Where the real risk lies with the euro crisis

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Where the Real Risk Lies with the Euro
Crisis
• By Michael Lombardi, MBA for Profit Confidential

Here’s what investors know so far
about the eurozone crisis:

Ireland, Portugal and Greece have all asked for a bailout.
Spain and Italy are next. The governments of both Greece
and Italy have toppled. However, the wild card that most
investors fail to recognize is the second largest economy in
the eurozone, France.



“But I thought France was getting its house in order being
one of the first in the eurozone to announce austerity
measures targeted at lowering the country’s debt?”
Yes, France was quick to introduce austerity measures, but
France’s present debt is not the issue.

The big problem is the French banks. French banks have
too much exposure to Italy. Yes, French banks have plenty
of “bad” Italian debt on their books. The stock prices of
French banks have been taking a pounding on the
CAC, the major French stock market.



The fear is that the French government will have to bail out its
banks because of their exposure to Italian debt. This is what is
causing interest rates on French-issued bonds to rise so quickly.

This morning, Moody’s Investors Services warned on French
government debt. French bonds demand 200 basis points more
than German bonds (10-year notes), a new eurozone spread
high between the two countries.

Germany has been reluctant to let the European Central Bank
simply print money and bail out the weaker eurozone
countries, because Germany has experienced its fair share of
hyper-inflation in the past due to over-printing money…and
doesn’t want to go there again.


The alternative is for Germany to pull out of the eurozone.

The prospects for the euro continue to erode. It’s doomed
either way: the $2.0-trillion round in money printing needed
to bail out the eurozone will unleash rapid inflation and
push down the value of the euro. If Germany pulls out of
the eurozone, the euro is finished anyway. All hail gold!



Michael’s Personal Notes:
Surprise…surprise…

After years of heavy selling, central banks became net buyers of
gold in 2010 for the first time in about 20 years. But that’s not the
big news…

The World Gold Council reports that world central banks made
their biggest purchases of gold during the third quarter of 2011 in
over two decades, with a slew of central bank buyers entering
the arena for gold for the first time in years.

If the buying continues, which I believe it will, world central banks
could end up making 2011 the biggest year for gold central bank
purchases in 40 years.


What’s fueling the purchases of gold by central banks? The
answer is simple. The euro has proven to be a catastrophe
and the U.S. is continuously failing to get its debt situation
under control. With 70% of world central banks having
adopted the U.S. dollar as their reserve currency, and given
what looks like a continued devaluation of the
greenback, foreign central banks are looking for an
alternative…and they’ve found it with gold bullion.



Where the Market Stands; Where it’s
Headed:
This week, traders will use the U.S. Debt Super-Committee’s
lack of progress on a deal to see-saw the markets. The bigger
the swings in the market, the more money traders can potentially
make trading those swings.

The U.S. Debt Super-Committee was created when the debt
ceiling of the U.S. government was raised this summer. The
purpose of the 12-person committee is to dissolve a gridlock in
Washington to get the government’s debt under control. If the
committee doesn’t conclude with a deal, $1.2 trillion in
government spending cuts is supposed to take effect in January
2013…the U.S. just kicks its debt time-bomb down the road
again.


If the U.S. Debt Super-Committee doesn’t reach a
deal, there is a chance that the credit rating agencies could
downgrade the rating of U.S. debt again…but who cares?
Standard and Poor’s cut the U.S. debt rating on August
5, 2011, and investors flocked to U.S. Treasuries, pushing
the yield on the bellwether bond to near a record low!

We continue to trade in a bear market rally that started in
March of 2009.



What He Said:
• “As a reader, you’re aware that I’m not a Greenspan fan. In the
years that lie ahead, I believe we (and our children) may pay
dearly for the debt bubble that Greenspan created during his
tenure as head of the U.S. Federal Reserve.” Michael
Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low
savings rate was eventually blamed for the length of the Great
Depression. Consumers just didn’t have enough money to
spend their way out of the Depression. With today’s savings
rate being so low, a recession could have a profoundly
negative effect on overextended consumers.” Michael
Lombardi in PROFIT CONFIDENTIAL, March 26, 2006.
Michael started talking about and predicting the financial
catastrophe we began experiencing in 2008, long before
anyone else. www.profitconfidential.com


Thank You

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Where the real risk lies with the euro crisis

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