The Dominant Force In World Financial Markets In 2010 Is Fear

Extreme volatility is not a sign of health for financial markets.  But in 2010 financial markets around the globe are experiencing unprecented volatility.  Why?  It is because the entire world financial system has been gripped by fear.  In today’s crazed environment, it seems like just about anything can set off a major panic.  In fact, these days politicians have to be extremely careful about what they say about their national finances, because saying the wrong thing can literally send world markets into violent convulsions.  For instance, when a senior Hungarian official said that the Hungarian economy was in a “very grave situation” last week it sent world financial markets into a tailspin.  Panic was everywhere and everyone was talking about how Hungary could be the “next Greece”.  Of course on Monday Hungarian officials backed away from that comment and tried to reassure world markets that everything was fine, but the damage had been done.

It was a perfect example of the spirit of irrational fear that has gripped the financial world.

After all, even if Hungary did fall apart financially, it wouldn’t plunge the rest of the world into a depression.

And the truth is that Hungary is not really in that bad shape financially.  Hungary’s budget deficit is about half the size of the Greek budget deficit and Hungary doesn’t even use the euro.

But now investors all over the world are constantly scanning the news for the latest piece of information that will send waves of panic through the markets.

In the current environment, fear is what moves the markets.

The reality is that fear is the reason why the euro is plunging at breathtaking speed.

Are many of the economies in Europe truly in really bad shape?

Of course.

However, it could be argued that the economies of the U.S. and Japan are in even worse shape in many ways.  Japan’s gross public debt has reached 201 percent of GDP and the United States has piled up the biggest mountain of debt in the history of the world.

But because of the extreme fear that has been generated, people are moving out of the euro and into dollars and yen.

In fact, the euro is probably headed even lower.

GFT Forex’s Boris Schlossberg believes that the euro could fall down to the 1.16/1.17 range before this current panic is over….

“I think we run the risk of seeing 1.16/1.17 before the next selling phase dies down. The euro is just absolutely hated here. The European rescue package still faces some regional opposition. There were rumors the German high court could rule it was unconstitutional. They don’t have a federal mechanism to put it in place, and there’s worries that at any point in time, the rescue package could be sabotaged.”

But all of this fear and panic is actually good for investors in gold and silver.

Why?

Because during times of fear and panic investors look to move their money into something that is secure, and gold and silver have been secure investments for thousands of years.

So in this environment of fear, gold is absolutely soaring.  On Monday, the price of gold climbed 1.9 percent to $1239.30 per ounce.  That was the largest one day rise in the price of gold since February 16th.

So how high will gold go?

Well, the truth is that nobody knows.

But if fear and panic continue to grip world financial markets in the months ahead, there is really no telling how high it could go.

In fact, even many mainstream financial analysts are becoming extremely bullish on gold.

As Dan Burrows of Daily Finance recently commented, “you don’t have to be a member of the build-a-bunker-in-Montana crowd to believe gold could hit $2,500 in the next couple of years.”

But these days no investment is truly safe.  One really bad rumor these days can send any stock, any currency or any commodity into a tailspin.

Fear is everywhere.  Governments and central banks are intervening in the markets in unprecedented ways, but it is still not enough to keep the markets from flopping around like a dying fish.

So for those who are waiting for the financial markets to get back to “normal”, you are likely to be waiting for quite a long time.  The world economic situation is not going to be getting any better in the long-term.  So if financial markets are flipping out this much even now, just wait and see what happens when things really start falling apart.

“The World Has No Money, And The Emperor Has No Clothes”

Most of us are aware of the very old fairly tale by Hans Christian Andersen in which two weavers promise an emperor the finest suit of clothes imaginable, but from a fabric invisible to anyone who is unfit for his position or “just hopelessly stupid”.  Well, in the fairy tale it turns out that nobody wants to admit that they are “unfit” or “stupid”, so when the emperor parades before his subjects in his imaginary new suit of clothes, it takes a child to cry out: “But he isn’t wearing anything at all!”  Well, many of us have been declaring that the world economy “has no clothes” for some time now, but when the anchor of NBC News declares it on national television it gets a bit more attention.  During his recent appearance on The Late Show with David Letterman, NBC’s Brian Williams was asked about the world financial situation.  His answer included this shocking statement: “The world has no money, and the Emperor has no clothes.”

During the interview, it was readily apparent that Williams was honestly shaken up by what had happened last Thursday in the stock market.  But who can blame him?  After all, most of us who watch the markets were totally stunned when the stock market dropped almost 1000 points exactly in less than an hour.

Normally a network news anchor is much more guarded and is much more careful about what is revealed to the public.  But on Letterman’s show, Williams gave us a glimpse of what he really thinks about the world economic situation….

“If I wasn’t a tad too close to this, I’d probably not leave the house.  But that’s how bad it is.”

A video clip that includes these jaw dropping comments by Williams is posted below….

So why did the U.S. stock market plunge so rapidly last Thursday?

Well, many have blamed the episode on a “bad trade” or a “computer glitch”.  Others claim that the Greek debt crisis caused a brief panic.  There are yet others who see something more insidious going on – such as Goldman Sachs seeking to remove their name from the financial headlines, or the Federal Reserve sending a message that S. 604 (the bill to audit the Federal Reserve) should not be passed.

The truth is that we will probably never know what actually caused the market to fall through the floor that afternoon.

But it did pave the way for more bailouts.

Over the weekend, European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases designed to stop the sovereign debt crisis that threatened to shatter confidence in the euro.

The Federal Reserve got into the act as well.  Over the weekend the Fed promised to flood the international financial system with U.S. dollars.  This was seen in the markets as a sign of “resolve” meant to keep doubt about the European economy from turning into a global crisis of confidence.

So on Monday, investors responded to these bailouts with exuberance.  The Dow Jones industrial average gained 405 points that day, which was the average’s biggest one day point gain since March 23rd, 2009.

But are more bailouts, more debt and a flood of paper money really something to celebrate?

No.

The truth is that debt and paper money that continually declines in value are some of the chief causes of the financial mess that the world is now in.

In fact, Congressman Ron Paul is warning that the European bailout that was just announced will just lead to even larger financial problems in the future….

And Ron Paul is right – all of these bailouts and all of this debt will eventually cause all of the major paper currencies (including the U.S. dollar) to collapse.

The funny thing about these bailouts is that they never seem to help the average people on the street.  Just take a look at the U.S. economy.  We are told that Wall Street has recovered and that things are getting back to normal, and yet more Americans than ever find themselves dependent on the U.S. government for their survival.

The U.S. Department of Agriculture recently announced that 39.68 million people, or 1 out of every 8 Americans, were enrolled in the food stamp program during February, an increase of 260,000 from the previous month.

Nearly 40 million Americans on food stamps?

How in the world did that happen?

Once upon a time, the old timers would tell us that one day things would get so bad that we would all have to stand in bread lines.

Well, today food stamps are the new bread lines.

If you have to rely on the government for the very bread that you eat, what kind of a position does that put you in?

The truth is that the once great American middle class is allowing the system to slowly keep grinding them into oblivion.

Like never before in our lifetimes, wealth is being concentrated in the hands of the “lucky one percent”, while the rest of us are rapidly being marginalized.

Do you ever stop to wonder why it seems like almost everyone is either broke or up to their eyeballs in debt?

That even goes for the major governments of the world.  The U.S. government (the “wealthiest” nation on the globe) has piled up the biggest mountain of debt in world history.

You see, Brian Williams was actually chillingly accurate when he declared that “the world has no money”.

So if the world doesn’t have any money, then who does have it?

The international bankers.

But, shhhhh, don’t tell anybody.

Just keep quietly clapping as the emperor walks down the street with no clothes on.

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