The Bailout Era

The Renaissance. The Age of Enlightenment. The Industrial Revolution. The Gilded Age. The Cold War. The Information Age.

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 this morning’s news, there’s little debate: time to fire it up!

The European Union (EU) and International Monetary Fund (IMF) 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 its 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 wrote us early this morning, “after a night of wanton debauchery.”

“Fiscal ‘consolidation’ will be sped up under the new policy announcement. That means the private income deflation we anticipate will show up sooner, and will be even graver. 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.

“However, 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 – eurozone.”

“Just like the Treasury and Federal Reserve’s late 2008 bailouts and quantitative easing,” Dan Amoss agrees, “this announcement will only serve to make Europe’s economic adjustment even more painful for the private sector. The GIIPS debt balances need to fall one way or another, be it default or prepackaged haircuts and restructuring.

“The Eurocrats are doing the bidding of European banks that are unwilling or unable to take necessary write-downs. It remains to be seen whether striking/rioting citizens will allow the planned austerity measures to work. I have my doubts.

“Implications for investors: This weekend’s actions heavily reinforce the three-five year investing case for gold, because there’s little reason for investors to view the euro as a relatively ‘hard’ currency. 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
for The Daily Reckoning