Gold News

Don't Be Fooled by This Misplaced Optimism

The Euroshow gets ever-more farcical, yet markets seem to be betting on a miracle...

THE MARKETS seem to be continuing their 'cautiously optimistic' theme – despite signs of a deteriorating global economy, writes Greg Canavan for the Daily Reckoning Australia.

The volatility and fear is seeping out of the market as traders bet on some sort of miracle play coming out of Europe.

But in a sign that the elites have absolutely no idea what to really do about the Euro debacle, the latest concoction to save the Eurozone as we know it is to have the big 'emerging' economies of China and Brazil pump money into the IMF.

The idea behind this is to boost the IMF's firepower in helping to bailout bankrupt European nations and banks. The Europeans don't have the resources to bail themselves out so they're recruiting the emerging economies to contribute.

If this sounds insane, it is.

The German constitutional court has made it clear...attempts to leverage the European Financial Stability Facility (EFSF) will be thwarted. That leaves the EFSF insufficient moolah to plug all the holes in European sovereign finances.

To get around this, the IMF is now talking about setting up its own SPV (special purpose vehicle) or just getting poor countries to buy IMF-issued bonds. Then the IMF could use the funds to contribute to the Eurozone bailout.

It's all a charade of course. It's just a way of making it look like the poor emerging economies are not subsidizing 'wealthy' Europe's failed welfare system. They're buying 'solid' IMF bonds, not Spanish or Italian obligations!

You may be interested to know the head of the IMF, Frenchwoman Christine Lagarde, met with French President Nicolas Sarkozy in Paris on the weekend. No doubt Sarkozy told her the French government was in no position to bailout its insolvent banks because in doing so, it would lose its prized AAA credit rating.

We're sure he also made it clear the Germans weren't keen on contributing to a French bank rescue. So he's told her to get on the case and sort something out pronto. Enter the 'poor bailing out the rich' plan.

This whole Euroshow grows more farcical by the day. Yet the markets hold up in the hope that something will be worked out. They've got about three weeks to come up with a watertight plan. Apparently the G20 meeting in Cannes on the weekend of 4-5 November will be the big reveal.

Perhaps the market thinks the end of current European Central Bank chief Jean-Claude Trichet's reign, in a few weeks' time, might be decisive. Mario Draghi, former Goldman Sachs banker and current head of Italy's central bank, will take over as new ECB head.

It doesn't take much imagination to believe that an Italian and former investment banker will have much more inflationary tendencies than the conservative Trichet. But there is still a limit over what he can do.

Chances are, in addition to scrounging up as much cash as they can, the elites are busy re-writing the rules to avoid economic and financial reality. They'll try to engineer a Greek default without calling it a default, so as not to trigger all the insurance claims that come with it.

The market might like such alchemy in the short term. But everything that has occurred since the credit crisis got underway in 2008 has shown that avoiding reality now only leads to bigger problems later.

In a sign that everything in the world is connected, new data shows growth in China's trade slumped in September to its lowest level in seven months. Europe is China's largest trading partner. Exports to the Eurozone grew just 9.8 per cent year on year in September, down from 22 per cent growth in August.

Determined China bulls will say that still represents pretty decent growth. But it's the speed of the growth that matters. And it's slowing down.

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Greg Canavan is editor and publisher of Sound Money, Sound Investments, a weekly financial report devoted to unearthing great value investments amid today's "money illusion" of fiat currency. Formerly editor of Australia's market-leading finance newsletter, Greg has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as LewRockwell.com and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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