Notes From Underground

As  we cautioned on Thursday, we were bothered by the EURO’s failure to make a new low against the DOLLAR even as the yield on Greek debt rose to 12-year highs. Friday saw a strong rallly in the EURO currency against the DOLLAR and most cross rates. During the weekend we got confirmation that the Europeans had agreed to a “real” support package for the Greek government. The amount is €30 billion ($41 billion) in a 3-year fixed rate 5% loan, which is substantially below the rate that 2-year  Greek debt traded at last week. The 2-year note in Greece yielded up to 7.45%, so the bailout helps to curtail the effects of what we called the Negative Feedback Loop problem that we detailed in Thursday’s post and what we have written about ad nauseam.

The EURO has opened up very strong in Monday’s trading in Asia, which is largely due to the huge amount of short EURO positions. While the news may buy some time for Greece–plus, Monday’s IMF meeting might sweeten the package. Is this the end to the problems in Europe? We say emphatically NO as now the other PIIGS will expect the same treatment that the Greeks were given. The reprieve though will allow the global financial markets to begin thinking about other problems that exist in the global financial system. The markets will begin to question the DEBT problem building in the US that have, for the last few months, been pushed to the sidelines as the DOLLAR attracted inflows based on  the safe haven status of the US.

And, as the EURO was labeled toxic, GOLD was also crowned with safe haven status. If GOLD fails to correct substantially, we will get a strong signal that new problems are lurking beneath the surface. Check your charts to look for resistance levels on all the EURO crosses to signify just how credible the market deems the proposed Greek bailout.

There was a high-level policy conference in Cambridge, England during the weekend. Funded by George Soros, the meeting of high-level global economic thinkers covered ideas about how to prevent another crisis, like the one the credit markets are trying to resolve. Soros spoke about the possible breakup of the European Union if they failed as a group to reduce the interest rates that Greece would have to pay (this speech was prior to the “bailout”), for it would mean that they failed to act as a union. He pointed out that it was Germany that was the key to debt resolution in Europe and therefore up to the policy makers in Berlin to save the the existing politcal entity that is located in Brussels.

Soros fails to point out that it is not the German elite that holds the key, but rather the good burghers of Bavaria. However, we remind everyone that George is no fan of democracy and rather believes that a world government should make all decisions as long as it is led by a philosopher king that was born in Hungary and educated by Karl Popper.

Our favorite philosopher king also advises that the UK will need to devalue the STERLING further after the upcoming elections in order to generate the growth needed to soften the weight of its fiscal problems. What he fails to answer is that Britain holds a distinct advantage over the European PIIGS because it has already allowed the STERLING to depreciate more than 30% against the EURO, its largest trading partner. We caution to believe anything BOY GEORGE says. As of 3 months ago, he emphatically stated that GOLD was the world’s biggest bubble, only to find out a while later that his fund had accumulated its largest GOLD position during the period he was warning of its overbought situation.

Hence, we take what he says on the open stage with a POUND of salt. Besides, if he is so worried about the future of Europe, don’t those nations residing outside the EURO currency stand to outperform during the immediate time period? Hmmm…

Tags: Dollar, Euro, Gold, PIIGS, Pound, Soros, Sterling

This entry was posted on April 11, 2010 at 6:02 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.