Who do they think they are fooling?
Last week, we had the farcical bank stress tests. And tomorrow, European leaders meet to come up with new proposals to ‘sort out’ what is now looking like the inevitable collapse of the euro.
The markets – which have been running two steps ahead of the European authorities all the way on this one – are already writing off the new proposals. They’re telling us the day of reckoning is looming.
I’ve said it before, this could be an interesting summer. We need to keep our focus on ‘stress investments’ – today, I’ll point to the three trades I’m making in preperation for a European collapse.
Europe’s Lehman moment
The European bank stress tests don’t exactly have a good record. In July 2010, the powers that be, concluded that nearly all the European banks were a-okay. That included Irish banks AIB and the Bank of Ireland. Yet before the year was out, it turned out that Ireland’s finest needed some €24bn in capital!
So how are we supposed to take Friday’s results seriously when they don’t even go as far as testing whether the banks can cope with a Greek default? We don’t.
Meanwhile, the markets are running their own stress tests. Italian and Spanish bonds are certainly stressing. And I tell you, if these boys go pop, there’s going to be some serious financial fallout.
People talk about Europe’s Lehmans moment. But the collapse of Lehmans was always going to be handled by the central bankers. What we’re looking at here is the collapse of nation states. And they could take central banks with them.
Get ready for the fire sale
It reminds me of how companies die. Most suffer a similarly long and protracted death.
As the company withers, anything of value gets sold off to competitors. Company assets that remain get mortgaged to the loan sharks.
And this is what’s happening in Europe. Nation states are told to sell off anything of value. They’re forced to borrow more and more money at penal interest rates. And as nations die their sovereign debt dies too.
As with ailing companies, all the leaders can do is procrastinate. And that’s great because it gives them the time to manage people’s expectations: downwards!
This is a lot worse than people recognise
A dying company can trade lower and lower for years. All the while, shareholders’ expectations are ground down until they have no expectations left.
At first you’d be happy just to get your money back from a bad investment. And then, over the years as the stock decays, you’ll be pleased to get anything back. It barely seems worthwhile selling, so you hang on with only a glimmer of hope in your heart. Expectations hit rock bottom.
Over the years, all the delaying and half-truths from company management has kept you from making the cold, hard decision to sell.
That’s what’s happening in Europe. Proposal after proposal. Stress tests and hollow words. They’re all designed to buy time and hollow out expectations.
While I don’t want to be alarmist, I really don’t think the average investor realises how bad things could get.
Back in 2007 at the time of the Lehman collapse, there seemed to be better recognition that something very, very serious was going on. The papers and news stations were full of it – twenty-four-seven.
But today most of the headlines remain in the financial sections. The sense of imminent danger is contained. Procrastination has done a good job of desensitising both investors and citizens. They haven’t made a run for the exits… yet.
Europe has two choices now
And tomorrow the European leaders meet again. They were supposed to be discussing Greek matters. But you can bet your bottom dollar that the assault on Spanish and Italian sovereign debt is what they’ll be focusing on.
They’ve got two choices now. They can either come out and tell it like it is. They can tell us that the European financial system isn’t working. They’ll have to make it clear who’s going to pay for the clean-up. Bond holders, or taxpayers, or both?
They’ll also have to come up with an approach on how they’re going to fix the obvious problems of monetary union.
The other option is they can come out with more hollow words and more dithering and fudging. Keep the patient in a vegetative state and pretend nothing’s wrong.
And that’s exactly what I think they’re going to do. An agonising and prolonged death looks like it’s on the cards.
What I plan to do as Europe collapses
So how am I preparing for this agonising death? I’m staying short banks, I’m holding a short on the FTSE and I’m definitely long gold. Click on the links to read why I think these are such great trades.
And on gold, if you haven’t had a chance to read Dominic Frisby’s Gold Profit Plan, then I’d highly recommend you do so. He has some very interesting thoughts on what he thinks are the best ways to build exposure to gold right now.
Because at some point the European debt markets are likely to go pop. Week by week, the cracks get bigger.
It’s going to be a very interesting summer.
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