Many already think that the European sovereign debt crisis is passing. That the latest bond deal and bailout for Greece solves everything.
But as far as I’m concerned, nothing could be further from the truth.
First, severe austerity measures do not create growth. So there’s no way Greece can grow its way out of its debt morass, even after the latest debt write-downs.
The proof is simple math. Before the Greek crisis flared up, debt-to-GDP in Greece stood at 120%. Today — and I repeat, even after all the write-offs — Greek debt-to-GDP stands somewhere north of a whopping 160%.
That’s more than 40% higher than it was at the beginning of the crisis — and the austerity measures are literally causing the Greek economy to implode, creating some of the worst social chaos we have seen in modern times.
Second, Italy, Portugal and Spain still remain vulnerable dominos. Each and every one of them is in hock way over their heads. And each and every one of them is just beginning to feel the impact of austerity measures.
Unemployment among youth is as much as 25%. Corporate and personal bankruptcies are surging. Social discontent is on the rise again. And tensions between countries within Europe are as high as ever.
Third, European banks themselves don’t buy any of the solutions. They show no confidence in Europe’s ability to survive the crisis.
That’s why Europe’s banks are holding on to money for dear life. Rather than lend into the economy, these banks are hoarding their cash, stashing droves of it at the European Central Bank (ECB) …and even scrambling to deposit hundreds of billions with Western central banks for safe-keeping.
Fourth, Europe’s economy as a whole is sinking. The ECB’s latest economic projections show the economy may contract 0.1%. That may not sound like much, but the previous forecast was for 0.3% positive growth.
Worse, that’s not going to help Europe’s internal financing needs this year. Italy and France alone have over $795 billion in debt that will have to be rolled over this year. With growth sharply slowing, plus uncertainty about which dominoes will be the next to fall, there’s a very real chance of a massive bear market collapse in European debts this year that takes down the entire European Union.
Fifth, high energy prices are making matters all that much worse. It would be one thing if we were seeing $35-a-barrel oil and cheap gasoline prices. But we’re not. So, high energy prices are certainly not helping the situation in Europe. Period.
Neither is inflation. With austerity measures squashing growth all over Europe and inflation on the rise, Europe is facing a double whammy in the months ahead. More hits to economic growth, more trouble rolling over debt and, soon, another renewed rise in social discontent.
In short, nothing, and I mean nothing, has been solved in Europe. There may be a lull in the crisis, but it will soon return with a vengeance.
As for the United States — don’t kid yourself. The U.S. economy looks better only because Europe looks so bad. In reality, the U.S. debt mountain is in even worse shape. And when it falls, it will fall hard.
Fortunately, we have some time before it crumbles. But not much. And as long as Europe’s crisis worsens, the U.S. will look like the better place to invest.
Which is precisely why the U.S. dollar is starting to rally again.
My suggestions …
A. Keep most of your liquid funds in cash, ready to be deployed on a moment’s notice, but as safe as can be right now. The best way: A short-term Treasury-only fund in the U.S., or the equivalent.
B. Hold on to all long-term gold holdings. You do not want to let go of those. Gold is heading to well over $5,000 an ounce over the next few years.
In the short term, however, I would not be surprised to see gold — and silver — move lower.
For one thing, as the U.S. dollar strengthens again, some of the shine will come off of the precious metals, even as Europe’s problems fester.
For another — and very importantly — both gold and silver failed to give monthly buy signals on Wednesday, February 29.
In fact, they failed miserably, with gold plunging more than $100 an ounce, more than 5.5%, in a single day and failing to take out the monthly buy signal at $1,789.
Silver, meanwhile, plunged almost 10% on February 29 and failed to close above its monthly buy signal at $35.85.
These are significant failed signals that strongly suggest that my forecast for lower metals prices — before they truly break out to the upside — remain on target.
Indeed, the next important levels of support for the metals — which I expect to see tested in the weeks ahead — are now at the $1,490 level in gold and the $29 level in silver. If those levels give way, even lower prices could be seen in the short term.
So if you’ve acted on any of my recent suggestions for light speculative bearish positions in gold and silver via inverse ETFs such as the ProShares UltraShort Gold (GLL) and ProShares UltraShort Silver (ZSL), I suggest you continue to hold those positions.
Ditto for my suggestion for bearish speculative positions on the euro via the ProShares UltraShort Euro (EUO) …and for the stock market via inverse stock index ETFs such as the ProShares UltraPro Short S&P 500 (SPXU).
Don’t overtrade them, though. Those are speculative positions and I cannot help you via this column with precise timing and risk management. So keep that in mind.
P.S. I’m just putting the finishing touches on the March issue of my Real Wealth Report. If you’re already a member, be sure to check your inbox this Friday, March 16, for my latest forecasts and a lot of news about how Real Wealth is going to help you get positioned for profits. If you’re not a member, this is a fantastic time to get started.