Thursday, May 6, 2010

EURO Fast Approaching 124

We are at the key support level of 1,150 on the SPX that I noted early this week. That didn’t take long…

The Euro has collapsed to 126.3 versus the 2008-2009 panic lows at 1.24

The European Panic Trade is obviously in full effect. Basically what is happening is that Greece’s citizens do not want their free lunch to go away (like a retirement age of 60), so they are rioting and forcing the government to refuse the IMF/EU bailout. If Greece refuses the bailout, then their only other option is to leave the Euro and default on their sovereign debt. This would crush the European banks which hold the debt.

European Banks in Freefall –

Credit Suisse (CS)
Deutsche Bank (DB)
UBS (UBS)
ING (ING) – breaking down out of a serious base (yikes!)

Current Debt Levels –

Greece $236 Billion
Portugal $286 Billion
Ireland $867 Billion
Spain $1.1 Trillion
Italy $1.4 Trillion

If Greece is killing the banking system in Europe, then imagine what will happen when Spain blows up later this year!

If you have ever wondered why the US decided to get rid of “Marked to Market” pricing and move to “Marked to Fantasy” pricing, then look at what is no occurring in Europe.

Everybody knows that the banks of the US and Europe are insolvent and that the only thing keeping them propped up is bs accounting and Government support via the taxpayers purchasing of bad loans. They also know that the only reason asset prices are going up is because of Government-funded leverage and Government-sponsored manipulation of asset prices. It is simply a matter of when, not if asset prices collapse again.

So the EU is left with a couple options, if it does not want a full scale collapse of the Euro Zone Economy –

Start Quantitative Easing. This is when the EU will ultimately print about $2.5 trillion in money to buy these bad loans off the books of the European Banks. This would be great for Gold. This also may force Germany out of the EU.

Ease accounting rules to allow for the Marked to Fantasy pricing of bank assets. I would assume that this would lead to a massive rally in European Banks.

Let Greece, Portugal, Ireland, Italy and Spain (the PIIGS) leave the Euro and go back to their old currencies. They could then execute their own domestic Quantitative Easing and Currency Devaluation policies, to inflate away their debt – this is how Banana Republics do it and how the US will ultimately take care of all of its debt.

Let the PIIGS default and suffer through a Depression over the next few years as we work off all the bad debt and rebuild our economies.

I think the most probable outcomes in the short term are QE and Market to Fantasy. At some point in the future, we then either get the breaking up of the EU or mass sovereign defaults.

Expect some sort of resolution in the very near future, because right now the debt and currency markets in Europe are frozen and a full-scale funding crisis is eminent.

May 15th is a key time cycle, so this all may get resolved by late next week.

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