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taking stock

To judge by the more upbeat tunes being whistled by investors and analysts, and the promising signals from Brussels that the politicians are closing in on a solution to the European debt crisis without forcing bondholders to choke down losses, it would seem we'll soon have to remove the descriptive "beleaguered" from future mentions of the euro zone.

European bonds are in the midst of their largest rally since last summer, and money is even flowing back into stocks in the troubled periphery. Last week, for example, equity funds tied to the Spanish market lured more net new capital than at any time since the global equity upswing in the second quarter of 2009. No one is rushing to load up on Greek or Irish debt yet, but spreads against comparable German bonds have narrowed since the start of the year.

Adding to the bullish market tone was a report from Goldman Sachs extolling of the virtues of downtrodden European bank stocks. "For financials, the narrowing of sovereign spreads in peripheral euro zone, which our economists expect to continue, is a clear positive," Goldman strategist Peter Oppenheimer opined in a note to clients.

It's possible that German Chancellor Angela Merkel and her trusty sidekick, French President Nicolas Sarkozy, have somehow managed to convince the bond world that the euro club will emerge stronger than ever and more closely resembling the cherished (more in theory than in practice) German model featuring strong fiscal discipline, tight monetary policy and an abhorrence of inflation. Or maybe the bond vigilantes are so worried about the overheated emerging markets and those parts of the world submerged in strife that the euro doesn't look so bad after all.

In any case, for those suffering from dangerous temporary euphoria about the state of the industrial world in general and the euro zone in particular, I have a surefire antidote: a quick chat with veteran German money manager Claus Vogt.

The euro, as we know it, will be gone in perhaps three years, Mr. Vogt, managing director of Aequitas Capital Partners and co-author of The Global Debt Trap, says from his office in Berlin. "The next crisis is already brewing. I may be too early. Maybe it lasts five years, but really no longer. I see no way to hold this sick contract together much longer."

Three Solutions

He sees only three ways out of the crisis: severe austerity; outright debt defaults; or cranking up the money-printing presses. Austerity isn't going over too well with voters, and the European Central Bank's policy is as loose as it can get. Since individual euro-zone members can't devalue their way out of trouble, that makes future defaults the winner by, well, default.

And that would be just the first big step on the road to ruin. "These haircuts would hit the European banks the most [because of their large caches of sovereign bonds] Immediately, we would be back to where we were in 2008, confronted with a huge systemic banking crisis."

The same fate sooner or later will befall the U.S. and other debt-ridden countries, Mr. Vogt insists. "That's why I call it a debt trap. There is no easy way out any more."

He and co-author Ronald Leuschel caused quite a stir in 2005 with a German bestseller titled Das Greenspan Dossier, a full frontal assault on once-deified former Federal Reserve chief Alan Greenspan, his easy money policies and his culpability in the Great Real Estate Bubble. They predicted its destruction would cause a stock market crash, devastate the global economy and bring the financial system to its knees. Now they are back sifting through the rubble and warning that current Fed boss Ben Bernanke is fuelling new bubbles through the biggest monetary stimulus measures ever devised.

Although Mr. Vogt is convinced the world faces a massive inflationary surge and fervently wishes we were back on the gold standard, he is not one of those back-to-the-land types stocking up on canned goods to wait out the storms. But he does urge investors to remain cautious and flexible.

"You have to be ready for lightning-swift changes. We saw it in East Germany two decades ago, in the USSR and now in Egypt. Things can change dramatically and quickly. … But we all tend to live as if, at least in our lifetime, no major disruptions, no major systemic breaks will happen."

His advice in a nutshell: Decide how much of your wealth should serve as insurance against such risks and put it into gold, silver and related stocks. As for the rest, essentially do what Mr. Bernanke and his brethren "want you to do. Which means from time to time, step in and speculate. You have to have stocks sometimes. Then you have to go out again. You have to short U.S. Treasury bonds [probably for another quarter] But there will come a time when you have to grab your profits and step back again. And wait for the next opportunity."