Beginning of the End?

In the UK’s Parliament, David Cameron is trying to stave off a revolt of the conservative party, as at least 60 members are aboard with the idea of putting up a referendum on leaving the EU.  As a way to head them off, Cameron is hoping to exact some EU treaty re-writes that will return some autonomy to the UK in the matters of social laws and employment.  At the moment, he doesn’t seem to be making any headway, and a revolt against his proposal seems likely.  At the same time, French President Nicolas Sarkozy has told Cameron that he’s sick of the UK telling the rest of the EU what to do, since the British “hate the Euro.”  If you haven’t figured out what’s at the root of all of this, let me help to explain:  The EU is on the brink of complete and utter destruction, and the Eurozone is likely to fails, since neither Greece(immediately) nor Italy(just over the horizon) seem likely to stave off default on their sovereign debt.  Yesterday, I related to you the story of Angela Merkel of Germany chastising Italy over its debt-to-GDP ratio, as she’s looking over the immediate horizon and can see the trouble brewing in Italy, but now France has joined in the pressuring of Italy.  The EU is in deep trouble just now and it looks like the beginning of the end.

Some see this as empowering the US, but any such bubble will be short-lived, as while power in Europe is likely to become decentralized in the short run, in the US, a collapse of our markets and our banking system may not be too far away as I reported Saturday and Sunday.  Our current state of economic and financial affairs leverages strongly against any lasting leadership role, because we’re in debt very nearly on par with Italy, and if we fold, the rest of the world will follow.  The problem at the moment for the US is that we’ve stuck our necks out on behalf of the Europeans via the Federal Reserve and the International Monetary Fund to an extent that we are now firmly tied to their fate.  If they fall, so will we, but the question remains: How far, and how fast?

If we had wise political leadership, they would demand that we stop sticking our neck out on behalf of the Eurozone.  Yes, if they fail, it will hurt us too, but the more we increase our stake, the greater our eventual losses, and the greater the damage will be here at home.  If the EU winds up dissolving at some future date, it will be a potential boon to American economic might, but in the short run, it will have dire effects on our capital markets.  The point to be understood is that I can’t imagine a way that Europe fetches this one from the fire, as the UK’s reluctance signals.  If the British do not wish to stick their necks out, I can’t imagine a reason on Earth that we should be so-inclined.

Domestically, we have weak leadership in the only House in government that would be able to stop any of our further involvement. John Boehner’s not going to stick his neck out in opposing what’s being done with the European derivatives from the Bank of America and JP Morgan, just as he wouldn’t stick his neck out over the debt ceiling negotiations.  In the end, Boehner will capitulate to the Democrats just as he did in July, and much like David Cameron is having to do with members of Parliament in London, Boehner will be trying to herd his members in Washington DC who can see the elections of 2012 directly in front of them, and know they cannot support these kinds of deals any longer.

What all of this is likely to mean on Wall Street at the open on Monday is anybody’s guess, but one thing’s for certain: The volatility we’ve been seeing these last several months is likely to continue, and one of these days very soon may be the worst day on Wall Street in 80 years.  I’m not trying to instill fear or panic, but I want you to know what’s going on in the world around you.  With Europe on the brink, the Middle East ablaze, and our own nation in a severe downturn, it’s only natural to wonder when the bubble will burst.  Washington has been trying to conceal all of this from you for so long that I think they may have forgotten it’s fake.  You can’t support the markets with direct injections of cash as was done through TARP, the bail-outs, and QE2 without eventually arriving at the day when it all goes belly-up.  Having been linked to Europe so thoroughly, we are more vulnerable than ever. Our political leaders have neither the competence nor the will to extricate our nation from the grip of a global calamity.  In the case of at least one individual, I believe it’s being engineered.  Prepare, ladies and gentlemen, prepare.

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