The Two Risks of Europe

In a recent research note Andrew Garthwaite of Credit Suisse discussed the two things that concern him most about the enduring crisis in Europe:

• At which points do countries reach the breaking point in terms of the amount of austerity they can endure?
  

Greek GDP has already declined 14% from peak and the Greek parliament is set to vote on the new round of austerity measures at the end of November (where legislation would implement the firing of 30 thousand civil servants).

• What will happen if the peripheral European countries keep missing their deficit targets?

In the first half of the year, the Spain budget deficit was closer to 9% of GDP than the 6% GDP targeted for the whole year partly, owing to the overspending by the 17 autonomous regions.

This is dead on. The big risk (and likelihood) in Europe is that the 'resolution' they are about to unveil will simply be some sort of enlarged version of the current plan. That ultimately won't fix the root of the problem as I've explained before in my previous articles. The main issue here is that continued austerity that accompanies these new plans is actually causing the deficits to deteriorate. The two risks above have the potential to blow the lid off this whole thing in the coming months as EMU leaders continue to misdiagnose and resolve the root of this issue.

The Simple Reason Why Gold Will 'pop' In A Market Crisis

For awhile it looked like the performance of gold might make for one major difference between 2011 and 2008.

In 2008, gold got destroyed as the market tumbled.

Gold, meanwhile, was at $1900/oz. just a few days ago.

Now gold is getting put through the meat grinder with everything else. pretty much only US Treasuries, the dollar and the yen are doing well.

What's the problem with gold? Quite simply, nobody has debts or bills to pay in gold.

think of a financial crisis as basically a period in which everyone is scrambling to raise money to pay their debts. Mostly people have debts in dollars. A lot of people in Europe have debt in euros. There's a ton of yen-denominated debt out there. there's basically no gold-denominated debt (as far as we know). thus gold is a really great thing to sell (to raise cash). Very few people have an acute need to own more of it.

When growth is bad, and interest rates are ultra-low, there's a case for holding gold. When things are getting really ugly though, cash becomes KING.