The Bailout Era

The Bailout Age?

The printing press already has its own prominent place in history, so we’re not sure what else to call the first couple decades of the new millennium, but after Monday's news, there’s little debate: time to fire it up!

The European Union and International Monetary Fund announced a plan that comes straight out of the United States’ playbook: smother debt flare-ups with truckloads of “free money” while the central bank manipulates rates.

European leaders unveiled a $957 billion plan to save themselves and their currency. Here’s the quick and dirty:

• The EU will pony up $560 billion in new loans and $76 billion in existing deals for the GIIPS nations (as we’ve taken to calling them...no reason to give pigs such a bad rap)

• The IMF says it's ready with $321 billion

• The European Central Bank (ECB) has abandoned its old stance (and credibility) by launching a program to purchase government and corporate debt.

“This is like pouring Chanel No. 5 on a French ‘lady of the evening,’” Rob Parenteau, editor of The Richebacher Letter, wrote us early this morning, “after a night of wanton debauchery. More public debt will be issued as public debt guarantees and other fiscal assistance are put into place. German bunds are now the most screaming short."

But Parenteau warns that a quick move is not necessarily a smart one. "I would not put on shorts on the euro or euro banks or buy a credit default swap (CDS) on banks until this rally flares out, which I expect by June, if not sooner. By then, you will have an even more advantageous point to pick at the carcass of the fatally flawed by design -- as many argued over a decade ago -- euro zone.”

What of the implications for investors who have been taken on a wild ride of late. "This weekend's actions heavily reinforce the three-to-five year investing case for gold, because there's little reason for investors to view the euro as a relatively ‘hard’ currency," Parenteau argues. "This weekend's actions also weakened the ‘safe haven’ status of German bunds; expect bund yields to keep rising if German politicians approve funding for the off-balance sheet strategic investment vehicle (SIV) contraption that was set up to evade the ‘no bailout’ clause of the euro treaty.”

“The short covering rally should be fierce, but quick,” Parenteau advises, “given the tremendous oversold/overly pessimistic position markets were in going into this weekend. Savvy, cynical professional investors are welcome to go long risky assets like EPP or IBB (a Pacific ex-Japan ETF and biotech ETF, respectively) for the ride, but you must be ready to rip these positions out within a week or two.”

Addison Wiggin 

The Bailout Era originally appeared in the Daily Reckoning, which offers a uniquely refreshing perspective on the global economy, investing, gold, stocks and today's markets. Check out our new special report Investing in Offshore Oil

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. The executive producer of the acclaimed documentary film I.O.U.S.A. and 3 time New York Times best-selling authort, Addison is also the editorial director of Agora Financial’s daily 5 Min. Forecast and The Daily Reckoning. 

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