Anatole Kaletsky, Editor-at-Large for The Times (London), writes this week on the subject on Europe's looming financial crisis and the potential breakup of the Euro. Here is an excerpt from The great bailout - Europe's best-kept secret, June 4, 2009.
Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.
Latvia, partly because it has followed an Argentine-style policy of "fixing" its exchange rate and encouraging its citizens to borrow in euros and Swiss francs, is now in the front line of the battle between governments and financial markets - and a humiliating devaluation looks increasingly likely. Last weekend a former Swedish finance ministry official brought in by the Government as an adviser admitted that devaluation was no longer a matter of "if" but of "when and how". If Latvia does devalue, then the two other Baltic states will almost certainly be forced to follow and the panic will probably move to Romania and Hungary. Beyond that, the contagion is likely to spread to the weakest members of the eurozone - Ireland, Greece, Portugal and probably Austria.
If the crisis expands, other EU governments - and especially Germany's - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks?
This has negative ramifications for European economics as well as markets, both credit and equity. In the short term it is supportive of higher gold prices, due to the fear factor.
It was interesting to read David Rosenberg's (Gluskin Sheff) comment today regarding gold. I couldn't help but wonder - now that gold is nearing the $1,000 mark again and talk of inflation is high fashion - are we due for another round of intervention. This can mean that, yes, gold is going higher, but then we are likely to see it followed by a round of short gold sales.
Buy gold (again, in a secular bull phase, but the dollar is not going to zero and being bearish on the greenback has become far too fashionable — especially in the wake of Bill Gross’s latest missive; the Euro is saddled with problems at least as deep as the USD, if not deeper)
At first I thought the weakness of the dollar could be a catalyst for a round of shorting gold. Central banks can't really afford to allow the US dollar to weaken too much, however, the continuance of the de-leveraging cycle and cash supply concerns would provide support for the dollar. Rosenberg discusses the idea that the US is likely to be in a de-leveraging cycle over a long period.
As for the dramatic monetary stimulus, this is only inflationary once velocity begins to rise. But cash requirements in a prolonged de-leveraging cycle are likely to remain intense and the ‘dry powder’ is very likely going to be diverted towards an intense private sector debt rollover calendar for years to come. An examination of the Japanese experience suggests this process could well take years. (Keep in mind that Japan had a consumption bubble emerge alongside its real estate bubble back in the early 1990s.)
The recent weakening dollar has been an anomaly in the course of the deleveraging cycle, that has come as a result of some money coming out of the treasury bond market and is being allocated to equities as a result of the powerful rally and momentum that has pushed the equity market prices up sharply since the March 6 bottom this year.
Therefore the European crisis that Kaletsky describes may be more likely to be the type of event that precipitates higher gold prices and whose price is then impacted by central bank intervention. We might not even hear about if Kaletsky is right, but, we may see it in the price of gold correcting from highs as it did 3 months ago.
Source:
The Times, Anatole Kaletsky, The great bailout - Europe's best-kept secret, June 4, 2009.
David Rosenberg, Breakfast with Dave (morning notes), June 4, 2009, GluskinSheff.com
Bill Gross, PIMCO, Investment Outlook, June 2009 - Staying Rich in a "New Normal"
