The Euro Path to Par is in Place & Hubris Hurts

Quotable

Teach us to care and not to care
Teach us to sit still
                  T.S Eliot

Commentary & Analysis
The Euro Path to Par is in Place & Hubris hurts

A little alliteration to punctuate a plausible picture of EUR/USD weekly…note the ongoing directional correlation between EUR/USD and the 2-year benchmark yield spread(blue line) in the chart below.

I should be more confident about the path of the euro. I should be at least 100% certain it will go to par. Evidently that is what all the best seers do when they are confident. For example, Bill Gross told
Bloomberg this morning he is 100% certain of a December hike in interest rates from the Fed, thanks to the better-than-expected US non-farm payroll report. It follows then the yield spread will continue to move against the euro, in favor of the dollar. Thus, par is assured, thank you Mr. Gross

It’s not that I don’t trust Mr. Gross;it’s that I think he is a bit psychotic. It’s the eyes that have always bothered me. Brilliant? Maybe. Unstable? Probably.

Point made, I think.

Would it be a stretch to say Bill was seeking out a camera on Bloomberg TV this morning in search reputational repair?

After all, Bill can’t be happy about the recent public reporting of billionaire political activist, George Soros’, pulling $500 million from his new Janus fund because of poor performance leading to a reported loss of a cool $10 million. “That’s peanuts dude, why all the fuss,” I would suspected Bill to have said. “Heck, I pulled down that much scratch every two-weeks or so when I worked at that awful place called Pimco,” our hero may have added.

This metaphor may not be apt, but I ask: Is it not at least the height of chutzpah for a man who became a billionaire from a firm named Pimco to share the following thoughts, reported by the Financial Times,
in a $200 million lawsuit?

“Pimco executives were ‘driven by a lust for power, greed, and a desire to improve their own financial position and reputation at the expense of investors and decency’, according to the typically colourful language in the lawsuit filed by its founder Bill Gross.

But none of that went on when Bill was there? Or maybe he was there protecting his clients from such shenanigans?

But wait, it gets better…

“Mr Gross launched a high-stakes lawsuit against Pimco, alleging wrongful dismissal and claiming he was ousted by a cabal of greedy underlings who did not appreciate his ‘towering reputation’ and ‘stunning performance in both bull and bear markets’”.

See, the word “psychotic” comes to mind doesn’t it?

What also comes to mind is the fact that these guys—bond fund money managers—are hugely overpaid. Granted, Mr. Gross is an extremely smart and talented man. He has proven that. But talk about confusing brains and bull market… below a chart of the US long bond yield…

10-yr Benchmark Yield Chart Next Page

So where from here do interest rates go?

Short real answer: I have not a clue.

Hedge pretending I might know answer: Mr. Gross is probably right about the December rate hike. After all the job market is so damn solid that a record 68 million American’s have fallen off the payrolls. But the fact is, despite the horrible job market, there are other very good reasons to hike the Fed Funds rate. The primary reason is because rates at zero bound are in fact hurting the jobs market.

When the Fed gets in the game of completely screwing up money and credit (foregoing rules-based monetary policy and a goal of stable money only) the arguments for them to act, and the action itself, become counterintuitive to the second power, at least. Oh well… I digress…

Given global economies are still wrapped tightly in a deflationary bear hug it seems unlikely we will get a big spike in interest rates, regardless of any Fed December hike. But from a currency perspective, a big spike isn’t necessarily needed. There is clear divergence among the top global central banks, and nothing as dramatic as that between the Fed and the ECB. With the US Fed heading higher, and Draghi doing all he can to keep the single currency regime from folding, it’s likely the dollar ratchets higher…

At least as far as the eye can see…