Monday January 18, 2010 - 14:28:12 GMT
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Black Swan Capital - www.blackswantrading.com
Can you say Drachma?
UK's recession has ended but growth in 2010 will be anaemic, Item Club forecasts. (Telegraph)
Black Swan Capital Presentation at the 2010 World Outlook Conference, Vancouver
On Friday, January 22nd, Black Swan will be presenting at the WOC in Vancouver; the topic of the talk: The US$ Holds the Key. There will be excellent group of speakers assembled for this two-day event: Jan 22nd and 23rd. If you are interested in attending or wish to learn more about the World Outlook Conference click here.
‚Äú‚ÄúIt seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe‚Äôs internal contradictions will tear it apart.‚ÄĚ
Milton Friedman, circa 1999
FX Trading ‚Äď Can you say Drachma?
Drachma of course is the old currency Greek citizens used to deal with. Could they be heading back to it soon? Maybe!
Mr. Orwell phone your office!
From the UK Telegraph, Ambrose Evans-Pritchard penned this yesterday [our emphasis]:
‚Äú‚ÄôRecent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario,‚Äô said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections.
‚ÄúThe author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a ‚Äėnew legal order‚Äô that transcends a ‚Äėlargely obsolete concept of sovereignty‚Äô and imposes a ‚Äėpermanent limitation‚Äô on the states‚Äô rights.
‚ÄúThose who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text.
Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs).
This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor.
The spread between Greek and German bonds is widening. We also noticed something else, the single-currency known as the euro, seems to be tracking nicely on the widening spread, as you can see in the charts below. The spread is the top chart and EURUSD bottom chart. [Chart not available in text format.]
Mr. Market isn‚Äôt cooperating with the dream of Greek fiscal austerity. Back to Mr. Evans-Prichart:
‚ÄúGreece cannot afford such a premium for long. The country must raise ‚ā¨54bn this year ‚Äď front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody‚Äôs put it, Greece (and Portugal) faces the risk of ‚Äúslow death‚ÄĚ from rising interest costs.‚ÄĚ
‚Ä¶and the European Central Bank is now facing explicitly the problem that comes from a single interest rate for economies with differing levels of labor productivity, fiscal discipline, and business cycle performance. Things that are expected to exist for a viable common currency zone.
‚ÄúAs Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their ‚Äėreal‚Äô interest rates will rise even higher. ‚ÄėIt is tantamount to hiking rates in the already weak PIIGS,‚Äô he said [Mr. Stephen Jen from BlueGold Capital]. This is the crux. ECB policy will become ‚Äėpro-cyclical‚Äô, too tight for the South, too loose for the North.‚ÄĚ
I end today‚Äôs missive with two quotes that lead off our 21-page Special Report we penned back in June 2009: Preparing for a Breakup in the European Monetary Union:
Prescient views, we think‚Ä¶
‚ÄúPolitically, though, this unity also has the potential of brining about explosive disunity. During deep recessions, the single, one-size-fits-all monetary policy could pit national politicians against the European Central Bank as a feeling grows of national impotence in the face of rising unemployment. It is not improbable that one or more member countries might withdraw from the euro and reintroduce their national currencies at some stage during the currency‚Äôs first decade.‚ÄĚ
Bill Emmott, 20:21 Vision, Published 2003
‚ÄúAnybody who still believes that a breakup of the Euro is impossible should at least re-examine this assumption with a skeptical eye. Experience shows that, in confrontations between politics and financial markets, events sometimes move from impossible to inevitable without ever passing through improbable.‚ÄĚ
Just in case you don‚Äôt remember what it looked like: [Image not available in text format.]
Drachma! See, I knew you could!
Next month, will take a look at the Portuguese escudos‚ÄĒlove that name‚Ä¶possibly another old/new currency we can trade again. ÔĀä
Black Swan Capital LLC
David Newman here ...
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