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.
