In November, 2010, Nassim Taleb (Mr. Black Swan) broke a long-standing media blackout to talk on CNBC about his distress over quantitative easing part two (QE2). At the time, Taleb concluded that the risks of QE2 were not worth the uncertain benefits. Given the Federal Reserve's objective of driving consumers and investors out of cash and into stocks and consumption, I found it curiously ironic that Taleb returned to CNBC for the first time since that 2010 visit and lamented the following:
I own stocks. Why? Because I don't trust Treasury bonds. So I happen to own stocks. I would rather have a dividend than a coupon. OK. So I own stocks. OK. Do I own them by choice? I don't know. I own them as a fund management principle…I am afraid of hyperinflation, not of inflation, but of hyperinflation. So I have no choice but to own stocks. Stocks and some real estate. That's what I own…to preserve my staying power, my financial situation.
Put a mark in the win column for the Federal Reserve.
While I firmly agree with Taleb's distrust of Treasurys, I was startled to hear Taleb's conclusion. After all, in February, 2009, he and Nouriel Roubini returned from Davos warning hell and brimstone (blog reference may take some time to load). Stocks were a tremendously better bargain then than now and few of their complaints at the time have been resolved. Granted, when you fear hyperinflation, the current three-year rally likely looks like a drop in the bucket. However, I was even MORE startled to hear Taleb mention he also owns some euros (FXE). After thinking about it for a while, I realize that this position makes sense for several reasons.
Taleb explained that Europeans understand their problems whereas in the U.S., Americans do not. I think Taleb implies that Europe has faced the music and has taken definitive (and painful) steps to address their debt problems. They have directly wrestled with their problems and have moved forward in taking collective action. Certainly with so much dire gloom and doom ink spilled about Europe and its monetary union for several years, the actual restructuring (default) of Greek sovereign debt seems anti-climactic by comparison. Versus the U.S. dollar, the euro did not print any kind of new lows on this news, and it remains a full 10% above the lows from 2010 when the euro debt crisis seems to have reached a climax (in retrospect).
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The euro is starting to look resilient against the U.S. dollar: 2009 and 2010 lows are holding firm as support.
Given the current resurgence in the U.S. dollar (UUP), I prefer to own the euro versus other currencies for now. The franc (EUR/CHF) is a decent candidate given the established floor on the exchange rate of 1.20, but upside is likely limited to more intervention by the Swiss National Bank (SNB). The SNB's monetary statement last week did not provide any new clues on when such intervention may occur again. I am a staunch bear on the British pound, and I like the apparent upside on the EUR/GBP pair:
The euro is very slowly rising against the pound
Source of charts: FreeStockCharts.com
I even like the euro versus the Japanese yen for shorter-term trades, but only after bouts of strength in the yen. The yen looks like it has finally entered a phase of secular weakness (for example, see "Yen Continues To Weaken As Prospects Dim.")
In other words, I am guessing that everyone with a negative opinion about the euro has long since placed their bets against the currency. It will take some new, more or less unforeseen calamity, to renew the downward momentum on the currency. Recall that last summer, Nassim Taleb joined the IMF to help the G20 understand tail risks in the global economy. I have to assume that his research has led to the conclusion that most threatening Black Swans are no longer fluttering toward the shores and hamlets of Europe.
Be careful out there!
Disclosure: I am long GLD.
Additional disclosure: I am also long EUR/GBP and EUR/CHF