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“A dame that knows the ropes isn’t likely to get tied up.”
Mae West

Commentary & Analysis
Rabbits and Band Aides out of their…ah….hat, that’s right!

If anyone, other than me, has been trying to trade euro intermediate-term on the fundamentals, you have likely gotten your derrière handed to you. Once again, we have another summit between the big two in the eurozone–Angela (a dame proven to know the ropes) and Nicholas (a man who never seems at a loss for words). I can just imagine what they must be thinking….but since this is a family publication, on most occasions, I will refrain…

But considering these two statistics on French and German banks, it should be no surprise why these two leaders are digging deep to pull another rabbit out of their….ah…hat!

  • French bank claims on Italy and Spain are $551 billion, and their claims on insolvent Eurozone periphery countries (Belgium included) overall is almost $900 billion.
  • German banks’ claims on Spain and Italy are “only” $323 billion and on insolvent periphery countries overall “only” $580 billion.

“Angela, really, can’t we just go back on vacation? This is pointless. The dollar is such a dog anyway; no one’s going to give a hoot!”

Interestingly, those fantasy statements that I am sure Nicholas would love to utter isn’t very far from the truth. And as I indicated to our FX service members this morning, if Mr. Bernanke gets his way, using the dollar as toilet paper to prop up risk asset markets globally, through his crazy commitment to keep rates on hold till mid-2013, the dollar breaks out big time to the downside.

US Dollar Index Daily: I sure didn’t get much in the way of “risk bid” when stocks were tumbling recently!

The question is: Will the euro’s problems allow that to happen? Let’s turn to our old friend Mr. George “Regulate Everything that Moves Except For Me” Soros for some answers as to how to solve the euro’s problems.

Writing in the Financial Times yesterday, Mr. Soros outlined three “easy” steps to sure up the single currency zone:

  1. Rescue the banks through the European financial stability facility. This makes more sense than sending it to Greece; that is for sure. Back stopping the banks would have been a lot cheaper to begin with. Instead taxpayers are ensconced in the double-dip pocket-picking e.g. send money to Greece, and when that slides down the proverbial rat hole bail out the banks too. Sooner or later taxpayers everywhere have to catch on to this game. Can banks in most countries be more than one to two clicks away from being nationalized if pols continue this while demonizing those “bad banks” along the way for cover? Jeeze!
  2. Europe needs a Eurobond. Mr. Soros says “the solution is obvious: deficit countries must be allowed to refinance their debt on the same terms as surplus countries.”
  3. That’s funny, I thought they tried this for about seven years in a row, and it WAS the cause of the problem. Binge buying by economies on consumer goods and houses on money borrowed at German-level rates, which had no reflection of market risk whatsoever. But, this time will be different if they just add some more teeth to those regulators–he loves so much–in Europe. [Just like Nicholas, more regulation is going to be the solution–yeah right!]

    Of course, this the little problem of the massive current account surplus Germany runs against these periphery countries. Mr. Soros addresses that by saying Germany has unsound ideas about macroeconomic policies wanting everybody to look like them. But someone has to be a buyer, they all can’t be sellers is Mr. Soros’s point. And he is right on this. The periphery countries can’t austerity themselves out of this problem; they must be able to run current account deficits. But the flaw in this argument is to believe Germany will voluntarily become less competitive, i.e. push more wasteful consumption ideas (as the Keynesians love) onto their people when their current system of discipline and hard work, especially on the industrial side, has worked so well. Good luck!

  4. Throw the bums out. There must be an exit mechanism for countries who flout the rules. He is right again on this point. A currency union cannot survive unless there is political and economic unity. Good luck again. There has never been that within the single currency despite the protestations of the politicos who dream of one day Brussels rules all activity, all thought, all action, all re-education…they want a “Mr. Orwell phone your office moment.” [P.S. this is why US liberals love Europe so much–you guys are so close…please…push harder.]
  5. But those cozy little machinations of the elite are getting a bit of blowback by the serfs on the ground; seems they aren’t too thrilled with their tidy little currency zone so far. The fact remains under the current system the periphery countries are locked into the straightjacket of the euro and cannot compete with Germany.

    The market may soon create its own exit mechanism. Angela knows that; Nicholas knows that; and you can bet Mr. Soros knows that too. I just wonder if this isn’t a bit of a déjà vu moment, thinking back to the summer of 1992, for Mr. Soros. You remember, that last time someone in the name of the UK decided it was time to leave the ERM.

If I were a betting man I would bet that Mr. Soros’ new “unregulated” family office might have a short position or two on the single currency experiment.

But, most of what I laid out in this missive is what we “do” know. We just don’t know how deep Angela and Nicholas will dig to keep hope alive.