They’re burning the midnight oil in Germany and France. The PIIGS are back at the trough again as Greece is back on the menu for default. Well, in truth, Greece has already defaulted on its debt a long time ago. But, for a technicality, Greece is bankrupt, as it should be. The technicality? Well, that’s where Germany and France step into the picture.

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As the two largest Eurozone economies, France and Germany have the most to lose if Greece does indeed default. In fact, the whole Eurozone and Euro would likely collapse if one member were to default and stop paying on its debt. Since Greece has no money anyway, the real default here is that of the Eurozone, something that is unlikely to happen. Like the US, the Eurozone has it’s own secret weapon… the printing press.

Were it not for this weapon, the Euro would already be trading below parity against the dollar and gold would already be over $2,000 per ounce. Neither is happening and I would bet that neither will happen anytime in the next few weeks. Over the long term, I think both will happen.

The Euro will likely not collapse overnight, but as I have stated in this missive many times before, the Euro is overvalued and doomed to fall. Right now, the Euro is lucking out as the Dollar is winning the race to the bottom. So, it’s not that the Euro is overvalued for fundamental reasons…it’s that the US Dollar is weakening – for fundamental reasons. Both will likely face the same fate at the end of the day. However, the Euro has much farther to fall than the dollar and I would look for opportunities to sell or short the Euro whenever there is strength. In my opinion any level above the current level of $1.41 is a good place to go short versus the dollar.

Greece is just the tip of iceberg and that is why the Eurozone has no choice but to print money and pump it in. The bigger problems are Spain, Italy, Portugal and Ireland. If one can fail, the others will fail as well. The Euro will collapse and the world will be plunged into a financial crisis greater than that we have ever seen. And, we have just lived through one that ranks right up there on the “pain” scale. So, while we will see and hear more about waffling from Germany or France about bailing out Greece, it will happen. It may be painful for a lot of parties, but Greece is a small price to pay to keep the world’s largest combined economic zone intact.

Back home we are facing our own major crisis in the making: the debt ceiling. Again, the ceiling will most certainly be raised before the US defaults. Drama – yes, there will be drama. A default, no, there will be no default. Need evidence? Look at the record low yields on US Notes and Bonds. It’s messy out there, but nothing a few hundred gallons of ink and some dead trees can’t cure.

The markets are in their summer doldrums right now. Lots of potentially bad (see above) and bad news to go around. That party that started in 2009, well, it’s not going so well right now. The Fed is taking away the punchbowl, and a thirsty market is not happy with the possibility of having to move up on fundamental news and not pump priming. It may be good time to rebalance that portfolio and check your stop losses. It could be a very long, very hot summer ahead.

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Best regards,

Kevin Raymond