Lots of Physical Buying while Paper Sells Off

Stay the Course: Lots of Physical Buying while Paper Sells Off:

We are witnessing significant financial crises unfold around the globe as the culmination of decades of financial mismanagement, miss-allocation of capital, over-indebtedness and the ultimate demise of fiat currencies begins their final reckoning. As events rapidly transpire, markets suffer huge volatility caused by confusion and questions about what is now happening and what is likely to happen in the near future.

While the road forward can take many turns, it should be clear that this final episode could spell the end of fiat currencies after a massive purging of global debt. Here we will try to distill a complex system of cause and effect and outline some potential paths. Ultimately, our quest is to understand the forces affecting both gold and silver, which we believe to be the ultimate currencies. To do that we need to look at what is happening with paper currencies around the world. This is our simplistic view, for what it’s worth. More importantly, we believe it is critical to watch fervently as events shake out in the coming days, weeks and months to gain clues as to where we are actually headed.

Short-Term Liquidity vs. Balance Sheet Problems:

The short-term liquidity issues that caused problems with large U.S. financial institutions in 2008 are now plaguing banks and insurance companies across the Euro Zone. The U.S. Federal Reserve’s response, as you may well know, was massive liquidity injections into the economy in the form of TARP, TALF, QE1, QE2, cash for clunkers, etc. and now “Operation Twist.” Because we have a printing press the Fed was able to “accomplish” their mission of recapitalizing the banks in the U.S, although these banks still have to deal with their own balance sheet issues which include declining real estate values. The individual European countries gave up their respective own printing presses when they joined the Euro, so now, faced with the same short-term liquidity problems, they must turn to the EU to bail them out.

The EU did just that last week in a massive coordinated effort with our Federal Reserve, the Swiss National Bank, the Bank of England and the Bank of Japan. All pledged to supply unlimited U.S. dollars to European banks in need of short-term funding through the end of this year (see our piece on the details here). That effort helped calm short-term fears of bank illiquidity, but it did not solve the real problem of insolvency. Insolvancy is a balance sheet issue brought about by owning too much questionable sovereign debt (Greece, Portugal, Ireland, Italy) that cannot currently be repaid at anywhere near face value. Clearly, while there is a short-term liquidity issue (losing deposits through slow motion bank runs) in European banks, their balance sheet issues must also be addressed to restore health to the financial sector. Because valuable time was frittered away without a credible, cohesive “solution,” the issue now is weather the markets will give the central banks and finance ministers enough time to recapitalize their banking systems and address their debt issues before equity markets revolt in a global meltdown.

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via Lots of Physical Buying while Paper Sells Off | Kathryn A Derbes CFA | FINANCIAL SENSE.

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