Market Volatility and Italian Bonds

The volatility in the stock market has continued this week.  The market was down big on Wednesday as there was increased concern about Italian debt, as rates on Italian bonds rose.  The stock market gained back some today (Thursday).

Gold, after showing a lot of strength and getting back near the $1,800 level, pulled back significantly today.

There is a continuing tug-of-war between the bears and the bulls.  I expect this to continue.  There is a tug-of-war between another artificial boom and a recession.  For a while, it looked as though the recession was going to win out in the short term.  But the stock market has done well in the last month and it points to the possibility of a short-term boom.  A short-term boom would not necessarily drive down unemployment significantly, but it might give people some false hope with rising asset prices, particularly in the stock market.

I thought that Wednesday sent an interesting signal with the concerns about Italian debt.  We have been hearing about Greece a lot, but I think the big fear all along has been that other countries would follow right behind Greece.  We have heard about the PIIGS (Portugal, Italy, Ireland, Greece, Spain), but now we are actually seeing the markets react negatively to all of the big government debt.  Before it was just Greece, which is a small and relatively poor country.  Italy is another story.

Wednesday was interesting because the U.S. stock market tanked.  It shows that major trouble in Europe will affect U.S. markets to a large degree.  While I still see a mini-boom cycle as possible in the near term, the situation in Europe makes it a little less likely.  A partial or full default by a country the size of Italy will send shock waves around the world.  It will be bearish for U.S. markets.  It will be bullish for the U.S. dollar, at least in the short term.  It is harder to say how gold will react.

The Republican candidates in the debate last night were saying that what happens in Italy is their business and that the Fed should not bail out anyone.  The candidates say that, but they are simply pandering to their audience (with the exception of Ron Paul of course).  If a default on Italian debt or any other debt jeopardizes banks in the U.S., you can count on a bailout.  Several of the Republican candidates, including Mitt Romney and Herman Cain, were big supporters of TARP (the bank bailouts) in 2008.  Of course, it may not matter because this may all blow up in the next year while Obama is still in office and we know that he will not stop a Fed bailout.

I expect continued market volatility.  I continue to recommend the permanent portfolio, as described by Harry Browne.  The name of the game right now is asset protection.  You have to keep what you have.  Any investment growth should be icing on the cake.