In government and mainstream media logic, the bailouts are supposed to be good for the euro. With EUR/USD pushing 1.27, it appears that somebody forgot to tell the market that implied guarantees for GIPSI nations to the tune of 100s of billions of new euros should strengthen the value of those in circulation.
Here’s a 10-year view of the spot market, revealing just how much downside there is in this cross. On the other hand, the euro is getting oversold on a short-term basis, with RSI approaching the conditions preceding the short but violent rally in late ’08. It could trend a little while longer, but don’t get caught short without your stops.
So we finally know the structure of the Greek bailout. 16 EU nations pledged to throw good money after bad and extend taxpayer-financed loans to Greece when the country starts to default. From Bloomberg:
March 16 (Bloomberg) — European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro.
Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.
“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.
With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November…
…“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,” the ministers said in a statement.
Of course almost everyone has it wrong about the implications for the euro. Sovereign defaults would be good for the euro, even if those nations end up leaving the monetary union for their drachmae, lire and pesos. Defaults are by definition deflationary, since they reduce the amount of outstanding credit balances, thereby increasing the value of the remaining euros. If everyone but Germany defaulted and left the EMU, the euro would be stong and they’d call it the Deutschemark again.
This is the dynamic that has propped up the strong Yen for 20 years even as the government has run up huge debts, and it is the same reason the dollar finds a bid whenever panic enters the financial markets. In a credit crisis, the very condition of having piles of debt denominated in a currency creates demand for that currency by both debtors and creditors.
What these bailouts are going to do is reduce the relative demand for euros and likely result in an accommodative ECB printing up hundreds of billions more. The politicians are lying or ignorant or both when they say that their goal is to save the euro — this is nonsense. Their goal of course is to save the bankers who own them.
The Greek taxpayers of course, if they have half a brain and some guts, should refuse to service this debt and simply force an honest default. All of Europe is conspiring to make them debt slaves forever, and the only Greeks who benefit are the political gangsters and government unions.
Of course this man doesn’t care a whit for the truth, so he is either an economic ignoramous (quite probable for a French lawyer and politician) or just plain lying when he makes statements like the following:
“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”
EU leaders have so far refused to give financial aid to Greece and have ordered the government to cut its budget deficit, the EU’s highest, on its own. While Papandreou says steps taken this past week to slash the shortfall warrant more help from the EU, German Foreign Minister Guido Westerwelle said yesterday that his country is “not going to write a blank check.”
Of course, a Greek default would strengthen the euro, since billions in balances would go poof, thus increasing the worth of the remainder. A bailout here will lead to bailouts in every Mediteranean country, quite possibly including his own. Pray tell, how will creating hundreds of billions more euros firm up their value? On the other hand, if every nation in the eurozone but Germany defaulted and then quit the euro for their old pesos, lire, francs and drachmae, it would be very strong and the Germans would just rename it Deutschemark.
Papandreou is visiting Berlin, Paris and Washington after his government passed a 4.8 billion euro ($6.5 billion) austerity package on March 5. A poll published in To Vima newspaper today showed 51.9 percent of voters support him even after the cuts, compared with 47.5 percent who don’t.
Sarkozy, who didn’t say financial support would be forthcoming, will meet Papandreou in the Elysee Palace around 6 p.m. local time. They will brief reporters afterwards.
Watch out, Americans. You don’t suppose that this American-born, Harvard-groomed oligarch is trying to take your money to prop up his racket, do you?
Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.
That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.
“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”
Tremonti also said that the EU could issue “eurobonds” or coordinate the sale of euro-denominated government bonds to better counter “financial speculation.”
Sounds like a bit of a turf war there between the IMF and the ECB, each vying with the other to administer the bailout and control the situation for their respective backers. The IMF gets much of its funding from the US, so let’s root for the Frenchman here.
As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits. Greece has done its work and Europe and the U.S. must now ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries, she said.
Merkel shows she’s not above the dishonest game of shifting blame to the markets for having the gall to recognise that Greece’s credit risk might a tad bit elevated.
Another day, another (barely) new low in the Euro:
I still think there are good odds for a surprise rally here. We certainly have the set-up: oversold RSI and a positive MACD cross on the daily bar, very low but leveling trader sentiment, and a widely-followed news event to draw in the retail players (the very guys who were so sure of a dollar crash back in the fall).
Take a look and compare the current conditions to September 2008: the patterns are very similar. A break of the line that has contained the decline since mid-January could be the trigger for a short squeeze.
For the really big picture, here’s the whole history of the shaky script. I bet it ends up back to where it started:
It just occurred to me that the Euro is the only major currency that has never had any specie backing. It has always been purely the creation of technocrats and bankers. Poor thing never had a chance.
For most of the last couple of years, the non-dollar, non-yen currencies have moved with a remarkable degree of correlation. Priced in US dollars, over a multi-month time frame (and usually even minute-by-minute) there has been little difference between the Euro, the Canadian dollar, the Australian dollar and the British Pound. The correlations are not perfect, and they break apart from time to time (as when the pound had a relatively crappy summer and fall last year). The last couple of days have been terrible for the Euro (white) and its ever so slightly “harder” twin, the Swiss Franc (purple):
What to make of this? Well, I have no reason to think that the gap won’t be closed before long. Sentiment on the Euro is so negative that I still think a violent short squeeze is possible, especially if there is continued strength in the equity, commodity and other currency markets.
Another possibility is weakness or sideways behavior in the general risk trade, with the Euro holding a bit firmer than the rest. It is so oversold that something eventually has to give. Of course, as we saw with the dollar from August through November, oversold can become more oversold, but that was a decline of a different nature: a lower slope, with a stair-step pattern. The Euro has basically crashed straight down over the last two months. That pace won’t be sustained for very long without relief rallies like what we’re seeing this week in the other currencies.
As I write, there is some support on of their charts. We’ll see if they bounce or cut through — the latter would be all around bearish and may portend a little panic in stocks, etc.
Oh — and how about that Euro/Swiss relationship? How do you explain the Swissie’s moves by the Greece situation? The Swiss National Bank won’t be printing anything to bail out Greece, and in fact might be expected to print less, given their talk of intervening to attempt (foolishly and with no lasting effect) to weaken the CHF vs. their biggest trading partners’ script.
Ok, so the big banks are being taken care of. Whatever they need to stay afloat, Daddy Paulson and his team of merry “asset managers” will provide. But will Bernanke’s billions, hot off the presses, be enough to thaw the credit freeze? This speculator’s money says decidedly not.
Replenishing bank vaults is one thing. Lending is another. The former is a cinch: print money or sell bonds, exchange cash for crap, and voila, the banks are made whole again. To actually get that money flowing, you need creditworthy borrowers with good collateral to step in and ask for loans. With families and corporations struggling with the debt they already have, while their assets are dwindling, who out there is both worthy of credit and daring (or dumb) enough to ask for more debt?
Just like the olden days.
Deflation is largely about mindset, and there is nothing that can or should be done about it. Prices need to fall and habits need to change if we are going to stand on solid ground again. Fortunately, the shift comes instinctively.
This weekend, the front pages of the online editions of Wall Street Journal and the New York Times featured articles on how to economize in small business and household budgets, respectively, and the same theme is all over television. It is amazing how fast the spendthrift mentality is fading away. Are we going to see pot luck dinners and Mason jars make a comeback?
Image from villagekitchen.com
Here’s the Treasury Eurodollar spread again (Bloomberg):
And here is the VIX (Yahoo! Finance):
It is rare, to say the least, to see these warnings lights stay on for more than a day or two, and these levels are unprecidented in the crisis.
To crash or not to crash?
Short-term timing is the hardest part of trading. Sometimes you are offered opportunities with a 90% certainty of a payout (such as an overextended multi-week rally in a bear market), and sometimes it is a complete toss-up. To preserve your batting average, it is essential to go neutral for your time horizon if you don’t have a high degree of certainty. You don’t have to swing every time.
It will be very interesting how the markets resolve over the next few business days after the bailout becomes law. I made the call for an historic bear market and depression more than a year ago, and things are playing out so far without surprises, other than the rapidity of the government’s reflation attempts (which have been fully expected and will only worsen matters). It was a simple matter to see that the credit bubble would burst and drag down asset prices. It is also plain as day that the US equity market’s fall is not even a third over in value or duration. What is uncertain is the timing of the rallies and mini-panics that will continue to comprise the bear market.
Last Friday I noted the freeze in the credit markets and said that a crash (in my mind, roughly a 20% loss in a few weeks, punctuated by days like this Monday) was highly probable. Even though the market let out a lot of steam on Monday, it might have built it back up on Tuesday.
A major crash from here would still not surprise me, but neither would a multi-week or even multi-month rally. I have detected a lot of bearishness lately from people who were slow to catch on to the situation, and this makes me wonder if we have seen our sell-off for now. The market, of course, does the opposite of what the majority expect. Maybe the majority thinks that there will be a big rally after the bailout, or maybe they have finally become sensibly cynical.
At any rate, I will be selling any rally and covering shorts in any plunge, because after a plunge always comes a rally, especially at this early stage of a bear market.
Consider that the market dropped about 2.5% at the open, before the vote was on the floor, and that Europe had been trading down 4% before Wall Street even had breakfast. Stocks around the world were having an awful day this morning, even though almost everyone assumed the bill was a done deal.
It is unfortunate that the market hasn’t held up long enough for the bill to pass in one form or another, since today’s drop just gives the congress critters an even greater sense of their own importance.
This market is headed way down no matter what, due in large part to 100 years of stupidity and malfeasance from Congress (the Federal Reserve Act, FDIC insurance, Fannie and Freddie, etc.). Government enabled bankers to run bigger and bigger scams, until the whole debt-laden economy became a house of cards. So yes, Congress caused the market to crash.
Well, there you have it. Paulson got his 700 big ones (to start) but Congress is going to make him ask again for some of it (like they’ll say no). Executive compensation cuts? Well, deduction caps and no new golden parachutes for the biggest beggars. Equity? Well, warrants, and Paulson gets to say how many, what price, etc. Majority stakes only in some circumstances. Boy, Congress really fought this thing once it learned how its constituents felt.
Futures traders are just beside themselves (with apathy):
So, where do we go from here? As I have been saying, we still have a crash to take care of. Maybe it starts this week, maybe next week, maybe December, but a year from now the buy and hold crowd will be lucky if the Dow is closer to 10,000 than 5,000. This bill won’t do a thing to stimulate lending. We are just turning Japanese, without the exports or savings.
As a short, I won’t look this gift horse in the mouth. Paulson bought his buddies time to unload the remainder their personal securities, but the bailout also adds a few girders to bolster counterparties on the losing side of a crash. My biggest fear these days is that so many securities dealers could go broke at once that the Options Clearing Corporation can’t make up for bankrupt put sellers. That is my version of TEOTWAWKI.
So, are there no libertarians in financial crises? I railed against this thing, but the bankers make the rules in this new zero-sum game, or rather negative-sum game (wealth is going to money heaven). For those who stay in, it is every trader for himself.
Here’s a pdf of the full draft of the bill at it stands tonight.