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Posts Tagged ‘@EUR’

Euro cannot get weak enough to solve Greece’s problems due to German export machine

June 18, 2011 7 comments

If you haven’t seen Warren Moslers comments on the Euro over the last few days, they are a must read.

Greece on the Slippery Slope

Thoughts on the Euro

Germany has built a significant part their economy around exports – this was an industrial policy decision.  When the Euro weakens, Germany grows very rapidly. France also has a significant export sector, even if it is smaller than Germany’s.

We’ve seen this in the recent past when they posted the 9% quarter in Q3 2010. The lowest level of EURUSD was in Q2, so Germany got orders at low EURUSD levels in Q2, and filled them in Q3.

The euro seems to have a “natural” lower limit due to the German export machine.  Once the EURUSD trades below 1.30 or so, German growth becomes attractively large.

I find it difficult to imagine the EURUSD much below 1.20 for extended periods. Simply because if Germany is growing at 10% plus per year, their equity and debt markets become extremely attractive.  This draws capital flows into the euro, pushing up the exchange rate, ect…

Usually, a weaker currency “cures” debt problems through a combination of inflation and export driven economic growth.

But Greece does not have a large export sector – at least not to the same degree that Germany does.  A EUR at 1.2000 does not help Greece to anywhere near the same extent it does Germany.  The euro would need to be much lower to spur export driven growth in Greece or Portugal.

And we’ve seen serious problems with the inflation argument.  There simply does not seem to be that much inflation in the world.  5% inflation in China is not enough to make Greece’s problems disappear.  Greece would need an extended period of 5% inflation in Greece to solve their problems.  The ECB would never allow this level of inflation.

So the usual cure – weakening currency drives inflation AND export driven economic growth – does not apply to Greece.

The euro wont’ get weak enough to spur their economy because Germany is way better at exporting.    Inflation isn’t high enough to make the debt problem smaller on any near term time scale.

So it appears the only way for the problems in Greece to go away is a bailout.

This is what happens when you have a monetary but not fiscal union.  It seems to me like the bailout payments would more accurately be classified as fiscal transfers – as though the economics and accounting dictate there MUST be these fiscal transfers even though there is no fiscal union.

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People finally starting to notice that German Taxpayers on the hook no matter what

June 7, 2011 4 comments

A few weeks ago I pointed out that German taxpayers are going to pay for a bailout in a post.  Either they pay for Greece and Ireland upfront, or they let Greece leave the Euro and pay for a bailout of their banking system.  There is not a scenario where the German taxpayer does not pay.

Today, John Mauldin has to go to a guy from the UMKC (University of Missouri-Kansas City – this economics school is the leading place for MMT in the country) to get someone to start to say this. Even then, the lede is buried somewhere in a few thousand words.

The German taxpayers will have to pay, period.   They think they can get away from this truth, but it will – it must – happen.

From Michael Hudson via John Mauldin via Pragmatic Capitalism:

“Hudson first lays the European crisis at the feet of banks and the institutions (ECB, IMF, and the EU) that are taking the Greek (and other) bank debt and putting it into public hands. He has a very real point. Then he points out that Greece is far better off just walking away, a la Iceland (at least read the last part of this post, on Iceland). And in polls he cites, 85% of the Greek people are against taking on the debt and paying the banks.

As I wrote last week, there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors. Ireland will be watching. There is no easy way out. If there is a referendum on this new “troika” proposal, it is likely to lose. This is not over”

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What does a Commodities Bust mean for the U.S. Dollar? Not what you’d think…

June 1, 2011 4 comments

PSI

We could see the start of a commodity meltdown tonight.  The oil market is extraordinarily fragile right now, and commodities are not looking healthy at all.

Of course you’re paying attention to the price of Silver, Gold, and Oil.  It’s impossible to fill your gas tank without noticing the huge hit to the wallet.  And Silver has been just going crazy until just a few weeks ago.

There is a huge clamor from people who don’t know how money works that the weakness of the U.S. Dollar is due to the actions of the Federal Reserve.  Zero Hedge is just one of the nuttiest, but you can find this claptrap everywhere.

It’s undoubtedly the wrong model, but it is the dominant model.

The conventional wisdom model in a paragraph: Quantitative Easing is – must be – shredding the value of the U.S. Dollar.  As proof of this astonishing, irresponsible behavior, Commodities are prudently rallying, because commodities are iron clad protection against the inflation that is certainly just around the corner.  Commodities are not in a bubble, their dramatic increase in price is a rational response to a near-worthless U.S. Dollar.  Other Currencies – the euro, Swiss franc, and Australian dollar, are also rallying because of the irresponsible fed.

It’s a convincing argument when commodities are in rally mode.  But Commodities are no longer in rally mode.  We could be seeing the start of the crumble right now, tonight.

In the last few weeks, Silver took a serious tumble.  A 20%+ drop in 3 days is a huge move for any market.  Not only that, but Silver could be forming a “flag” – a technical formation that predicts a further huge decrease in price.  This isn’t guaranteed – but it is something to watch.

People are beginning to question if Commodities will last.  Perhaps commodities are in a bubble.  We have had enough bubbles in the last few years – why not Commodities?

There is ample evidence that Commodities have a large speculative bid.

I focus on oil and copper because these two commodities only make sense to buy them if you are going to use them.  If the reason Copper is going through the roof is to prop up what appears to be a massive credit bubble in China, then we need to monitor signs the Chinese Government is cracking down on the practice.

And it appears China is cracking down on the Copper financing practice.  In a few months, this source of financing will go away for Chinese companies and speculators.  It appears that China has several years worth of Copper imports sitting on the ground being used as a way to borrow money very cheaply.

It makes sense to ask what would happen to the U.S. Dollar if there is a significant correction in the Commodities market.

Would a correction in the Commodities market be a bullish sign for the U.S. Dollar? 

The selloff in Silver could be the trigger event that causes a massive selloff in the entire commodities complex. It could cause a total rethink of the market consensus.

We are seeing this in price action today with oil going down, the Euro holding steady, and Swiss franc going through the roof. Commodities are correcting across the board, but the Currency markets are mixed.

If the commodities sell off, the primary proof the U.S. Federal Reserve is out of control will be far less potent. So what happens to the U.S. Dollar?

The conventional wisdom is that the U.S. Dollar must become stronger if commodities become weaker.  I am not as convinced about the link between the weak U.S. Dollar and the large increases in Commodity prices.

This is not to say there is no link between Commodities and the U.S. Dollar. If Commodities enter a correction, the U.S. Dollar could rally at least some.

Still, two data points give me pause:

  • U.S. Dollar Index and Commodity index out of sync over last decade
  • Massive speculation in Commodities covers up moderate real demand

The U.S. Dollar is roughly 8% weaker than it was in late 2005. In December of 2005, the U.S. Dollar index hit 80, vs. a price of 73.10 today. However, the CRB index is 130% higher than it was at the end of 2005.  You’d think that when the U.S. Dollar lost a ton of value, the CRB would have risen a proportionate amount.  It didn’t.  The spectacular rise in the Commodities came long after the U.S. Dollar had its most dramatic losses.

I’ve created a model of currency valuations based on the principles of MMT.  The model says the EURUSD should be much higher than it is today – perhaps as much as 20% higher.  I have kept the last few years of data of this model to myself.

But why am I talking about this?  Because if the Commodities fall but currencies rally, the conventional narrative cannot be true. But some other narrative must be. MMT provides a narrative that accommodates Commodities going down and the USD going down.  

The MMT narrative about the Commodity rally is that it is nearly all speculation based.   Warren Mosler says much of it is due to the huge inflows into long only commodity funds.  I agree with this narrative.  But MMT does not have a currency model – at least not a public one.  😉  I do have a model, based on MMT, that says most currencies around the world have a reason to be stronger against the USD.

Even the pathetic Euro – that messed up, fatally flawed currency – has a powerful reason to rally against the USD.    

This blog is called the Traders Crucible, after all.  Some forms of fundamental trading are applied economics.  Fundamentals of the currency markets fall into that category.

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Can a Sovereign Debt Jubilee Work for the Eurozone?

May 28, 2011 7 comments

This is one of the most interesting articles I’ve read about the crisis, How to destroy the web of debt.

The article makes a series of bold claims:

  • The Eurozone could reduce its overall debt to GDP ratio from 40% to 15% by canceling interlinked debt.
  • Ireland could reduce its debt/GDP from 130% to under 20%
  • 6 countries – Ireland, Italy, Spain, Britain, France, and Germany – can reduce their debt/GBP by over 50%
  • France can be virtually debt free, with 0.06% debt/GDP

In real world terms, what would be done is make a trade between countries for each others debt, and then just cancel the debt because in some real way, you can’t owe money to yourself.  So Ireland would trade with Greece – Ireland would give Greece its debt back in exchange for Greece giving Ireland its debt back.

Image from NYT

In some cases, it would require a three way trade. For example, look at the interaction of Ireland, Portugal, and Spain.  Portugal could reduce its debt by $80bn – or over 25% – just by netting out the debt it owes to Spain and Ireland with the debts owed among the countries.  Ireland would get a $40 bn reduction.

These are not trivial amounts of money.

All of this relies on the realization that the taxpayers are both the ultimate owners of the debt and the ultimate debtors.  German taxpayers owe a bunch of money to German pension funds, which are owned by German taxpayers.  The same idea can be applied across borders.

German Taxpayers will pay for Greek and Ireland problems no matter what

May 24, 2011 13 comments

One truth I do not see mentioned in the financial press is the fact that German taxpayers will be paying for a bailout of Greece and Ireland almost no matter what.

Unless the Eurozone follows Warren’s advice, Greece and Ireland will either writedown their debt in a negotiated settlement, or default and force bondholders to take a lesser amount, or the Euro will break up and these countries will default.  In any of these “acceptable” scenarios, the holders of the debt will take losses.  The holders of the debt are German banks, and to some lesser extent U.K. and French banks.

Specifically, the banks holding this debt are German Lundesbanks.  These are state associated, regional banks of Germany. They provide loans to mid-sized German businesses.   These banks are not exactly Fannie and Freddie, but their status could be considered to be similar in that they are closely associated with the government.

In other words, these banks will not be allowed to fail.   These banks will get bailed out.

So Germany has a choice.  They can remain in the Euro, and bailout Greece and Ireland directly.  Or they can let these countries default and the Euro breakup, and bailout their own banks when they become insolvent due to writedowns of Greek and Irish debt.

I would think they would consider the first choice – keeping the Euro going – would be better for them.  Germany can continue to dominate export markets with a dramatically underpriced currency, which is considered to be a good thing.  However, this scenario may result in unacceptable levels of inflation for Germany.

The political situation isn’t clear.  Nobody has explained to the German taxpayer they will be paying no matter what happens, so of course they are balking at paying for bailouts now.

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Bonds: Head and shouderish getting some notice

March 14, 2011 Comments off

30 Yr Inverted Head and Shoulders?

I wrote a post on the head and shoulderish formations in the long bonds and 10 year. This was now noticed by dshort and Chris Kimble.   The bonds are very close to breaking out higher during risky times – this could be a huge “risk off” trade.

But given this potential rally in U.S. Treasuries, what is going on in the Euro today?  It is strong even in the world wide “Japan will repatriate money” trade-o-the-day.  How does this match with U.S. bonds completing this potential head and shoulders?

Curiouser and Curiouser…

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A Euro head and Shoulders means a booming Germany?

January 10, 2011 2 comments

When I look at the chart, I think maybe it is:
But when the Euro was down in the 1.20 area, Germany and France were going gangbusters. Germany and France make up a lions share of the Eurozone in terms of GDP – strap on Italy and Spain and you have a solid majority of the GDP concentrated in these 4 countries.

At some point not far from here, the short EURUSD trade becomes self-defeating.  As the Euro gets lower, Germany grabs exports.  To lesser extent, France, Spain, and Italy do as well.  This is why China is always making statements about supporting the Euro – it has nothing to do with liking Greek debt, and everything to do with liking exports to the U.S.

But let’s just look at this head and shoulders for a second.  The head to neckline distance is: .1409  A dive from the 1.2872 level means the target for the Euro head and shoulders is 1.1463.  That is well below the June lows of 1.1891, and a remarkable  10.9% below the neckline.  This is a rather large formation, and would likely take a few months to deliver this target.

So the average price of the Euro over the quarter of that it takes to reach the target, and possibly recover a bit from the target price end up something close to 1.2100 (1.2800 – .1400/2 = 1.2100).  When Germany threw down its huge 9% GDP quarter, the Euro averaged 1.2637.  Hitting the head and shoulders target would result in an average Euro price over Q1 4% lower than the 9% quarter.

The DAX did not go anywhere during Q3. My real time view of this was that nobody suspected the economy would be this strong – and this is supported by the post release, gap move upwards.

However, nobody will be surprised today. It has become common knowledge that exports drove the Q3 GDP and that Germany business confidence is booming.

People tend to like stocks and bond markets where you’re getting 9% plus GDP growth – ask China or Brazil.

As a result, I do not think the Euro will reach the Head and shoulders target of 1.1463.   As the Euro gets lower, the sovereign finances of France and Germany get much, much better.   Spain and Italy have done a bit better than expected in their deficits as well.

German companies look extremely undervalued if they are putting in 15% YoY top line growth.

This is not to say the Euro will not make another run lower, but reaching the 1.1460 level is unlikely, simply because the reasons for the trade (sovereign debt defaults) are related to how much Euro countries can export. As the Euro gets weaker, their exports get exponentially more attractive, and people will start to buy Euro products and lock in rates with forwards.  This action puts a natural floor under the Euro.

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