That means in just a few short months, stocks could be back at their 2009 lows while gold prices travel north of $2,500 an ounce.
This is the worst-case scenario that’s been bandied about ever since Europe’s debt problems first came to light.
How do we know that this is what’s happening?
Because somebody is having trouble obtaining the money they need — and they just borrowed it from the lender of last resort.
The European Central Bank last week lent $500 million dollars to an undisclosed Eurozone bank through a credit mechanism that had been dormant for the past 12 months, with the exception of one $70 million draw in February.
This comes as no surprise — the warning signs have always been there.
In fact, I warned people just a few weeks ago that the eurozone could have its own American International Group (NYSE:AIG) — or worse, its own Lehman Bros. (PINK:LEHMQ) — lurking somewhere in the shadows.
Still, while this might not surprise you, it certainly surprised the heck out of the rose-colored glasses crowd that can’t seem to understand the European sovereign debt crisis is finally about to wash up on our shores.
That’s why stocks in the United States and around the world have taken such a brutal beating recently. Officially, the story is about the renewed worries over Europe’s debt crisis and U.S. data that suggests we’re once again sliding into a recession.
But what’s really happening is that global traders are moving quickly to liquidate holdings and raise cash while they can.
That’s why so-called risk assets like stocks, corporate bonds, industrial metals, oil and higher-yielding junk instruments are tanking, as gold, the dollar and the yen are bucking up.
The U.S. Federal Reserve already is engaging in damage control. President of the Federal Reserve Bank of New York William Dudley has said the risks of a double-dip recession are “quite low,” despite anemic growth. And it’s been rumored that U.S. Federal Reserve Chairman Ben Bernanke will telegraph new monetary stimulus measures Friday during his speech in Jackson Hole, Wyo.
But really, who are they kidding?
This crisis has nothing to do with liquidity (which is how the central bankers are trying to fight it) and everything to do with solvency (which is how they should be fighting it).
Not only are the risks of a global recession mounting by the minute, but I believe the concentration of risks is approaching critical mass.