My how the times change. Seems only yesterday everyone was expecting the dollar to collapse, when it already had! Now it’s time to fret about its opposite, the euro. I am a major dollar bull for 2010-2011, but when everyone is one one side of a trade that has gone a long way in a short time, you have to consider the odds of a correction. In the highly levered currency markets, these can be lightening fast.
Here’s the last 3 years of the ETF FXE (1 share = 100 Euros priced in dollars):
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Take a look at the 10 cent rally over a few days in September 2008 (and the remarkable similarities in price and RSI between the weeks prior to that move and the action since December). If the analogue plays out, we’ll get a quick spike to shake off the shorts and keep people guessing, followed by an even deeper decline. The catalyst in ’08 was the shorting ban. Maybe now a Greek bailout provides the nudge that sends shorts scrambling.
Bear in mind that if this scenario plays out, all of the other risk assets are likely to follow suit: this means a general drop in the dollar and yen, and spikes in stocks and commodities. I have to admit, a correction would fit just fine in all of these markets.
Aside from the charting similarities, what gives me an inkling that something like this could be in the works is the prevalence of chatter about how a Greek bailout is going to weaken the currency or even lead to the breakup of the eurozone. I happen to agree, but I don’t like having this much company.
One person who’s company I don’t mind sharing in the markets (short-term trades notwithstanding) is Hugh Hendry, who is the lone voice of reason at the table with a Spanish politician and the esteemed ignoramous Joseph Stiglitz. Other than for clues on public sentiment, he’s the only reason to watch this little TV production on the Euro’s troubles (he speaks in part 2):
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Stiglitz is being disingenous or is just a plain fool; a bailout is exactly what people are talking about (that’s what he means by “if they stand behind it”). The idea seems to be for Germany and the EU (including possibly even the UK) to gaurantee Greece’s debt, in the way that the US taxpayers were forced to back up Fannie and Freddie’s debt.
Hendry is right — the debt is unpayable, and default is the only option, even with refinancing at lower rates. Greece should just get it over with and repudiate the debt. It is by far the best option for the nation, though the worst for Greece’s politicians and the cronies and unions who benefit from government spending.
Stiglitz doesn’t understand markets. He seems to think the debt crisis is the result of “market mistakes.” This is utter nonsense — without the moral hazards created by deposit insurance, GSEs (Fannie, Freddie, FHA, etc), and the promise of central bank bailouts, financial institutions would have had an incentives for prudence. In our system today, they have none, since losses are simply shifted to the public. It is the greatest financial scam the world has ever seen, but certified “economists” like Stiglitz are steeped in central banking propaganda and incapable or unwilling to see what is right in front of their noses.
March FXE calls are quite cheap. This would be a good way to hedge against a rally – good thinking.
Stiglitz doesn’t understand the markets?
I think you get it right, and your point is confirmed by:
Stiglitz’s most famous research was on screening, a technique used by one economic agent to extract otherwise private information from another. It was for this contribution to the theory of information asymmetry that he shared the Nobel Memorial Prize in Economics[2] in 2001 “for laying the foundations for the theory of markets with asymmetric information” with George A. Akerlof and A. Michael Spence.
But then, shall we all close our short EUR positions?
He thinks because markets are not perfect (and he attributes failures caused by government to the market) that there is almost always a way for government to make things better. He is hopelessly confused. How does introducing guns (government) into a system of voluntary activities (the free market) make things better? Guys like Stiglitz just love guns, but they don’t realize that they themselves are just tools of those who really control the guns — the nasty market actors who are crafty at poltics.
For whenever guns are introduced into the marketplace, the Machiavellians will get control of them and use them to distort the market for their own benefit. When their scams cause bubbles and crashes, these are then blamed on the free market!
Their audacity is as astounding as the naivete of the public, which is largely the result of propagandizing by perfect worlders like Stiglitz.
what I just meant is that since Krugman, Obama etc. get Nobel Prizes, it really means that the prize is a contrarian indicator.
Stiglitz remain a Keynesian in the end, so his solutions won’t ever make sense… He’s like Roubini for that. He sees the problems, but he doesn’t have any clue about how to solve them.
On another note; i just made a post with data from small businesses, hard deflation, black on white:
http://realitylenses.blogspot.com/2010/02/small-businesses-confirm-economy-is-in.html
I knew what you meant, Pej. Anyone who gets a Nobel these days is highly suspect. Offhand, I can think of many more undeserving than deserving laureates — at least Hayek got one, incredibly. But the greatest American economist and historian, Rothbard, hardly anyone has heard of.
Hugh Hendry is awesome but even he is short EUR.
Thus, EUR calls.
“Stiglitz remain a Keynesian in the end, so his solutions won’t ever make sense… He’s like Roubini for that. He sees the problems, but he doesn’t have any clue about how to solve them.”
What are you solutions? Libertarian fantasizing about low taxes, replacing the welfare state with charity, gold standard (or “sound money”), obliteration of unions?
No, do not take this as general antagonism against anyone here, I really doubt that most libertarians (or even people) really get what is wrong.
However, I do not see this as a crisis of abandoning sound money or a financial crisis anyone (those are the symptoms not the causes), but as a crisis of innovation and the stagnation of technology. This view is held by Peter Thiel (a libertarian nonetheless). I do not see how libertarianism will solve the problem, but if we are going to have a zero-sum world without innovation, I prefer social democracy.
Don’t this as eliciting emnity, but see it as my general disconent on the lack of real technology progress.
http://www.scribd.com/doc/25913843/Utopian-Pessimist-Calls-on-Radical-Tech-To
I found this recently from Thiel…
Instead of seeing an inexorable trend to The Singularity, I see one towards entropy and decay…
Aki,
It’s a neat trick to sneak the premise of a zero-sum, no-growth world into the debate and then use that to prop up social democracy. But where does the decay in the rate of innovation and technological development come from? It doesn’t make sense to posit that it just happens “out of thin air.”
We can very easily compare now (a period, I would agree, of fairly slow technological growth) with periods of more rapid development (e.g. the nineteenth century) and posit that perhaps part of what helped creativity to flourish in that time was the system of laissez faire itself, which provided for the highest possible levels of individual self-realization, with fairly little or no obligations to or benefits from the community, other than what each individual saw fit to voluntarily pursue, in a spirit of cooperation rather than coercion.
I don’t need to “fantasize” about the things you listed because they DID exist then (aside from “obliteration of unions” … workers were free to organize and employers were free to fire them and find replacements, if they could) and technology DID develop faster.
Even my argument perhaps doesn’t trace all this back to its root cause; a socionomist would say that both technological development and political liberty peaked in the nineteenth century because the social mood trend was at its most powerfully positive. As that positive trend has waned in the twentieth century, concern has shifted from obtaining power over nature to obtaining power over other human beings, hence the decline in both the rate of technological development and the increasing encroachment of the state into what used to properly be considered an individual’s affairs.
Even in a zero sum world (a premise I steadfastly refuse to grant) I don’t see why social democracy would make more sense. Your argument above seems to be “libertarianism won’t solve all problems, therefore we should go with social democracy, even though that won’t solve all problems either.”
Aki, I am indeed a liberterian and a minarchist.
As Graphite said, we are not utopians, but merely want many of the destruction done to our society in the past century to be undone. Starting with the Fed, and then with the size of the state. Most of the destruction has been done during and following the WWII. But people, like goldfishes, tend to remember only the very recent past and do not bother reading history books.
I would suggest anybody reads John V Denson’s books, and also Murray Rothbard’s book on the great depression.
Statists think that the choice is between reality and utopia. Libertarians know that the real choice is between freedom and tyranny.
Graphite, I would like to thank you for your articulate philosophical answer. You have given me much to think about…
Golfboy hits the nail on the head.
What do you mean “prop-up” social democracy? Yes, as I said before I am a social democratic idealist, but I have some aspects of paleoconservative realism (not of the Rothbard type: think Buchanan and PC Roberts). Since I do have a sense of realism, my posts in this libertarian blog are not meant for proselytization because I realize that this would be a waste of our time and that I too have no solution for many of our problems. My intention was to criticize what I perceived to be libertarian idealism claiming that it would not solve these problems while simulataneous expressing a general discontentment with the lack of progress not solely at libertarianism.
But, I do agree with Peter Thiel fervently: the main problems are not of freedom and liberty, but a lack of technological innovation which is an apolitical assertion. Thiel himself stated that the voters and the government are not even aware of these problems, and he doubts that the government can do much (and I agree with him and everyone here on this.) My believe is that most people would see capitalism as intolerable in a stagnant world (Peter Thiel said this in the interview.) I guess it is just my view though.
I also said this about socialism:
“Damn, I love socialism, but I realize that it is politically impossible because “Robbing Stefan to pay Sven” works while “Robbing Peter to pay Pablo” doesn’t.”
Aki, if I put aside the fact that you are not making any sense to me, I could just tell that Peter Thiel is not the godlike person you think he is. On top of that, he seems to be a poor hedge fund manager if I were to look at his track record…