One of those perverse but interesting facts of this recession is that a share of Citibank is now worth less than a McDonalds Happy Meal costs. But do you get a plastic Shrek with Citibank stock? I think not...
Euro
On the ‘up’ days on the NYSE there appears to be a pattern forming. Europe comes out with news of further potential default in its banking system and credit markets and New York opens down accordingly. The Euro crisis is a disease that cuts to the heart of the European economic system and threatens to spread to the rest of the world. This appears not to bother the US which can take a 250 point drop due to looming sovereign default and turn it into a 50 point gain on the day due to a better than expected loss at Alcoa or John Deere. Call me cynical but if the band is playing whilst the ship is sinking, I ain’t gonna dance!
The European Monetary System needs to be overhauled and restructured. It must protect the conservative from the profligate and have the flexibility to suspend membership or expel those who would do others harm. What is wrong with a Franco-German currency system that is less tolerant of those who break the rules in order to create a currency that is less volatile and more stable? Why not have a ‘Chapter 11’ trigger for countries that are in breach of the Maastricht Accord? It will give them time to sort their problems without bringing down the entire system.
If Greece has the chance to go back to the Drachma, it will be able to cut interest rates in order to boost exports and pay its way out of this crisis. It is the absolutism of Maastricht that kept the British and Scandinavians out of the common currency. This lack of flexibility for once sovereign nations is what is threatening the Euro now and will do so again into the future.
As a former federalist and believer in the Euro I stand corrected. The legislated inability of nations to act on behalf of their own economic national interests is wrong. Moreover, the inability of the EU Premier League to prevent nations from behaving badly is even more worrisome. Who trusts Estonia or Bulgaria or Rumania to act as soberly as the Germans? I don’t, but if my country was in the Eurozone, I would expect them to.
We are still shorting Euro and will continue to do so whilst appropriate.
Gold
Gold has recently been trading with significant volatility. Whilst buying gold is considered to be a ‘flight to safety’, large waves tend to lift and lower all boats. The Lehman crash in 2008 saw a 20% drop in the price of the Gold ETF, GLD. Ironically, gold was dumped for dollars which retrospectively was probably exactly the wrong move to make. Gold does well because it is an asset with an intrinsic value, whereas dollars are backed up by promises from a government that is effectively bankrupt.
So worry not, about exaggerated price movements and volatility within the gold price. It is part of its normal cycle, along with finding strong resistance and range trading when on an upswing.
Long term, gold is a hold, however we may buy some more on dips as the volatility continues.
Oil
Despite ( or maybe because of) the fall in prices, the oil contango is massive. Anybody buying oil today at $72.12 can immediately sell it on a December contract for $91.60. All they have to do is store it for a December 18 delivery. This is despite increases in inventory that are pushing the price down. The question that has to be asked however, is, will oil reach $100 per barrel again? The answer is obviously yes, but you may need patience and a weaker dollar. $100 per barrel is an almost 40% return. The 800 pound gorilla however, could be China. Should Chinese demand for oil reduce, then that could have a further huge effect upon prices.
Oil is fast becoming an underweight recommendation.
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