The Euro's Heading to Parity? Really?
The market's frenzied obsession over the falling euro has gotten completely out of hand. Shortsighted fear and panic have blinded people to the longer-term picture. Bearish euro sentiment reached a crescendo recently with whispers that the "big money" had not yet pulled out of the currency. In other words, the big fish still had yet to sell. When these players sell, they simply chase another currency. In this case the yen and dollar are getting the attention. Good news for Japan and the United States, right? It's not that simple. Everyone needs to take a deep breath and consider the alternative view.
Before I begin, I'd just like to say that if I hear one more market commentator mention the word "Spain" to me, I'm yelling back "California." California! Spain's overall fiscal deficit is roughly 12% of their GDP. Can you guess what other country has a 12% fiscal deficit? You guessed it, the United States. It's also worth mentioning that Spain's deficit happens to be falling, while the United States is rising. And, as we're all well aware, Washington has shown zero signs whatsoever in reining in the spending leviathan.
So let's get this straight, right here, right now - the big hedge fund boys have an enormous amount of pull with the financial press when it comes to this story. Remember George Soros? He proved his billion-dollar point back in 1992 when he went toe-to-toe with the Bank of England. He won. So when other smart, successful, powerhouse hedge fund managers like Louis Bacon or Jim Chanos go public with their bearish bets on the euro, the financial media eats it up. These guys are modern day E.F. Huttons. When they talk, people listen.
But what we're talking about here is a major currency with a lower debt-to-GDP than both Japan and the United States. Have people decided to point the finger at the euro in order to avoid the fundamental fact that bigger problem is right here at home? The euro is trading as if it were the Greek drachma. Now let me ask a question: Should the dollar trade like the long-term death of Detroit where houses are selling for $100? The currency is not the economy.
The euro will recover. Why? For starters, because the U.S., China, and Japan all have a stake in it. You can't live on yen and gold forever. So take a moment to read and consider the following three ideas, and then explain to me with a straight face why we should all just follow the major hedge fund operators as they bait the media with their one-sided trades.
First, Japan has the worst debt to GDP in the developed world. How has this been overshadowed by Greece, the industrial powerhouse that it is, and its inability to pay its bills? While the yen has been stable relative to the dollar, Japanese trade will blow up if its currency keeps going up in a straight line.
Second, China has its own fair share of problems stemming from new tax, labor, and environmental laws that will place serious pressure on bottom line growth. Add to the mix the expiration of their infrastructure stimulus, and margins could get squeezed. Since the currency is still tied to the dollar, there could be social unrest if their currency appreciates.
Third, consider the United States of America, with its problematic economic future. When the stimulus starts to run out, and Congress raises taxes, the last thing we will need is a strong dollar. A weak dollar means higher exports, which means more jobs and more money for consumers to spend.
When it comes right down to it, the euro is essentially the deutschemark. Germany, with the most advanced manufacturing base on the planet, needs to wake up and gain political control of the euro. The French, with their large contribution to the euro zone, will probably follow. Have you even heard the French speak up? No, history is clear: France stands down when Germans get forceful.
In conclusion, China, Japan, and the U.S. all have a vested interest in curbing currency speculators and stabilizing the euro before it starts to wreak havoc on trade, margins, and Ben Bernanke's game plan. Big money to me means the governments that print it, direct it, and control it longer term. Like the last twenty years, we need to cash in our "Bernanke put", write a big check, sell the debt to the Chinese, and move the planets to keep the market from failing.
At least this time around the economy is expanding and U.S. banks are sitting on a pile of taxpayer cash. We are all in this ludicrous global joy ride together, Spain included.