Free Fallin’
Posted by admin on May 4th, 2010
It’s times like this in Europe that makes me want to play Tom Petty’s Greatest Hits CD and listen to “Free Fallin’.”
If you decided to short the euro by buying EUO for example, you must be having a nice morning. I had a nice walk along the intracoastal waterway here in Florida at 6:45am today because the bad price action this morning by the euro on so-called good news doesn’t bode well for the euro if you consider all of the negative factors in the market.
Not sure if you are familiar with Milton Friedman. He is a man whose faith in the market, and brilliant summaries of how it really works, has proven so consistently right for so long regardless of his most followed naysayers. Mr. Friedman was quoted as saying this in 1990: “It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.” All I got to say is “WOW!”
Over the past few weeks, I have had colleagues and friends express the collective concern that the euro could surge if Greece is saved. It’s true…it could…granted Greece is indeed saved. However, I would view this as a short term movement to allow us to short the euro even more if you choose to do so. However, over the longer term, the dynamics surrounding this currency are still very much negative. With Greece receiving a bailout, this would only prompt the other troubled EU members, such as Portugal and Spain, to ask for similar bailouts. The way I look at it is that the euro is damned whether or not bailouts occur. So, in the short term, I really feel that bailing out Greece is simply a band aid to cover up a long term problem with a short term solution.
Here is a simplistic summary of recent events surrounding the euro:
- Market realizes that Greece is in trouble and, as a result, yield spreads push higher. Keep in mind it was publicly known that Greece, Portugal, Italy, Ireland, and Spain should never have been able to leverage themselves to the stratosphere.
- Finance Ministers are confident that Greece can handle this problem alone, but their friends are there to help if needed.
- Well, maybe Greece debt is more than it can handle; this is a problem the Eurozone can effectively deal with. We won’t let our friend default.
- Well, maybe there is a little more debt exposure than we fist realized, so we are going to call in taxpayers outside the zone (IMF) to help us save our good friend Greece. There is no danger whatsoever of this issues spreading to other EU members. The euro is rock solid baby!
- We’re thinking 60 billion euros will be more than enough to help out Greece.
- Ooops, did we say 60 billion, we meant 110 billion euros! My bad!
Thus, showing us in real time one of the major flaws facing the single currency: none of the EU members really like each other and, as a result, there is very little if any political unity across the zone.
I expect the euro to continue falling over the longer term and could even get to a point that it is 1:1 with the U.S. dollar.
-Samir