Friday, May 18, 2012

Market Selloff Might Pause Despite EU Debt Crisis


The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The markets should soon find support on their current selloff, but this will only be temporary.  Europe's debt problems, which are at the epicenter of the current financial crisis, are not going to go away, they are only going to get worse until some realistic solution is found.

Stocks in Europe have been selling off for days and so have the euro and gold and silver. Only on Thursday did the U.S. markets start to drop significantly. Gold (GLD) and silver (SLV) managed to rally off deeply oversold conditions after reaching chart support around their lows from late last year. Even the euro (FXE) was trying to rally after getting close to its low from January. The major U.S. market indices are all approaching their 200-day moving averages (the Russell 2000 has already reached it). Some bounce should be expected at or just above those levels. Any upward movement should be considered to be a just a relief rally for now.

Once again the debt crisis in Europe has reared its ugly head. Greece is going to have new elections in June and an anti-bailout party is expected to win. Its credit rating was downgraded to CCC by Fitch on Thursday. An exit from the euro is now being seriously discussed in the halls of European power. At the same time, interest rates are rising in Spain and Italy to the levels where the Greek problem initially began.

Spanish 10-year government yields were as high as 6.38% this morning. The same Italian interest rates had reached just above 6.00% yesterday. Italy's rates were over 7.00% from last November to early January and Spain's were close to that level in November. The ECB then began a massive effort funded with money printing to drive them back down. It worked for a while, but as soon as the printing presses are paused, the market takes right back over.

The more serious problem is with the European banking system itself. Moody's downgraded 16 Spanish banks Thursday night and Spain had to partially nationalize Bankia last week. There was a run on Bankia Thursday and massive amounts of funds have been withdrawn from the entire Greek banking system. Contagion spreading to the major banks in the rest of the EU is a real danger. The LTRO (Long-Term Refinancing Operation) programs of the ECB have encouraged them to load up on the government debt of the failing peripheral countries. Many of the banks that did so were barely solvent as is.

More bailout programs from the central banks should be expected, but they aren't likely to work either. The real problems are with the non-functional economies. Spain is still building empty houses that no one buys and the Spanish banks are funding this activity.  Adding more debt to the problem is only going to make matters worse. Printing money to pay for that debt takes the problem to an even higher level. It all has to give at some point and it looks like the new few months will be one of crisis. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.


1 comment:


The dollars in long term decline.