By MoneyMorning.com.au
Overnight, the U.S. Dow Jones Industrial Average got a 100-point boost on news France and Germany had agreed a €2 trillion bailout for Europe.
But we ask: Where will France get the money to bail out Greece, Italy and Spain if it’s giving away €600 million-worth of goods for free?
In a moment we’ll explain why the latest plan to save the market will fail, and what you can do to avoid – and potentially profit from – the worst of it. But first…
If it’s Wednesday it means it’s time for Slipstream Trader, Murray Dawes’ weekly video update. As we write he’s going through his daily ritual of checking potential trades for his paying subscribers. Once he’s done that he’ll start laying out his broader thoughts in his free video.
And it should be a doozy today. As we mentioned above, the U.S. market climbed on the Eurozone bailout news… this pushed the U.S. S&P500 through a key trading level – 1,230.
This is where Murray was looking for the market to make a “false-break of the high”. In Murray-talk this means where the market goes through a previous high point. But rather than a sign for the market to move higher, it can signal the market is set to fall.
To the novice it sounds counter-intuitive.
But it’s just the type of signal Murray has looked for – and his trading members have profitably traded on – over the past 12 months.
So, to find out the meaning of this latest potential “false-break”, and what the market will have to do before the false-break is confirmed, check out Murray’s YouTube channel later today for his free weekly video update…
[Ed note: the latest video will be dated 19 October]
Until then, back to France and the €600 million give-away…
This from SPIEGEL Online (spotted by our old pal, Sound Money. Sound Investments editor, Greg Canavan):
“A huge arms deal is threatening to put French-German relations under strain. According to information obtained by SPIEGEL, France wants to deliver two to four new frigates to the Greek navy and to allow the highly indebted nation to postpone payment of the €300 million purchase price per ship for the next five years.
“Under the deal, Greece will have the option of paying up after five years, with a significant discount of €100 million, or returning them to the French navy”
The saying “You couldn’t make this stuff up”, is true.
In effect, France is subsidising its defence industry by allowing it to give away goods for free. But you can guarantee the manufacturer will still get paid, the workers will get paid and the suppliers will get paid… even though the buyer (Greece) will probably never pay for the ships.
So who will pay if the customer doesn’t?
Germany… and perversely, the French!
Not surprisingly, the Germans aren’t keen on the idea. Because the only way the Greeks can pay for the weapons of destruction is if it gets a European Union bailout. And which nation will bankroll the bailout the most? That’s right, Germany.
But France is tipping cash into the bailout fund too. So not only will the Germans cough up for French warships being sold to Greece… but the French will pay for French warships being sold to Greece.
It’s vendor financing on a whole new scale… where no-one makes money from the deal.
This is exactly why governments can’t be trusted or relied upon to solve the global debt problem. The only ideas they come up with involve increasing costs and increasing debt levels.
Whether it’s by subsidy, stimulus or printing money, it doesn’t matter. The goal is more debt, because that’s the only way they can stop the global financial system collapsing… for now.
Trouble is each of these involves the wholesale robbery of individuals… either through taxation or inflation.
And while these neat tricks appear to work in the short term, longer term they create more problems than they solve. We mentioned yesterday, how the policy of low interest rates had a negative impact on the institutions low interest rates were supposed to help – the banks.
U.S. bank Wells Fargo reported lower margins. And this morning Goldman Sachs reported a USD$428 million quarterly loss. That’s a big deal for a bank that last year made trading profits every day from front-running the Fed (it bought government bonds on the market and then flipped them to the Fed at a higher price).
And because the banks are so reliant on the bailouts being approved, banking stocks are seeing some of the biggest market moves.
Yesterday the market – and bank stocks – fell on news Germany wouldn’t fund the bailout. Today the market – and bank stocks – went up on news Germany would fund the bailout.
Odds are, despite the disapproving noises, Germany will hand over a bunch of cash to bail out Europe, and, indirectly, the banking system. But if markets think borrowing more money to solve a debt problem will work… well, they’re bigger fools than even we thought.
But it’s not all bad news. Because for you, the stupidity of others creates an opportunity.
That is: selling stocks you bought a few weeks ago to lock in a profit while share prices briefly rally. Or short-selling stocks to make gains when the market falls… as everyone again realises government bailouts aren’t the answer.
The only question left to answer is when you should sell or short-sell?
Based on what we’ve just heard from Murray’s weekly update (he’s just recorded it and getting it ready for broadcast), if he’s right about the significance of the latest stock market price action the next few days could give short-sellers “one of the best selling opportunities of the year.”
Cheers.
Kris.