In what is practically turning into an ongoing series on the subject, I will start with the elephant in the room, aka Europe, where the theater of the absurd shows no sign of leaving the stage.
There was a report last Tuesday from the Guardian that kited the market higher late in the day, but it was denied by unnamed German sources after the close. On that subject, Reuters ran the following headline Wednesday morning: "Sarkozy says Euro zone deal talks stuck over relations between EFSF and ECB center-right legislators."
Therein lies the problem: disagreement over the use of the printing press.
Obviously, something is in the works, but I think it is important to be clear what the powers that be can and cannot do. Europe has a number of problems that seem to be getting mixed together.
The eurozone's banks had a liquidity problem, which was largely addressed by the recently announced long-term refinancing operations of the European Central Bank. However, some banks may ultimately be facing an insolvency problem because the governments have an insolvency problem, and that is the big issue.
Bill Fleckenstein
The dearth of nations
The European Financial Stability Fund, or EFSF, is just another contingent liability of the same governments whose solvency is being called into question. Thus, while potentially a short-term Band-Aid, it really does not address the balance sheets of the governments. So the talk about leveraging up this fund is just more of the same non-solution to the problem.
In fact, such talk has been more about spreading debt around by having the EFSF take the first 20% or so of bond losses; with this, the $300-ish billion left in the fund that hasn't been earmarked already could potentially be spread over $1.5 trillion in bonds. But it would not be a $1.5 trillion program; that is just the amount of bonds it would cover.
In a recent piece, Dennis Gartman of The Gartman Letter provided an example of the confusion over what this really means, calling it "monetization of a massive order," i.e., Europe's response to QE1 and QE2, the Fed's money-printing programs. But they are not the same things. There is no monetization of debt via bond buying by governments, in what has been announced or leaked thus far.
Germany's 'nein-nein-nein' plan
I expect we will get to monetization, because at some point either the ECB has to find a way to monetize at least a portion of these debts or, as I said last week, the euro, European governments and their banking system are going to see enormous chaos, with many entities imploding.
That is why I believe that even though the ECB claims it is not going to monetize the debts, it is run by a council that votes by majority, and in the end I expect the Germans -- who oppose such money printing -- will be outvoted.
We may learn more about what they have up their sleeve in the wake of last weekend's meeting, but from what we have seen, they have virtually no ideas. They simply keep trying to solve the problem of insolvency by having the entities whose solvency is in question seek to bail themselves out, essentially by guaranteeing their own debts.
Clearly that won't work, so the only "solution" (which may buy time but won't eliminate the problem) is monetizing the debt via money printing. It will probably take an even larger escalation of the crisis to get there. As I noted, the countries that are following that course are doing far better at the moment than are the Europeans, and I'm sure that can't be lost on them.
Since the crisis in 2008, I have said that money printing would be the first option for trying to deal with all problems everywhere in the Western World. Europe is trying to avoid that path at the insistence of the Germans, but it will be forced to cave in, or the European Union as we have come to know it will cease to exist.
Cold mine
As for the beneficiaries of the printing press, in my Aug. 5 column, "There's gold in mining stocks yet," I mentioned several gold miners I liked. On Oct. 19, one of them stumbled.
Agnico-Eagle Mines (AEM, news) announced that it was going to to close its Goldex mine (it hopes temporarily) and take a write-down due to rock instability. The Goldex mine is a little better than 15% of Agnico-Eagle's production this year and was expected to produce at around the same level next year. (And 15% is about how much the stock dropped at the open.)
Over time, this may not matter, especially given the fact that the company will probably be able to fix the problem and restart the mine, but that can't happen until 2012. I believe in the short run the stock is going to be under pressure, plus I suspect at some point it will be subject to tax-loss selling. Thus, I decided to sell my position and take a tax loss, but I intend to revisit it when the dust settles.
Mining is an extremely difficult business and, unfortunately, this type of problem does tend to happen occasionally.
On the air
I did an interview Thursday morning with Bloomberg TV in which I talked about Microsoft (MSFT, news)/Yahoo (YHOO, news) rumors, as well as a bit about Europe and our own situation. (Microsoft owns and publishes MSN Money.) Interested readers can view it here.
At the time of publication, Bill Fleckenstein owned or controlled shares in Microsoft. He also owned gold.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
