Tread carefully when rumors are flying!

Wall Street has had a serious case of “buy the rumor” lately, with the Dow tacking on more than 1,200 points amid multiple reports of alleged bailout programs:

  A scheme to leverage up the European Financial Stability Facility (EFSF),

  A plan to change the 440-billion euro fund to a bank, so it can borrow money from the European Central Bank, and

  Some half-cocked idea to shift the European Investment Bank’s focus from planting trees in Spain to buying billions of euros worth of Spanish sovereign bonds.

I’ve seen it all!

But now, we’re getting to the point where rumors won’t work anymore. Investors want to see details — real, concrete steps to solve Europe’s debt crisis. And unfortunately, as I’ve been telling you all along, there IS no easy solution.

What needs to happen to finally put the crisis to bed — debt write downs, multiple bank failures, the expulsion of some countries from the euro, or the possible disintegration of the currency entirely — is incredibly painful. So global policymakers have only one option: Keep trying to stall and baffle the world with rumors, even as the underlying crisis gets worse and worse, and we tumble ever closer to a “Lehman Brothers” moment!

Separating Fact from Fiction
Has become Harder Than Ever!

Take this past weekend’s gathering of finance ministers and central bankers from the G-20 nations. It was supposed to usher in some new major, concrete push for international cooperation. That’s why the market ripped to the upside last week. But all we got was another plea from G-20 officials for Europe to “decisively address the current challenges through a comprehensive plan.”

Not only did we NOT get a plan, we actually got one major rumor shot down! That rumor was that the “BRIC” countries — Brazil, Russia, India, China — would pitch in to help bail out the International Monetary Fund. Then the IMF would use the money to help bail out Europe.

But it turned out to be yet another desperate gamble by the Wall Street bonus crowd to goose the markets. In actuality, the IMF “swatted down the idea repeatedly,” according to The Wall Street Journal!

A Sovereign Bond Insurance
Plan — One with a Fatal Flaw!

Or what about the idea that the EFSF should be turned into a bank? Turns out that rumor was also bunk. The new plan is to turn the EFSF into an insurer of sorts. It would insure investors in European sovereign bonds against some percentage of their losses, which would supposedly encourage investors to buy those bonds.

The problem?

That’s what companies like MBIA and Ambac Financial did with a bunch of lousy mortgage bonds back in the 2000s. Their insurance “wrappers” helped boost the ratings on those securities to AAA. But because the credit quality of the underlying bonds was so awful, the insurers themselves blew up!

Now, we’re supposed to believe the same hare-brained scheme will work with a bunch of lousy sovereign bonds? Especially when the countries backing the EFSF — France, Germany, and so on — are themselves in danger of losing their AAA ratings?

Just this week, Moody’s warned that France’s AAA rating was coming under increasing pressure. That’s a potent reminder that it can’t afford to come to the rescue of both its own troubled banks and the rest of Europe’s troubled sovereign countries.

Finally, there’s the whole issue of the ever-rising costs of bailing out Europe’s problematic countries. Greece got a 110-billion euro bailout in May 2010. But that wasn’t enough. So the country needed another 109-billion euro this July. Now THAT is proving inadequate, and an even BIGGER bailout is being discussed.

If things are this bad in Greece, how in holy heck is Europe going to be able to keep bailing out Ireland and Portugal?

Or Belgium, which is now seeing its interest rates and default swaps surging too?

Or Spain, which was just downgraded two more notches by Moody’s?

Or the granddaddy of them all, Italy? It’s the third-largest issuer of sovereign debt in the world with 1.59 TRILLION euros of bonds outstanding! Investors are dumping Italy’s bonds like mad again, DESPITE all the bailout chatter. That’s driving the country’s 10-year yield back to within a few points of the August record high above 6 percent!

The reality is that there just isn’t enough money sitting around to bail out those behemoths! That’s why European officials are already trying to dial back expectations for this weekend’s summit of European leaders.

Germany’s Chancellor Angela Merkel warned earlier this week that “dreams are taking hold again now that with this package everything will be solved and everything will be over on Monday,” while the country’s finance minister Wolfgang Schaeuble said there will be NO “definitive solution” coming out of the summit. Private bankers are also pushing back big-time at calls from government officials that they raise more capital at high cost to their shareholders.

Bottom line: The markets are going to continue to be buffeted by rumors and innuendo, with big rallies and big sell offs increasingly common. But the long-term outlook remains bleak given the huge debt challenges Europe faces. So please invest accordingly!

Until next time,

Mike

P.S. There are ways to protect your wealth and even prosper while Europe falls to pieces. Turn up your speakers and watch this video to learn more.