Monday, December 12, 2011

European Union Hits the Fan

Europe’s got a big ol’ debt problem. Euro-land is drowning in debt and unlike the US, they don’t have a means to print enough money to produce a life preserver. The US, of course, is kept afloat by the Federal Reserve and their printing press. By printing and conjuring trillions from thin air, the Fed has fastened a life preserver around the neck of Americans. In the end, they won’t go anywhere because all the land is flooded. But on the other hand, they won’t drown. They might starve to death or perish from exposure. But at least they feel confident that the Fed is their friend and might eventually toss them a crumb of food from time to time. 
The European Union, on the other hand, is dominated by Germany and Germany so far has resisted the printing press idea to a degree. Yes, they have agreed to allow different lenders from the IMF to the newly formed EFSF to the ECB to facilitate paltry loans to keep the leading edge of the debt tsunami from drowning the masses. But the big meeting this week was supposed to offer some kind of resolution. But alas, our German friends find that old habits are hard to break. They have always been a big believer in propaganda and they apparently still follow the J. Goebbels strategy of using propaganda for crowd control. The EU meeting concluded with yet another announcement that the rulers of the EU were hard at work in an effort to solve tens of trillions of debt and derivative suffocation with a one-pint air tank. Yes, they threw a few more hundred billion at the most troubled economies but big deal. They still don’t seem to understand how derivatives exponentially magnify debt like Ben Bernanke does. He and his merry Fed members have manifested anywhere from $7 trillion to $29 trillion in bailouts and loans to keep the US afloat for another day. It all depends on who we believe but I would put the Federal Reserve as the last entity on Earth that I would believe about anything. I found it indicative of today’s real struggle with reality in that Bernanke denied loaning the world tens of trillions. Rather, he protested, the figure was closer to ‘just a trillion and a half’. We know we are dealing with incredibly large numbers when any number followed by 12 zeroes is ‘just’ like any ol’ number. How can $1,500,000,000,000 be minimized and trivialized? These are extraordinary times in which we live and unfortunately, we don’t have any extraordinary leaders on the planet to save us.
So the EU agreed to some kind of ‘pact’ to tighten up EU governance and thus allow the Union to issue ‘sanctions’ against debt offenders. No one knows what this really means and no one has a clue as to how this will be applied. Thus, it would seem that the debt in Europe has hit the proverbial fan. 
This whole thing seems so simple. A fat man needs to go on a diet and eat less food. That’s not good for the grocery store in which the fat man shops. But, the fat man is going to die if he doesn’t lose weight so he needs to cut back his food intake and spend less money on food. The grocery store will therefore sell less food. Economies that expanded with debt can no longer support their debt. Therefore, they need to go on a diet, cut debt, cut spending, and get in better fiscal shape. Their grocery store has been the banks that helped them all get fat on debt. But the banks don’t want the economies to cut back on debt nor do they want them to cut back on spending. The banks don’t care about good fiscal health. And, they are not about to steer economies down the healthy isle of the store. Worsening the problem is the attitude of the economies that are indebted. They don’t want to cut back either. There is no solution but slow death.
What this means to investors is something I have written about over time. The currency of the EU must reflect this economic weakness and it should therefore weaken. After all, this is the strategy of every economy and every central bank on the planet. They all strive for an ever weakening currency to maintain their sham economies and their sham banking systems. The EU’s only course of action is to extend their indebtedness with ever cheaper currency and ever lower interest rates. The central banks will be complicit in this process as it transfers assets and power from the people to the banks. Thus, it is apparent that the euro currency must fall in value.
The chart below is the euro represented by the FXE. The chart is a two-year chart and it shows clearly the bearish head and shoulders pattern that has formed. We are currently sitting on the neckline and look poised to continue falling. Where does it go? Probably at least 15% lower than where it now sits. What does this mean? When the euro falls, the US dollar rises. Since Ben Bernanke commandeered the economy and the stock market years ago, the Dow and its sister indices have become nothing more than inflationary reactions to currency valuations. So, if the euro falls and the dollar rises, US inflation will ease as reflected by stock prices. The Dow should therefore fall by a corresponding percentage. That means the Dow should lose well over 1,000 points over the next month or so. 
A word of caution. Bernanke might seek to arrest any such stock decline by yet another injection of some artificial and temporary central bank boost. This is going to be a long war and investors are going to have to make strategic adjustments to reflect central banker actions. One thing is certain. The Dow tends to mirror the performance of the FXE (euro). 

FXE - 2 years weekly
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

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