The euro wasn't built for this continuing battle to establish financial rules, pitting more-prudent countries against those requiring bailouts.
Given all the recent chaos in financial markets around the globe, I thought I would step back and try to shed light on the commotion, taking a view from 10,000 feet in an attempt to get to the heart of the issues.
What the world is witnessing is the continuing epic battle between the printing press and excessive debt held by governments at the federal, state and local levels, as well as too much leverage on the part of the world's financial institutions.
Europe's spreading debt woes
That process recently hit a snag, temporarily tipping the battle in favor of the debt problems, largely because Greece didn't have its own printing press with which to continue the game. (Other troubled euro nations -- Portugal, Ireland, Italy and Spain -- don't either.)Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 269, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=690cee98-ce87-4952-af83-72f8c5262fca,667a4884-1c9b-48b4-b024-347f9433a1c8,5f912aec-82f7-4160-8b97-6120243c6fc5,9c959e83-f9e5-4751-8feb-e90a54fda90b,be6f70d4-a837-41bc-afba-13f695415c29,3129c60b-63b5-474f-835e-db7eaffcf092,d88ea621-da04-4fc7-8485-e248be6579d0,c8e20d73-25e1-4a25-90e4-b28550efe2cf,dee2259e-f1da-4d6d-a5ae-04ac4c1f56f4,35ffac0a-6018-4b97-8ee8-744aea14beaf", "player.fr": "iv2_en-us_money_article_fleck-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=690cee98-ce87-4952-af83-72f8c5262fca,667a4884-1c9b-48b4-b024-347f9433a1c8,5f912aec-82f7-4160-8b97-6120243c6fc5,9c959e83-f9e5-4751-8feb-e90a54fda90b,be6f70d4-a837-41bc-afba-13f695415c29,3129c60b-63b5-474f-835e-db7eaffcf092,d88ea621-da04-4fc7-8485-e248be6579d0,c8e20d73-25e1-4a25-90e4-b28550efe2cf,dee2259e-f1da-4d6d-a5ae-04ac4c1f56f4,35ffac0a-6018-4b97-8ee8-744aea14beaf;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Thus we have been dealing with the consequences of over-indebted countries seeing their bond markets tank and overleveraged financial institutions tanking because they own too much of the wrong kind of paper.
The European Central Bank has essentially decided to stand down from its talk about austerity (with the German populace being dragged along kicking and screaming), and it has decided to monetize euro government debt -- in essence, to print money.
However, for the ECB to really unleash its guns, countries in Europe need to vote to agree to it. So, the big challenge in the battle between the printing press and too much debt is basically a function of the way the euro was constructed.So much for the euro As I've said many times, it's a shame that the ECB's attempt to create rules for financial stability has been the undoing of the euro. On the other hand, this was always to be the outcome, because the disparate member countries were never going to agree in tough times. And, oh, by the way, the ECB and European Union didn't insist on countries following Germany's somewhat orthodox and austere economic path when they allowed countries like Greece to join.
So, the euro is in turmoil. Most likely, it's damaged for good as a potential currency with any real value, if that statement isn't an oxymoron on its face.
In the beginning of this "Greek" crisis, I said that either the euro would be watered down or that the Germans or Greeks would leave. Now the euro has been watered down, and I believe that ultimately the Germans will probably leave.
Germany is one of the few countries on the planet willing to pursue austerity and prudence in some form because it believes that, in the end, a solid currency is an important asset to have (which it is). However, the rest of the world is not going to pursue the kinds of policies Germany does.
Another reason for the pressure in markets has been the Chinese trying to put on the credit-growth brakes. I believe that if that situation becomes even dicier, they will back off from their tightening moves, especially because the yuan has screamed higher versus the euro.Yes, that was a crash Recently there has been a lot of talk about a potential crash. However, I believe that an as-yet-unrecognized crash has occurred (and it still may be continuing). What we experienced on May 6 was not a "fat finger" event but rather a good, old-fashioned crash that just didn't last all that long.
The conditions were ripe for that collapse to happen because the market has been boosted by money printing and quantitative trading. Thus it was a market underpinned by balsawood as opposed to girders of steel.
What's different about this wipeout versus all the others I've seen in the past 30 years is that this was initially led by the indexes, not individual stocks, though I'm not sure exactly what that portends. Does it mean a generalized wipeout for all stocks is directly in front of us or that this was just an especially brutal correction?I don't know, but I doubt we will see new highs in the stock market anytime soon. We would be lucky to see a giant trading range evolve, but we could also see a bear market evolve.
What I do know is that any sort of serious equity weakness will be met with enormous quantities of money and, potentially, new bailouts. The treacherousness of the environment is why I have had no involvement with stocks generically (excluding Microsoft (MSFT, news, msgs), the publisher of MSN Money) and prefer investment ideas that benefit from money printing -- like gold, gold mining and related businesses.
At the time of publication, Bill Fleckenstein was long Microsoft and owned gold.More from MSN Money
In Europe, recklessness wins againEurope's pain could be your gainEuro trouble won't end with GreeceChina's dangerous balancing actGreece's debt woes test EU unityRate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.444445; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=45;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesIn Europe, recklessness wins again 05/14/2010Euro trouble won't end with Greece 05/07/2010Greece's debt woes test EU unity 04/30/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='fh4kr5hkwd0sg5bqm69mu33h7ba3tn5x';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 2 of 2PreviousNexttunaman4u2 #1Friday, May 21, 2010 4:58:03 PMLove Bill... money printing is SO easy for the government that we need to protect against that. The middle class has no choice...The financial system has failed and the choice is a deflationary great depression or put it off to later inflationary money printing crashMy bet is on the printing...ReplyReport Abuseb_capp #2Friday, May 21, 2010 6:06:40 PMThe Euro may yet 'break up,' but I doubt as such. I put the 'ballpark' odds of a Euro break up at 35% ... primarily because I see nothing within the European press that says 'this is what ALL European gov't want ... a breakup.' And remember, A weakening Euro is to the benefit of the leading export nation within the European monetary union ... namely Germany ... and France as well ... as the French would like to get American products (think tech gadgets) off French store shelves. Also, rising import costs may impose an 'energy problem' for the Euro nations ... but the Euro nations have the best public ( and least energy intensive ) transportation system in the world. Yes, the Euro currency is a different 'breed of currency' as the nations which use the currency in some ways resemble the American confederacy during the Civil War ... and that's exactly why the currency union in Europe was formed ... so that the U.S. couldn't 'bully' any one single country ( as is currently the case in Greece ) within Europe.
Spain will 'virtual default' this summer as Greece just did ... the Euro nations will print money and the ECB will buy Euro debt behind closed doors ... but inflation will not take hold in the immediate future.
First, the equity markets worldwide have to take a tumble ( a retest of the S&P 500 low of 700 no later than Q3 2011 is likely in my opinion ) and then oil has to be 'repriced' so that the Saudis and the Canadians can put the funding from higher energy costs into 'heavy oil' projects.
That's when the true inflation gets going.
ReplyReport Abuse1 - 2 of 2PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/europes-dilemma-print-money-or-cut-debt.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*The European Central Bank has essentially decided to stand down from its talk about austerity (with the German populace being dragged along kicking and screaming), and it has decided to monetize euro government debt -- in essence, to print money.
However, for the ECB to really unleash its guns, countries in Europe need to vote to agree to it. So, the big challenge in the battle between the printing press and too much debt is basically a function of the way the euro was constructed.So much for the euro As I've said many times, it's a shame that the ECB's attempt to create rules for financial stability has been the undoing of the euro. On the other hand, this was always to be the outcome, because the disparate member countries were never going to agree in tough times. And, oh, by the way, the ECB and European Union didn't insist on countries following Germany's somewhat orthodox and austere economic path when they allowed countries like Greece to join.
So, the euro is in turmoil. Most likely, it's damaged for good as a potential currency with any real value, if that statement isn't an oxymoron on its face.
In the beginning of this "Greek" crisis, I said that either the euro would be watered down or that the Germans or Greeks would leave. Now the euro has been watered down, and I believe that ultimately the Germans will probably leave.
Germany is one of the few countries on the planet willing to pursue austerity and prudence in some form because it believes that, in the end, a solid currency is an important asset to have (which it is). However, the rest of the world is not going to pursue the kinds of policies Germany does.
Another reason for the pressure in markets has been the Chinese trying to put on the credit-growth brakes. I believe that if that situation becomes even dicier, they will back off from their tightening moves, especially because the yuan has screamed higher versus the euro.Yes, that was a crash Recently there has been a lot of talk about a potential crash. However, I believe that an as-yet-unrecognized crash has occurred (and it still may be continuing). What we experienced on May 6 was not a "fat finger" event but rather a good, old-fashioned crash that just didn't last all that long.
The conditions were ripe for that collapse to happen because the market has been boosted by money printing and quantitative trading. Thus it was a market underpinned by balsawood as opposed to girders of steel.
I don't know, but I doubt we will see new highs in the stock market anytime soon. We would be lucky to see a giant trading range evolve, but we could also see a bear market evolve.
What I do know is that any sort of serious equity weakness will be met with enormous quantities of money and, potentially, new bailouts. The treacherousness of the environment is why I have had no involvement with stocks generically (excluding Microsoft (MSFT, news, msgs), the publisher of MSN Money) and prefer investment ideas that benefit from money printing -- like gold, gold mining and related businesses.
At the time of publication, Bill Fleckenstein was long Microsoft and owned gold.More from MSN Money
The Euro may yet 'break up,' but I doubt as such. I put the 'ballpark' odds of a Euro break up at 35% ... primarily because I see nothing within the European press that says 'this is what ALL European gov't want ... a breakup.' And remember, A weakening Euro is to the benefit of the leading export nation within the European monetary union ... namely Germany ... and France as well ... as the French would like to get American products (think tech gadgets) off French store shelves. Also, rising import costs may impose an 'energy problem' for the Euro nations ... but the Euro nations have the best public ( and least energy intensive ) transportation system in the world. Yes, the Euro currency is a different 'breed of currency' as the nations which use the currency in some ways resemble the American confederacy during the Civil War ... and that's exactly why the currency union in Europe was formed ... so that the U.S. couldn't 'bully' any one single country ( as is currently the case in Greece ) within Europe.
Spain will 'virtual default' this summer as Greece just did ... the Euro nations will print money and the ECB will buy Euro debt behind closed doors ... but inflation will not take hold in the immediate future.
First, the equity markets worldwide have to take a tumble ( a retest of the S&P 500 low of 700 no later than Q3 2011 is likely in my opinion ) and then oil has to be 'repriced' so that the Saudis and the Canadians can put the funding from higher energy costs into 'heavy oil' projects.
That's when the true inflation gets going.
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