Meanwhile, aboard The Errol Flynn–where I am just as connected as I am when I am back at The Factory–Flash and I are entertaining Cary, Pinky, Holly and Amanda. Flash is in an apprenticeship program, and I have just given him a new incentive: his own Bloomberg terminal. You’ll get to know Flash in time. He’s someone everyone needs to know at some point. Like the rest of the cast here at the set of the richest man on the planet, Flash adds an immense amount of value.

“WHAT?” Flash asked, “You think gold might pull back?”

“Yeah, I think so,” I admitted, “That’s why I sold the majority of it.”

“You said you wouldn’t sell it till it hit $10,000 per oz. Why the switch?”

“I still think it’s going to $10,000 an ounce,” I smirked, “but I am cautious in the short term. I think we could see a pullback more severe than I want to sit through. Besides that, there are so many things that I want to buy now. And I can always get right back into gold whenever I choose.

Gold is crowded here–is there a gold bear anywhere? I haven’t met one in weeks.” I continued. “What’s more, I haven’t seen or heard from a bull in stocks in what seems like months. There are too many bulls in gold and too many bears in stocks.”

“So what are you buying?”

“Calls in everything–especially financials like Goldie (GS). I haven’t been this bullish in a while. You know I love the bull side–particularly when there are too many bears.”

Then Pinky called and said to meet her in the lounge, where we sang with Cary Okie.

Flash didn’t even show up to the party in the sky; he stayed back in the office lost in his new Bloomberg. Flash is one of the greatest traders I’ve known. And he is just getting started.

And the beat goes on.

Dedication: My yoga pals I spent time with in Ubud.
“Two men look out through the same bars: One sees the mud and one the stars.”
–Frederick Langbridge (1849-1933)

Meanwhile, back at the factory, the accounts are repositioned and the only stocks we own are gold and silver names. We also own various calls on gold and silver and a fair amount of puts on the euro.

I previously wrote of the S&P 500 holding to it’s pattern of higher lows. Stocks have recovered off their lows, but have come upon resistance, which at one time was support. Given this picture, I am looking to short the S&P rather than be long it.

Trader Art - Support Becomes Resistance Oil on Canvas

Greece

Remember this about Greece: they cannot be bailed out by borrowing more. You cannot borrow your way out of too much borrowing. It does not work. Once debt levels reach a tipping point, there is no way out except default. Which is what Greece will be forced to do through a forced restructuring.

Big Trade

Given the crosscurrents, we are looking at a trade that could be bigger than the crash of 2008.

Hold on. The big trades are always full of twists and turns.

As the previously documented sovereign event approaches, the uncertainty that remains draws me closer to the prosperity that will effect the collective consciousness of my readership connection. To further dissect the economic scenario that is playing out, I will offer some thoughts on where things are, what could cause things to reverse, as well as how to best prosper from the sovereign contagion that is spreading like wildfire.

Greece

In my prior post, I outlined the sovereign default risk that we face—somewhere, sometime soon. Several geographies are flashing extremely risky scenarios. Greece is in need of a bailout and they lay on the precipice of disaster if some aid is not found. Any proposal of aid I have seen will not be a solution, rather a band-aid on a broken bone. However, a band-aid could buy Greece some time–which they are in dire need of.

Ireland

Economic woes in Ireland are severe, and they are not being given the focus they require. Further trouble in the place where I kissed the Blarney Stone could be the impetus for the contagion to spread further, causing the market dislocation that I anticipate.

Dubai

Risk in Dubai is priced where it was at the height of 2009. Further trouble and inability to restructure will cause fallout in Dubai—which will affect Europe, which will effect Greece, and the dominoes will continue to tip. Last week in Dubai, I found money dealers paying extremely large mark-ups for physical gold. Indeed, rumors of gold being used as legal tender in Dubai are true. Again we see my thesis substantiated: the risk aversion trade here is not the US Dollar, rather the precious metals–gold and silver.

Spain: The Wild Card

All of the above geographies could stabilize, or with further troubles, could act as catalysts for the contagion to spread quicker than it already is.

I’d note that Spain was a large driver of contagion over the past two years. The housing bubble in Spain was by far the largest real estate bubble compared to anywhere else. They also face a severely high unemployment rate. However, even with all this trouble, spreads on banks in Spain are not showing the stress they should. When the stress of the housing bubble and unemployment rate percolates into Spanish banks, it will be easy for Spain to pick up where it left off. More in need of a bailout this time, Spain will contribute to the strain in Europe, affecting Greece, affecting Ireland…tip, tip, tip.

All That Glitters

Though the catalyst remains uncertain, the looming event is undeniable. Remember, when the entire universe lunges to take risk off the table in a reaction to what I anticipate, gold will stand, glittering amidst the debris. I’ve said it once and I’ll say it again: if you don’t own gold, you should.

And the beat goes on.