NEW YORK (TheStreet) -- European Central Bank President Mario Draghi announced the bank's policy of Outright Monetary Transactions, or OMT, on Sept. 6.Shortly after, upon hearing Spanish Prime Minister Mariano Rajoy denied he was considering making an application for rescue, I laid out this game plan: Market assumes Spain will apply for rescue, Spanish debt yields go down. Which reduces Spain's need for rescue and increases its bargaining power in easing the conditions for rescue. As a result, Spanish debt yields shoot up. Which increases Spain's need for rescue. As a result, Spanish debt yields go down. Go back to Step 2. We are currently in Step 2 of the first iteration. In theory, the loop can settle into an equilibrium, the yield premium based on the probabilities and risks of rescue/no-rescue scenarios. But this is an unstable steady-state, like a pencil standing on its tip. One might say it has already been at equilibrium, only it's dynamic. But this dynamic "equilibrium" is poised to swing wildly each time it goes through the loop due to the inherent positive feedback mechanism, as explained below. (By the way, I have a gripe with people calling it "negative feedback," which makes the system stable. Just because the effect is bad, doesn't mean the feedback is "negative.")
The mistake by Greece was that it's not big enough. In this sense, Spain is not Greece. With Too Big To Fail status, Spain can afford to bluff, to dominate and prevail at the negotiation table. Unless and until the conditions for rescue are watered down enough, Spain has no incentive to apply or, even after accepting money with pride and grace, to actually comply with conditions. This is due to the philosophically flawed design of OMT, as is the case for all euro rescue plans so far -- or one might say even the euro itself -- not the moral quality of any individual or group. So the reality is the supposed conditions for OMT have no teeth. They are there only to stop German Bundesbank President Jens Weidmann from resigning, at least for now, causing a huge embarrassment to ECB and serious damage to its credibility and effectiveness, as reported by Reuters in a fascinating account of events leading to the OMT announcement. The ECB is destined to capitulate every time. The reluctance may be genuine on the individual level, but borders on scam in the sense that the bank has no choice from day one. The German people will be reminded of various previous capitulations on Greece and Italy, only this time on a much bigger scale. How long will Germans endure such Outright Monetary Thievery I do not know. It's just a step down the road leading to the inevitable "Gerxit."
During this phase, stocks, as represented by the S&P 500 ETF ( SPY), the euro, as represented in the Euro ETF ( FXE), commodities, and commodity currencies such as Australian dollar, as seen in the Australian Dollar ETF ( FXA), will be under downward pressure. The U.S. dollar, as represented by the U.S. Dollar Index ETF ( UUP), and bonds will be under upward pressure. Gold in terms of the U.S. dollar may go up or down, but in terms of the euro will likely go up. I continue to think gold, as seen in the Gold ETF ( GLD), as having the best risk/reward ratio in this environment. Timing will be impossible to predict unless you have reliable inside info from the euro-zone political inner circle, and from many sides. Such is life in a market completely dependent on politics. At the time of publication the author had holdings in gold. This article was written by an independent contributor, separate from TheStreet's regular news coverage.