Tuesday October 27, 2009 - 13:41:23 GMT
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Black Swan Capital - www.blackswantrading.com
The Eurozone Economy is Going to Zero
Hungary to Emerge From Economic Crisis as Global Fiscal Leader, BofA Says Hungary is poised to emerge from the global recession as a leader in fiscal health as years of economic pain brought on by government austerity measures pay off, according to Bank of America Merrill Lynch. (Bloomberg) [Editor‚Äôs Note: Yes, you read that right.]
‚ÄúThis is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.‚ÄĚ
Orson Scott Card
FX Trading ‚Äď The Eurozone Economy is Going to Zero
Would you think I was crazy if I said I am 100% certain the value of the Eurozone economy would eventually fall to zero?
What about if you read my Currency Currents from last Friday, 23 October 2009? In it I laid out several pieces of information that most definitely point to an imminent flat-line for the EZ, no?
Okay, maybe there‚Äôs more to it than that; maybe Friday‚Äôs issue didn‚Äôt consider the full picture; maybe there are valid reasons the EZ might not go to zero. After all: it can‚Äôt be all gloom and doom ‚Äď there has to be some boom (i.e. think ‚Äėbusiness cycle‚Äô boom, not ‚Äėsuicide bomber‚Äô boom.)
Ok, now I‚Äôm sounding a little more credible and rational, I would think.
But, for the sake of entertainment, in the headline of this article let‚Äôs replace ‚ÄėEurozone‚Äô with ‚ÄėUS dollar‚Äô, as in ...
The US Dollar is Going to Zero
Do I lack credibility by making this forecast?
The scary thing is most people would probably fly by this headline without thinking twice. That reflects the current mindset of investors and analysts: gloom in the US, boom in the rest of the world, and doom in the US dollar. There‚Äôs no other way around the fact that the world‚Äôs reserve currency is on the verge of going ‚Äúpoof‚ÄĚ.
But I would want to know when it will go to zero, why it would go to zero and what will happen when it does go to zero. And dare I wonder if there‚Äôs anything actually keeping it from going to zero?
Seems kind of like a hype-driven, unsubstantiated headline ... at best.
Ok, I‚Äôm done proving my point. Here‚Äôs a piece of news that will almost certainly tell you the Eurozone economy is soon going to zero:
As a follow-up to some of Friday‚Äôs piece, year-over-year growth in the M3 measure of money supply slipped in September. Same goes for M1. More importantly, though, was the annual contraction in credit to the private sector.
Apparently this is the first time the Eurozone economy has seen a contraction in loans to the private sector. Loans to households for consumer credit and home purchases each dropped from the previous month‚Äôs results. Even loans to non-financial corporation, which had shown welcomed growth in August, showed contraction this month.
And apparently the market is starting to price in a rate hike by the European Central Bank next month, after they‚Äôve flooded the Eurozone with record liquidity.
Now, this news about loans to the private sector did not catch economists off guard; they seemed to be expecting the declines.
But was anyone else expecting the declines? Is anyone else even bothering to pay attention?
This absolutely did not move markets today when it was released. So the euro is not falling on the idea that the Eurozone‚Äôs recovery is going to be slow and tough. And it‚Äôs not falling on the potential that the ECB choke‚Äôs off the short-of-breath recovery in its infancy.
And it‚Äôs not falling on the idea that the Eurozone economy is going to zero.
I can tell you, though, that the euro fell sharply versus the US dollar yesterday. And while this may turn out to be just another buying opportunity in the longer-term uptrend for EURUSD, I can tell you the market seems to feel as though the euro is getting tired. The general mood seems to feel there‚Äôs more downside potential to this correction, at least.
A pull back to roughly $1.4750 will find some trendline support; major support comes in at $1.45 ...
John Ross Crooks III
Black Swan Capital LLC
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