Cart (0)
VIDEOIt's Not a Recovery in Europe
By
Professor Pinch
Jul 29, 2010 10:50 am
A look at gold and the euro to see that Europe could in fact be setting up for deflation.
 |
|
German business confidence is soaring while US consumer sentiment sinks.
Britain's second-quarter economic growth was almost twice as fast as expected, the strongest in four years.
Meanwhile, economists have steadily marked down forecasts for Friday's US gross domestic product report.
I also have a chart of UK and US GDP growth rates from the same Reuters piece:
Here are some observations/questions I have: It appears the US government stimulus -- no matter how ill-conceived some of us may feel it was -- produced a bounce in US GDP faster than the UK has seen. Plus, I'd offer that the UK is just two quarters behind us with respect to GDP growth. Its second-quarter GDP numbers look like our fourth-quarter '09 numbers. So why shouldn't we expect its future quarters to mirror ours? I think it's open to debate, personally.
So what's going on then? Why are we seeing a rally in the euro?
But at the same time, we've seen gold sell-off?
Normally over the past few years we would have seen these assets move together.
So what's different this time? Is it a “goldilocks” recovery with no inflation and strengthening eurozone prospects?
Hardly.
I'd humbly submit to you this is something entirely different: deflation in Europe with a liquidity crunch for European banks. Sound familiar? It should.
In my mind, Europe is going through its version of our summer of '07. You remember that time, right? IndyMac and Countrywide failing, subprime mortgages and the MBS they were tied to getting downgraded en masse, leverage loan markets freezing, and other credit markets grinding to a halt. Those were such halcyon days. I'll forever look back upon them with great fondness.
So then I came across this chart from Tim Backshall of Credit Derivatives Research:
It made me all weepy. Like the Indian staring out at all the garbage.
And then I came across this chart, showing gold in euros:
This shows the real story behind the gold sell-off and the euro rally. Indeed, FT Alphaville pointed this out in a note put out by SocGen (emphasis mine):
However, recent patterns include very sharp drop-off in net long speculative position on COMEX in the first week of July, and the contraction in the outstanding position, from 902 tonnes to 775 tonnes in just one week. This came under heavy liquidation and an increase in short positions. The primary force behind the move was a combination of physical selling in the market above $1,200 and then the heavy unwinding of short euro / long gold positions at the start of the month amid a boost in confidence in the EU position.
Confidence in the EU position? I guess there could be some of that. We were pricing in a dissolving of the euro earlier this year so there's bound to be a bounce when that risk is alleviated. What I noticed is that gold and the euro both made U-turns right about the same time all those money rates started going parabolic. Coincidence? Maybe, but I wouldn't stake anything this drastic just on coincidence.
Here's another scenario: rising interest rates, strengthening currency point to a rise in credit risk and decreasing liquidity, with weakening commodity prices added in for good measure. That smells like a deflationary set-up that's forming in Europe. If that's true, what we're trying to figure out now is where should the EURUSD and EURJPY exchange rates in a three-way deflationary derby.
That may be something else for everyone to bake into their calculus at this point.
Editor's note: Related currency ETFs and ETNs include the iPath EUR/USD ETN (ERO), which trades on the NYSE, the Currencyshares Euro ETF (FXE), the Currencyshares Yen FX (FXY), and the USD/JPY Exchange ETN (JYN).
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
