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Our Two Cents – Week of 5/14/12

Rain, rain, go away. While Boston has been under rain showers for the past week, and recovering from the Celtics loss May 14, we drizzled some of the top headlines from the financial markets into this week’s roundup.

In the U.S. the economy continues to show signs of improvement. Jobless claims now stand at 367,000—1,000 less than last week, and job openings in March are the highest in almost four years, as employers advertised 3.74 million job openings. Additionally, economic confidence remains steady at -18, up slightly from the previous week and slightly better than the -20 average for the month of April.

In the eurozone, the German economy grew by 0.5 percent in Q1 2012 after it contracted 0.2 percent in Q4 2011. Economists predicted a growth rate of 0.1 percent, and some experts speculated Germany—the economic backbone of Europe—could help save the eurozone from recession. Macroscopically for the eurozone, economists predicted an economic growth of 1 percent for 2013, with the European Commissioner for Economic and Monetary Affairs Olli Rehn saying “a recovery is in sight” for the area. After Greece entered its second week without a government, the European Commission hoped the country would remain part of the eurozone, not withdrawing from the region and returning to its drachma form of currency.

For hedge funds, they saw an inflows increase of 1.24 percent so far in May, according to the GlobeOp Capital Movement Index.

• German Economy Grows Fast in Q1 2012 – 0.5%, Forex Crunch, May 15, 2012
• EU Commission wants Greece to stay in euro zone, Reuters, May 14, 2012
• Hedge Funds See Inflows Of 1.24% In May, FINalternatives, May 11, 2012
• Eurozone economy to shrink by 0.3%, EU Commission says, BBC, May 11, 2012
• US Jobless Claims Remain Low, Forex Crunch, May 10, 2012
• March job openings were the highest in almost four years, USA Today, May 8, 2012
• U.S. Economic Confidence Steady at Relatively Improved Level, Gallup, March 8, 2012

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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Conspiracy theorists typically sell their paranoid version of the world in tabloid newspapers, best-selling novels, and blockbuster movies, but it is unusual for such narcissistic drivel to make its way into the ‘dismal science’ of economics.  However, this is exactly what has happened over the last year, as Professor Hans-Werner Sinn, a renowned German economist and President of the Ifo Institute for Economic Research at the University of Munich, sparked a heated debate over the nature of the surge in so-called TARGET2 claims within the Eurosystem – an argument that has left those financial journalists and investment commentators who fell for Sinn’s hype with egg on their respective faces.

Sinn has drawn attention to a particular item on the Bundesbank balance sheet – “Other claims within the Eurosystem (net)” – that has grown from just €5 billion at the end of 2006 before the financial crisis began to almost €500 billion by the end of last year.  This observation – alongside a surge in the net liabilities of the peripheral countries’ central banks within the Eurosystem – has seen the economist argue that, “the Eurozone payments system has been operating as a hidden bail-out whereby the Bundesbank has been lending to the crisis-stricken Eurozone members via the Target system…”

Sinn is not done just yet and argues that the increase in TARGET2 claims at the Bundesbank is perpetuating current account deficits in the periphery, while crowding out credit to the German banking system, and exposes German taxpayers in the event of financial losses.  His arguments have proved too seductive for some, but, in reality, the spin is highly misleading in some cases, and, in others just plain wrong.

Before addressing the debate, it is important to outline what the TARGET2 system is and how it operates.  The TARGET2 system – the abbreviation for the Trans-European Automated Real-Time Gross Settlement Express System – is a payment system used for the cross-border transfer of central bank money between eurozone national central banks.

To see how it operates, suppose an Irish bank wishes to send a payment to a German bank.  The TARGET2 system reduces the Irish bank’s account at the Central Bank of Ireland, and generates a deposit in the German bank’s account at the Bundesbank.  The ECB acts as an intermediary in this process, whereby the increase in Bundesbank liabilities is offset by a claim on the ECB.  Similarly, the ECB has a claim on the Central Bank of Ireland, which has a claim on the Irish bank.

Before the financial crisis struck, TARGET2 positions were close to balance, as the large and persistent current accounts deficits in the periphery were easily financed by private capital flows.  However, once turmoil erupted in the financial markets and concerns mounted over the solvency of banking systems in the periphery, banks from Portugal, Ireland, Greece and Spain were effectively shut out of the interbank lending markets.

The scale of the capital outflow vastly exceeded the current account deficits in the periphery, and threatened a systemic event should the respective banking systems collapse.  The Eurosystem simply had to step in and provide unlimited funding to the periphery, which sparked the surge in TARGET2 imbalances.

These TARGET2 imbalances are a function of capital flight and not the current account positions in the periphery.  The notion that current account imbalances are being perpetuated via the TARGET2 system is simply not borne out by the facts.  The respective banking systems are engaged in a deleveraging process that has seen a sharp tightening of lending conditions, while the current account positions are improving across-the-board with Ireland even managing to return to surplus.

Sinn’s argument that this process is crowding out credit to the German banking system is also misguided.  It is true that German banks use of the ECB’s refinancing operations has declined in the recent past, but they are certainly not been crowded out.  The ECB is currently meeting the full amount of liquidity requested by banks, conditional upon sufficient eligible collateral.  Thus, the German banks are simply not in need of liquidity, which is hardly surprising given that they have been the beneficiaries of capital flight from the periphery.

Finally, the German taxpayer is no more exposed to financial losses than if the TARGET2 claims within the Eurosystem resided on the balance sheet of the Central Bank of Ireland.  The counterparty to the claims of the Bundesbank is the ECB and, losses incurred by the monetary authority are pooled and shared between all national central banks in the Eurosystem according to their respective ECB capital share or 27 per cent in the case of Germany.

Professor Sinn’s arguments are both misleading and dangerous given that his points have been bought by several financial journalists and investment commentators.  The folly in his thinking can be best demonstrated by considering what might have occurred had this funding not been in place.  The banking systems in the periphery would in all likelihood have collapsed and the strain on the single currency could well have proved unbearable.

The German economist is misguided and those who see conspiracy theories for what they are will know better.

Previously posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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­­Our Two Cents – Week of 1/9/12

With the first week of 2012 crossed off the calendar and the Iowa caucus in the past, the one word to describe the start of January—especially in the United States and European financial markets—is optimism.

The U.S. economy added 200,000 jobs, and its unemployment rate fell to 8.5 percent in December (from 8.7 percent in November). These figures paint an initially positive scene that the long-awaited economic recovery is finally making some positive strides. This good news comes on the heels of news earlier in the week about weekly jobless claims which have dropped to 372,000. Even though the holidays have passed, retailers and the economy also unwrapped a nice financial present. According to the International Council of Shopping Centers’ tally of 25 retailers, sellers collectively reported a 3.5-percent increase in monthly revenue at stores open at least a year. For November and December, retailers saw holiday sales increase 3.3 percent. While consumers were purchasing, hedge funds were gaining. In November, hedge funds raked in $3.6 billion in new money, according to BarclayHedge and TrimTabs Investment Research. Also, investors are confident about the 2012 hedge fund outlook, especially after they experienced a rough 2011.

In Europe, the markets rallied early last week, showing early signs of optimism after the previous year that saw economic chaos. To start 2012, Germany successfully auctioned its bond issuance by selling its 10-year benchmark bund. The nation sold $5.28 billion of the 2-percent January 2022 bund, its current 10-year benchmark paper, with bids reaching $6.52 billion. Successful bonds also found their way to the United Kingdom. British bond experts say U.K. government bonds—seeing record lows at the end of 2011—will remain as safe-haven assets, especially because the euro zone crisis hasn’t been solved. Experts say investors will continue to turn to U.K. government bonds because the country is able to control its currency and enact a monetary policy stimulus if needed.

• 2012 Hedge Fund Outlook: Investors Expect Bright Year After Stormy 2011 , Advanced Trading, Jan. 9, 2012
• U.S. Economy Gains Steam as 200,000 Jobs Are Added, New York Times, Jan. 6, 2012
• UK Bonds Boosted By Euro Zone Woes, CNBC, Jan. 6, 2012
• Jobless Claims Drop to 372K – Raising Hope for Lower Unemployment Rate, Forex Crunch, Jan. 5, 2012
• Retail sales picture shows gains after tough holiday season, USA Today, Jan. 5, 2012
• Germany Bund Auction a Success , Wall Street Journal, Jan. 4, 2012
• Hedge Fund Flows Swing Positive In Nov., FINalternatives, Jan. 4, 2012

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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­­Our Two Cents – Week of 1/3/12

The crystal ball atop New York City’s Times Square has dropped, champagne glasses have clinked and confetti has strewn—all signs welcoming 2012. As we said goodbye to a year that saw economic commotion, we greeted the new year with a refined sense of optimism for the U.S. and equal thoughts of hope for abroad.

Americans are more confident about 2012 after what they say was a less-than stellar 2011, according to an Associated Press poll. Nearly 70 percent of Americans said 2011 was a poor year because of continuing economic crisis, and 62 percent said they were hopeful for a more positive 2012. About 37 respondents said they saw economic improvements coming within the next 12 months, and almost 40 percent believed their personal financial situations will improve. Signs that the U.S. economy is starting to accelerate are already coming to fruition. Experts say an improving job market and increasing retail sales—especially in the past holiday season—are reasons for why growth in the U.S. economy may hasten even if conditions abroad aren’t replicated. Holiday sales during the week ending Dec. 24 ascended nearly 15 percent from the same period in 2010 to $44 billion, thanks to Christmas Eve falling on a Saturday.

While the U.S. conditions are rebounding, Europe’s markets are starting 2012 on the right foot. Italy’s FTSE MIB index is up nearly 1 percent, and Germany DAX is also up more than 1 percent. Yields in Italy are down to below 6.9 percent.

In the last few days of 2011, Italy’s Treasury paid significantly less to borrow money for six months than it did a month ago, restoring some senses of economic confidence. Even though Spain has slipped into recession, the country’s inflation has eased much more than expected in December to its lowest level in 13 months. Inflation rates also relaxed in Germany for the third straight month.

Speaking of Germany, it received the highest mark on the Bank of Montreal’s economic report card of the world’s most important economies in 2011. The nation earned a score of 89.2 because of its 2.5-percent inflation rate, 7.1-percent jobless rate and 1.2-percent budget deficit. Greece closed the list at No. 12 because of its 3.2-percent inflation rate, 16.6-percent jobless rate and 5.9-percent budget deficit. The U.S. earned the No. 6 spot for its 3.2-percent inflation, 9-percent jobless rate and 10-percent budget deficit. The bank based ratings on low inflation, low unemployment and low budget deficits.

The year 2012 also observes the 10^th anniversary of the euro. While some individuals blamed the euro for causing Europe’s economic meltdown, the monetary unit could become the world’s leading single-currency alliance if leaders can succeed in tightening fiscal integration, according to one official from the European Central Bank. ECB policymaker Christian Noyer said if European officials can implement the actions from the Dec. 9, 2011, emergency summit, the union will emerge stronger.

• 2012 Is Starting Out Hot: Markets In Rally Mode For Second Straight Day, Business Insider, Jan. 3, 2012
• Euro could become world’s leading currency: Noyer, Reuters, Dec. 31, 2011
• Growth in U.S. May Accelerate Even as Europe Shrinks, Bloomberg, Dec. 30, 2011
• AP poll: Americans more optimistic about 2012 after downbeat 2011, Los Angeles Times, Dec. 29, 2011
• Retail sales resilient in final holiday stretch, Reuters, Dec. 29, 2011
• Italian Funding Costs Slide , Wall Street Journal, Dec. 29, 2011
• This Is How The World’s Most Important Economies Stacked Up In 2011, Business Insider, Dec. 28, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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The seemingly endless turmoil in the euro-zone virtually ensured that 2011 would prove to be a difficult twelve months for investors in risk assets.  Indeed, the increased stress evident in the region’s sovereign debt and bank refunding markets in recent months – alongside growing concern that the single currency might unravel – is the primary reason that the developed world’s major stock market indices failed to stage a meaningful recovery off the cyclical bear lows registered in the autumn.

Stock markets climbed higher during the spring and managed to retain their positive momentum in the face of higher oil prices – precipitated by political unrest in the Middle East & North Africa.  However, the heightened appetite for risk struck a speed-bump towards the end of April, as a long string of negative economic surprises in the U.S. – just as the Federal Reserve’s second round of quantitative easing neared an end – caused fears of a double-dip recession in the world’s largest economy to resurface.

Stock prices in the developed world and elsewhere duly registered a bear market decline of more than 20 per cent but, just as investors’ recession fears subsided and the world’s major bourses began to stabilise, attention shifted across the Atlantic to the deteriorating and seemingly hopeless position facing the Greek government, which had seen its economy plunge into a severe downturn on the back of the harsh austerity programme prescribed by the so-called troika.

The Greek crisis and the turmoil precipitated across the euro-zone prompted Europe’s slow-moving leadership into action, who reluctantly announced to the world in September that they had just, “Six weeks to save the euro.”  The disturbing rhetoric was duly followed by the fourteenth summit in less than two years and, the third comprehensive attempt this year alone, to quell the rumbling debt crisis that continues to question the viability of the region’s monetary union.

The proposals agreed to at what was dubbed the, “summit to end all summits” were received enthusiastically by investors at first glance but, upon further reflection, the measures were deemed to fall well short of what was required to draw a line under the crisis.  A wave of selling followed and, the stress that was once confined to the sovereign debt markets of the miscreants in the monetary union’s periphery steadily moved inward to infect the core, and even a supposedly blemish-free Germany did not manage to escape investors’ wrath.

The tension continued to mount and the growing sense of panic among the international community was palpable as the realisation that a disorderly break-up of the single currency could no longer be considered a trivial probability dawned on observers.  Not surprisingly, all eyes were focussed on the latest gathering of the European Union’s political elite in Brussels towards the end of last week.

The latest summit to save the euro appeared not to disappoint and delivered much as expected – with much of the detail well flagged days in advance – and, as a result the financial markets’ initial response was relatively mute but, two days of analysis over the weekend and investors delivered a more considered verdict – the summit had failed to move the euro-zone even one step closer to a successful resolution.

The summit’s proposals reveal that the EU’s political leaders remain in denial or are blind to the true nature of the crisis that afflicts the euro-zone and, until the politicians awake from their slumber, the odds of a successful conclusion to the sorry episode is still not much better than a coin toss.

The EU’s leadership continues to believe that profligate government spending among the euro-zone’s periphery is the central problem and, insist that fiscal austerity is the only path to future stability.  With this in mind, the summit proposed that euro-zone members adopt constitutionally-binding debt brakes requiring states to maintain balanced budgets, defined as structural deficits of no more than half a percentage point of GDP.

The idea that the euro-zone’s woes simply reflect fiscal mismanagement is simply not borne out by the facts.  Indeed, before the crisis struck, only Greece and Italy showed government debt ratios that were well above the Maastricht limit of 60 per cent, while both Ireland and Spain sported public debt fundamentals that seemed to be comfortably below the danger zone.

The euro-zone’s periphery came unstuck because large private sector deficits led to unsustainable external imbalances that had to be financed in a foreign currency – namely, the euro – since member states had given up their currency sovereignty upon admission to the single currency.  This meant that euro-zone countries with persistently large current account deficits and dangerous levels of foreign debt as a result, were vulnerable to a sudden reversal in capital flows.

Put simply, euro member states are users of currency rather than issuers of currency and, as a result, must obtain euros to meet international payments as they fall due.  The euros required can be obtained through exports, borrowing or asset sales.  However, the euro-zone’s periphery increasingly relied upon the willingness of member states with current account surpluses to finance their deficits.

The music stopped once the global financial crisis struck and, in many cases, the external deficits were effectively nationalised by government in an effort to prevent an economic meltdown.  Not surprisingly, fiscal deficits and government debt-to-GDP ratios subsequently exploded.

This fact seems to have gone unnoticed by Europe’s leadership, who continue to pursue the fiscal austerity route.  Those of a bullish persuasion will argue that the constitutionally-binding debt brakes are a welcome step on the road to an eventual crisis resolution.  However, the measure simply enshrines pro-cyclical fiscal adjustments in the currency union’s struggling member states, without any countervailing transfers from a central fiscal mechanism akin to that which exists in the United States.

Signing up to this deal is nothing short of economic suicide, as member states are effectively being asked to adopt contractionary fiscal policy when a recession strikes.  The downward pressure exerted on the economy under such an approach could only be overcome by higher domestic consumption and investment or a trade surplus.

The former would be most unlikely since the private sector is already heavily indebted across the periphery, while the latter was not adequately addressed at the summit.  Simply put, the chronic current account deficits in the periphery are the mirror image of the surpluses in the core and, these imbalances must be considered in any attempt to resolve the crisis.

The current approach is designed to make matters worse and all the more so, given that the member states issue debt in a foreign currency and have no credible central bank backstop.  The deal to save the euro does the exact opposite and, if implemented, would hasten the single currency’s demise.  As a result, financial market stress is virtually certain to continue in 2012.

As Otmar Issing, the prominent German economist once noted, “There is no example in history of a lasting monetary union that was not linked to one State.”  Investors take note.

Previously posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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Mirror, mirror on the wall, what’s the fairest currency of them all? The Brothers Grimm in “Snow White” posed that question about the queen’s beauty, but in the financial world, Germany’s Deutsche mark had been one of the strongest and handsomest monetary units in the land.

As the euro zone crisis continues, German Chancellor Angela Merkel and French President Nicolas Sarkozy have issued an ultimatum to the 27 European Union governments, saying they need greater control of their national budgets by Dec. 9. If countries don’t participate, the 17-member euro zone will progress with plans for amendments to fiscal treaties aimed at creating a tighter and more integrated union. While Germany spearheads reforms, Standard & Poor’s warned that credit ratings for European nations, including Europe’s economic powerhouse of Germany, could drastically fall if agreements to the financial crisis aren’t reached.

A history dating back to 1871, the Deutsche mark’s official user is Germany, with unofficial users Bosnia, Montenegro and Kosovo. This is our fifth post in our series about “currency culture,” where we examine the history of different world currencies and how they play a role in popular culture (see our previous posts about Britain’s pound sterling, Italy’s lira, Switzerland’s franc and Greece’s drachma). With an introduction as melodic as Ludwig van Beethoven’s Symphony No. 9, here are some interesting facts about the mark:

• Commonly called the “Deutschmark” in English; called the “Mark” or “D-Mark” in German
• Introduced June 20, 1948, by Ludwig Erhard, late chancellor of Germany, and replaced the Reichsmark
• Symboled as “DM”
• Banknotes of DM 5, DM 10, DM 20, DM 50, DM 100, DM 200; coins of 1 pf, 2 pf, 5 pf, 10 pf, 50 pf, DM 1, DM 2, DM 5, DM 10
• Deutsche Bundesbank, the central bank of Germany, is referred to as “Buba” (from Budesbank)
• Banknotes observe notable Germans such as fablers Jacob Grimm and Wilhelm Grimm, writer and novelist Bettina von Arnim, scientist Paul Ehrlich, naturalist Maria Sibylla Merian and mathematician Johann Carl Friedrich Gauss
• Construction costs of Neuschwanstein Castle—the inspiration for Disneyland’s Sleeping Beauty Castle—during the lifetime of King Ludwig II totaled 6.2 billion deutsche marks
• Signal Iduna Park, considered to be the “Opera House of German Football,” has an estimated price tag of 35 million deutsche marks
• Deutsche Bank is a leading global investment bank in Germany, Europe, North America and Asia and title sponsors the professional golf tournament Deutsche Bank Championship held Labor Day weekend in Norton, Mass.
• Taxi fare from Berlin Schoenefeld International Airport to the city of Berlin costs about 60 to 70 deutsche marks
• Costs zero deutsche marks to enter Oktoberfest, the most famous event in Germany and the world’s largest fair (the beer, however, is not free)

Like a Mercedes-Benz, we hope these facts “mark” some new luxurious currency knowledge as your drive to master the financial markets continue.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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Major activities in the euro zone economic crisis, including proposed amendments from European leaders and austerity packages from Italy, topped our transaction of the biggest currency markets headlines.

France and Germany spearheaded negotiations about new fiscal plans for the 17-member euro zone, issuing proposed amendments to Europe’s governing treaties to provide better economic governance to nations. Meeting at Élysée Palace in France, French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared proposals they would deliver to the full European Union Dec. 8. Some proposed amendments include automatic penalties for countries that exceed European deficit limits as well as the creation of a monetary fund for Europe. Sarkozy said he hoped the treaty changes would be ready for ratification as early as March 2012.

On Dec. 4, Italian Prime Minister Mario Monti unveiled for his country a 30-billion euro austerity package, which includes raising taxes and the pension age, in hopes of harnessing the euro zone crisis. He said the package was painful, but important, as he also renounced his own salary as prime minister and economy minister. Late last week, Sarkozy spoke to French voters about the economic slowdown and rising unemployment. His speech came on the heels of remarks from European Commissioner for Economic and Monetary Affairs Olli Rehn about the euro zone entering a “crucial” 10-day period. During this time, nations must focus on building “convincing” financial protections and tightening economic governance, as Sarkozy and Merkel have outlined.

While Italy, France and Germany devised reforms, Greeks returned to simpler ways of life. Because of Greece’s debt, many inhabitants have defaulted to bartering. In the small fishing village of Volos, which is about 200 miles north of Athens, many residents have been buying and selling goods from each other and vowing to neighbors during harsh economic times. In the United Kingdom, the British pound sterling emerged as a safe haven for investing because demands for British government bonds rose. Investors also turned to the pound sterling because it was up 2.1 percent against the euro since early September.

Across the Atlantic, the United States saw some signs of hope for jobs. According to the U.S. Labor Department, unemployment dropped to 8.6 percent. In November, 120,000 jobs were added, up from 100,000 from October. The good news was that the American economy grew, even though conditions abroad waned. But what weren’t waning were the wallets of some Connecticut hedge fund managers who won a $254-million Powerball drawing. The three winners pocketed the state’s biggest lottery ever and have donated some of the money to people in need.

• Sarkozy and Merkel Push for Changes to Europe Treaty, New York Times, Dec. 5, 2011
• Italy PM unveils sweeping austerity package, Reuters, Dec. 4, 2011
• Signs of Hope in Jobs Report; Unemployment Drops to 8.6%, New York Times, Dec. 2, 2011
• All Eyes on Sarkozy Speech as Euro Zone Pushes for Grand Plan, Wall Street Journal, Dec. 2, 2011
• For a Sterling Play, Look to the U.K. , Wall Street Journal, Dec. 1, 2011
• Modern Greeks Return To Ancient System Of Barter, NPR, Nov. 30, 2011
• Hedge Fund Managers Win $254M Powerball Drawing, FINalternatives, Nov. 29, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The first golden age of globalization that spanned more than four decades from the late nineteenth century onwards, came to a shuddering end on June 28, 1914, when an unknown Serbian, Gavrilo Princip, forged himself a permanent place in history, when he assassinated Archduke Franz Ferdinand, the heir to the Austro-Hungarian throne, in Sarajevo.  The actions of Princip and his ‘Black Hand’ revolutionaries precipitated a war across the European continent that achieved little but the deaths of countless fighting men.

Unfortunately, the so-called ‘war to end all wars’ did not match its billing and, the conditions enshrined in the Treaty of Versailles and, subsequently imposed upon a defeated German nation, virtually ensured another depressing chapter in Europe’s bloody history.  Needless to say, the harsh programme proved self-defeating as, a downtrodden people in their search for leadership amid the chaos, propelled Adolf Hitler and his henchmen to power.  There is no need to expand on their drug-fuelled exploits.

Fast forward to today and the roles have been reversed.  The Germans, under the helmship of Chancellor Angela Merkel, wish to impose their will upon the rest of Europe but, what is demanded is neither achievable nor desirable given the unacceptable social costs.  One need look no further than Greece to see the destruction that is a direct result of the austere policies imposed by the troika and endorsed by Merkel – the outcome, it is fair to say, is a failed economic state.

The demands placed upon Greece were never likely to work and basic arithmetic said as much.  A high marginal propensity to consume that is moving lower as desired savings rates edge higher, combined with a low marginal propensity to import and uncompetitive export base means that the aggressive fiscal consolidation was doomed from the outset.  All told, the medicine prescribed has killed the patient.

The world’s capital markets will move on of course and, investors will almost certainly have Portugal in their sights, as the deep-seated problems in that economy don’t look much better than Greece.  Meanwhile, Ireland has decoupled from its troubled brethren in the euro-zone and not simply because of any public sector achievements but, a return to current account surplus and less dependence on foreign sources for financing.

Be that as it may, the turnaround in the Irish situation is wholly dependent on no recession across the euro-zone from here to infinity.  Non-financial private sector debt as a percentage of GDP accumulated to obscene levels in this country, under the watchful gaze of those who should have known better and, still remains off the charts compared to the rest of the developed world – despite the aggressive deleveraging that has already taken place.

Unfortunately, a European recession is almost certainly written in stone at this juncture.  Dithering by policymakers, who seem incapable of distinguishing between liquidity and solvency crises, has undermined market confidence to such a degree that the resulting financial market stress is almost certain to produce the dreaded double-dip.  More to the point, recent data releases all suggest as much.

A further downturn in economic activity, before the region even comes close to recovering its pre-recession peak, could well put an end to the European project.  Even before a recession is considered, back-of-the-envelope calculations indicate that Greece will not recoup its lost output for ten years and, both Ireland and Portugal should not expect to see expansion from former glories until the second half of the decade.

Of course, those predictions are predicated upon a ‘softly-softly’ upward trajectory in each individual economy’s fortunes.  It is safe to say that such an approach rarely matches the subsequent reality and, will ultimately prove to be fantasy in the context of an all but certain downturn.

The crux of the matter is not a renewed downturn of itself but, the unacceptably high levels of unemployment to begin with and, particularly among the young.  The latest reading on unemployment rates across the euro-zone is hardly pleasant reading at ten percent but, youth unemployment can be described as nothing less than a social tragedy and, fiscal consolidation programmes across the region as endorsed by Germany, will almost certainly make matters worse.

Digest the numbers but be warned, they are not pretty.  The latest readings show that the highest rate of youth unemployment begins with Spain at 45 percent and, then Greece at 43 percent. Ireland, Portugal and Italy hug closely behind with levels close to 30 percent.  No matter what economic leaning one comes from – left or right – these numbers are unacceptable.

The euro stands at a crossroads but, no matter what is accepted by the yellow-bellied politicians that yield to German demands, nothing can escape the fact that such prescriptions have already delivered one failed economic state.  Be warned, Ms Merkel, Europe’s future may well be decided on the streets.

Previously posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

There is nothing more telling that something has gone mainstream than seeing it as a skit on SNL. Facebook movie, Martha Stewart imprisonment, airport security scandal – pick the topic and if it’s hot, it’s been exposed in an often crass and typically hysterical way, on SNL.

I am moderating our Plight of the PIIGS panel this week with esteemed panelists Charlie Fell, Jamie Coleman, Bob Iaccino, and Spencer Beezly, and it reminded me of the Strauss-Kahn Eurozone Crisis skit that SNL opened with back on May 21st.

It depicts ex-IMF chief Dominique Strauss-Kahn at Riker’s Island. In the skit, two other inmates talk about their feelings about the eurozone crisis including their views on what Germany needs and why Spain needs something different. I won’t spoil the fun for you – watch it for yourself.

While it’s a great parody and made for a good laugh, it also amplifies the dire and desperate situation we face in the eurozone. I am looking forward to Thursday’s webinar and to hearing what the panelists have to say about what’s next for the eurozone. Be sure to tune in for what promises to be a lively debate.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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This week has seen the markets calm somewhat as Trichet soothed the short term traders with upbeat comments, and avoided putting his foot in it as he did in the previous months ECB press conference. However, whilst there was little else he could do but talk up the Euro, the economic and political headwinds suggest that little has changed. In fact, the lack of the Central Banks realization that debt deflation and not inflation is the problem moving forward, and the German political reluctance (understandable) to bail out the rest of Europe, means that the Euro’s woes can reignite at any time. As mentioned previously, the devaluation will benefit Germany the most as has been seen by the beginnings of impressive export numbers. Unfortunately it has come far too late in the cycle to help the more struggling nations, even allowing for the fact that devaluation is simply a one off benefit. This can be seen in the U.K’s poor manufacturing numbers this week. The sudden reversal from Government spending to huge cutbacks will see the Euro zone slide back into recession in the 3rd and 4th quarters. More worrying still, is the fact that the ECB is likely to continue to resist an aggressive policy of quantitative easing in such an event. It can be rightly argued that even if they were to embark on such a policy it is now too late. Yields of Government debt remain elevated outside of Germany and with the economic slowdown almost inevitable in the peripherals, it could be viewed as throwing good money after bad.

This brings me to the proposed Bond EU 700 billion loan guarantee announced last week. I won’t repeat the details but one part stood out above all others. The vehicle for the process will be a “Limited Liability Company”. The last time I checked the whole purpose of having a limited liability was it meant you could walk away from those liabilities. It hardly inspires confidence and suggests that it is simply an exercise in trying to massage perceptions in the hope that you don’t actually have to do anything. Professional colleagues I have discussed this with all came to the same conclusion that it was simply smoke and mirrors. Any sign that that stresses are rekindling will in all probability see the fragility of such a program made starkly clear.

So what does it mean for the Euro? A have little interest in either a politician or central banker talking a market up, as this usually simply provides opportunities for day traders. It does nothing to address any of the big issues. Therefore, whilst the Euro/Dollar stays below 1.2265 it is under pressure in the short term, whilst on a more structural play, a long term decline through the second half of the year is the most probable outcome.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.