Death Spiral in Euroland

Posted: Nov 26, 2011 12:01 AM

If you indulge in Black Friday shopping, have fun. I hate shopping with crowds. I always trade the day after Thanksgiving. It’s a light trading day, but sometimes you can get some good opportunities.

Today might be one of those days, but be very careful. Europe has hit the point of no return I am afraid. Debt ratings in some countries went to junk yesterday. Italy paid record highs in their latest auction. Tell me, how is Italy not junk?

The only countries in Europe that aren’t junk are probably France and Germany. However, without knowing the true exposure of their government finances to the rest of the EU, it’s hard to know if they can maintain their status or not. As rates continue to steepen in weekly European Union debt auctions, the entire continent speeds it’s collision course with stagflation.

The only way out of their financial mess is print money or grow. They aren’t going to grow given their current economic policies. Watch the near term months in the Eurodollar ($GE_F) contract. If they start to break hard, EU banks and governments are having funding problems.

As we mark time to the eventual day of reckoning, December 1 seems like the next big data point to me. It’s the date of the next French OAT auction. Spreads between French and German debt are at all time highs. As the PIIGS careen upwards to 8%, I don’t see how the French can keep their debt costs from spiraling higher as well.

It’s just too risky to hold these securities. Investors have to demand a huge premium. No doubt the resolution will be haircuts if you hold the security, and devaluation of the currency they are denominated in.

I don’t see any white knight coming in and changing things. The Europeans have made their bed, now they have to lie in it.