Stocks continue to remain in la-la land. I really cannot find another way to put it. Europe has now gone from a relatively small problem (Greece) to a HUGE problem (Italy).
To put this shift into perspective, Greece is the 11th largest economy in Europe. Worldwide exposure to Greece debt is roughly $280 billion. In contrast, Italy is the third largest economy in Europe and the third largest bond market in the world. Global exposure to Italy’s debt is north of $800 billion. It’s already taken down one firm (MF Global), others are coming too.
That’s what I mean by a BIG problem.
It is now clear that Italy would have already posted several failed bond auctions if not for direct intervention from the European Central Bank (ECB). Worse still, despite the interventions, Italian bonds continue to implode with the 10-year now yielding over 6% (Germany’s 10 year yields 1.78%).
The whole thing is quite reminiscent of 2008, when it took the market two weeks to figure out that Lehman’s bankruptcy had catastrophic implications. MF Global has now gone under, Italy is fast losing control of its bond market, and stocks look to have likely topped last week.
I believe we have likely put in a top last week. We’ve already broken back below the 200-DMA on the S&P 500. Once we break below 1,225, we’re back into Crisis mode.
Much of this hinges on the Euro which looks to have bounce up to “kiss” resistance at 138 and is now ready to roll over to 135 in short order.
As goes the Euro, so do stocks. Speaking of which, stocks are expensive based on their near perfect correlation to the Euro as well:
My general view remains as follows: we’ve had a brief final hurrah in the risk-on trade (stocks up, commodities up, Dollar down) due to rumors and hype all of which have proven to be unfounded or simply desperation from those who need stocks higher.
Meanwhile, behind the scenes the financial system continues to break down in a big way. The EFSF deal has proven to be a dud before it even passes, Merkel and Sarkozy have lost all credibility as problem solvers, and Italy lurches ever closer to providing a real systemic disaster.
Again, the issues in Europe are ANYTHING but solved. This is why the credit markets are already anticipating more Greek haircuts as well as ever increasing systemic risk.
If you think I’m over-reacting, consider that the EU is now talking about trying to use various countries’ Gold (Italy and Germany) as collateral for bailout schemes.
Folks, when countries are openly admitting that the only real capital they have is Gold, then they’re admitting that paper money, particularly the debt-based bailouts, are no longer effective at solving the financial system’s problems.
Heck, why do you think China just imported a record amount of Gold? Because they think we’re out of the woods? Weren’t they the ones who were supposed to save Europe?
The reality is that the powers that be (the Federal Reserve and ECB) are fast losing control of the system. Bernanke’s already admitted he hasn’t got a clue how to solve the financial system’s problems. The Bank of England says we’re facing the greatest financial crisis in history. Even the IMF has warned that we’re heading towards a global financial meltdown.
If you’ve not already taken steps for what’s coming, the time to do so is NOW before the real mess begins.
On that note, I’ve already alerted my Private Wealth Advisory clients to open 12 CRISIS trades in anticipation of the next leg down. Already several of them are up. And I fully expect we’ll see ALL of them in the double digits in the coming weeks.
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