This has been a dismal year for the euro. The credit crisis continues unabated for the eurozone. Policies are talked about constantly without any real action provided. It seems as if there is no hope for the euro. This is best summarized when looking at the Commitments of Traders (COT) report, released by the Commodity Futures Trading Commission (CFTC). Currently, there are more bets against the euro than at any time since June 2010, which was also the low of that year for the currency, as investors soon rushed for the exits.

Should you bet on a euro squeeze against the U.S. dollar? Perhaps, but there might be other options. The eurozone is still an unstable and dangerous place to put your money. In fact, billions have been pouring out of the eurozone, as companies are unsure what will happen in the New Year. Let’s take a quick look at what might happen in 2012.

The eurozone just announced a new LTRO, Long Term Refinancing Operation. Essentially, this is created to increase liquidity in the system, a positive step if only for the short term. Then there is the possibility of Greece leaving the eurozone. On the whole, jettisoning the weakest nation would benefit the euro currency, although several big problems withItaly andSpain are left to be dealt with at a later time.

When you trade a currency, you are taking a bias on both sides; buying one currency and selling another. Instead of selling the U.S. dollar, perhaps you might look toJapan. This is a nation that has the highest debt/GDP ratio—at 230%—in the world, a budget deficit of 9.2%, and the central bank of which is committed to devaluing its currency in the hopes of increasing exports. On several metrics,Japan’s currency looks overbought, a condition caused by the flight to safety away from riskier currencies like the euro.

Both regions, Japanand the eurozone, have significant structural issues that need to be dealt with. Japanhas demographic issues that can’t be fixed with a simple vote. The nation is getting older and not enough kids are being born to replace the population. In the short run, the yen has been used as a “safe” currency, to hide assets away from the instability of the eurozone. If investors sold a euro and bought yen, a short squeeze would mean that trade would be reversed. Yes, the U.S. dollar would also move, but when selling the other side of a currency, I would look to the weakest nation first, the one with the biggest problems.

The U.S.has a lot of problems, no question. But, as of today, it is still the reserve currency in the world. The Japanese yen is not. This is not a trade recommendation, but a variation to think about if the euro were to squeeze the bears. In the long run, the euro is in severe trouble. A short squeeze is not a long-term strategy; just one enacted due to an extreme position in the market.

The shocking thing to consider: currencies like the yen and U.S. dollar are backed by economies that are saddled with massive debts, yet they are considered safe. The world is running out of strong nations to invest in. Countries are racing to the bottom, trying to spend their way to economic prosperity, racking up huge debts and ultimately devaluing their currencies. In the end, it’s the citizens who lose, as the chaos that ensues causes uncertainty and ultimately a loss in purchasing power.

It’s either the frying pan or the fire; the choice is yours.

The stock market has certainly proved that investors can be big buyers of shares, but in this market, a catalyst is required. Dividend yields, corporate earnings, technical analysis and even insider purchases are not enough to motive buyers in this market. The stock market’s trading action today is still based on confidence and this is the major catalyst that institutional investors require in order to step up to the plate.

Many stocks in the Dow Jones Industrial Average continue to outperform the rest of the stock market and institutional investors have been buying yield in the absence of capital market certainty. Some of the best stocks this year have been global large-cap companies that are paying higher rates of dividends to shareholders. With the two major stock market buyers being institutional investors and large-cap companies themselves, we can expect more share buybacks and an increase in dividends throughout 2012 (see Dividends and Growth—the Two Go Hand in Hand in this Business Cycle). There’s just no other place for institutional investors or large corporations to put their cash. They’re not going to load up on inventory or on new employees.

So my near-term outlook for the stock market is baby-step, positive trading action, with share prices going from one small trading range to another. Anything is possible in this market of course, but even institutional investors aren’t expecting to revise their earnings outlook higher in 2012. The prospect of a recession still lingers and then there’s the sovereign debt issue, which is still a major, cascading risk to currencies and the stock market.

Because the end of the year is quickly approaching, a lot of institutional investors will be looking to pad their portfolios with the year’s stock market outperformers. This trend has been going on for years now and you can see it in the trading action. This is why we’re a little more likely to experience positive trading action in the stock market right up until the end of year. Institutional investors have always been the biggest bandwagon traders of them all.

I say this with a grain of salt, because stock market investment risk remains very high at this time. A couple of positive trading days do not make a bull market. And we can’t forget that, despite eurozone austerity measures, sovereign debt in these countries is still going up and is expected to keep going up for the next several years. The purported fix for the sovereign debt problem has so far been an exercise in political posturing. And culpability for political rather than economic solutions certainly lies with global institutional investors who own a lot of eurozone sovereign debt. They don’t really care about austerity measures and the three-to-five-year outlook; these institutional investors (mostly big banks owning lots of eurozone sovereign bonds) care about saving their existing portfolios now. That’s why there is all this political pressure for short-term solutions, rather than economic solutions to reduce debt to GDP levels.

This is the marketplace we’re in. The stock market is recovering from a short-term, oversold condition. Institutional investors in Europe will be looking to save their bond portfolios and domestic investors will be looking to pad their equity holdings with the year’s best stocks. It isn’t much of an outlook, but it’s the reality that exists.

When things seem like they can’t get worse, they usually do for this global recession. This past week was a scary sign of things to come for all European debt.

Germany, the anchor of the eurozone as the strongest economy, tried to sell some bonds and failed to find buyers for 39% of the supply! Then the Italian bond auction yielded rates more than double from just October! Plus Portugal and Hungary’s debt has been cut to junk status!

These were among the worst auctions for the European debt markets since the eurozone was formed. It was a complete disaster, a sign of a global recession. People are scared to invest in European debt. Now this fear has spread to Germany, the strongest nation in the eurozone.

To put your money in stocks or European debt you are literally “buying into” and supporting the leaders in charge. This failure to get investors to buy bonds is a sign that no one trusts the leadership of the eurozone and, once lost, trust is very hard to get back. When you’ve trusted someone and they let you down, how quickly did you trust that person again?

This also pushed the currency down and all European debt in the eurozone. If the political leaders are not trustworthy, like those in the eurozone, then you will dump their currency. We’re not talking about a small country, but an entire continent! Lack of investor confidence means that investors are worried that a global recession is looking more likely.

When it comes to their own investments, where are central banks around the world putting their freshly printed cash if not European debt? In gold, of course; certainly not in paper money.

In the last quarter, we’ve just seen one of the biggest buying binges by central bankers over the last 40 years! Not just by eurozone countries. If the global recession continues, people will question the eurozone’s ability to repay their European debt, which makes the global recession even worse. The whole situation continues to spiral out of control.

Gold has sold off with the recent pullback in the markets because investors are trying to raise cash to cover their losses on other investments. However, the price of gold in terms of the euro actually went up! This is a straight trade; no one wants euros and no one will take anything that isn’t paper money…and certainly not European debt!

The U.S. political and economic system is a mess along with the eurozone. Long-term investors are avoiding sticking their money in a country with a political system grinding to a halt, just as they are avoiding European debt. The only investment where you can preserve what you’ve worked hard for is gold.

Can the U.S. economy and the eurozone rebound to stop a global recession? With investors dumping their European debt across the board, this is a sign that investors are bracing for possible defaults by eurozone countries. The problem is that some of these eurozone nations are too big to be rescued.

Can you trust the policymakers in the U.S. to be any better than eurozone leaders? There is no magic solution to save the economy. People are dumping European debt now and interest rates are shooting up. Eventually investors will realize that the U.S. debt and interest rate situation is very similar to what’s happening in the eurozone. This would be disastrous for investors who don’t own gold.

Investors are getting out of European debt now, avoiding the eurozone and preparing to survive the global recession. I wonder what your landlord would say if you told him that you’re going to postpone paying your rent indefinitely.

Until some concrete decisions are made (I’m not going to hold my breath), I would continue putting my money in gold and avoiding European debt. Unless you can hold your breath for several years.

The old saying is that there are only two sure things in life: death and taxes. I say three; add in the fact that politicians lack the conviction to make the right decisions!

They’re looking after their own interests, not yours.

If you based the prospects for Europe on the euro, you can see by the chart of the euro that optimism has improved since hitting a low in March 2010. However, the current debt crisis has killed the rally, as the euro has broken below its upward trendline.

The 17 members of the eurozone are scrambling to save Greece by expanding its eurozone rescue fund. So far, 16 of the 17 members have approved the revised plan, leaving only Slovakia as yet to approve the change. But this “no” vote doesn’t appear to be an issue, as expectations are that Slovakia will come to the table and agree before the European Union Leaders summit on October 23. The eurozone’s two biggest members, Germany and France, have said they are committed to resolving the debt crisis in Europe.

And to try to safeguard the fragile European banking system, there is talk that banks in Europe should be forced to temporarily increase their capital reserves just in case the region’s debt crisis worsens. European banks should not be allowed to pay out dividends or bonuses until the capital reserves are upped, said José Manuel Barroso, the president of the European Commission. The fear is that a deepened debt crisis could batter the European banking system similar to what happened in the United States, which would not be good.

Barroso is also asking for the launch of a permanent bailout fund—the European Stability Mechanism—to begin in mid-2012. The plan is that private investors in government bonds should absorb any losses when the country needs to write off some of its debt. I’m just not sure how this would work, but clearly the yields offered would need to be big enough to compensate for the added debt risk taken.

I continue to feel that Europe is in deep trouble, which could take years to dig itself out of. Greece is in deep despair and the situation there could easily worsen.

The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).

My global economic analysis is that the debt, deficit, and stalling growth issues cannot continue much longer or Europe will falter and fall into a deeper or new recession. Greece remains in a deep recession. The PIGS are also struggling to survive and turn around.

The European Central Bank (ECB) has maintained its benchmark lending rates at 1.50, but also cut its gross domestic product (GDP) growth forecast for the region.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the eurozone was “dangerously close to a recession.”

So now we wait for Europe to sort out its mess and this will take a long time. The problem is that the fragile European situation also impacts America, which is in its own big mess.