How can one sum up a complicated crisis in a few sentences? Perhaps it would go something like this: European countries issued a massive amount of bonds in order to spend like inebriated soccer fans. Regional leaders then attempted to help the worst offenders (e.g., Greece, Spain, Italy, etc.) by forcing banks to purchase weaker government debt. Today, both the banks that hold the bonds of questionable value, as well as the countries that issued them, require lifelines.
Could the eurozone crisis be contained quickly? Only if country leaders agreed to redistribute the region’s wealth. Richer sovereigns whose governments and citizens lived within their means merely have to accept the equivalent of higher taxes ... so that the less productive, less responsible nation-states may benefit from the redistributed funds.
Will Germany, the Netherlands, Finland, Belgium, Austria and the more responsible eurozone members share their hard-earned fortunes? Yes ... eventually. After all, the “rich” usually end up giving up something in the name of stability.
In the U.S., the stated income borrower who lied about his ability to pay his property loan was the first to receive federal aid to keep him in his home. Similarly, the eurozone member(s) that lied about financial troubles have been and will be the first to receive regional/international aid to keep that member(s) from defaulting.
That said, the redistribution isn’t likely to happen overnight. In fact, the stronger eurozone members need to be convinced that wealth redistribution is the solution. And so far, this has been a tricky thing indeed.
In fact, eurozone inaction has fueled an impassioned love affair with the previously-maligned U.S. dollar. The greenback via PowerShares DB Dollar Bullish (UUP) has been a premier place to stash cash, in spite of endless political gridlock and an out-of-control deficit.
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Last November, when there were doubts about Greece’s government and its ability to unify around eurozone membership, UUP darted 7.5% over the next two months. And since late April/early May, when it became clear that Greek voters would vote out incumbent supporters of eurozone austerity, UUP rapidly garnered 5% through June 6.
Keep in mind, UUP is essentially benefiting from fear of what the eurozone will or will not do. Yet WisdomTree Brazilian Real (BZF), CurrencyShares Canadian Dollar (FXC) as well as the WisdomTree Chinese Yuan Fund (CYB) have also suffered from the uncertainty.
There may not be a sound reason for getting into foreign currencies just yet. Perhaps by Q4, we’ll see greater clarity on the eurozone’s direction and another round of dollar-devaluing quantitative easing. When it comes, exchange-traded vehicles like FXC, CYB and BZF may be lower-risk ways to recognize economies with higher quality balance sheets.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.