Some may think I am a die hard defender of the Euro. I am not. I am a mean reversion trader and I jump on positions where things are crazy. Dennis Gartman with his call that the Euro will split into two does not get it! So I thought what I would do in this article is explain what my currency rationale is and which trade I am putting on in 2011.
What Dennis Gartman is saying.
In his latest opinion Dennis Gartman is saying that Germany will get tired of being the paymaster and will force through a Northern Europe Euro and a Southern Europe Euro.
In the next several years, Gartman thinks the currency will break into a northern euro and a southern euro. Germany, he said, won't stand to continue to fund countries like Greece, Spain and Portugal — all of which have lesser average work weeks, lower productivity rates and lower savings rates, he said.
Dennis GET WITH THE FREAKEN SHOW, Germany has ALWAYS since the EU was formed being the paymaster of Europe! Tell me something that all of the German populace does not already know? Check your facts PLEASE. What will he do when the Euro strengthens? He will continue to short it.
If one has no short position, however, he suggests using this rally to get short. Being as he thinks Europe's problems are long-term, he would sell any rallies in the euro.
Why is Dennis Gartman an Idiot for calling a Northern and Southern Euro?
Dennis Gartman does not get Europe, he really doesn’t. It is because he is an Anglo! Being an Anglo has quite a bit to do with the decision. I have lived in Europe 16 years, but I did all of my education in America and Canada and until I learned to live in Europe I did not get it either. My wife who is Quebecoise actually got it right away. What I am referring to is social thinking.
The best way to explain this is by illustrating how some in Switzerland have succumbed to Anglo thinking. It seems that Switzerland has been at the center of the Ireland blowup as they have been blocking Ireland bonds. Reading the zerohedge article it would appear that Switzerland is acting like a hedge fund. That does not surprise me since Hildebrand comes from that background. I am a Libertarian through and through, but when it comes to finance vs industrial I am an old fashioned German who believes in a strong industrial base. Hildebrand has no understand for that and it is causing problems. The Swiss unemployment scene is still above pre-crisis levels. With the strengthening Swissie there has been an extra-ordinary meeting called in Switzerland on how to deal with the strengthening Swissie. From the latest reports margins are being squeezed hard in Swiss corporations
To understand what the Swiss National Bank has been doing think of it as follows.
You are part of a very large city. And you are a house in a block called Europe. While you are not part of the townhouse community your townhouse is connected to those that are. Right now your block is on fire. Yet your own house is not. In fact you are well equipped with water and fire panelling that you are not going to burn down. As this block is burning down your neighbours ask for some help. You say, “should have done what we did and you would not be having this problem, so no we are not going to help.” To make things worse you throw out your garbage from your house into the neighbours fire.
Needless to say this will create animosity towards you. Somebody like Dennis Gartman would see this as good for Switzerland since they are being fiscally prudent. But I say it is bad because while Dennis talks his book, an entire economy built on financial constructs is not going to feed the people. In the past Switzerland while not participating in the social net of the EU, did not contribute to the fire. They remained neutral and created gentlemen agreements that would dictate that there would be no participation in the speculation (approx 1976). This is why people in Europe liked Switzerland. They did not get involved, and they stayed neutral. So in the case of the fire example Switzerland would not be throwing oil on the fire and would be sympathetic to those who’s houses are being burned down. I guess this is what bothers me the most with the current position of Switzerland in that they have given up their neutrality with respect to the Euro.
So where does the Euro go?
Last year the height of the Euro turmoil everybody (incl Dennis Gartman) was calling for the abandonment of the Euro.
It’ll probably still be around by the end of April, and the end of this year, and it will probably still be here a year and a half, two years from now. But I think these are terminal problems that the monetary union and the political union are facing, and it’s only a matter of time before it ceases to exist. Will it happen overnight? No. It will happen in a slow, very painful, long-standing, horribly drawn-out, ugly affair.
This was a year ago, and the tales of two countries could not be more stark. The US labour market went nowhere, but Germany is awash in cash. So Dennis who is winning economically here?
In 2011, Dennis Gartman and company is not as dramatic anymore, and now calling for a “new” Euro. This begs the question if the Euro crisis will ever stop. I say no. I do believe that there are problems, but the are overdramatized. The real problem is that the US and UK which should be the beacons of GDP growth is not happening. Thus it is better to focus on the Euro and wait until those other regions get up to speed. Recently the BBC talked (thanks Investment Postcard) about how the US has major problems and yet the guests were ra-ra, and avoiding the questions.
The flaw in the American thinking is that they think growth will figure out things. But the reality is that growth only gets you so far. Germany is where it is because of the gut wrenching changes they made during the Schroeder era (around 2000). It cost the SPD their political clout.
How to play this?
I don’t think the Euro will strengthen. From the political talk the magic zone for the Euro is about 1.30. With Japan and China buying European debt there is a constellation being established that is not to the benefit to the US and UK. In fact from a recent central banker meeting it appears Trichet is giving the emerging world and their capital inflow restrictions some support. This should be sending shockwaves through the economic community as it appears the ECB is leaning towards China, Japan, and so on. And whether we like it or not China is an economic superpower.
While many would short China I would stay away from shorting. Let’s put it in context. China has 2.6 trillion in reserves, and if China were to issue debt it would be easily to be able to issue around 6 trillion of debt. In other words China would have access to nearly 9 trillion dollars to support its own country. Simply put this is a country you don’t short.
Going into the Swissie as a safe haven is a problem because Switzerland is suffering, and if push came to shove Switzerland would, as Pascal Couchepin has said adopt the Euro for economic survival.
This means the only plays left over is to short US bonds, and go long gold. You could go long silver, but I don’t like the run-up in silver. From my calculations I could see a run up in gold to around 2,000 to 2,200 from current levels.
The key thing to watch is the US debt ceiling. If that is raised yet again as I will become very bullish on gold. If on the other hand the ceiling is not raised in the ensuing US chaos I will be looking at the US again.