Greek Default Now Seems Inevitable; Watch the Euro

The WSJ writes in Waking Up to Greece’s Default Position :

Last week saw real progress in reaching a solution to the Greek, Portuguese and Irish debt crises. It is now recognized that these countries can never, ever, repay their debts, certainly not on time, and more than likely not in full. A default by any other name is a default.

Mish writes in his blog:

Untenable Timeline

Note that Roubini’s timeline is 5-10 years. The ECB an EU expect Greece to return to the dent markets by 2013.

Structural reforms or not, Greece will not pay back its debt in two years, nor will Greece return to a healthy bond market in two years.

Greece will default.

A few days ago I revisited the EUR/USD chart among other things:

… and the seemingly most hated currency in the world has also remained within it’s long term trading range, and it may be possible that once again it will show some significant strength for the months to come:

dollar-euro-trading-range-may-14-2011

That possibility seems more and more likely at this point …

Related Posts:

The Unstoppable Dollar Rally; Gold & Treasury Snapshot; The Great Depression 2.0 in Full Swing

The Dollar Rally

I will be focusing on the Euro/Dollar, but what I will be saying is not necessarily limited to the Euro, but applies many other currencies (except maybe the Yen).

The Dollar has now reached a 4 year high against the Euro:

dollar-euro-06-05-2010

Those who kept on talking about a Dollar crash from 2008 on where a bit late in the game. The Dollar crash, that was a result of expansive and inflationary government induced credit and monetary expansion with the naturally ensuing business cycle, has already happened through the 2000s. The Dollar has essentially bottomed out in April 2008.

Since then it has moved up and down, but up on the net. A trading range seems to be emerging that I expect we will continue to stay within for years to come.

Thus, my (and other people’s) predictions of a coming Dollar rally were essentially nothing but an expectation that the fundamental long term trend that began in 2008 will continue:

3% Bullish Sentiment on Dollar – Indication of a Coming Dollar Rally

Has the Dollar Rally Started?

Here is another thing from January this year that I dug up from my Campaign for Liberty inbox, it’s a response I gave to John Dennis who asked me why I expect the Dollar to go up (, and who by the way is running for Congress against Nancy Pelosi in San Francisco this year):

John,

I am sorry I haven’t been checking my C4L inbox regularly. I will follow it more closely now. Keep me posted about upcoming meetings if possible.

Reasons why I think the Dollar won’t collapse (against the other major currencies, that is):

  • The debt load in the US is rather crushing, the general direction of credit is currently a net contraction with upticks from time to time which by no means are changing the general trend
  • The major Dollar crash HAS ALREADY happened from 2001 through 2008, years of massive credit and money expansion, but now we are on the other side of peak credit
  • The true money supply growth rate is now coming down in spite of massive and futile attempts to reflate and to destroy the Dollar
  • The global debt pyramid is one that builds on the dollar, that means that in an environment of global delevaraging, people divest from foreign currencies and need to get back in the dollar before doing anything else
  • China is inflating to the tune of 30% money supply growth, I believe that were China to depeg the Yuan might crash
  • Bullish sentiment on the Dollar is at an all time low, I believe a few months ago it was at 3%! Everyone and their mother are predicting a Dollar collapse; this is a strong indicator for a massively oversold asset …
  • On a side note: All paper currencies move toward zero in the long run when measured against gold, but they fluctuate amongst each other on their way down, the US currency is a bad one, but that doesn’t mean all other currencies are being printed by saints

Time will tell what to expect.

I think is far as politics and this matter are concerned, Libertarians are opening themselves up to attack when they continue to predict a Dollar crash that may not happen anytime soon. On top of that, People can’t relate to the argument that says “what they are doing is destroying the Dollar”. Most people don’t get all the intricacies that are involved and tune out I believe.

We have so many better things to talk about that visibly affect everyone in their day to day lives.

Thanks for the interest.

Regards,

Nima

EconomicsJunkie.com

By the way: Good luck, John! Even though political action is futile, it would sure be nice not to have to see this pompous and terribly arrogant witch in the news anymore. :)

The Gold Rally

Those who predicted a dollar crash, thought it would coincide with a gold and soft commodity rally. And then there were those who said that a strengthening Dollar would make the gold price fall.

I have been saying again and again that I think strength in the Dollar may actually coincide with strength in gold and silver, while soft commodities and stocks will tank. Thus I responded to an article on Minyanville whose author predicted the Dollar rally but also expected gold to fall at the same time:

I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.

Gold is a money commodity. A dollar rally would be a sign of further delevaraging and deflation. During deflation cash is king. And gold is the king of all cash.

Here’s gold over the past year:

gold-06-05-2010

And here is gold VS oil (an example for a soft commodity) since the Dollar rally resumed:

gold-vs-oil-06-05-2010

This is important to understand: All fiat currencies move down against gold in the long run. This is completely inevitable. However, they fall at differing rates.

The Treasury Rally

What about Treasury yields?

treasurys-06052010

Flat since Dollar rally resumed. I expect the support to give way sooner or later. The way down is pretty much wide open then. On December 18th 2008 they dropped as low as 2.04% as the reality of Deflation was all to visible to everyone. Since then we have seen numerous efforts to bailout businesses and all the wildly unimaginative interventionist measures that already caused the Great Depression in the 30s.

People have been outdoing each other in calling an end to the recession and bureaucrats and central bankers have been lauding themselves about successfully preventing another depression. The funny irony is that they have in fact beautifully set the stage for The Great Depression 2.0 with all its unsurprising and predictable side effects …

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.

And here is Chief Clown Krugman, once again doing his duty in filling the role:

A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year.

Hmmm, I thought the government has solved the crisis with its heroic spending intervention? Why don’t we all just lean back and let that magic Keynesian multiplier do its work in getting us back on track? Why spend even more when the crisis has been solved, when Big Government has saved us, as Krugman himself proudly pronounced not too long ago?

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

One might object that this all makes perfect sense since Krugman is actually not an economist, but rather a propagandistic, dishonest, and filthy mouthpiece for any Democratic agenda you throw at him. But that’s not a very nice thing to say about this poor fellow so I would never go down that path … oh wait, I just did it, damn, sorry Paul! It’s just … could you maybe try to be a bit less predictable??

And yes I know I know, he goes on in there talking about how the situation remains terrible and how we must remain careful and bla bla bla, but that nonsense just doesn’t matter. He did lead his readers to believe that “big government saved the day”! He did say that we’re NOT going to have another Great Depression. That’s the essence of his message.

Here is a good discussion about it on yahoo:

The truth is, we’re seeing precisely the expected scenario in action, the Japanese model:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Reality is kicking in again. We’re slipping out of a small break we took from recession, and back onto the inevitable path. As a result of foolish government intervention we are now, once again, in worse shape than we were at them time the real correction was supposed to occur. And this is rather likely to be reflected in consumer behavior, and by extension also in Treasury yields.

China

An interesting side effect of the Dollar rally is what’s happening to Chinese exports. Since its currency is pegged to the US Dollar, the Yuan is strengthening against the Euro which is hurting the powerful Chinese export lobbyists.

This is yet another case for a coming Yuan devaluation against the Dollar, that I already talked about almost 1 year ago:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

– Global deleveraging is driving investors from other currencies back to the Dollar
Deflation hitting the US first, and other countries only later
– Imports into the US are falling rapidly
– Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

Bottom line: The supposed Yuan devaluation everyone seems to be expecting, were the Yuan to be freely floated, is simply not gonna happen!

That’s all I have to say for now. Have a good weekend everyone!

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Germany Leaving the Euro?

Well, first off: No, that ain’t happening. As much as I wished. At least not until the Euro completely falls apart. No other people consider the Euro their pet project more than German politicians.

Zerohedge posted something about rumors and a clip with a statement from Gregor Gysi, the head of the socialist party in Germany:

What he’s essentially saying is the usual communist nonsense about curbing evil speculation against the currency and in the end he says that “something will be decided on Friday and I have no idea what it’ll be …”.

But hey, there’s nothing better to distract people from the obvious issues than some fun rumors …

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EU Launches Frantic Bazooka – Euro Gives Up Early Gains

Europe Pulls Out Bazooka Part II in 3D

Since Euro countries are grappling with deficits, they are vowing to spend more money to fight the consequences of deficits, EU Crafts $962 Billion Show of Force to Halt Crisis:

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.

Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.

“A very thick line has been drawn in the sand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. “This is all in. What more could they have done?”

A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterday’s renewed bid to bolster the euro.

How to Pay

“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.

The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poor’s 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.

ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

‘Overwhelming Force’

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”

Merkel’s Meeting

As Merkel’s cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germany’s most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.

Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.

The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.

Can you imagine? Governments that have regularly broken commitments to cut deficits? Unthinkable!

One thing’s for sure, as I said over 1 year ago:

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

The Euro

What are foreign exchange markets saying? Here’s the Euro today:

euro

It rallied up as high as $1.31 on the announcement and has given up almost all those gains within a few hours already. This is volatility galore on the FX market!

This may be a result of frantic intervention on the part of the US, as the Federal Reserve opens credit line to Europe:

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone’s weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in “dysfunctional” markets.

The Fed’s action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

The Fed said action is being taken “in response to the reemergence of strains in U.S. dollar short-term funding markets in Europe,” and to prevent the spread of that strain to other markets and financial centers.

A so-called “swap” line with the Bank of Canada provides up to $30 billion. Figures weren’t provided for the other central banks. The arrangements are authorized through January 2011.

The debt crisis first erupted in Greece. Fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries. Eurozone ministers and the IMF this weekend approved a $140 billion rescue package of loans to Greece for the next three years to keep it from imploding.

The Fed had wound down these crisis-era programs with other central banks in February, along with other emergency programs to get lending flowing more freely again and return stability to financial markets. At that time, financial strains in the United States were easing, and the Fed began to take steps to move policy closer to normal.

It also had begun to lay out a plan to reel in the unprecedented stimulus money pumped out during the crisis. The Fed’s balance sheet ballooned to $2.3 trillion, more than double where it stood before the crisis struck. The program reopened on Sunday will expand the Fed’s balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.

It is doubtful whether these currency swaps have ever accomplished anything but a very very short term relief.

We hear European bureaucrats rail against evil speculators who are daring to question the stability of the system. This is all repetitive nonsense which we can shrug off with a smile. I have said before that a truly meaningful reform of capital markets would require that governments remove themselves from the equation, rather than becoming the only factor in that equation:

what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies  to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above  and many more evils would automatically go with it.

So long as people don’t make these simple connections, they need not be surprised about the same problems popping up again and again, with the same short sighted responses protracting the problems again and again, choking our productive capacity until the system comes to a painful halt.

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Imbalance Increases in Eurozone

Bloomberg writes Steinbrueck Says Euro States May Bail Out Members:

German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out cash-strapped members of the 16-nation bloc, going further than his counterparts in saying euro states can’t be allowed to fail.

“Some countries are slowly getting into difficulties with their payments,” Steinbrueck said late yesterday in a speech in Dusseldorf. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.”

Steinbrueck’s comments underscore mounting investor concerns as European nations pile on debt to bail out banks and counter the deepest recession since World War II. The EU governing treaty says member states aren’t liable for other members’ obligations.

While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a “very difficult situation.” The comment came in response to a question from the audience. Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.

The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

Euro Weakens

The euro fell below $1.26 for the first time since early December. The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt.

The Irish government is committed to restoring sustainability to public finances by 2013, the Dublin-based finance ministry said today in an e-mailed statement. At 41 percent of gross domestic product, the country’s debt is below the EU average of 60 percent, it said.

EU rules don’t “really constrain the ability of euro area countries to support one another during a period of exceptional stress,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note. “It’s hard to imagine that the region as a whole wouldn’t come up with a package of measures to support the individual economy.”

Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others.

There is nothing much that international groups can do. Please consider in particular IMF Running Out Of Cash:

Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world’s advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

Who will bail out the IMF? I little while ago I wrote about the disastrous balance sheet of the Federal Reserve Bank, and concluded with a question. Who will bailout the Federal Reserve once it needs help? The IMF? It seems like the IMF will need help first.

European member states needs to come to their senses. An absolute and unconditional abandonment of any more bailout talks is highly necessary. Member states need to consolidate their finances, cut spending, trim down their obtrusive bureaucracies and cut their unsustainable tax burdens. Germany, France, and Italy should be leading the way in these efforts. The European Commission needs to put an end to its disastrous policy of subsidizing agriculture.

Individual responsibility per member state rather than complete collectivism should be aspired. Unfortunately Europe has not been very keen on individual responsibility. In Germany, France, and Italy, all one can hear is rants about “neoliberalism”, “anarchism”, “capitalism on steroids” which supposedly are to blame for the financial crisis.

The sentiment in the US is not at all different. As the US economy continues its decline, Europe is unwittingly joining the bandwaggon.

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