by Ron Rowland / Thursday, November 10, 2011
The fireworks in Europe are just getting started. Leaders and bankers across the Continent are playing the same "extend and pretend" game U.S. bankers have used with their mortgage portfolios.
We've known all along the PIIGS countries ( Portugal , Italy , Ireland , Greece and Spain ) had unsustainable government deficits and would need bailouts. The question was (and still is) how the debt will be liquidated — and who will feel the pain.
The next domino is Italy . Greece is relatively small in comparison. Consider these 2010 statistics from the CIA World Factbook:
Note that on a per capita basis, Greece and Italy look about equally prosperous. Their debt/GDP ratios are also not far apart. Italy , however, has a GDP almost six times that of Greece , and a labor force five times bigger.
In other words, Greece is just the opening act. Italy is a MUCH bigger problem. That's why France and Germany are worried.
ITLT and BUNT, Revisited
A few months ago I told you how Euro Unity Was Always an Illusion. At that time I said " Greece was the first crisis only because the bankers had to start somewhere. Italy isn't far behind." Now we are seeing the next phase of the crisis.
You may recall we looked at two 3x-leveraged exchange-traded notes that follow the Italian and German Treasury bond markets.
Back then, PowerShares DB 3x German Bund Futures ETN (BUNT) was sharply outperforming PowerShares DB 3x Italian Treasury Bond Futures ETN (ITLT). This told us, among other things, that the real bailout beneficiaries were German banks.
What's happening to them now? Earlier this week, ITLT broke below the August 4 panic low. Here is an updated chart ...
As for BUNT, it's still in a nice uptrend but has not yet surpassed the September high point.
The declining strength of BUNT in comparison to ITLT suggests to me that traders are losing confidence in Germany . This doesn't mean the German economy is anywhere near as bad as Italy , Greece , or the other PIIGS. But we're starting to see some cracks.
Greek leader George Papandreou's plan to call an austerity-plan referendum sparked furious responses from other governments. Their "take it or leave it" ultimatum admitted for the first time that it is possible Greece can leave the euro currency. This was a key turning point.
If Greece successfully abandons the euro, then Italy , Spain , Portugal , Ireland , and others will face irresistible pressure to do the same.
I think a euro breakup is inevitable. The only question is when it will happen, and whether it will be done the easy way or the hard way. I'm afraid they will choose the hard way, and the consequences will be global.
So What Do You Do Now?
You don't have to just sit here and bite your nails in suspense. Some of the smartest people on the planet are following the crisis every second of every day: Bond traders.
You probably don't know how to find current quotes on foreign government bonds. And even if you do, you might not know how to decipher them. Instruments like BUNT make it a whole lot easier. They are the financial equivalent of weather radar ... your early warning system.
My suggestion: Keep an eye on BUNT. Add it to your watch list. If you see it start to roll over — as it very nearly did in late October — you'll know German government bonds are no longer a safe haven.
Likewise, as long as BUNT holds up then you can probably relax a little bit. We could still be blindsided in some way, but any mass exit from German bonds will show up quickly in the BUNT quote.