On Why The Euro Is Trash And How To Play It

by: Turtle Management

I am not being negative for the sake of being negative. This rally does not make any sense. How many times now have we seen the market rally on hope only to be disappointed. This time is not different, we will be disappointed.

There are only two ways out of this mess for Europe. Debt can be written down and defaults occur across the board and banks fail, or they print money like crazy to monetize the debt and prevent contagion. That’s it. It is really that simple. The problem in Europe is that so many countries are completely incapable of paying back their debts. They cannot get the growth, as Greece has proven thanks to the Troika’s recent report, in tax revenues, exports, or people (larger labor force via population growth to increase GDP) to climb out of their debt. If the EFSF is approved to bail out failing banks and a defaulting Greece all that does is make Germany and France the next Greece because there is no way Italy, Spain, or Portugal, can contribute and pay back Greece’s debts when they cannot even pay back their own.
More than any other country, Germany does not want to print. Inflation from the monetization of debt after World War I helped create the extreme economic conditions that led to the rise of the Nazi Party and Hitler. This is why Stark resigned from the ECB recently and rates at the ECB were not lowered thanks to the 3% inflation report. Unfortunately, given the pressure and alternatives, Germany might be forced to print or go along with monetizing debt.
Monetizing debt will not come without investors in the market and some banks taking losses. Just like in 2008 when the entire U.S. financial system was bailed out except for Lehman and credit/lending dried up, the market will fall hard. If you recall, Lehman failed in September yet the market didn’t crash and bottom until March, while the S&P 500 (NYSEARCA:SPY) trading at its lowest point. However, in the long run, once the losses are taken and the recessions and depression in Europe bottom out (maybe within a year or a few years) all that printed money will push stocks higher as earnings are nominal and not real. Unlike the USD, the euro is not the primary reserve currency in the world. If things get really bad, countries do have other places that they can go and dumping the euro for USD (which is also garbage in the long run) is easier than dumping all USD for euros or something else. Monetizing debt with the euro is far more dangerous than what the U.S. did in 2008. Short the euro.
Either way you look at it, the euro is destined to fall. If European leaders print euros to monetize debt or they just let countries default (or a combination of both) the euro will tank. The rally in the both the markets and the euro will be short lived. Look to buy ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS), ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU-OLD), or ProShares Short S&P 500 ETF (NYSEARCA:SH) to short the market. Use the ProShares UltraShort Euro ETF (NYSEARCA:EUO) and Market Vectors Double Short Euro ETN (NYSEARCA:DRR) to bet against the euro. I love gold in the long term as well and that can be played with GLD, but be wary of it in the short term. If we have another crash in the market, everything will likely fall.
Disclosure: I am long SPXU-OLD.