For those who thought Europe's financial troubles were behind it, the last two weeks have proven otherwise.
The chess match concerning Ireland, Greece, the European Central Bank and others continues, and it seems the powers that be in the European community want the Irish to "take one for the team" by agreeing to be bailed out.sovereign debt ratios will tighten and the problems inside the European banking system will be ameliorated.
Also, if Ireland calms down, perhaps the reverberations won't make it to Portugal, Spain or Italy.
Bonfire of the currenciesAll of that is most likely wishful thinking.
The intractable issue of how to get all the disparate (and now largely insolvent) eurozone countries to pull on the same oar during tough economic times has always been the currency's Achilles' heel.
It is difficult to see how the European Union nations can collectively manage their way through this crisis -- apart from printing money -- since all the options they have are Draconian. (They can't even deal with the problems of Greece, much less bigger and better-run countries.)
(Of course, the yen is no better than the euro, which also helps prop up the dollar.)
That sinking feelingWhile our currency continues to hang in there, warts and all, it is starting to be another story entirely for our debt. The latter has seen a fair amount of carnage in the two weeks since the Federal Reserve announced a second round of quantitative easing, that monetary stimulus effort now well-known as QE2.
While many (including, I think, the people who run the place) regard the Fed as omnipotent, the action in Treasurys has been a demonstration of the power of the market. The Fed may be bigger than certain small markets -- and even that is debatable -- but it is not bigger than the bond market.
If the weakness we have seen continues and printing more money doesn't work (i.e., if it drives yields lower), bond prices could tank. That means higher interest rates, which is trouble for stocks; thus, financial assets could really suffer.
In any case, given the fallout we have already seen from QE2, including an unusual amount of criticism directed toward the Fed, we are in the early innings of the funding crisis (which I have discussed many times), though we don't know the rate at which it will play out from here.
Those with a bent toward technical analysis could make a pretty good case that 10-year Treasury rates have formed an inverse (i.e., upside down) head-and-shoulders pattern, which signals that rates are headed higher. On the other hand, with Fed chief Ben Bernanke determined to buy $600 billion worth of bonds, if the Federal Reserve shifts its target along the curve, anyone betting that bonds will fall could easily find prices going against them in the short term.
The little printing press that couldn'tNonetheless, so far it looks as though the news of QE2 has led to aggressive selling in the fixed-income market and, to some degree, the stock market and commodities as well.
It’s far too early to tell whether that is just noise or if it signals the end of the move in stocks and bonds. (But it does look to me like the bond market is starting to try to take away the printing press from the Fed.)
However, I certainly don't believe it is the end of the move in precious metals, even though they have been thumped pretty hard lately.
Precious metals -- in back-to-the-future fashion -- may help resolve currency turmoil, as more and more people contemplate the advantages of a return to some form of the gold standard. (See “Who needs dollars when we have gold?”)
If it is broke, maybe you should fix itAlong that line, my good friend James Grant wrote an excellent piece for the editorial pages of the Nov. 14 New York Times print edition. Headlined "How to make the dollar sound again: In gold we trust," the piece appeared on the Times' website Nov. 13.
As I pointed out last week regarding the World Bank chief Robert Zoellick's call for monetary reform published in the Financial Times (registration required), when thoughtful people make cogent cases for the elegant, self-correcting nature of the gold standard, the rest of the world, which is in search of an answer, will be forced to give such proposals due consideration.
Obviously, the permabears won’t count here, but not everyone is a pathological gold hater.
At the time of publication, Bill Fleckenstein owned gold.
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