Sell the Dollar, Buy the Euro? Think Again. 29 comments
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There are many commentators calling for a continued decline in the dollar and with the rally in the Euro to continue till at least 1.40 against the dollar following the Quantitative Easing announcement by the Fed. The impact of QE where the dollars printed go to fill the gaps in the balance sheets of big banks is being broadly considered bearish on the Dollar.
However, it may not be what it seems to be when it comes to inflation, and perhaps the longer term value of the dollar, especially against the Euro. The Fed's objective is to maintain asset prices at a level which allows debt servicing to continue. As long as lenders use prudent lending standards with their balance sheet's Fed Enhanced lending power, it is unlikely to result in a credit bubble which will drive run-away hyper inflation.
During this credit crisis the ECB and its most powerful members have been consistent in being the Johnny Come Latelies. John Mauldin's Investor Insight has a detailed discussion about European Banks. European Banks are in worse shape than the US banks with their Eastern European Exposure along with the US Sub-Prime and their own Real Estate Bubbles. Basel II Accounting Rules give them a lot more leeway to take on leverage and like bankers true to their spirit, they did.
In my view the Euro is a short until the EU monetary union's administrative structure is rethought or the currency's value becomes commensurate with EU's role in the 21st century. EU does not have the economic size or the demographics to support their existing monetary clout; and unlike the US they do not have a history of assimilating immigrants to strengthen the productivity and demographic base.
The primary question in my mind is what to short it against, since the mood is against the dollar. A basket of currencies with an overweight of commodity driven currency like the Canadian, the Aussie and the New Zealand Dollars is my choice. The basket under-weights countries which have already boarded the Quantitative Easing train or Currency Weakening Boat like the US Dollar, the British Pound or the Swiss Franc; though any significant weakness in them against the Euro might be good points to add to the position. Everyone is rushing to sell (see USD.EUR and EUR is up 8 days in a row!). This might be another big
macro trade which blows up one weekend when a major crisis erupts in the Euro Zone (see Euro Versus the Commodity Currencies).
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It's a bigger problem than just one of re-thinking.
The Eurozone highlights the essential ambiguity of nation states with very separate identities and traditions trying to embrace a supra-national (not even global) structure.
The mechanisms are not in place - neither political or jurisdictional -
to underpin and backstop a reliable single currency for such a heterogeneous set of states with very different economic qualities.
On Mar 21 03:34 AM Dave Wrixon wrote:
> Americans are obsessed with Military Power.
>
> Bush has proved that the entire might of their combined arsenal does
> not give them enough clout to even subdue a small country the size
> of Cuba.
>
> Furthermore, after the collapse in the Soviet Union much of the power
> just turned to rust. The same will happen in America. Total disproportionate
> defense spending is a major part of the problem.
"The dollar will devalue very soon. Read this article
which is directly based on a news article called "UN Panel says World should Ditch the Dollar" from Reuter's yesterday:"
Go read the article yourself, Bill Jencks. First, it is only a proposal. Second, the dollar would be one of the basket making up a new reserve currency.
Vikram is talking NOW! You and your article are talking about some INDEFINITE future time.
Imagine, a dozen Treasury Secretaries, all with different political and economic compulsions, trying to come to a consensus. The ECB was clearly wrong last spring when they could not get off the inflation band-wagon leading to the rapid decline of the Dollar and the subsequent oil bubble, which weakened of the US consumer-base.The Germans, who are typically against bail-outs were the first in Europe to bail-out a major corporation!
The global economic picture will either worsen or get better. However the Euro is not positioned to benefit from either scenario.
In the positive scenario, the currencies which are likely to gain are the once which do not carry the baggage of a damaged financial system, have some organic domestically driven growth capability, and can participate in any upswing in the world economy. The commodity sensitive currencies fit the bill best.
In the negative scenario, where the global economy continues to worsen, major new shocks are much more likely to come from Europe than the US. If risk appetite decreases further, the bias will be to head towards the safest bets where the uncertainty element is the least. This includes the USDollar, and perhaps the Japanese Yen. The Euro will not be the safe-haven of choice, when it is not clear who is in control, what their plan is, which nations are next in line to join the union, or in some cases even thinking about leaving the Union.
And in times of crisis, the psychological significance of military strength should not be discounted. Europe has been getting a free-ride on the US Taxpayers via the NATO umbrella, when it comes to defense spending. If that situation changes, it will have a negative impact on European economies.
Oil and property are much closer to their bottoms than gold, which makes less vulnerable to a price collapse than gold. I'm not saying that gold will not go up, but just not as much was other commodities that have much farther to go up.
The problem with gold: everybody loves it right now as an inflation hedge, so it's "hyper-inflation" that everybody thinks is coming is already priced into gold.
Also, unlike oil or property, gold doesn't really serve a purpose other than storing value, so eventually, people will want to trade it in for something that has real economic value (as in you can live in it, run a business with it, or build stuff with it).
On Mar 22 04:46 AM Ebi wrote:
> Is Euro the only option? I think you're better off with gold.
1. I also wanted to add the Norwegian Krone (NOK) as one of the key currency to go long against the Euro. The Krone has a strong commodity link and the Norwegian economy is one of the best when it comes to fiscal discipline.
2. Among the long currencies I will under-weigh the Canadian Dollar with relation to the AUD, NZD and the NOK. The Canadian economy is too closely linked to the US, a correlation I would like to reduce in this trade.
What effect will this news have when it reaches the markets?
My guess is that everyone will dive frantically out of any US stocks, bonds and any other paper dollar denominated assets and run to safe havens like gold and silver. And since all currencies are now fiat, and most countries hold US Treasuries(which is a measurable asset against national currencies) - all currencies are likely to drop - in varying degrees - with the dollar.
We're still in a period of disinflation with deflation knocking on our doors. I'm not saying deflation is a foregone conclusion, but I'm a hell of a lot more worried about it than I am hyperinflation at this point. Go back and read your history. Hyperinflation is a pretty rare bird. We've still got severe asset price corrections in front of us as every one repairs their balance sheets. Let's talk again about inflation when the velocity of money becomes a non-zero number.
Real Estate? Are you mad? We're in the midst of the worst hard asset correction since the Great D, and you're advocating a 4-to-1 levered position in the worst performing asset class? What happens if there's another 20% down leg from here? Oh... you join the legion of underwater dwellers. I guess you're not familiar with the old adage about catching falling knives.
That aside, we live in aninterconnected world where the major currency blocs (USA-Europa-Japan, and at some future point, China) cannot really pursue monetary politics independent of each other. All these paper currencies may fluctuate excessively but ultimately they share the same fate. ironically, if the ECB stands by its more prudent monetary policy this would indeed draw people to teh Euro (less monetary debasement) which in turn would punish the Euro-zone via higher exchange rates ( mounting export problems). So at some point the ECB would be forced by politicians who usually know zilch about economics to debase the Euro as well in order to restore competetiveness for Europe's economy in a world of free floating paper 'money'.
Hence, the only long term viable protection are gold, silver and platinum, and maybe real estate that can be put to productive use for living and growing stuff on it.
trying to trade paper for paper maybe fun but it will inevitably lead you Ãnto a situation where one can brag about owning the largets pile of paper all day long - only that it is the largest pile of worthless crap.
My best idea right now is to be diversified in short term instruments and a basket of metals + oil. If the economy kicks up a notch we might get an inflation hit but commodities should appreciate. If not the short term instruments should do ok.
When the central banks like the Federal Reserve begin "buying" debt, it is with an accounting entry, hence we in the US see "Federal Reserve NOTES" (a promise to pay back nothing). More BILLIONS of dollars in circulation that were never there before: that is the inflation of the money supply that can't be undone by grandiose talk about "macro-economics" or some other pseudo-science.
Why is the M3 money supply number no longer reported? Seems fairly important to me.
These charts also tell a different story.
These charts also tell a different story.
These charts also tell a different story.
i) The size of the debt compared to the total size of the economies both of the debtor nations and the bond holders; think Iceland.
www.investorsinsight.c...
ii) Currency Issue: A large amount of the debt is issued in Euros and not in local currencies. Investments in Eastern Europe were made in the hope that it will be the China for the Europe. With the slowdown, the exports have dried up, and the currencies have fallen. As a result not only have the assets underlying the debt have become less (or even non producing) but their real ability to service a debt in Euros has gone down.
www.investorsinsight.c...
iii) Legacy Issues: Some of the Eastern European countries also suffer from the challenge of their communist/socialist past. For example Hungary has a huge pension obligation which lies at the heart of its problem.
online.wsj.com/article...
JW