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Key News

  • Bill Gross tells CNBC the dollar index will make a new low. Editor Note: That’s a shock!
  • Mark Faber tells Bloomberg the US dollar will eventually go to zero. Editor Note: Mark, by then your great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great grandchildren won’t remember your ponytail once the world is on a Turkish lira based monetary system.


For Missing the Unmissable

Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.

The Other Teflon Men

Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008 Letter). You know who you are. All promoted!

                              Jeremy Grantham

FX Trading – Currencies and Straight Jackets
Finally some good flows from the crisis—lower beer prices:

McGee reduced the price for a beer this month to 3.50 euros ($5.18) at his hostelries after the pound’s 12 percent drop against the euro in the past year led customers from the U.K. province of Northern Ireland to stay home.

“’We can’t devalue, but our neighbor can and has, and left us high and dry,’ he said, adding sterling is a ‘huge’ problem. ‘You’ve got to try and keep the Northerners coming.’

“The pound’s plunge is a threat to Ireland as its economy shows signs of emerging from the worst recession in modern history. Consumers are heading north in search of cheaper food and televisions, U.K. tourist numbers are sinking, and exporters such as food company Kerry Group Plc and C&C Group Plc, the maker of Magners cider, are suffering in their largest European market.’


You can see in the weekly chart comparing the Euro to the British pound below and understand exactly what Mr. McGee is talking about as it shows the sharp appreciation in the euro against the pound.

Euro – British pound Weekly

The relatively high euro is starting to bite hard into both core and peripheral countries that are tied to it. We wrote the following in our special report back in June, titled, “Preparing for a Breakup in the European Monetary Union,”…

As you can see, one size monetary policy does not fit all. Now, if each of the member states had their own currency, with the ability to adjust upward or downward to various economic conditions, there likely wouldn’t be so many concerns about ECB policy now that things are tight. But they don’t have that luxury as they are stuck in the straightjacket known as the euro currency.

Back to Milton Friedman; he long argued for the advantages of flexible exchange
rates and pointed out that it was not available to members of the EMU.
Exchange rate fluctuations naturally offset inflation and productivity differentials
with much less friction than adjustments in nominal wages and prices under fixed
rates. The inflation and productivity differentials across the EMU vary widely.
Thus a one-size fits all monetary policy, with the additional disadvantage of one
inelastic currency to which all are anchored, means high-inflation and lowproductivity
countries bear a bigger brunt domestically when the business cycle
turns down. As a result they have increasing incentives to leave the euro should
an asymmetrical shock occur.

Below is a chart comparing the labor productivity among the southern tier states
known as the PIGS — Portugal, Italy, Greece, and Spain. They have always
lagged behind Germany in terms of productivity and have always been the weak
fiscal underbelly of the euro (next section).

But one of the publicized advantages of the euro before adoption was its ability to
equalize labor productivity among the member states by allowing for the free flow
of both capital and labor across borders. In fact, labor markets have remained
rigid throughout Europe, and, other than some migration from Eastern European
workers to Western Europe, labor mobility hasn’t happened. This goes to the
earlier point we made about culture, how people in Western Europe still maintain
strong national identities and are mostly reluctant to move from their home

At some point, because there is no currency to adjust for these productivity
disparities, the adjustment must come from a cut in nominal wages and significant
austerity. This is politically dangerous with the rising social unrest across the
Eurozone, as discussed earlier in this report. Of course the other means of escape
from this problem is for the PIGS to grow themselves out of it. But, given the
sharp decline in exports globally which we believe will be a long-term structural
reality, growing out of this situation seems hardly an option. The GDP plunge is
depicted in the chart below:

If the US dollar is Tweedle Dee, that makes the euro Tweedle Dumb.

Both are paper promises from countries with a lot of core fundamental problems. But, no one said this currency trading game was a thing of beauty; it’s just the opposite. It’s in fact like being on perpetually tour as a judge for the world’s ugly contest.