Economy: Could This Fictitious
Story Become Reality?
It’s 2012 and the world realizes the euro can’t make it as a currency. Greece, Portugal, Spain and Italy have all been repeatedly bailed out. Germany and France have had enough. They tell these weaker countries to get out of the euro or Germany or France will go it alone.
Meanwhile, in Canada, the air has finally been released from its overheated housing market and the economy is on shaky ground for the first time in almost 20 years. In the U.S., years of printing money are causing rapid inflation. Interest rates are rising, as investors want higher and higher returns from U.S. Treasuries. Debt has become a big problem for states and municipalities. The sovereign debt issues of Europe have crossed the Atlantic.
By late 2012/early 2013, countries around the world are in a race to devalue their currency. So they come up with any idea.
The central bankers of the G7, or maybe even the G20, meet to discuss an across-the-board devaluation of world currencies. But if massive currency devaluation is going to happen, what will be the reserve currency?
It can’t be gold, because there is not enough gold in the world to satisfy the reserve, even if the price is $3,000 by 2013. America joins China in making a new reserve currency composed of U.S. dollars and Chinese renminbi, 20% backed by gold.
Could this happen? Let’s put it this way: while I don’t have a crystal ball, I’ve seen stranger things happen. What I do know is that, sooner or later, something has to give with the euro and the greenback. That’s what the 10-year bull market in gold bullion has been telling those who listen.
Michael’s Personal Notes:
There is so much to say this morning, so much to write about. Fortunately, most of the action is happening outside the United States.
Moody’s Investors Service cut Portugal’s long-term government debt credit rating to junk status yesterday afternoon. Greece, Portugal, Spain, Italy…they are all in trouble. While just Greece and Portugal have “officially” had their credit ratings slashed, I predict Spain and Italy are next.
The entire euro region, except for Germany, is in trouble. And I don’t want my readers to underestimate how fast those troubles could spread to North America.
From the other side of the globe, this morning, we get the news that China has raised its benchmark interest rate for the third time this year, as inflation is accelerating at its
fastest pace in China since the summer of 2008. (So much for the naysayers who said China was a bubble about to collapse.)
In China, a one-year deposit with the People’s Bank of China pays 3.5%. In the U.S., a one-year T-bill pays about one-twentieth of that, 0.17%. You really need to ask why foreigners would buy U.S. Treasuries. The answer: I believe they are buying less and less of them.
Whenever we hear news of another euro country facing sovereign debt issues, we see investors in those countries run to U.S. bonds as a safe haven. Between those buyers and the Fed, the demand for U.S. Treasuries continues…that’s until the world wakes up to America’s own sovereign debt problems.
Where the Market Stands; Where it’s Headed:
On May 20, 2011, my lead article in PROFIT CONFIDENTIAL was “Dow Jones 13,000; Why It Will Become Reality.” I’m sticking by that prediction for these simple reasons:
Monetary policy remains very accommodative. I believe the government and the Fed remain ready to do whatever it takes to stimulate further should the economy lapse back into recession. Yes, the economy is in trouble, but corporate America continues to churn out profits. The number of stock advisors bullish on the market is relatively low—there isn’t a lot of optimism in the marketplace, which is good for stocks.
After a correction that took the Dow Jones from 12,876 on May 2 to 11,875 on June 15, I believe the bear market rally is set to give us a final blow on the upside.
Please, don’t get me wrong. My opinion is that we are fully entrenched in a bear market that has yet to enter the dreaded Phase III. But I see this bear market luring more investors back into stocks before taking their money away again.
The Dow Jones Industrial Average opens this morning at 12,569, up 8.6% for 2011 and only 430 points away from the 13,000 target I discussed above.
What He Said:
“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933… who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.