Where the Real Risk Lies
with the Euro Crisis

Ireland, Portugal and Greece have all asked for a bailout. Spain and Italy are next. The governments of both Greece and Italy have toppled. However, there’s a wild card that most investors fail to recognize.Here’s what investors know so far about the eurozone crisis:

Ireland, Portugal and Greece have all asked for a bailout. Spain and Italy are next. The governments of both Greece and Italy have toppled. However, the wild card that most investors fail to recognize is the second largest economy in the eurozone, France.

“But I thought France was getting its house in order being one of the first in the eurozone to announce austerity measures targeted at lowering the country’s debt?” Yes, France was quick to introduce austerity measures, but France’s present debt is not the issue.

The big problem is the French banks. French banks have too much exposure to Italy. Yes, French banks have plenty of “bad” Italian debt on their books. The stock prices of French banks have been taking a pounding on the CAC, the major French stock market.


The fear is that the French government will have to bail out its banks because of their exposure to Italian debt. This is what is causing interest rates on French-issued bonds to rise so quickly.

This morning, Moody’s Investors Services warned on French government debt. French bonds demand 200 basis points more than German bonds (10-year notes), a new eurozone spread high between the two countries.

Germany has been reluctant to let the European Central Bank simply print money and bail out the weaker eurozone countries, because Germany has experienced its fair share of hyper-inflation in the past due to over-printing money…and doesn’t want to go there again.

The alternative is for Germany to pull out of the eurozone.

The prospects for the euro continue to erode. It’s doomed either way: the $2.0-trillion round in money printing needed to bail out the eurozone will unleash rapid inflation and push down the value of the euro. If Germany pulls out of the eurozone, the euro is finished anyway. All hail gold!

(Also see: My Bold Prediction on How the Euro Crisis Will Play Out for America.)

Michael’s Personal Notes:


After years of heavy selling, central banks became net buyers of gold in 2010 for the first time in about 20 years. But that’s not the big news…

The World Gold Council reports that world central banks made their biggest purchases of gold during the third quarter of 2011 in over two decades, with a slew of central bank buyers entering the arena for gold for the first time in years.

If the buying continues, which I believe it will, world central banks could end up making 2011 the biggest year for gold central bank purchases in 40 years.

What’s fueling the purchases of gold by central banks? The answer is simple. The euro has proven to be a catastrophe and the U.S. is continuously failing to get its debt situation under control. With 70% of world central banks having adopted the U.S. dollar as their reserve currency, and given what looks like a continued devaluation of the greenback, foreign central banks are looking for an alternative…and they’ve found it with gold bullion. (Also see my Top Five Reasons Why Gold Prices Will Move Even Higher.)

Where the Market Stands; Where it’s Headed:

This week, traders will use the U.S. Debt Super-Committee’s lack of progress on a deal to see-saw the markets. The bigger the swings in the market, the more money traders can potentially make trading those swings.

The U.S. Debt Super-Committee was created when the debt ceiling of the U.S. government was raised this summer. The purpose of the 12-person committee is to dissolve a gridlock in Washington to get the government’s debt under control. If the committee doesn’t conclude with a deal, $1.2 trillion in government spending cuts is supposed to take effect in January 2013…the U.S. just kicks its debt time-bomb down the road again.

If the U.S. Debt Super-Committee doesn’t reach a deal, there is a chance that the credit rating agencies could downgrade the rating of U.S. debt again…but who cares? Standard and Poor’s cut the U.S. debt rating on August 5, 2011, and investors flocked to U.S. Treasuries, pushing the yield on the bellwether bond to near a record low!

We continue to trade in a bear market rally that started in March of 2009.

What He Said:

“As a reader, you’re aware that I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble that Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way out of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008, long before anyone else.