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Unscrambling the Euro Eggs
On April 17 I wrote about a conversation (link) with an individual who lives in Athens. He had this to say about the coming Greek elections:
“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid will have to change.”
He also said this:
“The attitude in Brussels and Bonn towards Athens will change after the election as well!”
He had that right, so I called him back to get an post-election update.
BK: Is it true that you will soon spending Drachmas?
Athens: This seems to be the only possible outcome. Germany will no longer support Greece, neither will the IMF.
BK: What would the new Drachma be worth in Euros?
Athens: Far less than the rate that was used to convert Drachma to Euros in 2001. At least 50% less. For Greece, the exchange rate for the Euro will be the key, but you can’t forget that the Drachma will also have a new exchange rate for the dollar.
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Greece joined the Euro in 2001 at a fixed conversion of 341Greek Drachmas to the Euro (EURGDR). In the period preceding the link, the USDGDR was 328. Assume the Drachma floats freely and promptly loses half of its value versus the Euro. The market rate would be EURGDR 682. If the EURUSD was trading at 1.3000 it would mean that the USDGDR would be 568. The GDR would lose half its value against the Euro but it would only lose on 37% versus the dollar. I asked the fellow from Athens about this:
Athens: There is the proof. The Euro is too high against the dollar.
I thought that was an interesting comment. I went back and looked at the original conversion rates to the Euro for France, Italy and Spain and compared them to what the USD exchange rates would be today:
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The +11% results for these countries versus the USA looks wrong to me. I considered what the local currency rates would be if the Euro were lower in value versus the dollar. A rate of EURUSD 1.20 still doesn’t get it done for me. It starts to “look right” with the EURUSD at 1.10
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If the Euro were to be broken back into its original pieces, the old legacy currencies would trade around the Deutche Mark (DM). It is a very safe bet that if there was a free float of the currencies, the DM would increase in value versus all of the other EU members. It’s an equally safe bet that the USDDM of ~1.67 that was posted on 12/31/98 (last day of the DM) is going to also be much weaker (DM strength).
If the DM is going to make a comeback it will create a very nice new reserve currency. Money will migrate from both Switzerland and Japan to a different “safe” place. It will end up in Frankfurt. These are my estimate for what may happen:
USDYEN = +10%
USDCHF = +10%
DMYEN = +30% (1999 to date)
USDDM = -40% (1999 to date)
USDDM = Parity
DMCHF = Parity
DMFF = +15% (1999 to date)
DMLIRE = +20% (1999 to date)
DMPESETA = + 40% (1999 to date)
DMDRACHMA = +60% (2001 to date)
DMESCUDO = +50% (1999 to date)
DMGUILDER = +10% (1999 to date)
Of course these are just estimates, but I think the directional moves I describe will take place. The issue is how long it will it take and how violent the markets will be. On that score, I would estimate that it would take at least a year for these adjustments to take effect, the process of making these adjustments will be very violent indeed. One thing is clear to me, Germany is going to take the brunt of the adjustments that must follow.
The Germans are going to get hit from all sides. Its currency will rise against all the EU countries, it will rise against the Dollar and the Yen. This reality is the reason that Germany has done what they have to avoid a breakup of the Euro. I don't think they can avoid the consequences much longer. Germany is now stuck between a rock and a hard place.
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"Who Governs Greece Right Now?" http://www.keeptalkinggreece.com/2012/05/10/who-governs-greece-right-now/
Greeks are saying "Screw austerity but keep giving us money or we'll shoot the Riot Dog."
The whole world is scrambled let alone Europe. Is there any place left on the planet where there are no broke governments or crooked bankers? Is there a place where there are either no vacant homes or no homeless people? Is there a place where everyone who wants a job can get a job? Is there a place where leaders send their children to the battlefield alongside those of the lower class?.......Hmmm, I thought so. This is a scrambled omelette using rotten eggs.
Nobody that I know liked the EUR when it was introduced. Prices on everything went up sometimes double.
The only winners were the elite and their banking buddies as we can all see now. Greece's political uproar is just a precursor of what is to come in all other European nations. The people are realizing that they've been pawned and guess what, they don't like it.
This discussion on exchange rates against USD or DEM (what is GDM?) is pointless when half the continent is engulfed in politically motivated uprisings and the other half stuck in political quagmires.
you dont know me but i loved the euro. buying real estate in europe in the 90s gave me an instant premium in usd terms. added to the appreciation of the asset over time i have made a handsome profit.
Should have clarified that nobody in EUROPE liked the EUR or anything that the EU bureaucrats have served us thus far.
The EU and all the utopian set of rules that came with it have never convinced people's hearts.
When the EUR falls, so shall the EU and all the legislative and judicial institutions that came with it.
Uniting 500 million people with 20 or more different cultural backgrounds, languages, traditions etc. was a DREAM.
That dream has died. It culminated in the creation and introduction of the EUR and it went downhill from there.
the euro dream is a political union, not just an economic one. there is simply too much at stake to balk at bailing out the PIGS in the short term. they will continue to print money just as the us has until the fire is extinguished. the union wil survive but we will all be poorer thru the upcoming wave of inflation that will literally kill millions.
the only solution as an investor is to buy real assets that yield real income. its not a fluke of nature that ABS funds AUM are sky rocketing. ask any HF manager what he wants to do next if he had longer money and they wil all answer that they want to lend money against assets. fail to repay? no problem, they will own your asset and re sell it.
its time to remember that stocks are risky. its time to be defensive. and shorting the euro on the basis of this analysis is like burning your neighbors house hoping that les supply will make your home worth more.
i think this just proves why germany wil continue to bail out europe. a stronger DM kills exports period. how many of us would buy a BMW if they were 40% more expensive? as good as they are at engineering, consumers will buy cheaper cars.
holding your breath in a fire seems like a bad long term solution unless its your only choice.
DM strength would be mitigated through the massive printing needed to bail out it's banks
And pension funds, and insurance companies. Germany sold a lot of nice stuff on credit, credit which will not be paid back, or will be paid back pfennigs on the deutchmark.
Meanwhile, the demographic python in that country is in for a horrid big lump to be passed.
The load of mostly smug aging bastages and beyotches in that lump are expecting pensions, and health care for their many ailments, not more work to do and shrinking checks.... I say "smug" because they think their system of pensions is superior to, for example, the American case of pensions that are at risk from default by the companies, whereas supposedly the government guaranteed pensions are a sure thing.
The big problem is of course that the python has been eating sparsely (low low low natality in Germany for decades) so there aren't enough healthy, ambitious, working age people to turn the crank of all the productive infrastructure, machines and capital they've got (mal)invested domestically. GERMANY IS GOIN' DOWN TOO. Their mercantilist vacation from history is OVER.
Everyone things Germany is the strong horse in Europe, the real deal amongst a sea of relative productivity posers. Nein.
Real civilisations also reproduce themselves, i.e. create new human capital at a regular pace. Germany? FAIL, big time.
Viable civilisations also get those young people working, i.e. motiovated intriniscally to work and take risks, in their 20's, as opposed to lazing about in interminable schooling and very paced training opportunities, with 32h jobs to perform once they get done with that. FAIL FAIL FAIL.
This is all going down. Demographics is destiny, bitchez.
http://www.democracynow.org/2012/2/22/as_greece_erupts_bbcs_paul_mason
"The financial markets at the moment are focused on Greece and Europe. At the moment that is solved, they will focus on your country, because you are $14 trillion in debt, and there is doubt about whether your institutions can one day deliver the austerity that those financial markets will demand to make that debt stable"
Right, because Germany will be so healthy after its trading partners default en masse on their debt to its banks, pension funds, insurance companies, and central bank. Riiiight. Ditto for France, but squared.
quite right! the US Peso is hardly a bastion of economic moderation and fiscal prudence. the fate of the US Peso is in the hands of the Chinese and frankly i have little faith that Chinese objectives are benign.
The Spaniards got screwed too when the euro came to town. I remember being in Madrid when it happened. One day a beer cost 100 pesetas, the following day it cost 1 euro, 167 pesetas. Enough to make a man stop drinking.
Fixed it for ya! ;-)
Bruce - Solid analysis...only you left one thing out. Where is the universal currency, Gold, priced within your scenario?
It's an important question because one must forecast if inflation (commodity based) becomes a real issue with the new currency alignments.
Who cares what the relative value of the currencies are if it takes a barrel full of the fiat to buy an IPad...ahem.
So, if you're a Greek why wouldn't you want to take every last cent out of the bank right now and convert it into either hard assets or $USD cash?
because if youre living in Greece USD are useless to buy stuff.
if you're living in the US dollars are also pretty useless ... ever tyr eating one ... Yeeech
I think most already have.
What I discuss here is not "new news" in Athens.
Pardon me, but that is bullshit. Maybe the Greeks with Swiss accounts not small business owners and regular folk. Unlike Westerners the Greeks I speak with aren't caught up in Stockholm Syndrome when it comes to Goldman.
ORLY?!
Greek Bank Run Hits Record
The part where you show me what they 'bought' with the withdrawn 'cash' is missing.
Hard assets are limited and $s make no sense. Try again.
If the Greeks believe that they are going to take losses on their savings is there are chance of bank runs getting stronger in Greece? Would this possibly cause issues with depositers in other PIIG nations? Might reall have a crazy affect on currency trades world over.
Note: event the MSM is reporting that the Greeks are taking Euros out of their banks and hold as cash - before the conversion to another local currency. I guess the bank of Ball-Mason-Jar never really goes out of style....
Sweet and touching photo of the trapped sheep. Hope the little furry creature got lifted out of there all right.
A symbol of us all.
He was lifted out...and then they whacked 'em to make mutton and comfy slippers.
This is what we have to look forward to...
I was just trying to make the point....I hope he/she is fine, too!
This Sheep led a happy and fulfilled life(it doesn't take a lot to please a sheep) ... until 1 day it met the destiny of all sheep that is
"A symbol of us all." - quite possibly true(for a majority) as this sheep got into the trouble by not taking responsibility for it's own actions and hoping that others will look after it's best interests, baaaaaaaaaaailout!
An awful lot of "just regular folks" who want a decent life, and a better one for their kids, are gonna get SCREWED over all this, just so the bankers can get paid back the money they created out of thin air (fractional banking methods). These banksters probably need the re-education camps process. I don't like the idea of kraut jack boots 'n all - but I'll have very little sympathy when the "boots" start the re-education process for the banksters....
'Money will migrate from both Switzerland and Japan to a different “safe” place. It will end up in Frankfurt. USDDM = parity.'
So what Germany loses on its trade account (owing to DM strength), it makes up on the capital account (via safe haven capital inflows).
Sounds a bit like the American model, don't it? :-O
With the entire western world defaulting (like Russia did in the 90's) all fiats will go to parity in value (that value being ZERO).
So long as a relative few continue to profit at the expense of everyone else and no one is willing to have an adult conversation about fraud and the rule of law, all economies are indeed local and becoming more so, possession is the law, got physical assets that generate revenue Bruce?
You better.
great post .... good catch by Bruce K:
Scenario: the artificial prop of Euro by USA, PRChina and BofJ (plus others) will bust. The strategy of debt monetization via implicit currency debasement will spin out of control (see Sorcerer's Apprentice) as 'currency pairs' management will become 'too dynamic' even for HFT and supercomputer/inside information technology. Hence PRChina and Japan will be forced out of the 'game' for national survival purposes. Team 44 in USA is praying that this happens after nat'l elections, not before .... but if you are Saudis, Russians, Chinese, Japanese, koreans, Indians, etc. do you 'vote for Team 44' at risk of national suicide? Not even the current Nobel Peace Prize Winner can induce such suspension from reality as he hs been accustomed to much of his adult life.
And unelected Chairman Bernacke, despite all best intentions or misguided objectives per his perceived Federal Reserve 'mandate', can & only will do so much. That is why this ultimately comes back to Team 44 versus the Federal Reserve which really an 'indirect agent' of the US/world economy.
Morning headline (yeah, one report does not make a 'trend', etc.): "US trade gap widens at fastest pace in 10 months" ... so who wants to 'hold' currencuies when the dynamics are as treacherous as I can ever recall ....?
Just a thought ....
I like your thought. If you are correct the real question would be; "precisely how much longer will the people of the world allow the Federal Reserve Banking Cartel to continue to front-run itself?"
Has anyone else wondered exactly where all the interest that is paid on government debt goes? With no honest audit on the Federal Reserve the world will never know.
An important rule in investing for me; People and institutions who fear the light of day and transparency are not to be trusted.
jeeeej Guilders! I miss those. The Netherlands savers were royally fucked with the exchange rate. Practically, buying power was halved in the year after euro introduction. And yes, before the euro there was a healthy export economy present here as well. So the argument of increased trade holds water, but it's possible to do without.
A revaluation of prices throughout europe could prove an interesting opportunity (for those looking abroad).
I think Germany will have another deal with the Netherlands government, given the high export eastward. Another screwing of dutch savers imminent. I don't believe they'll valuate a new exchange euro->guilder properly.. Most likely they'll grab some extra billions to fill the holes.
Dollars? Yeah i keep a healthy amount of cash against my euros. But in case of social-political turmoil in the USA (I don't see it getting better, given all those hollow points ordered and Ron Paul being shut out in the coming elections (despite possibly popular vote)), dollars are NOT the place to be. So colour me not-enthousiastic.
got gold?
Another screwing of dutch savers imminent."
Or maybe not if the rise of Geert Wilders is any indication of Dutch mood.
Putz Putsch.
Athens: There is the proof. The euro is too high against the dollar.
All things remain relative no matter the weather Bruce. Statements like the above are made from general observation without consideration of what the clownbuck really is.
Fact is we're living through a really long, round-a-bout default of BW(soon to be called BWI IMHO). Hollande seems to be a mild neo-liberal in contrast to the outgoing midget who was hardcore. Will he be able to remain mild? Don't know. This topic is now officially dead and on its way to being dragged and paraded through the streets allowing any swinging dick to chime in(not you obviously) but it does nothing except distort the facts and frame the discussion in the banker friendly way.
Until oil trades in something besides dollars, the "clownbuck" will have value. And the clownbuck/oil relationship happens to be backed by the biggest military on the planet.
Sure, the oil/dollar relationship creates a synthetic (many would say "illegitimate") demand for dollars. But at the end of the day, the greenback is backed by guns, carriers and nukes.
Oil is only available for dollars as long as gold is available for dollars. The dollar is *not* backed by the military or the taxpayer (the NPV of future taxes has already been spent, and then some!).
Actually it's backed by the US consumer. Tax rates are so high and the State so large it's really hard to discount outright default scenarios for those of us who can't print money. That would be the various States of BOTH Europe and the USA it would appear.
'Value' is a funny word. I'll assume you mean 'purchasing power' instead. Probably, internally only though.
Get caught up Popo, cause that's already happening. Your analysis is correct but useless since that only means the end is near when the last stop has to be put forth as savior.
'purchasing power' instead. Probably, internally only though.
Funny you should say "only" internally, as the USA trades mostly with itself (90%), and much of the rest with immediate neighbors, AND gets more than 75% of its hydrocarbons from its hemisphere, and quite a lot domestically.
Europe on the other hand...well, they are dependent on the World Police to keep the sea lanes open.
You sure you want to stick with the qualifier "only" up there???
And plenty tungsten bars