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Archive for the ‘Currencies’ Category

The euro is a dying currency.  On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010.  In fact, as I write this the EUR/USD is sitting at 1.2791.  Back in July, the EUR/USD was over 1.45.  But this is just the beginning.  The euro is going to go a lot lower.  At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed.  Most Americans simply do not grasp the gravity of what is happening.  Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay.  As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do.  U.S. banks are massively exposed to European sovereign debt and European banking debt.  When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet.  So you better look out below – the euro is coming down and it is coming down hard.  After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further….

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that….

“Parity with the dollar next year is not out of the question”

Can you imagine that?

1 dollar = 1 euro?

Don’t think that it can’t happen.

But the decline of the euro is just part of the story.  The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days….

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing.  Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock.  Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent.  Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy’s youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

“Employers Impose Bans On Smokers”

These are some of the other top headlines on USA Today right now….

“Automakers Rush To Offer Apps In Your Car”

“Bargain Season At Taco Bell, Pizza Hut, Wendy’s”

“Does Your Dog Understand You? Study Says Maybe”

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.

Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure….

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse’s Fixed Income Research unit was right on target….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

The European debt crisis just continues to get worse and worse.  None of the solutions that European leaders have tried have worked.  We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe.  The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point.  Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable.  What is happening in Europe could turn our “limited recovery” into a “major recession” almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

The Economic Collapse

The devalue-your-way to prosperity proponents are out in full force in spite of the mathematical silliness of it all.

Three writers of the Wall Street Journal article Weak Currency Stands to Buoy Zone Exports propose Europe is in the midst of a “weak recession” and a falling Euro will help exporters.

Weak recession? We will see about that.

At the top of the “beggar-thy-neighbor”, weak-currency devaluation list is Martin Feldstein who writing on the Financial Times specifically proposes A weak euro is the way forward.

The Way Forward – Not

Feldstein believes “The key is to expand the net exports of those trade deficit countries to the world outside the eurozone.”

Yet at the same time Feldstein readily admits “The politicians who planned the euro, generally did not think about future current account imbalances or other economic problems. They wanted the euro as a means of accelerating political integration.”

Moreover, Feldstein specifically notes “Productivity in Germany rose much faster than it did in Italy, Spain and France. Germany also placed limits on wage growth. Those two factors mean that labour costs in Germany’s tradable sector have risen some 30 per cent less since the start of the euro than labour costs and prices in those countries with slower productivity growth.”

Proposal to Fix the Unfixable

Devaluing the Euro cannot and will not fix those structural problems. In essence Feldstein wants to fix a problem that is not fixable.The amazing thing is Feldstein nonetheless wants to try anyway with proposals he knows full well cannot work.

Put Feldsetein in the can-kicking group with this admission: “A decline of the euro cannot be a permanent solution to differences in  productivity trends within the eurozone. But it would give those  countries time to improve productivity growth before the euro’s  fundamental strength returns.”

Can the Euro Be Saved?

Given that the Euro is fundamentally flawed, even if it could be saved, why should it be saved? At what cost? To whom?

Feldstein does not specifically address any of those questions, although does wonder how much the Euro needs to fall.

Wondering how far the Euro needs to decline to “save the euro” is akin to wondering how many peanuts elephants need to eat before one can launch a rocket ship to the moon.

Ironically, Feldstein concludes “If those relative improvements in productivity do not happen, there may  be no choice but to end the eurozone as we know it today.”

Why Don’t We Start There?

Getting Greece, Spain, Portugal productivity up to the standards of Germany is NOT going to happen while all those countries are on the same currency with the same interest rate (and probably not under any circumstances at all).

While currency devaluation may in theory help one country in isolation, it cannot save the global economy or  Europe as an entity.

Feldstein should know that, and I suspect he does. Unfortunately, he refuses to go down the only path that makes political and economic sense.

This is after all, not only about economics, but also about political realities.

Political and Economic Realities

The political and economic reality is the Euro has failed. It was fundamentally flawed from the beginning.  Politics suggests it is too late to start over. Germany will not go along, and in my opinion, for excellent reasons.

So, instead of attempting to fix the unfixable, why not work on the best plan to break up the Eurozone?

Mathematical Realities

Not every country can run a current account surplus. Yet, every country wants to. On May 19, 2011, Paul Krugman Praised a Weaker US Dollar.

What’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.
Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker.

Mathematical Impossibilities 

1. Krugman and the Fed want a weak Dollar
2. Feldstein and European countries want a weak Euro
3. Switzerland wants a weak Swiss Franc
4. Japan wants a weak Yen
5. China wants a weak Yuan

Can someone, anyone, tell me how that is supposed to work?

Magically it’s supposed to. Yet, mathematically its impossible in relation to each. However, it is possible in relation to another currency: gold.

Amazingly, not even Nouriel Roubini can figure that out, which prompted my article Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror.

Here’s the deal: If the Euro slips, the dollar must by definition rise. If dollar exports then drop, the Fed may respond with QE3 and Japan may sell the Yen.

Note the extreme silliness of the circular proposals to weaken everything, yet the writers cannot even see it. It’s a sad testament to the absurd grip Keynesian and Monetarist theory has on academia, Nobel prize economists, and in general economic writers most places you look.
Mike  “Mish”  Shedlock

Global Economic Analysis

What do governments and central banks do when they don’t like what is happening in the financial markets?  They directly intervene and they manipulate the financial markets of course.  On Friday, the central banks of the G-7 acted in concert to drive down the value of the surging yen.  So why did they do this?  Well, the fear was that a rising yen would hurt Japanese exports at a time when the economy of Japan needs all of the help that it can get.  So, as central banks have been doing with increasing frequency, they directly intervened in the Forex market in order to bring about the result that they desired.  Unfortunately, this is not an isolated incident.  The truth is that foreign governments, central banks and large financial institutions are constantly manipulating the Forex, precious metals and stock markets all over the globe.  You see, in today’s global economy the “stakes are so high” that the free market cannot be trusted.

The reality of the matter is that none of the financial markets are really “free markets” anymore.  Not that they are completely rigged, but to say that they are very highly manipulated would not be a stretch.

At least this time the manipulation was made public.  Of course it would have been really hard to hide the fact that all G-7 central banks intervened in the Forex on the same day.

The last time there was such a coordinated intervention in the global currency market was back in 2000 when central banks intervened to boost the struggling euro.

But the truth is that individual central banks attempt to manipulate the Forex all the time.

Some of these interventions become public.  In September 2010, a bold 12 billion dollar move by the Bank of Japan to push down the value of the yen made headlines around the globe but had only limited success.

Another example of this from last year was when the Swiss National Bank experienced losses equivalent to about 15 billion dollars trying to stop the rapid rise of the Swiss franc.

Many nations around the world have become extremely sensitive to currency movements.

In particular, there are several Asian nations that are known to be constant currency manipulators.  For example, Singapore is very well known for intervening in the foreign exchange market in order to benefit exporters.

And that is what this most recent intervention on behalf of the yen was all about.  It was about making Japanese exports cheaper.

But who is going to say no to Japan right now?  It is believed that Japan asked the G-7 to do this, and so they did.

Japanese Finance Minister Yoshihiko Noda told the media the following about this massive intervention in the marketplace by the G-7….

“Given yen moves after the tragic events that hit Japan, the United States, Britain, Canada and the European Central Bank have agreed with Japan to jointly intervene in the currency market.”

So isn’t the Forex supposed to be a free market?

If you still believe that, I have a bridge to sell you.

According to Kathleen Brooks, the research director at a major Forex trading firm, it looks like there is a certain level that global authorities simply will not allow the yen to rise to….

“It looks as though global authorities are willing to pull out all of the stops to defend the 80.00 level in dollar/yen.”

The following is the full statement released by the G-7 defending their currency intervention….

Statement of G-7 Finance Ministers and Central Bank Governors

March 18, 2011

We, the G-7 Finance Ministers and Central Bank Governors, discussed the recent dramatic events in Japan and were briefed by our Japanese colleagues on the current situation and the economic and financial response put in place by the authorities.

We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector.

In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.

But it is not just foreign governments and central banks that manipulate financial markets.

If you want to try to make money on the Forex, you had really better know what you are doing, because most “little fish” get swallowed up and spit out.

A number of years ago I actually invested in the Forex and I rapidly learned that it is not a “clean game”.  I discovered that there are industry insiders that openly confess that several of the “big fish” in the industry brazenly “stop hunt” and regularly trade against the positions of their clients.

Not that stock markets around the globe are much better.  It would take thousands of pages just to document the well known cases of stock manipulation and insider trading.

And don’t get me started on the precious metals markets.  As I have written about previously, very compelling evidence of manipulation in those markets has been handed to the U.S. government and they have essentially done next to nothing with that evidence.

Not that people don’t make money in the financial markets.  Some people make a ton of money.  But those people are experts and they know how to survive in a “dirty game”.

If you are an amateur, you really need to think twice before diving too deeply into the financial markets.  If you think that you can jump into the Forex or the U.S. stock market and “get rich quick” you are in for a rude awakening.

The financial markets have become a game that is designed to funnel money to the “sharks” and to the “big boys”.  Once you put your money into the game, the odds are that “the house” is going to win.

For those that still do believe that the financial markets are a good way to build wealth, at least be prudent enough to get some sound financial advice.  There is no shame in having a financial professional invest your money for you.

But it is no guarantee of success either.  The truth is that millions of Americans have experienced a lot of pain in the financial markets over the last few years.

As the global economy becomes even more unstable, the manipulation of the financial markets by governments and by central banks is going to become even more dramatic.

As financial markets around the world crash and rise and crash again a whole lot of people are going to be wiped out financially.

You don’t have to be one of them.

The Economic Collapse

The “permanent Bull market” engineered by the constant intervention of banking and political authorities has a problem: the duration of each cycle is getting shorter.

As we all know, the central banks of the world have decided that in lieu of actual prosperity, they will provide the illusion of prosperity via a “permanent Bull market” in stocks.

I have discredited this “wealth effect” many times, as have others. Since the vast majority of equity and financial assets are held by the top 10% of households in the U.S., then the “wealth effect” only benefits this narrow band of households. Very little trickles down as the newly enriched account for about 40% of all consumer spending–but luxury shopping creates mostly low-paying jobs: clerks in jewelry stores, busboys in fancy restaurants, etc.

So far, so good, as far as the Federal Reserve and the politicos in Washington are concerned; since Wall Street is skimming billions again and big campaign contributors all come from that top 10% slice of the economy, then their pals and supporters are benefitting immensely from the facsimile “prosperity” of a propped-up “permanent Bull market.”

But something is going wrong with the interventionists’ delight: each new run of the “permenent Bull market” is shorter than the last one. Consider this chart of the S&P 500:

Although it is not shown, you will recall that the first leg of the “permanent Bull market” (PBM) lasted from about March 2003 (final sputtering end of the dot-com bubble) until about July 2008, when the market finally fell below the critical support offered by the 200-week moving average. That run lasted about five years.

The next “permanent Bull market” began in March 2009 after the central banks and politicos intervened on an unprecedented scale in the second half of 2008. That run ended in May 2010 when the Eurozone’s debt problems broke through the EU’s thick crust of denial and obfuscation. So that leg lasted a mere five quarters.

More intervention and a new layer of denial and obfuscation “solved” that crisis (which seems to reappear with alarming regularity) and the next leg of the “permanent Bull market” was launched by the Fed’s QE2 $600 billion quantitative easing program–yet another unprecedented intervention in an economy which was supposedly one year into “recovery.”

This most recent return of the “permanent Bull market” lasted less than seven months–from September 2010 to mid-March 2011.

The dynamic is clear, isn’t it? Each new leg of the “permanent Bull market” requires a heavier dose of unprecedented intervention, denial, “stimulus” and obfuscation than the last one, yet the resulting Bull market is significantly shorter in duration than the previous run.

If this pattern holds–and exactly what evidence supports the claim that the next “permanent Bull market” will last longer than the previous one?–then we can anticipate that the next Bull market will last considerably less than seven months, and the one after than even less, until the forces of intervention and manipulation encounter a solid wall of granite.

At that point, massive intervention won’t spark yet another “permanent Bull market”: it will spark a collapse of equities as participants realize that the last iteration of the “permanent Bull market” lasted less than a month, and the next one might not last a week.

Of Two Minds

The problems plaguing Ireland are common and something very familiar with Americans.  Irish banks got drunk on housing bubble beer and loans were made without any actual thoughtful analysis of whether the loans would be paid back.  Now the European Union is stepping in with the IMF to bailout Ireland not because it has a soft heart or cares about the people in the Celtic country but because it is trying to protect the big interconnected web of banking interests of German, Spanish, English, and US banks.  That is the ultimate issue at hand.  After all, Ireland has a GDP of $222 billion or roughly the same amount as Louisiana so it doesn’t seem like such a small country could captivate financial news for weeks on end.  But if you look at the external debt of Ireland it just blows you away in relation to the size of the country.  Let us take a look at these metrics:

 
Source:  Wikipedia, CIA World Factbook

You’ll also notice that Italy and Spain are right there ahead of Ireland and these are the next dominoes to fall, especially Spain.  Portugal is also facing big issues with debt.  The EU and IMF are trying to avert a massive global run on these countries but the problem isn’t one of liquidity.  The issue at hand is of peak debt.  People and countries have borrowed too much based on what they are capable of paying back.  If Ireland’s GDP is $222 billion and their external debt is $2 trillion you can see that this will be a major issue.  It is hard to imagine this amount of debt for the production of the country but remember that the global banks were all the willing to lend money out to Ireland for over a decade.  Yet the bailout issue and the problem with central banks is that they are only concerned with saving their banking colleagues.  Even when the Federal Reserve was developed in the US it was premised on preventing bank runs and protecting network banks.  That was and continues to be their primary mission.

Yet the bigger problem is the troubling unemployment plaguing many countries with a mammoth amount of debt.  Let us take a look at unemployment in some select EU nations:

The spotlight is glaring on Ireland at the moment with a 14 percent unemployment rate yet the more stunning case of Spain shows a headline unemployment rate that is over 20 percent!  We can only imagine what their underemployment rate would be.  These bailouts do very little to address the problems and dislocation in the employment market.  We already know here in the US where the unemployment and underemployment rate is up to 17 percent and has remained stubbornly high now going on four years that more debt does little to ameliorate employment conditions.  Yet the US Treasury and Fed try to put on a vibrant charade that all is well.  Does it feel like all is well?

The EU problems are gigantic in scope.  Ireland only a few days ago was openly talking about their solvency until the summer of 2011 and that they had plenty of cash to get by for half a year.  Well a few days later rates roared upwards and people started yanking money out of their banks.  They saw the above numbers just like you are.  Think about the ratio more on a human level. The amount of external debt for Ireland is like someone making $20,000 a year yet having debt connections of $180,000.  That is absolute madness and shows how the allure of easy money and the fact that bankers have no restrained with printing money will put the entire global economy at risk. The solution of the banking system here in the US and EU is basically to bailout the bankers at the cost to all local taxpayers.  The bankers are so consumed by their tiny niche market issues that they fail to recognize that the employment markets are collapsing all around them.

Having too much debt is a recipe for financial disaster.  Greece was only chapter one followed by the Irish in chapter two.  Portugal and Spain will be next.  It isn’t a question of will they need a bailout but when.  Spain’s GDP is $1.6 trillion or $200 billion below that of California.  A collapse of Spain will be enormous news and will sent ripples across the globe especially in the EU.  Yet with a headline unemployment rate of 20 percent how will they pay their debt back?  They can’t to answer that question.

The US has also reached a peak debt situation.  The answer from the banking sector is to dilute the US dollar and make the American standard of living collapse because banks gambled irresponsibly for decades.  The banks now have taxpayer dollars so they don’t care about the unemployment and underemployment rate of 17 percent.  Now, they talk as if we need to take our hard knocks and speak with authority.

“These are the same people that had Hank Paulson on bended knee begging the House Speaker a few years ago for a $700 billion blank check.”

The central banks are merely infectious puppets of the banking system.  They aren’t accountable to the people or local governments.  Did we even debate quantitative easing here in the US?  The continuous bailouts are merely a way to protect the banking sector while the stats on employment speak for themselves.  How can you tell when a central banker is lying?  When they open their mouth.

My Budget360