The Euro – Arranging the Deck Chairs on the Titanic
Many people think that the European Union was some form of agreement to get all the countries able to do commerce more easily, instead of having 17 different types of currency and 17 different interest rates. And at 50,000 feet that sales pitch sounds very much believable. But what if their founding was really all about safety. In the U.S. we’ve never been invaded by Hitler, seen millions die in trenches, and before that had England, Spain and France lobbing musket and cannon balls at each other. After centuries of war Europeans wanted an ever-lasting peace. The difficulty here is taking 17 "cultures", and melding them into one interest rate/one currency/one work ideal. For example: Germany is full of hard working people, enormous exports, tremendous precision and quality. While Greece is socialist to the extent that people vacation more than work, exporting very little, and living off the government. Time has proven that these two cannot function under one economic rule. As one can imagine the German people are none too fond of having to adjust their work lives, and their savings habits to bail out the ‘Club Med’ folks. But, there is indeed a plot to figure out this nightmare, and to do so we need to go back to 2008 in the U.S. to figure it out.
In 2008, the U.S. had a housing "Ponzi scheme" the likes of which the world has never seen: from politicians that had plans to get every person in a house, to greedy bankers that sold fraudulent mortgage backed securities (MBS's) around the world, to a credit explosion that ‘financially’ interconnected everyone.
So, while the politicians played to the masses of people with declining wages, and created the "bubble", you know that behind the scenes The Ben Bernanke, Paulson, Geithner and the rest of the Goldman Sachs alumni said: "Don't worry about it. Make the loans; take in the fees. It won't be evident for several years that it's a massive nightmare. Then package all of it up, and make more fees selling the Mortgage Backed Securities to all the pension funds around the world. You'll take in more billions in fees". And then someone asked: "But what happens when they're all found to be junk?" To which the reply had to be, "That's not a problem – the U.S. Federal Reserve will make sure all the major banking institutions that buy this stuff, will be made whole". Then they asked: “Can we really make Europe whole?” The answer: “Legally no, but in reality – you bet!” The rest is history and for the longest time I was wondering why none of the European Banks were screaming lawsuit? Well recently (via the Freedom of Information act, along with several lawsuits from Bloomberg) we found that the Federal Reserve had lent/given European institutions some $16 TRILLION. And when Congress asked The Ben Bernanke, where's the money? He replied. "I don't know". The same response John Corzine gave last week when asked about the missing $1.2B from MF Global!
Okay, now we fast-forward to Greece going under, and 5 other countries very close indeed to declaring insolvency. Now the ECB of Europe is often thought of as Europe's Central bank and in some function it is. But the ECB is legally not allowed to lend to any Government. And all totaled – countries needed over $6 TRILLION to stop the bleeding. Who has $6 TRILLION – enter Timothy Geithner from the U.S. But one of the caveats of this lender (and one of the articles of the ESM) is that a "Committee" of 8 Government regulators, and 17 "Board Members" be formed. These 25 people will have TOTAL control of all the member countries budgets, austerity rules, margins, rates, ratios - you name it. Now where it gets interesting is that the heads of ALL of these banks, and Governments are Goldman Sachs employees, advisors, or X-Goldman Alumni! Just a coincidence? I think not!
So here is how I think this will all play out. The ECB will stand firm against lending to the individual countries and randomly printing money. The insolvent countries need that money desperately, and will be forced to join the ESM (controlling ‘board’ etc.). When everyone is then "under the umbrella" of central command, the money will flow. But if it’s illegal for the ECB to lend money, where’s the money coming from? The money will come from the U.S. Federal Reserve. They will do what they perfected in the housing bubble years, which is to get money, attach fees to it, and lend, lend, and lend to all the sovereigns. And they’ll funnel it through Goldman to ‘Get Er Done’! So the bankers are in line to make ‘Billions’ providing the money those countries need. And who’s on the hook for it: The U.S. taxpayer!
The Market:
Because of Europe, our market has been an up and down mess. Without the huge "bazooka" of money, the bankers don't get all those great fees, nor do they get to go speculate in the markets and drive prices higher. But the bazooka is coming, they just have to get it all set up. When everyone is "on board", the money will indeed flow. Because the money spigot isn't currently on full blast, the market has had a hard time driving itself higher – for example: up days still come on lower volume than the down days. Too many fund managers, desperate for performance want with all their might to just buy-buy-buy, but they still worry that something in Europe will beat them up again. They've been through it too many times. But I tend to think that they're going to try one more time to push this market over the resistance line of DOW 12,200. If it makes it (and I believe it will) we should have one last hurrah run that takes us close to Christmas and nearly challenging the 12,600 level.
Now (don't get me wrong), we don't deserve a rally. Just this week, Cargill a huge private company with it's roots in lots of businesses, said that sales were slowing quickly. DuPont, Corning and the chip sector all warned that they wouldn’t make their yearly numbers. The true economic news is terrible. This week we heard that initial jobless claims fell to 381K. Well, those are "seasonally adjusted" numbers, and without the adjustment the initial claims soared by 120K to over 500K. But yet again, fundamentals mean nothing, because it’s all about free money. The Fund Managers "need" a decent market for year-end bonuses, and they don't have much time left to make it happen. So, if we get through 12,200 and close above that for 2 sessions, it's my guess we run wild for a while.
Oh, one last note, when the money spigot is opened for Europe, both gold and silver will make their next move higher.
Tips:
For those of you following me on Twitter – you know that I purchased more Gold and Silver last week.
Currently we have:
- GLD at 159.49 – now at 166.55, (bought more last week),
- SLV at 28.00 – now at 31.37, (bought more last week),
- MS (Morgan Stanley) at 15.08 – now at 16.4 – my sell stop is 15.5
- BAC (Bank of America) at 5.31 – now at 5.75 – my sell stop is 5.31
- GS (Goldman Sachs) at 92.1 – now at 101.70 – my sell stop is 96
- MGN (Mines Management) at 2.33 – now at 2.47 – my sell stop is 2.40
With the U.S. backstopping Europe, it means we will be printing more money. That means inflation, and that means Gold will rise both on the idea of an inflation hedge, and as an alternative currency. Silver will rise on the inflation hedge, and the ever-continuing global demand for it both as an investment and for industry. Frankly they're both seriously in play and will be until the Fat lady sings – and she’s not even in the dressing room!
We’re still looking at the junior minors, but the only one we pulled the trigger on as of yet is MGN.
To follow me on Twitter and get my daily thoughts and trades – my handle is: “taylorpamm”.
Please be safe out there!
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