Financial Sense

Euro Crisis Totally out of control? Implications

by Christopher Laird, PrudentSquirrel.com | May 19, 2010

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The evolving Euro crisis is expanding and deteriorating rapidly. In only one week since the $1 trillion EU proposed bailout, the following happened:

This list goes on but you get the idea.

Overall, you can say that the US housing crisis spread to the US financial system first, The US blew up first, but now the others with the same problems (EU) are breaking down, and as the world tried to reflate financial markets and succeeded with public money, that is now over and the new outcome is the EU region is the next ‘Lehman’ style crisis, but it’s a crisis of the biggest economic aggregate in the world the EU (Yes it’s bigger than the US).

Since Germany just acted unilaterally to ban short sales in the Sovereign bond market and CDS, it indicates a lack of EU financial coordination. Germany never wanted to do this bailout, and is dragging its heels, making any attempts at countermeasures too late to increase confidence. (CDS by the way have been the ONLY real market with real pricing for the last several years, and the CDS markets always led to the final deterioration and final ‘verdict’ before the crises of the day spiraled out of control. CDS are bets on debt defaults, their prices reflect the reality. Hitting the CDS market takes away any remaining market transparency. Now all markets are being hidden inside huge public purses).

What this means for markets

Overall, this means that the EU is in serious trouble. It means the EU has shown they cannot contain this situation. It probably means the Euro is going down to parity with the USD at least. If the situation is not brought under control, the EU itself is threatened, and imagine what would happen to the Euro if Germany or anyone bolts the EMU (Euro monetary union). The Euro would collapse.

The USD benefits, the carry trades are unwinding (USD, Yen and others). Gold benefits because it’s a major haven, even with the USD rallying hard and commodities tanking. Gold can still get dragged in if there is a huge world stock sell off, so be cautioned.

US markets benefit as money flees into the US, but still US markets are continuing to drop – this is hugely bearish.

Three weeks ago, we told subscribers that the Dow peaked at 11,000. The Dow peaked at about 11200. It looks like that call is going to hold up.

With Asian and EU markets down, commodities tanking due to expected economic slowing, and US markets down and looking to continue falling, and China already in the early stages of popping their construction bubble (60% of China GDP is construction related) there are no bright spots out there. The US recovery will stall and is stalling now.

None of the above trends are a surprise because the world tried to remove public stimulus and QE (where the public treasuries buy all falling assets) at end of March 2010. We predicted back then that taking out QE would crash markets in two months… well, here we are. Going back to QE with the ECB now is not working either. QE may be a dead resource at this stage. (IE we are not going to see another big world stock rebound with new QE).

The only remaining question here is when will markets really start a long grinding decline, with the EU and Euro right in the middle of the storm. This has probably already started.

Copyright © 2010 Christopher Laird
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Christopher Laird | Los Angeles, CA USA | Email | Website

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