BOSTON (TheStreet) -- After a disastrous failed bond auction in Germany, investors need to ask themselves whether anything related to Europe is worth buying now.
The surprisingly poor auction of German bunds saw the sales target missed by 35% on weak demand, an extremely wide margin considering Germany's triple-A rating from credit ratings agencies. Already, yields on the 10-year German bunds have increased from the 1.98% at auction to above 2%, a sign investors are dumping those bonds at a fast rate.
German Prime Minister Angela Merkel
Unfortunately, Germany's failed bond auction was only a part of the bad news beclouding European countries Wednesday. Fitch Ratings is now warning that France may lose its triple-A rating because it can't handle any more shocks. Meanwhile, eurozone industrial orders fell in September by the biggest amount since December 2008. Belgium and France are now in disagreement over financial support for failed lender
Even Goldman Sachs analysts, who had been expecting improvements from new governments in Italy, Spain and Greece, threw in the towel on their Nov. 11 recommendation to go long the euro.
While the analysts viewed that the nomination of "technocrat-led" governments in Italy and Greece could lead to a clear reduction in risk aversion, "this has failed to materialize -- even after the reform-friendly election outcome in Spain."
The failed German bond auction is what has really spooked investors ahead of the Thanksgiving holiday. European markets fell by nearly 1% Wednesday while the yields on 10-year bonds in Germany, France, Italy, Spain, Netherlands and Switzerland climbed.
If investors aren't willing to buy bonds from a triple-A rated country like Germany, they're hard-pressed to find anything safer and worth the risk. The debt contagion appears to have gotten so big it will swallow the entire Continent. No country is safe anymore, not even Germany.
"I hate to use clichés, but this is the straw that broke the camel's back," says Michael Pento, president of Pento Portfolio Strategies. "If we assume this is indicative of the appetite of the most safe sovereign country in Europe, this is a complete disaster. It's a failed auction by definition. If you don't want to buy the safest investments in the safest country in Europe, what else is safe?"
Here's why the terrible bond auction in Germany should worry investors: The European Financial Stability Facility (EFSF) is supposed to rescue the entire continent from the debt crisis by using leverage. But with investors shying away from Germany, considered the safest of debt in Europe, where will the money come from for the EFSF?
"The EFSF was never a viable option to begin with," Pento says. "People already weren't investing in sovereign debt of these distressed countries. It would have to be a German backed bonds. And they failed to get bids for 35% of their auction! Over a third of their bonds had no buyers at any price. This is a complete disaster for the entire continent of Europe."
Pento worries that new European Central Bank President Mario Draghi will now have to print trillions of euros in order to save the continent. It would be a mistake if they tried, he says.
"There is the notion the ECB has to monetize trillions of euros in debt," Pento says. "Let's say they can keep Italian bonds below 7% for six months, which is a longshot. You're creating a tremendous amount of inflation while you manipulate the yield curve. You've created this inflation and, when the only buyer leaves the market, yields end up skyrocketing. They go higher than if you never intervened."
Skyrocketing yields in European countries due to the inflation scenario Pento lays out would likely lead to slumping gross domestic product (GDP) across the Continent. Pento says the markets have overlooked this fact, which has "huge ramifications." But what's worse, Pento says that if the laws of economics and mathematics are the same in Europe as they are in the U.S., we could see the same problems here at home.
"You're looking at the ghosts of Christmas future with Greece and Italy," he says. "This is exactly where the U.S. is headed. We couldn't even find a penny's worth of reductions from the Super Committee. We are careening towards a sovereign debt crisis."
-- Written by Robert Holmes in Boston
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