Today I return back to the U.S. from the current "frontlines" of this three-plus year economic crisis. My week in Europe left me no more enlightened than I was before, because there are no easy answers to problems facing the continent (or, perhaps, incontinent). Every bank is loaded to the gills with sovereign debt of neighboring countries, and would be insolvent if forced to mark to market. Most of Europe really can't service its sovereign debt, and default is inevitable, especially when this is combined with the severe recession that will accompany the bailout of the European banking system.
Friends I met in Paris have indicated they're buying gold, and that they have no more than 50-50 faith that the euro can continue as the common currency. I must concur. The only real solution for Europe is for the European Central Bank to print, print, print. My simple investment position re Europe is: Own no bonds, have only short euro exposure -- and bet on gold as the safe haven, especially with the Swiss franc taken out of play.
Added to the mix this week is the unusual two-day Federal Open Market Committee meeting here in the good ol' U.S. of A. This will give the Federal Reserve an extra day to contemplate the fact that there is nothing it can do now to help the U.S. economy -- though they can play a role in helping Europe prop up its banking system. Rates are at all-time lows, and yet they are doing nothing to stimulate activity in interest-rate sensitive industries such as housing.
As I argued last week, rather continuing to push ineffective "solutions," I would prefer we imitate policies that actually worked in the past. However, I hold out little hope. As we all know, it is safer to fail conventionally than it is to succeed in an unorthodox manner.
In any case, there appears to be a slight hope that a third round of quantitative easing, or something similar, may come out of the FOMC this week. Based on both internal and external resistance, combined with immediate data that inflation is accelerating, I am looking for a no-action decision. My best guess is that the equity markets will follow the usual trading pattern: rally into the meeting, then sell off post-release. Buy the rumor; sell the news.