How will all of this play out? I don’t know. But one thing I DO know is that German Chancellor Angela Merkel’s political party faces seven state elections in 2011. Losing these could mean no additional term for her in 2013.
Most of the “risk on” trade today hinges on the Euro holding up. If the Euro collapses, then stocks and commodities will follow suit (a weak Euro pushes the US Dollar higher).
With that in mind, the weekly Euro chart shows the currency is very close to making a breakdown below its trendline:
In plain terms, the markets are officially on “borrowed time.” The three key charts for determining when things get ugly again are the Euro, US Dollar, and long-term US Treasuries. At some point one of these is going to breakdown in MAJOR way. When it does, it’s going to drag us back into Crisis mode
In plain terms, the system is broken. Everyone, including the Fed, knows it. The financial world has collectively chosen to ignore this due to political pressure and career pressure. However, this will not last forever.
The reality is that situation in Europe has literally reached a fever pitch. We have now progressed to the “contagion” point in which the entire system is at risk versus individual countries. To whit, Ireland has only just been bailed out and already Spain, Italy, Portugal, and Belgium.
"Most people believe that most oil in the world is produced by the big oil companies, the Exxons, the Shells, the BPs, the Totals of the world... That is not true. Most oil in the world is produced by national oil companies.”
Our esteemed Fed Chairman Ben Bernanke is about to find his policies running face first into a BRIC wall. He’s been exporting inflation abroad to the emerging markets all the while claiming it doesn’t exist. With growing civil unrest due to soaring food and energy prices the emerging markets are now fighting back.
Now, many commentators have pointed out the various ways in which this policy has endangered the US’s balance sheet, economic clout, and currency. However, there’s one element that NO ONE seems to have picked up on. That is…
You, me, and everyone else in the US, is now PAYING the Fed for its insane, anti-Middle class policies.
Remember, we are continually paying the debt via interest payments drawn up from tax receipts. Thus, by buying up US Treasuries, the Federal Reserve is in effect reaping interest payments from the US populace.
This week’s action can be summated in a single question:
Which is stronger, the Euro collapse or the Fed’s Permanent Open Market Operations (POMOs) AKA money pumps to Wall Street?
These are the two primary forces at work on the markets today. Thus, this week’s action will be determined by one of the two:
1) The Euro (the bearish influence)
2) Light volume/ the Fed’s ongoing POMOs (the bullish influence)
One of the biggest misconceptions about inflation is that the US Dollar needs to collapse in order for inflation to occur. While a currency collapse often accompanies periods of heightened inflation, this is not necessarily true.
Possibly the most insane development in a year of nothing but insane developments from a financial standpoint was the idea that somehow the Euro was saved as a currency because the IMF leant even more money to various European countries that were already over-indebted.
Consider that these countries already owed too much money… so the IMF (indirectly the US) leant them even more.
If you own these precious metals because you want to hold them as catastrophe insurance or a hedge against inflation, then issues like short-term drops in price should be seen as buying opportunities.
Indeed, Gold bulls have already ridden out 13 corrections of roughly 7%, six corrections ranging from 10%-16%, and three full-scale Crashes of 22-23% since the Gold bull market began in 2001.
So if you’re a long-term bull, you’re used to seeing some serious dips in the price of Gold holdings. And if you bought more Gold during those dips, you’ve profited handsomely.
The most important piece of news announced last week was the Fed’s release of the schedule for its second round of QE 2 bond buying. All told, the Fed intends to buy $105 billion worth of bonds through January 11, 2011. The purchases will occur practically every other day and are broken down into $6-8 billion increments. Now, the Fed has made it clear that it intends to prop stocks up at ANY cost.
Indeed, the US, like all crumbling empires, is so caught up in its self-centered notions of superiority and “bread and circus” entertainment (in today’s world McDonald’s hamburgers and garbage TV like Jersey Shore) that it is TOTALLY “change blind” to the fact that China has not only ascended from a communist backwater to THE key player in the world’s global economic balance (more on this in a moment)… but is now holding MOST if not ALL of the trump cards from a global monetary/ economic standpoint.
China has made it clear that it is NOT pleased with the US’s current monetary policy (China has blamed the Fed for its inflation woes with some officials going so far as to label the Dollar’s status as a reserve currency, “absurd”).
The US has in turn responded by labeling China a currency manipulator and blaming it for the US’s economic woes. Indeed, it seems almost every other week that some US Government official comes out with a “it’s ALL China’s fault” statement.
However, when push comes to shove, it is China that holds the trump cards in the form of interest rates.
