Bill Fleckenstein
Last week was a quiet one in world financial markets. Not.
Sunday night, Oct. 30, set the tone when the Japanese intervened to drive the yen lower. At one point it had lost almost 4%, but those losses were eventually trimmed. Meanwhile, European debt was under pressure yet again, which to me was a clear manifestation of the obvious -- even before Greece's bombshell -- that, for all the fireworks precipitated by the so-called solution from the defenders of the euro, there are still huge obstacles to overcome.
The carnage only got worse on Tuesday because of a number of factors. But the proximate cause was that Greek bombshell, the decision to hold a no-confidence vote and a referendum on whether to accept the ECB's bailout plan. Given Greek Prime minister George Papandreou's shrinking popularity, it is not even clear he would be able to hold said referendum, as his coalition government may be near collapse.
Owed to a Grecian turn
It would seem that, in effect, the Greek voters have indirectly, through their politicians, called Jean-Claude Trichet's bluff (i.e., that there would be no default on Greek debt, but no money printing either). Of course, Trichet gave up the helm of the European Central Bank the day after Halloween, handing it over to Mario Draghi. But now, this mess has gone so far and taken such a wild turn that even massive money printing on the part of the ECB might not be able to hold the euro together.
After all, if the Greeks are going to renege on their promises of austerity -- since voters have already rioted and gone on strike against that -- why would the Portuguese, Spanish or Italians pursue the austere course?
What is quite clear is that countries want their printing presses back so they can live beyond their means and not deal with the fact that promises made cannot be kept. We here in America are in exactly the same position, but for this moment in time -- as I keep saying -- the angst is focused on Europe.
It is not at all clear to me what the Europeans can do even to put a Band-Aid on the horrendous cancer that their pecuniary patient has. At this point, I don't see how the euro as we know it can survive, and I would not be at all surprised to see some European Union members vote to have their own currencies back (which would allow them to return to money printing).
That will cause all kinds of knock-on problems, and it may not come to pass, as it would be very difficult to engineer. But it seems like that is where we are headed. (Thursday's rate cut by the European Central Bank was cheered by markets there, but it won't accomplish much.)
A ghost of a chance seems good enough
With October behind us, we can take a look back to see if there is any information to be gleaned from the huge moves we saw during that period. I had suggested about a month ago (in "Market at a turning point") that if the world didn't end (as a lot of people were expecting a replay of the 2008 financial meltdown), we could see underinvested managers fall all over themselves to chase the market higher.
I think that has, in fact, taken place; after all, markets have rallied since then even though not much has actually gotten better. The only thing that might be viewed as an "improvement" -- besides the tiny rate cut -- is the fact that the ECB, with its long-term refinancing operations and other bond buying, has not been sterilizing its purchases (i.e., trying to offset its bond buying with bond selling). Thus it is printing money, even if it is not actively acknowledging it.
First World problems on parade
Coming into this week, my view was that the chaos in Europe would only increase the pressure (which was already quite high) on Federal Reserve Chairman Ben Bernanke to begin QE3, another round of money printing. I expected him to announce such a move on Wednesday, and if he didn't, for the stock market to tank.
Well, the Fed communiqué on Nov. 2 basically said nothing new. Nevertheless, stocks have held up well thus far, so perhaps the previously described dynamic of underinvested managers of other people's money jumping in is still at work.
I still expect to see a big move by the Fed before too long, as the stage has been set for Bernanke to pull the trigger, which he can do at any time.
On the air
In my latest interview with Eric King, we discussed the situation in Europe, Greece, money printing, and of course. gold and the miners. If you are interested, you can listen to it here.
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.
