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Don't Let the Dollar Cloud Your Vision


The spotlight on Eastern European currencies and gold is growing.

In "A Watched Pot Never Boils; Look Abroad Instead", I versed the following opinions on currency fluctuations:

Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.

There's seldom a mention of the problems in European banks that foolishly lent money to the Baltic States in euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans can't be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US. ...

A watched pot may boil, but it's not likely to explode, especially when everyone watching the pot expects an explosion any second. ...

Somewhere, something is going to blow sky high, but from where I sit, it's as likely to be in the yen, the Swiss Franc, the British Pound, or something no one is watching at all.

Watch Eastern Europe For Possible Fireworks

While most eyes have been on the US dollar, I'm not alone in thinking a crisis might start elsewhere.

Professor Mark Bloudek offered this opinion on Thursday:

I am having flashbacks to the late months of 2006, when I was watching the ABX index for signs that the subprime loan crisis was beginning. I remember the lowest rated tranches of the ABX being worth 100 and checking every day to see if/when they would crack.

Why am I having flashbacks? Because the Eastern European currencies (Ex. Hungarian Forint, Czech Krona, and Polish Zloty) remind me of the subprime loans of 2006. A crisis here likely will start a flu that will spread ultimately to the major countries. Why do I draw the analogy between Eastern Europe and subprime loans? Because subprime borrowers were the weakest type of borrowers and the least able to deal with adverse consequences (they defaulted first as a result).

This is similar to the Eastern European countries, which are the most fragile countries in terms of staying power on the fiscal front right now. (Witness the massive budget deficits in those countries).

I bring this up today because the Eastern Europe currencies are under a lot of pressure today (about 2%). Keep a close eye here, Minyans, as this is likely the candidate that could start the crisis fire anew IMO.
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