Do you remember Baghdad Bob from Gulf War II? He was the Iraqi
minister of information who kept pledging that the U.S. was being
routed and our troops were nowhere near Baghdad … even as they were
marching through the streets. The colorful denials made for great
entertainment.
Now the same theatre of the absurd process is playing out in many of
Europe's major capitals.
First Athens — and then Dublin — pledged they didn't need a
penny of aid from the European Union or European Central Bank. They
said they could pay back their debt, no problem, even as their bond
prices were plunging and interest rates were soaring. The bailout
denials kept coming and coming … right until the fateful day when
they threw in the towel and begged for the money!
Soon, the next domino in the chain is going to fall. Then the next
after that. If you're an investor exposed to the risk, you need to
get out of the way.
I'll tell you how in a minute. But first, let's lay out the daisy
chain of events to come …
*Portugal Next; Then Belgium? Spain? Italy?*
The focus this week has been on Portugal. The country's deficit hit
9.3 percent of GDP in 2009, putting it just a few small steps behind
bailout nations Ireland and Greece.
Meanwhile, its overall debt outstanding is closing in on 90 percent of
GDP. Standard & Poor's will likely soon cut its A- rating on
Portuguese bonds, while Moody's Investors Service could lower its
rating a couple of levels.
In response, global bond investors are dumping the country's bonds,
driving borrowing costs higher. The government just auctioned off 650
million euros in three-year notes at a yield of 5.4 percent, up from
4.04 percent just last October. Its ten-year borrowing costs? Even
higher — recently breaching the 7 percent mark.
Government officials have responded by trotting in front of cameras
and microphones to deny they need any help. José Socrates,
Portugal's prime minister, said a few days ago:
"The country is doing its job and doing it well. Portugal will not
request financial aid for the simple reason that it's not
necessary."
Yet, at the same time, EU officials have continued to lay the
groundwork for more bailouts. They're openly talking about boosting
the size of the 440 billion euro bailout fund to as large as one
TRILLION euros!
Why so much? Because officials know that Portugal would NOT be the
last domino to tumble!
Based purely on our analysis of the market's own signals, the next
likely candidates are countries like Belgium and Spain, or even Italy.
Indeed, Spanish bonds now trade at yields that are almost three full
percentage points higher than benchmark German bonds, a clear signal
that investors view them as much riskier.
European Debt Crisis Has Major
Significance For Investors Like You!
So how does this crisis impact you? What does it signal about OUR
future and OUR markets?
First, if you own the debt of troubled European countries — directly
or indirectly — you're caught in a house of pain. One example: The
benchmark 10-year note Portugal sold in early 2010 has lost almost 18
percent of its value from its April high.
My advice: Scrub your bond mutual funds and ETFs to make sure they do
NOT own this lousy paper. Just look at the most recent quarterly
report for details on their holdings.
Example: The iShares S&P/Citigroup International Treasury Bond Fund
(IGOV) holds debt issued by Italy, Belgium, Spain, and Portugal, for
instance.
Second, the euro itself is getting dragged down by the European debt
crisis. So funds loaded down with any euro-denominated bonds —
including those issued by Germany, France and others — are affected.
Example: American Century International Bond Fund (AIBRX) is one of
the worst-performing international bond funds so far in 2011, losing
more than 2.5 percent year-to-date. The culprit? Large holdings of
German, Irish, Dutch, and Belgian bonds.
Third, the progression of the European bond crisis is similar to what
we're seeing in the U.S. municipal bond market. Just substitute
overburdened, overindebted state names like Illinois, California, or
New Jersey for the countries of Greece, Ireland, or Portugal.
If you own municipal debt issued by weaker U.S. states, you're
probably going to lose money as prices fall and yields rise. Get out
while there's still time!
One final note: The sovereign debt crisis has not YET risen to the
level of a market-wide, systemic, crash-inducing event. But we have to
keep our antennae up. If things spiral out of control, the equity
markets could be in for a rough ride.
Fourth, while the debt crises are profit killers in Europe and the
U.S., the massive money printing to offset these threats is generating
huge profit opportunities elsewhere — in alternative investments
like gold, emerging markets, and select currencies.
Source: Fxstreet.com
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