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Baby Got Backs: John Taylor Sees A Race Not To One Bottom, But Two
A Race to Two Bottoms
September 23, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Borrowing a quote and an idea from Winston Churchill, we would argue that the current and future EUR/USD rate is “a riddle wrapped in an enigma inside of a mystery.” Why an ‘idea’ as well as a quote? Well, Churchill used this phrase to describe the Soviet Union, a conglomeration of states managed by an opaque bureaucracy that was challenging the global capitalist system. The Eurozone is surely more benign and not quite as opaque, but their ambition is challenging the global dollar standard, a critical component of the current global capitalist system. Churchill concluded that the Soviet Union would do what was in its national interest. That made Kremlin watching easier than understanding the interplay among the many power centers of Europe. As it is clear that the Eurozone does not actually have a national interest because there are so many nations involved and that the answer to this is a conundrum, the value – and the future – of the euro is extremely hard to predict.
So far this year, the euro has lost about 9 cents against the US dollar, but it has been strong lately, rallying about 17 cents from its low in early June. The euro has shown us two faces so far: the first is the disintegrating one that dominated the first five months, and the second is the tight-fisted one that is currently in ascendance. The recent effort at rehabilitation has been fostered by the horror of the first part of the year when things unraveled very quickly as the Greek liquidity problem rapidly morphed into a question of solvency not only in Greece but in several other Eurozone members as well. The fear of a general collapse of the “Euro-project” dating from the end of World War II, and encompassing the entire career of all leading citizens, was enough to drive these leaders together. Recent successful debt auctions have shown how effective this ‘fortress’ of European policy has been. All the bond auctions, no matter how risky, have gone swimmingly. Despite the fact that the rates paid by the stricken debtor countries will force them into defaults in the next five years or less, the European financial press has been mum. Realistic or probing analyses are branded as “evil.” Unfortunately for the citizens of Europe these high rate loans are driving the EUR/USD back up. Not only will this cost the deficit countries dearly as deflation takes hold and local businesses are hurt because of cheaper imports, but the German growth engine will sputter out as it loses its export markets. This strategy is guaranteed to drive Europe into an even deeper recession in the next six months (but you won’t read this in Europe). Living standards will drop sharply in the deficit countries as they fail to meet the targets set for them by the EU, ECB, and IMF. Latvia and Ireland have shown us the horrors that lie ahead. Although the EUR/USD should rise until the economy cracks, most likely the investing world will anticipate the next crisis beforehand. A strong euro now assures us of a very weak euro later.
The US is also following an aggressive strategy, but the Americans are pushing rates down, not the economy. By emphasizing money creation through Quantitative Easing (QE), the Fed has weakened the dollar while hopefully increasing the liquidity available to the real economy. Although the process of QE might have little impact on credit growth, the weaker dollar will help stimulate the domestic economy while holding deflation at bay. If the Japanese experience is illustrative, the recession will hit the US anyway and the bank balance sheets will shrink as well. When the next recession is in full bloom by the start of next year, at the very latest, the dollar will rally as the shortage of dollars impacts global business. With the Eurozone showing severe strains next year and the dollar in short supply, the EUR/USD will be on its heels again. Only with a much weaker euro will the Eurozone authorities be acting in what most would perceive as their national interest.
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Econoday sees consumer expectations and money supply as the two top reasons the leading indicators increased. Didn't we just see Michigan consumer sentiment plunge?
Highlights
The index of leading economic indicators jumped 0.3 percent in August largely reflecting, what was, a swing higher for consumer expectations. It's not what consumer expectations added to August, it's rather the huge amount they subtracted from July. What's ominous is that September's mid month consumer sentiment reading took about as a big a plunge as it did back in July.
The second biggest factor boosting August was a swing higher for money supply, something that may extend in future months given the Fed's focus on a second round of quantitative easing. And outlooks for many readings are positive including strength for the workweek, perhaps extending strength for building permits, and even perhaps, at least for the bulls, extending gains for the stock market. Jobless claims, though still high, appear to be coming down.
The report's coincident index has stalled, unchanged for the second time in two months and held back again by weakness in payrolls. Today's report is mixed, pointing to what the report says is little economic change ahead.
As it is clear that the Eurozone does not actually have a national interest because there are so many nations involved and that the answer to this is a conundrum, the value – and the future – of the euro is extremely hard to predict.
Well, nations within the Eurozone have national interests and under some set of conditions, being part of the Euro is not in their national interests. This will determine the fate of the Euro.
Not hardly as there are significant questions remaining as to IF there is actually a true sovereign of any sort remaining in Europe.
Well there aren't significant questions remaining as to which countries do the economic heavy lifting and are expected to shoulder the burdens created by others who also happen to look and speak differently. I'm guessing that tolerance for this kind of thing in places like Germany and France isn't unlimited.
Agreed. All of the evidence shows that voters in Germany and the States are well ahead of the politicians. Long live the Reichsmark.
Perhaps the old lines of communication are bringing the bigger issues to the fore with greater force. One example of this dynamic is to observe the level of interest in France regarding the perceived political and economic stability of Belgium.
Not hardly as there are significant questions remaining as to IF there is actually a true sovereign of any sort remaining in Europe.
A. True, but that includes the EU/ECB, leaving open the chance for the nation-states to reassert their soveriegnty. Brussels needed another 20-30 years to really pull off the morph that Washington did in the states.
B. Switzerland, arguably Norway, and Iceland if you regard it as part of Europe.
hmm We'll see. And the idea that having already cracked over tax avoidance issues the Swiss either do presently or will in future enjoy true national sovereignty given the ever greater cries for treasure elsewhere remains in doubt. As for Iceland & Belgium, you just have to love how the reassertion of micro imperatives are manifesting.
dup
Yes indeed as ass play knows no socio-economic boundaries. And as we appreciate here, Chez Shalom sets the lowest standard possible regarding ass play and their gold standard of shit soup sandwich.
From a velocity standpoint, Taylor is correct. I do believe that we'll see the Euro fall and does need to be near parity as the countries on the perimeter are suffering tremendously from an inflated Euro. I wish I was as sure as he is about the dollar rise due to lack of supply.
Tough making a bear case for stocks when market leaders are making fresh, new, world record highs....
That is, if you trade stocks for a living....
Exactly, hold on tight to your shares of Apple Robo. Everyone else sell.
If you have traded stocks for a living, then you know that trees do not grow to the sky. Even if they are apple trees.
perhaps he's discovered irony.
Does anyone else think that RobotTrader's computer is hacked by Leo these days?
Brilliant
If you want to see an even crazier chart check out LVS dating back to July...+50% gain. It makes the Apple rise look small :)
I presume you are holding your gold and silver charting and waiting for the next .00001% move down. Then you can post the last 60 milliseconds of the charts to show how they are tanking.
"the weaker dollar will help stimulate the domestic economy while holding deflation at bay."
what? turning the dollar into toilet paper is good for the overall economy?
what about real jobs? what about massive deficits and a government that is smothering the private section
As I recall, the best argument against the original adoption of the euro ran along these lines. The thrifty and responsible Danes, Dutch, and Bavarians would end up sharing a bank account with the Italian mafia and Portugese drivers (think NASCAR meets kamikaze).
The north/south split will destoy the Euro, just as the producer/parasite split will destroy the USSA. Gentlemen, start your engines and place your bets.
This is the problem in a nutshell, particularly if you work in the equity markets for a living. Torrid times for buy and sell side alike. People better get used to fixed salary not variable unless you're in the leveraged employ of the government through the TBTFs.
this is why i don't see how the economy of New York City can really make it out of its current crisis. There was a time when commissions were fixed but now "it's all about the leverage." Well...the government is eating up "all the leverage." While certainly better than the alternative "private leverage does not an economy make." There are "bailouts"--a viable alternative provided you can after "corrupting the entire process" still get the money. Challenging.
Good points. Writers have been predicting the demise of cities at least since the 1970's when remote terminals first became cost effective, but it never quite happens. On the other side, the often sensible Tim Harford (The Underground Economist) says people in cities are more prosperous because they are more creative than the rest of us. I would like to drag his ass around Detroit, Cleveland, Buffalo, etc. until he is disabused of that nonsense.
It does seem that the variety and depth of economic activity continue to contract in most cities. It's a trend worth watching.
I don't know. Maybe the differences in the eurozone are too great. Germany is too strong while others are too weak, like Greece, Ireland and Spain. The EU is an artificial construct with no central bank. Strong countries might not want to carry water for the moochers and the wheels come off. More riots and strikes in weaker countries will create pressure not to change. Management in Spain is committed.
http://www.ecb.int/
The Euro will out last the Dollar.
For details, ask FOFOA. It all makes sense to me.
Now, let's take a look at the architecture of the euro. In January of 1999 the euro was born. And if we go to this page on the ECB website, page 51, we see that plans for the euro began in 1962:
the euro also has its savings, its "official reserves," which are specified to be at least part in gold. At the beginning, in January 1999, they were 30% in gold bars. And they also legislated that this gold should FLOAT against the new currency. So, now, for 46 consecutive quarters they have religiously revalued their reserves – their savings – against the euro.
Now the "official reserves" consist of mostly dollars on the one hand (euros are not a reserve to the euro, only foreign currency and gold) and gold on the other. So by FLOATING these reserves (the "savings"), gold has risen to 60% and the (mostly) dollar portion has sunk from 70% down to 40%. And notice that they are "floating" their "hard money" against THEIR "easy money."
What do you think will happen to their "savings" (I mean "official reserves") when the claims on foreign currency (dollars mostly) default through currency collapse? Of course gold will rise! Will it rise more than 66%? In dollars that would be about $2,100. You think gold will exceed that when the dollar collapses? Will it exceed that value in euros? If it does, the euro's "savings" will rise, even without selling a single dollar! Dollar value will just disappear and reappear in the gold! A transfer of wealth, so to speak.
The $ will never die. It might simply get transformed as the CAD (hell, maybe even the MXN) add some support. Soon as countries start exiting the EU (not saying this will happen soon, but just as countries rushed to enter, the reverse will one day happen) its monetary powers will be diluted.
absolutely hilarious. The jokers who keep calling for the disintegration of EURO continue
ti rise.
I will again repeat.
EURO is not powering on its own merits. It is is China and only China which has buying euro. I do not have a newsletter to broadcast this but every single datapoint indicates the China hand in rallying EURO. As far as Germany goes, trust me the Germans export to US pales in comparison to their export to Asia esp China. So the strong EURO is to the dollar and to a much lesser extent to Asia.
And here is another shocker for the zero hedge guys. EURO is on its way to unseat the dollar from its cradle of reserve status next year. Once China completes diversification, EURO will shoot for the stars before the rest of the world shifts to EUROs.
Yes PIIGS will suffer but am not too sure EURO creators will care.
As Rothschild said "Give me the power to print money, I dont care who makes the law""
But then u guys were calling for Greece default? For EURO disintegration? Debt/GDP in france going over 80%?
Well seems there is something u guys missed as EURO shoots away.
Yes indeed. All we need now is the Holy Roman Emperor back in style and its off to the races.
And here is another shocker for the zero hedge guys. EURO is on its way to unseat the dollar from its cradle of reserve status next year. Once China completes diversification, EURO will shoot for the stars before the rest of the world shifts to EUROs.
If Germany pulls out of the Euro, the Euro is finished. China may try to incentivize Germany not to bail on the Euro but ultimately Germany will do what is in their best national interest. And just like with U.S. Treasuries, it is not inconceivable that China will be left holding the bag.
China will also be left holding the bag if/when the EU begins dramatically weakening the Euro, and since a weakened Euro will help both the PIIGS and the German exporters I imagine it will happen eventually.
This is just another example illustrating one simple truth: The current international trade regime does not work and cannot be made to work. Period.
Nations really only have two options today; become a domestic consumption suppressing predatory mercantilist state with a weak (weaker, weakest!) currency, or become a job-shedding, debt-building consumption junkie. The trouble is you can only be the former as long as there are plenty of the latter, but no one can afford to be the latter very long.
I think Rothchild came after the HRE. During the HRE needless to say the German's were pretty terrifying. I have been told the Rothchild bank is still in existence. It is today called "the World Bank" but I may be mistaken.
And here is a little bit of Biblical prophecy.
The US and UK are not mentioned anywhere even vaguely. Asia (incl Japan), EU, Shipping Countries, Gold Producers and of course Middle east along with heavens favorite, Israel are all clearly mentioned with clear roles. The 200,000 army from east marching to Israel will surely include China, India and the road way for such a journey has now been constructed (karrakoram Pass from China, India, Pakistan to Iran).
There is only one way such a scenario can be realized in the "last days" and that is by the gradual/sudden fade away of US and UK from world system. Such a thing is not too difficult to forsee given the cataclysmic load of debt that both nations carry. Now there are reports circulating about 2011 to be the year of severe austerity for US under the threat of one of its own rating firm threat to derate them. If austerity measures are implemented even to 5%, US social fabric will blow away and thus pushing it into a thrid world status. If austerity is not implemented, US debt will derated for the first time ever and it will still end in absolute and complete disaster for US as yields and CDS will fly through the roof. Greece part 2 will play out and this time there will be no bail out.
Shadowstats suggests that US GDP is bloated up by 30%. Can you imagine if this is true and it comes to light when US debt starts to get derated in 2011?
UK has nothing to save itself. It is a wasted country with no resources surviving on talks and boasts from its well sophisticated politicians. UK had a chance to survive by helpinjg Greece but they decided to stand pat and the ensuing statement from Germans "UK has played its destiny" indicates the anger. There is feeling that EU will stand aside as and when UK comes with the begging bowl which should not be far away given the precarious nature of its economy.
US,UK have very little standing between them and the fall into abyss. My own call is a combo of severe deflation and debt yield explosion as the trigger.
Returning to Bible, EU is set to rise. No matter what the analyst say and what the Germans say. If the bible says that in the end days there will be new roman empire, there will be a new roman empire. We already have the clear counters of it. EU rising. Obviouslu there are issues with it which is what the Bible too says "It will be a weak Empire". But note it will be an empire which means it will have world dominion. Greece was a pilot case for the EU to set its policies to test and execution. UK could be next as EU may force UK come under EURO if it needs help.
And then there is Asia. Bible is categorical. Kings of East will rise. We see that in China and India. Japan is coming out of a deflation of 20 years now clearly noted in YEN rise as well.
There it is laid out. For all those who care.
But for those who are comfortable looking at economic numbers, I dont think the situation is very different.
http://www.leap2020.eu/GEAB-N-47-is-available-The-Global-systemic-crisis...
Check the link out. Have been following them and they remarkably good and accurate. They suggest that EU-Asia trade will blossom and save the world from deflation while US, UK fall into the endless abyss of no return.
Really Tyler,where do you get them from?
"When the next recession is in full bloom by the start of next year, at the very latest, the dollar will rally as the shortage of dollars impacts global business."
"With the Eurozone showing severe strains next year and the dollar in short supply,..."
Are you serious?With a f*****g madman at the printing press in Bernanke the one thing there will not be a shortage of next year is freakin' dollars ffs!
The Europeans have one "national" interest : the EURO. We shall never surrender ! ;=)
The Euro is up 2 DAYS! All BS. Tomorrow it will be the dollar that goes up and it will be: THE DOLLAR WILL CRASH IN THE FUTURE!
You know what: The sun is up but it will go down also in the future just to rise again!
In all fairness, EURUSD is at its current level from 1.2 in a very short time.
This is all a prelude to the new "New World Currency", in which, when enacted, everyone will be crushed on both sides of the pond. I don't see it happening until one of the big developed countries blow up. It may just be Japan that starts the decline. They have kicked the can the furthest of any Country.
First of all look @ the oil price, not just a 'commodity' but the elixir of industrial/commercial life itself. Getting cheaper, you ask?
No, the world is getting poorer, what is happening with the euro is simply part of the race to ... what, exactly?
Germany swipes value from the European periphery which indeed drives the value of the Deutchmark (euro) higher. What's next? Who bails out Germany when the periphery is exhausted?
"the theory is that the dollars will make their way into the real economy." it appears the problem is "what is meant by the term real." this of course would include gold, silver...wheat? corn? this is what i mean when i speak of "the nuclear core" of an economy. of course by rights the Obama Administration can "bang away" all they want. As Colin Powell famously said to George Bush on the eve of Gulf War II "you break it, you own it." calling it a "double dip" just doesn't do it justice, does it? in short "i'd much rather be dealing with a broken Iraq than a broken USA." Needless to say "the movies coming out of New York these days are far from entertaining." I hear the music scene is pretty hot, tho.
That's not possible! BernankeAir has contracted with European subcontractors to supply helicopters and skid-loaded C-130s to deliver the needed cash. No problemo!
Happy Belated B-Day - RR. Thanks for the post yesterday on the e-bay coin prices. Amazing that silver coins get such a high premium. I'll have to check that out to see if it is a worthy arb.
I think the concept of the dollar shortage is predicated on massive defaults, which would essentially reduce the money suppoly. Not agreeing or disagreeing, but I've read the dollar shortage argument before, and that's usually what they predicate it on.
JT is one of the highlights of my week- sadly.
Great article again. Not the usual hasty analysis such as the zero sum US/China stuff.
Very dissappointing to see you do such a clear eyed analysis of the EU economy and then commit the very same errors you point out in others when analyzing the USA situation.
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