The markets should soon find support on their current selloff,
but this will only be temporary. Europe's debt problems, which are
at the epicenter of the current financial crisis, are not going to
go away, they are only going to get worse until some realistic
solution is found.
Stocks in Europe have been selling off for days and so have the
euro and gold and silver. Only on Thursday did the U.S. markets
start to drop significantly. Gold (NYSEArca: GLD) and silver
(NYSEArca: SLV) managed to rally off deeply oversold conditions
after reaching chart support around their lows from late last year.
Even the euro (NYSEArca: FXE) was trying to rally after getting
close to its low from January. The major U.S. market indices are
all approaching their 200-day moving averages (the Russell 2000 has
already reached it). Some bounce should be expected at or just
above those levels. Any upward movement should be considered to be
a just a relief rally for now.
Once again the debt crisis in Europe (NYSEArca: EZU) has
reared its ugly head. Greece (NYSEArca: GREK) is going to have new
elections in June and an anti-bailout party is expected to win. Its
credit rating was downgraded to CCC by Fitch on Thursday. An exit
from the euro is now being seriously discussed in the halls of
European power. At the same time, interest rates are rising in
Spain and Italy to the levels where the Greek problem initially
began.
Spanish 10-year government yields were as high as 6.38% this
morning. The same Italian (NYSEArca: EWI) interest rates had
reached just above 6.00% yesterday. Italy's rates were over 7.00%
from last November to early January and Spain's were close to that
level in November. The ECB then began a massive effort funded with
money printing to drive them back down. It worked for a while, but
as soon as the printing presses are paused, the market takes right
back over.
The more serious problem is with the European banking system
(NYSEArca: EUFN) itself. Moody's downgraded 16 Spanish banks
Thursday night and Spain had to partially nationalize Bankia last
week. There was a run on Bankia Thursday and massive amounts of
funds have been withdrawn from the entire Greek banking system.
Contagion spreading to the major banks in the rest of the EU is a
real danger. The LTRO (Long-Term Refinancing Operation) programs of
the ECB have encouraged them to load up on the government debt of
the failing peripheral countries. Many of the banks that did so
were barely solvent as is.
More bailout programs from the central banks should be expected,
but they aren't likely to work either. The real problems are with
the non-functional economies. Spain (NYSEArca: EWP) is still
building empty houses that no one buys and the Spanish banks are
funding this activity. Adding more debt to the problem is only
going to make matters worse. Printing money to pay for that debt
takes the problem to an even higher level. It all has to give at
some point and it looks like the new few months will be one of
crisis.
Daryl Montgomery is Author: "Inflation Investing - A Guide for
the 2010s" and Organizer,
New York Investing meetup
.