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Euro Crash

Shawn Baldwin from CMG, outlines the structural problems associated with the euro as a currency, the regional limitations and other factors that are currently having detrimental effects upon its performance.

The euro has been pounded to a low of $1.2359 against the dollar, driving it down to its lowest level against the greenback since November of 2008, after the global economic meltdown–effectively creating a 5 percent loss. The initial euphoria of the 750 billion euro facility almost immediately turned into doubts and fear. That subsequently caused confidence to wane which generated a tremendous sell off in the markets. This is of no surprise to the readers of this commentary, I predicted the demise of the euro in the May 6th 2010 commentary Market Chaos! (//www.fastcompany.com/1639874/market-chaos-the-9985-point-drop-and-the-mechanism-explained ) in this commentary I outlined the imminent pounding that the euro would receive in the second to last paragraph. We are now witnessing that beat down as the experimental currency is now at its lowest level in nearly 2 years.It’s been a considerable drop off since Jay Z and supermodel Giselle were seen posing with and requesting pay in the now beleagured currency.

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In economic terms, we say that the euro “will enter a period of sustained weakness”– which means that more than likely its going to stay down in value for a while given the bleak economic outlook for Europe. The European Central Bank (ECB) will HAVE to begin serious quantitative easing. This is not something that the president of the ECB, Jean Claude Trichet, wants to do. Trichet is an incredibly proud Frenchman and he is an even prouder defender of the Euro, he always makes it a point to state that the ECB (read as he) doesn’t respond to political pressure–Trichet is going to be tested on this one. The truth is that if he doesn’t, the damage will continue to the further detriment of the Eurozone, something that no one wants inside the 16 member European Union, affectionately known as the EU. To a large degree, the euro can no longer be used as a safe haven while the Greek debt crisis rages and Spain and Portugal loom largely as the next imminent issues.This definitely kills any opportunity that it might have been used as a reserve currency as some had suggested since sentiment towards the instrument has severely declined, a point that I vehemently opposed in in the October 27th 2009 Currencies, Carbons and the CFTC commentary(//www.fastcompany.com/blog/shawn-baldwin/financetrading-and-global-capital-markets/currencies-carbons-and-cftc) –5th paragraph, last sentence. We can be sure that European austerity measures will insure weak economic growth in the medium term, much to the delight of the many sophisticated investment firms (read as hedge funds) who bet on this outcome.


What does all this mean?

Gold will continue go higher as safe haven if the euro is no longer viable–expect some profit taking by opportunists. The rise in gold will also push up other precious metals-including Platinum and Palladium which are particularly attractive (look for a strong jump in palladium as it has technical uses that will drive it up aside from its cosmetic use in China) in the short term as institutional investors stay in a risk averse “trading” mode versus and investing one.I outlined this metals play in the aforementioned October 27th Currencies, Carbons and the CFTC commentary  for those wishing to construct a trade please find an outline on metals (the 8th paragraph) which will be relevant again. This time the play will be similar in returns as well as construction, the last time it netted a returns of over 20% within a quarter. I believe that returns in the 20-25% range are apropos this time. In the near term this will give the dollar additional strength.There are several ET’F’s for those unwilling to play the futures directly. I believe that the best returns will come from a strong weighting of gold, platinum, palladium and silver. For those less bold try a basket of precious metals to reduce your risk.

The Obama Administration has placed a number of firms under scrutiny, while the firms simultaneously have been put under pressure by their investors to rule out puchasing sovereign debt, mostly due to the climate of risk aversion tied to sovereign debt failure and potential restructuring (I believe that this will most likely be the outcome for Greece-I will detail that in another commentary).  Oddly enough, both the United States and the investors have reaped the benefit of these practices as managers have received strong returns in a very short period and the US has received a stronger currency as the dollar was sought as a safe haven. Strange bedfellows.

Consequently, the 750 billion euro package put together by the Ministers ultimately benefits the bond markets, the purchase of the bonds should do very well–at the expense of the euro. The ECB will most likely keep rates extremely low far longer than other major central banks.  Although, Jean Claude Trichet has insisted that the purchases will be “sterilized”. These actions will ultimately keep pressure on the euro. Continue to short the euro and to go long the dollar and gold/precious metals for the medium term they are all going up….. it’s about to get ugly. 


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About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago

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