Archive for the ‘Currency Market’ Category:
In the Least Ugly Contest, the Dollar Is Ready to Rally!
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Fundamentally, the U.S. has major problems. The government’s budget deficit is projected to hit a record $1.6 trillion this year — nearly 11 percent of the gross domestic product, making it the biggest gap between spending and revenues since World War II. And it is facing annual deficits of more than $1 trillion as far as the eye can see.
Even the Bank for International Settlement (BIS), often called the central banks’ central bank, has admitted that the current debt policy in the U.S. is unsustainable. Sooner or later it will lead to a funding crisis, which will then force major economic and political adjustments.
But Europe isn’t doing any better …
For example, credit default swap spreads on Greek government bonds recently widened by 24 basis points when Moody’s slashed the country’s credit rating three notches to B1. It has become increasingly obvious that Greece’s debt problem has not been solved and cannot be solved without debt restructuring — the politicians’ way of saying “debt default.”
Ireland and Portugal are in the same boat. And Spain isn’t far behind. Since Spanish real estate is still massively overvalued — some economists say by as much as 40 percent — Spain looks like an accident waiting to happen.
And what are Europe’s politicians doing about all of this?
Well, they are pretending that everything is A-OK and the European rescue package was the final solution to this major problem. Of course it is not …
You can’t wipe out mountains of debt by simply issuing more debt! The rescue package was nothing more than kicking the can down the road. It bought them some time. But it didn’t get them one iota closer to a solution.
And for an idea of what’s in store …
Look at Ireland for a Clue
Ireland just voted for a new government. I interpret that as a clear vote against the severe austerity program the European Union (EU) has urged Ireland to implement. Yet the Irish population has no incentive to bear that policy’s painful burden. Why should they?
After all, most Irish government bonds are held by foreign financial institutions and the European Central Bank (ECB). Why not let them share some of the burden; let them take some losses?
Didn’t Iceland do relatively well after it simply repudiated its debt? Why not follow this easier path, the Irish are understandingly starting to ask, even if the cost of doing so is to get rid of the euro.
And Greece, Portugal, Spain, and others might come to the same conclusion.
So as far as the dollar and the euro are concerned, it all comes down to a contest of ugliness … and you have to pick which is the least ugly!
But before you pick, you must understand that …
The Euro Has an Additional Problem …
The EU has a major disadvantage compared to the U.S. in dealing with over-indebtedness: Singular national interests. Therefore it is much more difficult for European politicians to go along with the unavoidable and accept the tough choices that must be made.
Agreement over necessary major spending cuts and potential defaults, which will undeniably bring hardship in the short- to- medium-term, is very hard to come by.
That’s because national interests vary widely …
For example, what’s in the best interest of Greece, Ireland, Portugal, or Spain is definitely not what Germany and the other relatively healthy countries want.
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The likely outcome of this explosive mix, a euro crisis, is becoming increasingly probable. What’s more, the chances of the euro not surviving in the coming years climb with each passing day.
There is no easy way out of the European government debt trap. Sooner or later someone will opt for a severe hair cut. Then all hell will break loose with the euro.
Of course there is widespread unwillingness to accept the unavoidable in the U.S. as well. But compared to Europe, chances are much greater that a national agreement to make these hard choices will finally be accomplished.
So to me it seems that there are fewer obstacles to overcome in the U.S. than there are in the EU.
Plus there is a lot more at stake for the U.S. than just another recession, even a very severe one.
You see …
The U.S. Has a Reserve
Currency to Lose
The U.S. has a huge privilege its economic and political elite are well aware of: The dollar is the world’s reserve currency. Losing this privilege would be a major long-term loss not only for the economic well being of the nation but also in terms of global dominance.
Ben Bernanke and his predecessor, Alan Greenspan, fell short of the responsibility that comes along with this privilege. Their easy money policy played — and still plays — a prominent role in digging the hole the U.S. is in. And Bernanke doesn’t seem to get it! But this, too, will change. Or there will be a change in Fed chairmanship.
To me it’s more like a question of time until the U.S. accepts the truth and starts doing the right thing. If not, the nation will face a crisis of major proportions.
It is not clear, though, when the time for a return to sound fiscal and monetary policy will come. That’s why I am a long-term dollar bear and a long-term euro bear. This of course means that I am a long-term gold bull.
The same fundamentals that strongly impede fiat currencies support the long-term gold bull market. Therefore I suggest investors consider taking a long-term strategic gold position in a gold exchange traded fund (ETF), like GLD, until a major policy change comes about.
But that doesn’t mean there aren’t any …
Opportunities in Paper Currencies
Currently, the dollar’s decline in terms of other currencies seems somewhat overdone. And technically the dollar looks appealing. As you can see in the chart below, the Dollar Index, which measures the dollar against a basket of currencies, is sitting at a major uptrend line.
At the same time sentiment indicators towards the dollar are as bearish as they get. In fact, they’re back to levels last seen at the important lows of October 2009 and November 2010.
Look at the following chart for the positioning of what the Chicago Mercantile Exchange (CME) calls large speculators. Their cumulative position against the dollar is larger now than at the low of March 2008 and November 2009 — when the dollar was much lower.
So it’s very probable that the dollar will soon shoot to the upside — at least for a few months. If you’re inclined to get in on that action, now might be a good time to buy an ETF like PowerShares DB U.S. Dollar Bullish ETF (UUP).
Best wishes,
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
A Sound & Credible Currency
As a currency, the Euro doesn’t have to do much to equal its peers…
“SILVER HITS new all-time highs in Euro” proclaimed Zero Hedge on Monday.
Regular readers of the blog site won’t choke to know it was wrong, this time by only one third. Mistaking (and showing) a chart of month-end prices for a chart of daily silver prices, Zero Hedge’s pseudonymous host, Tyler Durden, missed the true Euro-equivalent spike to €32.80 per ounce of 18 January 1980 – hit in what was then the Deutsche Mark the very same day that silver priced in Dollars also hit its all-time high to date…some 44% above this week’s top.
Still, the point is near-enough made. Because silver, like gold, isn’t just about the Dollar, even though its latest surge coincides with the latest plunge in the US currency. Instead, silver has also caught a strong and growing bid over the last 5 years against the Dollar’s upstart challenger too. And since the Euro debt crisis really got started 12 months ago, the silver price has scarcely looked back…rising 108% from the start of 2010.
“The Euro as a currency is not in crisis. The single currency is sound and credible,” said European Central Bank president Jean-Claude Trichet in an interview with Paris newspaper L’Espresso earlier this month. Which, a little like Zero Hedge, is both premature and misleading. Because the Euro “as a currency” doesn’t have to achieve very much to retain the same credibility as its modern-day competitors.
Against the older monetary measures of gold and silver, on the other hand, the Euro looks just as weak as the other three “big four” reserve currencies – the Dollar, Sterling and Yen.
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Tags: adrian ash, Bullionvault, Currency Market, EU, euro, Gold, Silver, sound currency, sound money, the euro
My own Forex VPS solution – anyone interested?
Hello everyone.
Alan here with an important announcement geared
toward all of you who trade foreign currencies (forex) like me.
I am seriously considering putting together my own Forex VPS
solution and I thought I’d send out an e-mail to see if any of
you would be interested in signing on board.
I’m not sure how many of you know what a forex VPS or even a VPS is
all about so I’ll briefly explain it here. Those of you who already
know this stuff can just skip it.
Basically a VPS is a dedicated computer/server that is hosted in a
high-end data center with a very high speed and reliable internet
connection. This VPS server’s job is to run your forex trading
platform and any forex robot(s) (automated trading systems, also
known as expert advisors) you may wish to use. It is the ultimate
in piece of mind for traders. IT ensures that power outages, slow
home internet connections, and other such problems do not affect
the performance of your trading applications. I think that every
trader should use a VPS solution if they’re serious about what
they’re doing.
Suffice it to say that what I have in mind to setup will be a very
advanced platform. It will be Linux based so you can’t get virus
infection, it will be rock solid stable, it will be portable
(you can log into your vps platform anywhere in the world), and
last but not least it will offer you unlimited bandwidth plus
unlimited memory usage – so you can run as many forex robots (EAs)
as you’d like.
Platforms that will be made available: MetaTrader 4 (MT4) and
MetaTrader 5 (MT5)
Latency?
The vps servers will be spread across 3 data centers – US, UK , and
Hong Kong. I will configure your VPS account to use the server
which is nearest to the MT4 server of your chosen broker thus
providing the lowest latency connection possible.
One thing that may interest affiliates and system sellers/marketers
is whether we will have an affiliate program. The answer is yes.
You can even have it so that your clients will not have access to
whatever EA you’re selling but merely “lease” it while running on
the VPS account.
To launch this venture I’d need about 100 clients to start.
What about cost?
Well, I did some research and I decided that given the fact that
there will be no bandwidth and memory restrictions then $45 /month
would be a reasonable price to ask. Most other forex vps providers
charge double!
So whoever is seriously interested please let me know by signing up
to the interest group mailing list I setup for this purpose. Here
is the link:
http://forms.aweber.com/form/61/1676955861.htm
If I get 100 or more people on board then I’ll get the wheels
rolling and in a short while the vps platform will be made
available.
If you have any comments or suggestions feel free to e-mail me or post a comment.
P.S. Feel free to share this info with your forex trading friends
and associates.
Thank you for your support.
Sincerely,
Alan
Telling Trend Reversals: The Dollar and Bonds
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In last week’s Money and Markets column, I wrote about Bernanke’s quantitative easing policy. The goal of the policy is to create higher stock and housing prices by pushing the dollar and interest rates down.
So how is the Fed’s plan going? Let’s start with the …
Euro/Dollar
The day after the Fed announced it would buy another $600 billion in Treasury bonds with newly created money, the euro broke out of a short-term consolidation in what seemed to be a continuation of an uptrend that began in June.
But one day later this move proved to be a false breakout with the euro falling from 1.4282 to 1.3587 as of this past Monday. That is a huge move in only seven trading days! And now the euro’s high in the wake of the Fed’s announcement looks like the last hurrah of the rally off June’s low.
As you can see in the EUR/USD chart below, the euro made a double-top in 2008. Ever since, there have been lower highs and lower lows. The 200-day moving average is still declining thus confirming the euro’s longer term downtrend.
Euro/Dollar 2000 – 2010
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Source: www.decisionpoint.com
The lower panel of the chart shows the price momentum oscillator. Recently this indicator shot up above two. Readings as high as this have historically been followed by larger corrections or trend reversals.
And I can’t see any reason why it should be different this time. Especially since sentiment indicators towards the dollar have reached very high bearish readings.
Now let’s turn to the bond market …
Treasury Bonds Are Firing Back
My next chart shows 30-year Treasury bond yields. After the Fed’s decision to implement QE2, yields started to rise and prices started to sink. Not what the Fed wants … and surely bad news for the U.S. housing market.
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Technically this development may be a very important one …
Long-term Treasury rates hit a low in December 2008. At the end of August 2010 they marked a secondary low, well above the former one. This may turn out to be a huge bottom formation, thus signaling the reversal of a secular downtrend that began in 1981.
The Stock Market Could Be Next to Reverse
A stronger dollar and rising interest rates are not good for stocks. Now we have both! So in my opinion, these two reversals are probably a harbinger for what’s to come for the stock market.
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The S&P 500 chart above shows a potential double-top forming. If I’m right, the next bear market may have started a few days ago.
Best wishes,
Claus
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Currencies: The Quickest Way to Grab Profits from Emerging Markets
By Evaldo Albuquerque
Dear Sovereign Investor,
In 1989, Stanley Druckenmiller, former money manager for George Soros, made millions off the German deutschemark after the Berlin wall fell.
In 1992, Soros did even better. He became an overnight legend when he grabbed a sweet $1 billion in a single day just by shorting the British pound.
What do these two traders have in common?
You could argue they applied their big macro themes to the currency market. But in reality, it’s even simpler.
They just followed the investment money. They knew the countries with the strongest fundamentals would attract the most investors – and the most cash. And the weakest countries would chase investors (and their money) away.
So they simply bought the currencies from the fundamentally strong countries and shorted the currencies from the fundamentally weak countries.
Simple, but brilliant.
Years later, it’s still embarrassingly easy to copy this killer strategy. But you need to know where the investment money is flowing. Today, it’s flowing straight into emerging markets like never before.
A New Era of Emerging Markets Has Already Begun
It’s no secret that emerging markets have done a complete 180 over the last decade. Take Brazil for example.
When I was growing up in Brazil, the country was a mess. We had very high unemployment rate, hyperinflation, political instability, you name it.
Today, Brazil has an all-time low unemployment rate, record consumer confidence, and an uncontested thriving economy.
Brazil is not alone. Many other emerging market nations are going through the same experience. What happened to them? They simply learned from their past mistakes.
During the 1990s, there was no better place to find economic turmoil than emerging markets. The Mexican peso crisis in 1994, the Asian crisis in 1997, and the Russian debt default in 1998 were some of that decade’s highlights.
Surviving a crisis is a harsh lesson for everyone involved.
Naturally after enduring a crisis, most emerging markets wanted to ensure it never happened again. So leaders started making some serious reforms.
Today most emerging markets are collecting the fruits of those reforms. Most are sitting on piles of cash.
That’s one of the reasons most emerging markets recovered so quickly from the recent global recession especially compared to the big developed nations like the U.S. and E.U.
Emerging Markets: Where The Action Is
The contrasting situation between emerging market and developed nations creates a mixture of push and pull factors.
Developed nations are plagued with very high levels of debt, weak economic growth, and rock bottom interest rates. This bad scenario doesn’t attract investors. Instead it pushes investment cash outside the country.
Emerging markets have low levels of debt, very healthy economic growth, and rising interest rates. That’s why more and more investors are turning to emerging markets.
In the last few quarters investors have been pouring billions of dollars into emerging market nations. The graph below shows how these countries’ stronger growth is attracting investment cash, according to the estimates from the Institute of International Finance.
As you can see, these emerging markets are becoming little cash cows for investors from all around the world…
The Best Way to Profit From These
Incredible Opportunities
It’s amazing how much money is flowing into these emerging markets. These capital flows are very important to currency traders because it practically guarantees these countries’ currencies will rise against the dollar.
They create very profitable trends for those who are trading in the spot market, especially when there’s a well defined trend in the dollar. And that’s exactly what we have right now.
Thanks to Bernanke’s new $600 billion quantitative easing plan, you know the dollar is heading no place but lower.
As a currency trader, you can simply pair these stronger emerging market or “exotic” currencies with the weak dollar for some decent gains.
During the last weak dollar trend over the summer, I helped my Exotic FX Alert subscribers pair the weak dollar with the stronger Mexican peso and Polish zloty for gains of 46% and 108% (among others).
It’s a simple strategy. But it really is as easy as watching where the capital flows will head next and being ready to jump on these opportunities in the spot Forex market.
Bottom line: Emerging markets are where the money is heading.
Best Regards,
Evaldo Albuquerque, Editor
Exotic FX Alert
The Currency War – Good For Gold
By: Peter Schiff, Euro Pacific Capital, Inc.
As the world awaits another $600 billion flood from Bernanke’s printing press, central bank governors from Brasília to Tokyo are preparing to respond in kind. This is the monetary equivalent of a nuclear war, except instead of radiation, bombs of inflation threaten to make the world economy uninhabitable for saving and productive enterprise.
While much of the attention has been focused on China and accusations that it is a “currency manipulator,” the first shot in this war was clearly fired by the US Federal Reserve. Last month, the Fed came out with a statement that, for the first time ever, said inflation is rising at a rate “below its mandate.” That is, they acknowledged that the deflation threat had passed, that prices were stable – but they still intended to send prices higher.
Since the Bretton Woods Agreement was signed in the wake of World War II, the global monetary system has been based on the US dollar. This means that when the Fed decides to create trillions of dollars of inflation, other countries can’t simply say, “let them dig their own grave.” Instead, because their international transactions are denominated in dollars, they feel a pressure to maintain relatively stable exchange rates between their currencies and the dollar.
Most countries do this informally and have their own (bad) reasons for maintaining a certain level of inflation. China, however, is more literal in its devotion to the dollar system, perhaps due to its psychology as a new arrival on the world stage. So, in recent history, the People’s Bank of China has largely maintained a “peg,” by which it currently offers to pay 6.8 RMB for every dollar deposited, no matter how many extra dollars the Fed prints. To put it another way, China, and to a certain extent the entire world, is on a Dollar Standard — like the Gold Standard, but based on another fiat currency instead of a precious metal.
What this also means is that China does not intentionally devalue its currency against the dollar, but only to keep pace with the dollar. Chinese Commerce Minister Chen Deming said as much in an interview on October 26: “Uncontrolled” issuance of dollars is “bringing China the shock of imported inflation.” Most emerging markets are the same way. In order to prevent rapid economic dislocations, and often to appease their powerful export lobbies, these countries seek to maintain a status quo versus the dollar – whether through inflation as with China or capital controls as with Brazil and South Korea, or both.
In short, the currency war is really just the rest of the world trying to shield itself from a barrage of nuclear dollars.
The end result is that the entire civilized world is locked in a race to inflate, and no fiat currency is truly safe. In my brokerage business, I advise clients to buy companies – not currencies – in countries that I believe will thrive in the war’s aftermath. China could dump the peg tomorrow and, after a period of adjustment and write-offs, would continue to grow apace. The UK, on the other hand, is happy to be locked in a competitive devaluation as it helps the government avoid imminent default while it puts through budget reforms. But regardless of their strategic positions, all major central banks will likely engage in some money printing to keep their currencies level with the rapidly devaluing US dollar – until the greenback loses its reserve status. (This may happen sooner than later, if an agreement this month between China and Turkey to stop using dollars in their transactions is any indication.)
As the Fed seeks to blow up the global monetary system, I take comfort in the fact that gold cannot fight a currency war because it is not a currency. Gold is money. Currencies used to be backed by money until the global fiat system was introduced under President Nixon. Fiat currency can be printed at will until the economy collapses, as has happened many times in history. Money is impossible to devalue at the whim of politicians because it is naturally scarce. Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been.
If we are witnessing a fight to the death among fiat currencies, then gold is surely the Red Cross – a peaceful arbiter and source of mercy for our accumulated savings. While I do believe that life will go on after this war, as with all others, the thought of the world’s savers all hiding their assets safely in gold brings to mind the old question: What if they gave a war and nobody came?
Peter Schiff is CEO of Euro Pacific Precious Metals. Having spent years encouraging his brokerage clients to buy physical gold, he grew concerned about the growing number of unscrupulous dealers that tried to “up-sell” customers to rare or collectible coins with high markups. Peter Schiff’s gold coin buying philosophy is to buy for the coin’s metal value, not its claimed “numismatic” value. He decided to open his own firm to sell investment-grade bullion products at competitive prices. Euro Pacific only sells reputable, well-known coins that trade on the open market, such as American Gold Eagles, Canadian Maple Leafs, and Australian Kangaroos. To find out more, please visit www.europacmetals.com or call us at (888) GOLD-160.
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=================================================
Information, charts or examples contained in this
blog post is for illustration and educational purposes
only. It should not be considered as advice or an
endorsement to purchase or sell any security or
financial instrument. We do not and cannot give
investment advice. On certain occasions we have a
material link to the product or service mentioned in
the email. This may be in the form of compensation or
remuneration.
=================================================
Probably the best forex trading systems in the world
Today, Tuesday 13th July 2010, at 9 AM EST, trading systems of more than 40 champion traders from all around the globe and so much more, will be disclosed.
The systems, interviews, videos and live trading presentations of Mark McRae’s current SureFire Trading Champion V2 top guns, and all the previous champions, will be accessible to only a few and you have been invited to join that elite group – effective TODAY!
Not only have these “over achievers” notched up staggering gains, they each have fully disclosed their systems.
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Here’s a recap of the leaked information that started tongues wagging and astonished everybody:
# Banned System Video
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=================================================
Information, charts or examples contained in this
email is for illustration and educational purposes
only. It should not be considered as advice or an
endorsement to purchase or sell any security or
financial instrument. We do not and cannot give
investment advice. On certain occasions we have a
material link to the product or service mentioned in
the email. This may be in the form of compensation
or remuneration.
=================================================
Euro; the Worst Is Yet To Come
By: Sol Palha, Tactical Investor
If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb
I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.
Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.
They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.
The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011.”The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. “Its recipes are a disaster and the government must turn them down.”
The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story
Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.
Spain’s new austerity measures, too little too late
Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. “We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story
We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.
Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend.”Is the package big enough?” asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. “That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core.”
Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.
“I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you,” said Lambert at a Morningstar Investment Conference in London.
“The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages,” he said. Full Story
Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.
In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency. While these brain surgeons run around trying to figure out what is the best approach, make sure you have some of your money parked in Bullion (Gold, Silver, Palladium and or Platinum). In troubled times the best hedge way to protect oneself is via precious metals.
The enemy of my enemy is my friend.
Arabian Proverb
Europe WANTS a Lower Euro
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The euro is in devaluation mode … in a sharp 17 percent decline against the dollar over the past five months. And I’ve written extensively on why, and why it still has further to go.
Now I believe a covert policy decision has been made by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union (Emu) to survive.
Of course, each individual country within the Emu doesn’t have the luxury of devaluing their currency when times are tough. They’re locked into a monetary union of sixteen countries. And monetary and currency policy decisions are made by the ECB.
That puts countries like Portugal, Ireland, Italy, Greece and Spain (the PIIGS) at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity.
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| The Emu will do whatever is necessary to save the floundering euro. |
But now, it’s becoming evident that the Emu as a whole is prepared to take such drastic measures to keep the euro intact!
I think we’ll find that the ECB will aggressively reverse course on exiting from the emergency monetary policies they put in place to deal with the financial crisis of 2008 … returning to emergency mode, and in a big way. They’ll likely be forced to openly buy up the government debt of the weak economies to keep them breathing — i.e. print money, and a lot of it.
The plan requires that Germany, the core of the euro, participate in serving the interests of the lowest common denominator in Europe: The PIIGS. Of course, they’ve already done so by agreeing to provide bailout funds to Greece. But the next moves in the playbook will likely drag Germany headlong into it.
Germany: Swimming with the Fishes
Germany is the biggest, most robust country in the euro zone. It was among the first major economies to emerge from recession. Its economy is expected to grow by 1.5 percent this year, and 1.8 percent next year. So things are going relatively well for the Germans following the harsh recession.
Why, then, would Germany agree to be dragged down by the weak and expose themselves to potential inflation problems in the process? Why not just hit the eject button and remove themselves from the euro?
Here in a nutshell lies the problem: Germany has a lot to lose if other euro countries end up in shambles. It’s exposed on two fronts …
First, Germany is on the hook for $668 billion in PIIGS sovereign debt. Not to mention the fresh $30 billion they’ve agreed to give Greece.
A default, or worse, a string of defaults would be disastrous for German banks and European banks in general. European banks bought about half of the general government bond market last year.
And second, if these countries continue their downward spiral, Germany’s intra-Europe exports (10 percent of total exports) promise to dwindle with it.
So what does Germany gain from sacrificing for the weak?
For one, it averts the problems mentioned above. And two, it will enjoy a much weaker euro in the near future, thus providing a nice kicker for its exports outside of continental Europe.
ECB Already Taking the Plunge
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| ECB President Trichet would not discuss the euro’s value in his recent press conference. |
Europe, the IMF and the ECB demonstrated this week that it’s ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece. And perhaps in a bigger move, the ECB is now accepting Greek junk bonds for collateral — jeopardizing the credibility and independence of the central bank.
As I was watching the ECB press conference following its monetary policy meeting this week, central bank President Jean-Claude Trichet looked flustered and measured his words very carefully. And two things gave me a sense that they had a plan, which included a much weaker currency:
- He adamantly said a Greek default is “out of the question.”
- And a biggie … he ignored all questions about the value of the euro, despite its slippery slide!
The Swiss National Bank must have sensed something, too. This week it chose to back away from buying euros as an intervention tactic to curtail the strength of the Swiss franc. Perhaps, the SNB knows that gobbling up euros at current prices is a recipe for losing money.
In sum, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations. So be prepared to see a continued decline in the euro and other global currencies … and more capital flowing into the U.S. dollar in search of a safe haven.
Regards,
