The Euro
In October 2008, we were hit by the biggest black swan since 1929. The entire banking system had failed and the resulting tsunami sank all boats. Clients who have been with me since the September crash know how bullish I was then about bear funds. . We were long gold and yen in October 2008 and these proved to be profitable calls. That November, I shorted the Russell 2000 and the Materials Index and we did pretty well. In fact we stopped shorting on the 23rd February 2009, not long before the March 9th bull market.
This time, (until now) I’ve resisted doing the same. In 2008, the reasons for the crash were purely commercial. The Banks had made bad bets and paid a heavy price for investments that even they didn’t understand. This correction is different. Sure, there are fundamental economic reasons for the Euro to fall (Greece, Portugal etc) but this crisis is essentially political. Politicians are notoriously bad economic indicators and are not too be trusted. So I’ve waited. I’ve waited for the economic fundamentals to rise above political expediency and that appears to be happening.
The Germans are leery of the bailout and Chancellor Merkel is fully aware that more than 50% of Germans are clamouring for the return of the Deutsche Mark. Last Friday stories emerged of threats by Sarkozy to withdraw France from the Euro unless Germany and other Euroland nations supported the bailout for Greece. Presently this rescue plan is held together with duct tape and politicians promises, nothing more.
As of today, I think we are more likely to get closer to dollar parity than $1.50 to the Euro this year.
On the back of euro weakness and a fear that Europe’s contagion could spread to the US, the oil price dipped briefly below $70. This is despite the onset of the American driving season. The weak demand in Europe must also be pared with a stronger dollar, penalising petroleum buying nations who have weaker currencies, stifling demand.
The big worry is China. Should their demand for oil reduce, then the price could fall further toward $60. But even now (for the patient investor) the price is attractive, offering a 40% return @ $100 per barrel and it will get back to $100 per barrel.
As you know, I am bearish on China. 60% of Chinese GDP being due to construction is frightening. Things that are built need to be bought and that is an awful lot of property to sell. However, the Chinese government needed to find quick jobs in order to prevent potential unrest amongst its retrenched factory workers. My fear is that they have overspent too early on this stimulus and have underestimated the weakness of the western economies. For the stimulus to work, they have to continue injecting cash into the system beyond the recovery for it to become part of the recovery. If the recovery is at least a year away (highly possible) then China may be in trouble.
The Euro rears its ugly head again when talking of China. Europe is China’s biggest market. If the Euro continues to fall in value, Chinese imports will become more expensive exacerbating China’s problems. Some say that the Shanghai Index offers real value, trading at levels not seen since 2006 (2688) but still (I believe) it has yet to bottom. We will be buyers but at the right price.
The Euro is still the focus of concern around the world and today Greece receives its first payment from its EU partners. Will it be enough? Will the contagion spread? We shall have to wait and see.
No comments:
Post a Comment