Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

A Hair Trigger Stock Market Rally

Stock-Markets / Stock Markets 2011 Oct 14, 2011 - 01:08 PM GMT

By: John_Browne

Stock-Markets

By the first week of October, after having dropped more than 18 percent from its highs achieved in May 2011, U.S. stocks were desperate to latch on to any good news. In this context, the apparent agreement between the major European players to kick their debt can down the road was viewed as an "all clear" for shell shocked investors.


Since October 4th the Dow has rallied almost 10 percent, one of the best 10-day stretches in the history of the stock market. The gains have been enough to push the Dow into positive territory for the year. However, the agreement in Europe that sparked the good times solves absolutely nothing and virtually assures that problems will re-emerge in the near future.

To salvage their most indebted banks and some of their struggling periphery members, including Portugal, Ireland, Italy, Greece and Spain, Europe has agreed to create, and fund, the 440 billion euro ($590 billion) European Financial Stability Facility. It remains to be seen how this extra layer of bureaucracy will make any difference in putting the continent back on a sustainable path.

While a meeting between two Euro leaders (Sarkozy and Merkel) may have galvanized Eurozone politicians into more dramatic group action, the new Facility fails to address the intractable political problem that solvent countries are tiring of funding profligate neighbors. It also fails to reverse the fundamental structural problems that plague the euro.

Just a few weeks ago, when the EFSF bailout fund was announced, it was widely trumpeted as a cure-all. However, many have already deemed the Fund to be too small, with some calling for it to be increased five times to over $2 trillion. However, even $2 trillion would be a paltry sum with which to confront any debt problems erupting from larger countries such as Italy.

In his recent attempts to block the adoption of the EFSF, Mr. Richard Sulik, leader of Slovakia's Freedom and Solidarity Party said "I'd rather be a pariah in Brussels than have to feel ashamed before my children who would be deeper in debt should I raise funding for the EFSF bail-out mechanism." I believe that the vast majority of EU's 400 million citizens would echo this view. But with democracy crushed almost to death already within the EU, such a view would not easily be published. Unfortunately for young Slovaks, the plan passed.

The recent collapse of Dexia Bank, which had been considered to be fiscally sound earlier this year, was too big for Belgium to handle. Help was required from France and Luxembourg. However, it is important to understand that there are many banks in Europe that may have substantially more "troubled" assets than Dexia, which carried less than $600 billion of total assets on its balance sheet.

For instance, the three largest French banks which recently passed the euro stress test (as Dexia had in the past) have total assets of some $6.3 trillion, or about half of America's GDP! While it is unclear how much of these assets would fall into the "troubled" or "toxic" categories, it is reasonable to assume, given the extent to which these banks have loaded up on sovereign debt, that the percentage is not insignificant. Clearly then it will not take a tremendous amount of asset downgrades to force a systemic crisis. On this basis, how much confidence can be inspired by the new framework?

I believe that it is just a matter of time before these possibly catastrophic debt chasms erupt into full view. When they do, the euro itself may be pulled apart. In today's interconnected world, a collapse of the world's second largest currency would create such chaos that soon it would threaten the continued viability of the fiat U.S. dollar.

Facing these possibilities, as well as the realities of anemic U.S. economic growth, and the risk of disappointing Q3 corporate earnings, it is hard to trust the recent U.S. stock rally. This is particularly so as the rising stock prices have been based on very low volume.

It is time for investors to hope for the best but to plan on the worst. Part of this plan should involve greater care for portfolio currency selection, which is examined in greater detail in a report recently put out by Euro Pacific Capital.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, Michael Pento, and John Browne delivered to your inbox every Monday.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in