Ireland: What a Mess!

But it might just create a chance to Buy Gold and other hard assets on the
cheap... WELL THIS should be interesting, writes Dan Denning in his Daily
Reckoning Australia . The EU/IMF bailout of Ireland is not going off without a
hitch. The UK's Telegraph reports that the Green party, which currently forms
the junior half of Ireland's coalition, might withdraw that support and call for
new elections in January. This would call into doubt the ability of the current
government not only to execute a deal with the EU and the IMF but also to pursue
its four-year austerity program. What a mess! We'll get to how Ireland and
Australia are similar in a moment. But first, please recall the words of the
great philosopher of the New York Yankees, Yogi Berra. He once said, "When you
come to a fork in the road, take it." Today's fork in the financial road leads
down two different paths. One path is continued US Dollar devaluation and a
strategic migration to emerging market assets (under the assumption that the
BRIICS nations will eventually have to allow for currency appreciation...or face
rampant food and fuel inflation). This trade favors Buying Gold , commodities,
and tangible assets in general. But remember what happened in 2008? The Global
Financial Crisis actually led to a massive rally in the US Dollar. Emerging
markets got hammered. The "risk" trades financed with cheap greenbacks were
reversed and commodities took a shellacking as well. Could that happen again?
The boys at Knight Research think it's going to happen again, but even bigger
and badder this time around. In a recent research note, they wrote: "We believe
the structural and cyclical terms of global trade have finally reached their
tipping point. This will catalyse a wholesale change in sentiment and a historic
repositioning of risk assets. The emerging market global growth story is over."
This is the fork Murray has been preparing for in the Slipstream Trader for our
subscribers  It would mean falling indexes in Australia, which would of course
mean falling components of those indexes. Knight Research elaborates on this
fork: "The game is over. Presently, we believe that the broad-based resurgence
of investor confidence in the emerging market and secular bull market in
commodities will end badly; proving that the rally which commenced in Q2 2009,
was in fact an 'echo bubble' facilitated by massive-and unsustainable-stimuli
from the Chinese government. "We believe that the end of the Great Consumer
Credit Cycle and the vast structural differences in the terms of trade between
the United States, the EU, and China, have finally caught up with the secular
bull thesis on emerging market and commodities. "Quite ironically, the Fed's
aggressive policies will likely prove to be the catalyst which breaks China's
unbridled expansion of credit and non-economic growth, ushering in a wholesale
rebalancing of risk assets." This is not a lukewarm prediction. It would quite
obviously be mega bearish for the Aussie Dollar and for commodities. And thus
far, there's not much evidence to support that giant reversal is afoot that is
more bearish for emerging markets than it is for the US Dollar. It's a fork in
the road, though. So we have to take it and see where it leads. There ARE a few
factors supporting the "Game Over" theme. One is that Ireland's woes are not the
last o the Eurozone's problems. There is Greece. There is Spain. And really,
Ireland is not even done and dusted yet. To some extent, Euro weakness is dollar
bullish and contributes to the "Game Over" theme. But the bigger factor is
Chinese tightening, or just your basic traditional popping massive credit
bubble. There are early signs of that. Last week China raised reserve
requirements on banks again. And Citigroup agrees with our assessment that
rising food prices in China could be bearish for metals. China's State Council
is talking a big game on controlling inflation. Does it mean China is quickly
shifting away from a bias toward export growth toward an inflation fighting
bias? That's the big question. If it does mean that, you can expect lower
commodity prices. For example, three-month copper on the London Metals Exchange
fell overnight. The news preceding the drop was that refined copper imports to
China fell by a third last month. Comex December copper traded lower too, near
$3.75/lb. We're going to have Dr. Alex what he thinks about this. But we can
guess. He probably loves it. He just got back from another site visit in Africa
to a copper project. If you're a Diggers and Drillers reader don't worry. You've
already read about this company. It's not a new recommendation. Alex has done
his homework on the companies he's recommended. Weakness in the copper price
invariably follows through to the shares. If you're a secular metals bull, you
believe this lowers your average purchase price on the shares most likely to
benefit from rising prices. If you're a bear on copper, well...you're a bear. Go
dance. Alex, of course, has taken the other fork in the road. This fork is for
those who've realized the end of the Dollar Standard in the global money system
is likely to be bullish for real assets, despite your reflexive US Dollar
rallies. Europe's chronic and structural problems add an element of Dollar
support. But the long term story on this fork is to favor "real assets" over
paper money. Which brings us back to Ireland and Australia. Irelands bank's went
all in on the Irish property market. When the bubble burst, the banks were left
holding the bag (a huge mortgage book). The bag was so heavy, in fact, it broke
their back. So the government had to pick them up. And the bag was too big for
the government to pick up too, especially given rising borrowing costs for
countries at Europe's periphery. Could that ever happen in Australia? Could
banks with massive over-exposure to domestic property be caught out by losses
and unable to borrow from overseas except at much higher rates? And could the
government be forced to step in and cover the bank at the cost of its own good
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