Have you been to the circus? You’ve seen the folks who set those wobbly plates spinning on the end of poles?
It’s all I can think of when I look at the current situation in Europe, and to a significant extent, the rest of the developed world. Let me explain.
There are three major factors at play right now that may very well tear the European Union (EU) apart and leave all of Europe reeling. It could very well mean the end of the euro, the end of cross-border travel, the end of one of the biggest free trade pacts ever created, the end of the world as we’ve known it for the past three decades.
First is all the off-the-book bad debt that the EU is hiding.
Previously I’ve discussed the deep problems with Europe’s banks and the way the European Central Bank (ECB) has done everything within its powers — and then some — to prop up scores of non-performing loans and the banks that are holding them.
The bigger and better performing European nation will now have to bail out Greece, and now Italy. The problem is, the way they have bailed them out is as phony as the “debt instruments” that led to the financial crisis in the first place!
They’re the same kind of debt instruments, but instead of being built by greedy banksters, they’re being built by desperate central banks. Think of it as the first wobbly plate the European bankers have spinning.
The second is, the British exit (aka Brexit) from the EU.
The UK didn’t adopt the euro. It still maintains its own central bank. But it did join into the EU for the sake of trade. And it has worked.
Many companies on the continent have built factories and offices in the UK so they can sell into Europe easily. A Brexit would make that a lot more difficult. And it is a serious concern, especially considering the fragility of the economies there.
Brexit would collapse the existing businesses owned by say, German carmakers that have a significant footprint in the UK. It means a lot of unemployed British workers. It also means the carmaker would have to relocate its factories, an expense that wouldn’t help its stock.
Multiply this problem across dozens of industries and you get a sense of how jarring and destabilizing the Brexit would be. Second spinning plate.
Third is the Syrian refugee crisis.
It may not seem to be a part of Europe’s economic situation, but this is a massive issue for Europe and its neighbors. Greece is being inundated with refugees that can’t really be sent back yet can’t be supported economically by the EU or Greece.
Anti-immigration parties are starting to gain power in many parliaments and Eastern European countries are also straining under the weight.
Remember the U.S. was very gung-ho on many developing Eastern European nations joining NATO to blunt Moscow’s desires in the region. Now it looks like this refugee issue is going to have some serious implications for NATO on the security front. And given the new challenge of keeping a Saudi Arabia-backed army from invading through Turkey, the refugee problem could get worse instead of better.
These wobbly plates are spinning… and there’s no way to slow them down or even catch them when they fall. One fall may precede another, or they may all fall nearly simultaneously.
And so we must prepare now.
This is going to have massive implications for the U.S. dollar, gold and oil. The dollar will get even stronger (which will crush exports) as investors flee the British pound, the euro, and Swiss franc for anything stable outside of Europe. It will likely be the beginning of the end for the euro if all three of these plates crash to the ground together.
Gold will soar, as will silver. Most Asian nations have no faith in stocks and bonds. They prefer tangible assets. Stocks are like off-track betting. When you invest, you invest in hard assets. There’s so much demand in India that it just re-taxed purchases of gold to depress demand. If Europe devolves, you can bet they’ll be buying gold no matter the tax.
Many European central banks will likely begin selling off high-priced precious metals to keep their countries afloat. Right now, many European countries are preparing by hoarding enormous stockpiles of gold.
Oil is trickier. If the Saudis invade Syria and are successful, they will command the oil markets. If they fail, it may have serious repercussions back at home and destabilize the regime. That would make prices soar. If they don’t go in, we’re in the current status quo.
The surest plays here are gold, silver and titanium. And to get your money out of Europe.
— GS Early
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