Low Euro Will End The Crisis

Includes: FXE, UUP
by: Jason Schwarz

Monday’s negative market reaction to Moody’s was the same as it was last Monday when S&P issued its European warning. Both times the optimism that existed from Europe was brought to a screeching halt because of the noble efforts of our great protectors, the ratings agencies. What a joke. We do not agree at all with Moody’s assessment. Last week’s coordinated effort of the Federal Reserve to prop up lending for bank capitalization was and STILL IS a safety net to protect against a Lehman type failure in Europe. The combination of short-term Bernanke with long-term Merkel is one that provides Europe with the best of both worlds. Moody’s and S&P fail to understand that socialistic reform can’t happen any other way.

Those who proclaim that the results of the European Summit merely ‘kicked the can’ down the road are wrong. In fact, the results of the Summit did the opposite. The process of austerity that weans Europe away from its socialistic programs is the long-term solution that must accompany any kind of short-term fix. If you are only focused on the variable of sovereign debt you are missing the bigger picture. There must be enough stress in the financial system to allow pressure points so that change can occur. Change only happens when backs are against the wall. Without these pressure points, no government would be able to pass austerity. Italy would laugh at Mario Monti. Before Bernanke’s pledge to support Europe, we were worried that these pressure points might escalate out of control into a collapse of European banks. With Bernanke, that threat is under control. Anyone who naively hopes for shock and awe fails to understand the historical significance of this moment. There is a sequence of events that must unfold in order to put Europe back on track in a competitive world. Those events are happening according to plan.

Sure, the Dow will drop 200 points when out-of-touch ratings agencies voice their concern, but after these kinds of knee-jerk reactions is not the time to sell stocks. If Moody’s or S&P had any forecasting ability whatsoever, they would have downgraded European debt long ago and would now be in a position to upgrade with each and every improvement that is passed. Now that would be an effective ratings agency! The message from Moody’s should have been that Europe is much better off than it was two weeks ago. It’s too bad we live in a world where these laggards move the markets. The big picture in Europe is now crystal clear. Leaders will maintain pressure points in order to pass austerity, the rest of the world will serve as a backstop to any sort of collapse, and in the end the ECB will increase its monetary tools as soon as the proper sequence presents itself. Europe truly is getting closer to becoming a non-issue for U.S. equity markets. Without the threat of widespread contagion, we can move on.

As global leaders are working it out, the value of the euro has steadily declined to an 11-month low at $1.30. The primary criticism of austerity has been that it solves one problem but causes another in the economic growth department. The dirty little secret in this whole European crisis is that the value of the euro has been too high for too long. The European economy is dependent upon tourism that has been non-existent because Americans can't afford to travel abroad. The low dollar has been essential to jump-start the U.S. economy but it is now time to cut Europe some slack with the euro. Many in the media, notably Jim Cramer, have been monitoring the FXE as the only economic variable of importance. They're telling us that if the FXE drops it will doom the market. That is not necessarily true. A weak euro is the tonic to solve Europe's economic woes after austerity has been implemented. At this point in the game, the dollar needs to rise to restore confidence and the euro needs to drop to stimulate its economy.

In conclusion: Long term Merkel + Short term Bernanke + Falling euro = End of Socialism without a banking or economic collapse. This crisis is over.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.