Hey, have you heard? The stock market is absolutely soaring right now. The Dow was up 330 points on Monday, and overall the Dow has risen by more than 10 percent since October 3rd. So should we all be throwing our money into the stock market in order to take advantage of this tremendous rally? Well, if you actually believe that the sovereign debt crisis has passed and that we are no longer on the verge of a massive worldwide financial crisis then I have a bridge that I would like to sell you. The stock market may be soaring, but absolutely nothing has been solved. The truth is that this stock market rally is for suckers. The primary reason why stocks rose today was because German Chancellor Angela Merkel and French President Nicolas Sarkozy promised that they would reveal a “comprehensive response” to the European debt crisis by the end of this month. When pressed for specifics, Sarkozy stated that “now is not the moment to go into the details.” So do global financial markets really have a legitimate reason to be giddy about the super secret plan cooked up by Angela Merkel and Nicolas Sarkozy, or are Merkel and Sarkozy just blowing a bunch of smoke?
Merkel and Sarkozy have made bold promises in the past, but nothing ever got fixed.
So why should we believe them this time?
If they have real solutions, why don’t they just reveal them now?
Why keep us in suspense?
By making these vague promises, Merkel and Sarkozy certainly did give a boost to global financial markets, but they also seriously raised expectations.
Now many in the financial world are expecting something truly significant from Merkel and Sarkozy. For example, CNN has quoted economist Scott Brown as saying the following about the announcement by Merkel and Sarkozy….
“The Europe debt crisis cloud has been hanging over the market for a year-and-a-half now,” said Scott Brown, chief economist at Raymond James. “The risks and worries have been intensifying over the last couple of weeks, but after this weekend, the market is expecting something big and concrete that will put the crisis behind us.”
So can Merkel and Sarkozy deliver something big?
Of course not.
Merkel has already gotten all of the bailout money that she is going to get out of the Germans. The political will for more bailouts is totally gone in Germany, and many of Germany’s top leaders have expressed this in no uncertain terms.
For example, German Finance Minister Wolfgang Schaeuble is publicly admitting that Germany will not be able to contribute any more money to the European bailout fund.
Also, the leader of Bavaria’s Social Christians, Horst Seehofer, said after the recent vote on the Greek bailout package that his party would go “this far, and no further“.
Recent opinion polls in Germany make it abundantly clear that the German people are overwhelmingly opposed to more bailouts. Squeezing more money out of Germany simply is not going to happen, and that means that squeezing more money out of the rest of Europe is simply not going to happen.
In a recent editorial, Ambrose Evans-Pritchard described the current political situation in Europe in this manner….
Repeat after me:
THERE WILL BE NO FISCAL UNION.
THERE WILL BE NO EUROBONDS.
THERE WILL BE NO DEBT POOL.
THERE WILL BE NO EU TREASURY.
THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.
THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.
Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.
So exactly what “big” solution do Merkel and Sarkozy have up their sleeves that does not involve more money?
Can they really produce the goods or are they just blowing smoke?
Perhaps global financial markets should be focusing on what we can see rather than on what we cannot see.
For example, the first major bank bailout in Europe has now happened. Dexia is being bailed out, and it is going to cost more than 100 billion dollars.
The funny thing is that Dexia actually passed the banking stress test that was conducted a few months ago.
What does that say about all of the major European banks that did not pass the stress test?
Also, perhaps global financial markets should focus on all of the credit ratings that are being downgraded all over Europe.
Lately, we have seen a cascade of credit rating downgrades.
For example, Moody’s slashed Italy’s credit rating by three levels last Tuesday, and the other day S&P slashed the credit ratings of seven different major Italian banks.
The problems in Europe continue to grow worse, and yet the stock market is soaring.
It doesn’t make a lot of sense, does it?
If Greece defaults, it is going to be a major disaster.
If Italy or Spain defaults, it is going to be financial armageddon.
The world truly is on the verge of a massive financial crisis. If you don’t want to believe me, perhaps you might believe some of the top financial officials in the world….
*Bank of England Governor Sir Mervyn King: “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever”
*U.S. Treasury Secretary Timothy F. Geithner recently stated that if something is not done quickly, Europe faces “cascading default, bank runs and catastrophic risk.”
*IMF advisor Robert Shapiro: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected.”
For many more shocking quotes about how bad things have gotten in Europe, just check out this article.
Merkel and Sarkozy are holding really weak cards but they have chosen to raise the stakes anyway.
Their bluff may calm financial markets for a month or two, but in the end they will not be able to stop what is coming.
A great financial collapse is coming to Europe.
Try to get out of the way of the coming avalanche while you still can.