the line. But now its supporters are looking at $1,500 as the next strategic objective.

We wouldn’t disagree. But judging by the number of gold-related headlines flooding our in-box, it’s getting to be a pretty popular trade, at least in the newsletter industry. The newsletter industry is not exactly main stream. And of course it’s the thundering herd that’s going to send gold stocks much higher as bullion prices rise. But it still wouldn’t surprise us to see a correction.

Who knows though? Maybe we are watching the governments of the world stumble their way toward depression. At no point since the crisis began have they been able to suggest a remedy that markets liked or restored confidence. Not that we envy them confronting the massive mal-investments of a multi-trillion dollar global credit bubble.

But did it occur to anyone that the best thing to do is nothing? Let the banks fail. Let the businesses fail. Of course it’s going to cause massive chaos, job losses, and insolvency. But isn’t that where we’re headed anyway?

Doing nothing is a kind of action. And doing nothing is something that governments haven’t tried yet. They should try doing nothing to see how it goes. The result could be surprising. And it certainly won’t cost A$42 billion or US$787.

This argument will never carry the day. We are surely headed toward more and bigger programs, more and bigger bank failures, and more and bigger moves in precious metals. On that point, gold shares have lagged bullion. But we’d expect once the gold mania really gets going with the mainstream, the shares we’ll take off. That’s what we’re planning for in Diggers and Drillers.

The other good but disturbing news is the amount of play LNG is getting in the press. Another glowing report surfaced in this weekend’s Financial Review. LNG is emerging as Asia’s favourite carbon-friendly fuel. This is good for Woodside Petroleum (ASX:WPL). But it’s the developing LNG industry in Queensland that has all the foreign energy firms circling the local waters. Kris Sayce has been all over the story in the Australian Small Cap Investigator for a few months now.

The hot temperatures and strong winds have returned to Melbourne today. For all our readers in eastern Victoria, be safe. Until tomorrow.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Curtain of Debt Divides Europe"

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8020 Financial

Political syllogism (courtesy of the old TV show Yes Minister):
We must do something.
This is something.
Therefore we must do this.

Thank you DR for making me feel like the biblical Noah. I am Dinakarananda from India and I am grateful to the entire DR team. I have been an avid reader of DR for the past two years. I am very happy that I stumbled on DR soon after I landed in Melbourne and looking for some Australian business news website that was sensible and truthful. I have been an avid investor in India since 1993 and in the US since 1999. I cashed out almost all my investments in equities and bought 130Kg of gold back in October-November of… Read more »
Jon Bain

The Pound will fall too. Perhaps $, pound and Euro will go down at once. They have overvalued themselves in order to exploit the rest of the world by buying cheap imports. Then, their local business needed protectionist laws to compete. All of which just makes them weaker, and their currencies crashing is the natural result.

The exchange rates are rigged. They do not float, even if they claim to.

Thats the ‘endgame’ for this crisis. The first world losing half its value. If not, then worse.

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