Avi Tiomkin is winking…
Posted by The Lonely Trader on October 7, 2008
No, that isn’t Sarah Palin winking at you, doggonit. That’s Avi Tiomkin, who wrote an article for Forbes entitled “The Demise of the Euro”. The article has since been taken offline, but he made a number of valid if somewhat unbalanced points. I first came across the article on the old FXHub site, an excellent resource which is also now defunct.
When I posted the link to the article, it didn’t get a peep from anyone. If anyone is interested, Seeking Alpha still rents pixels to a response to that article, written rather glibly by Felix Salmon. I was reminded of Tiomkin when I read Wolfgang Munchau’s article in the Financial Times. I urge everyone who trades currencies or invests in European equities or who does business in the EU neighborhood countries (to include North Africa and the Levant) to read this article. And watch your arses! This is one of those times when I’m not just reading a good article and passing it along. So listen up sheeples and get yer money outta there if you haven’t already. Alrighty? And don’t go buying commercial real estate in Dubai or large industrial farms in Southern Egypt with the remains of your risk capital, okay?
Eniway [wink], I’ve noticed that the only national leader in the EU to get it remotely right is Sarkozy. He spoke about the existential threat to Western capitalism as if it (capitalism, not the threat) had already failed to survive. That was before he furtively backed (and then didn’t) a €300 billion rescue plan that utterly failed to be ratified. So what if he’s French. So what, I say! This has nothing to do with the fact that among otherwise arrogant and self-serving EU politicians, he was quite simply about as prescient as a politician could be – even if the monetary system in the EU ends up being spared le guillotine this fact will not change. As politicians go, he is sounding more like Adam Smith than many a number of too-self-conscious champions of free market economics today. If you don’t know what I’m talking about, then you just haven’t been reading up on your economics. That’s okay. You can click here to get away from this blog, where I’m sure you will be more entertained.
So let’s watch what happens to the euro. I confess, I don’t want it to go. I’ve heard more than one person in the US say they wish the euro and the EU would wither and die, but they don’t know what the hell they are talking about. (They should take a look at the mess we have made of things.) Take a look at EURJPY –
As you can see, this isn’t a price chart. It is a chart of the daily ranges of this pair since Jan 2, 2008. EURJPY is considered by more than a few sage people to be a barometer of the international monetary system. What is happening here is uncommon, to put it mildly. As the carry trade disappears down the rabbit hole and the notion of the euro as a fiat currency looks increasingly untenable (for now), there is absolutely no reason for the yen to appreciate the way it has. It is no small coincidence that in this period of painful deleveraging, the carry trade was one of the more highly leveraged plays out there — and it was thought at one time to be “risk free”. (And just take a look at AUD, NZD and GBP!) Those spikes, which started around the beginning of September, represent a death rattle of the carry trade a warning sign of the trouble ahead for the euro, the EU, and the international monetary system. If the euro dies in the next three years, the effects will be painful and widely felt. I suspect our international financial leaders are trying to figure out a way to protect it. I wish them well.
In the meantime, I tried to trade AUDJPY after the RBA announcement. (In case you missed it, they cut rates by 100 bps.) Of course, I wasn’t filled even though I specified bounds of 30 on either side of price. It would have been a killer news trade with very low risk, and I was just too small, too slow, and too retail. EURJPY buy-backs have almost erased today’s selling, with resistance currently sitting in the mid-14400s. The pair has been bouncing around in 100 pip waves the way it used to bounce around in 40 pip waves “back in the day”. The Kern River after a summer flood comes to mind. (In other words, wear a damn life-preserver!) I may enter long on a retracement toward today’s lows, but I may also just wait for a signal that goes with the current. I am wary of countertrend signals that print in strong and sustained moves. (Did anyone see those cascading stops below 10280 on the USDJPY last night? Danger for exporters in Japan!)
Not much scheduled on the calendar in the way of data for the rest of the day — but plenty of potential action as all the fatheads try to preserve what is left of liquidity and credit and the MSM clings to every little idea — no matter how banal — as if it were important enough to rip another 800-point hole in the Dow. EURJPY trades 13948 at 0523 UTC.
0804 UTC Update: Short USDJPY 10293 at 0720 UTC
0908 UTC Update: Close USDJPY 10179.9 at 0908 UTC
Nelson Yee said
Actually, the article’s still there.
The Lonely Trader said
Well then? Post the link! The original link that I posted doesn’t work.
Nevermind! The link is now mysteriously working…I swear it wasn’t working when I wrote the above post!
Peter said
Euro dies? I can’t picture it, if anything euro will gain more and more popularity over US dollar, even if EUR/USD falls close much further.
The Lonely Trader said
It’s not so much about the relative value of the Euro and the USD for me. It’s the political and fiscal/monetary strains of adhering to Maastricht and successive reforms to the Treaty that I’m wondering about. Successive reforms have only encumbered the decision process, not streamlined it. And the credit crisis and economic slowdown certainly aren’t helping matters — where the only sensible options for protecting member countries’ citizens seem to be in violation of the rules. Interesting situation. I think this is why more than a few observers (many of them Europeans) speculated several years ago that the euro would not survive its first crisis.
But hey, I’m with you. Time will tell.
LP said
Hey you saved my arse. You told me back in May that the Euro was fundamentally over-valued and I took your advise and started to read about it, and I didn’t hedge the fam money. What a great piece of advice. Danke.
Anyway, as far as the Euro, I don’t wish to see it die but man those 12 or so countries can get to consensus. They’ve got a few issues. If the Euro fails, what kind of impact do think the Euro farming policy will have on food prices around the world?
The Lonely Trader said
Whassup man. Glad you dodged that bullet…the EZ does have a few issues, doesn’t it? Most of them are just not talked about in the MSM. They are boring compared to what is going just about everywhere else, but they are very important.
Yours is a huge question. The agricultural sector, as you know, is the only sector in Europe with a common policy framework. In a nutshell, I think the CAP already kept the prices producers received artificially high and fairly stable. This encouraged more production — but at the same time high prices paid to producers also kept consumer prices high, discouraging consumption within the EU — though the EU commission would say that the CAP keeps prices “reasonable” for consumers while ensuring a “fair” standard of living for farmers. (Sounds like another ag policy we know!) This led to surpluses that had to find export markets. Further, tarrifs discouraged imports. The resulting surplus was then dumped on poorer countries — targeting specific markets and undercutting local producers in those countries. This had the effect of lowering international prices for raw agricultural goods, not increasing them — and has even affected prices of value-added ag goods, such as powdered milk. Anyone who has been to Sub-Saharan Africa has seen those ubiquitous Nido cans everywhere — even in remote rural areas you see them in every household…well, Nido is not an African product! (And there are many, many more examples.) Doha was supposed to eliminate all this. You know what happened in Doha.
Add the current situation to the problem, and it becomes more complicated. The general downturn in the EZ will reduce policy options available to decisionmakers for fiscal as well as political reasons — which in turn will undermine the reforms that everyone recognizes as necessary. Which in turn will prolong the negative effects in markets abroad. The reforms are currently a mix of direct and indirect payments, rationalization schemes, and preferential trade “partnership” agreements with neighboring countries — favoring some commodities over others, imposing quotas here and there, but not yet having the desired effect on the ground of disadvantaged countries…and making producers in the EZ and there populist politician friends kinda mad. Too big and nuanced for me to go into here. But if the euro fails, the impact on the CAP will be huge. I think you might see the protectionism stay, with transaction costs adding to producer and thus consumer prices…will the farmers still be able to produce surpluses? Not sure about that. Will individual countries be able to guarantee floor prices for farmers? Some may. Others may not. I think the ultimate impact of a failed euro will have a range of effects on different markets.
So what about the price spikes? What’s with the high prices in the developing world now? We know that CAP keeps prices high within the EU — okay, CAP keeps them “reasonable” — and tends to depress prices in other markets. Could CAP have played a part in the recent run up in commodities prices? Not sure…I stopped tracking it in any meaningful way after 2000. I think the consensus is that other factors created high food prices — all well covered in the press.
Didn’t answer your question…but the exercise was fun.
LP said
Holy cow man…I had to read that a few times…HTF do you know this shit?
Anyway, I just got a bit smarter today…
The Lonely Trader said
I have kind of a complicated past. One of these days we’ll have to meet up and have a beer or three and I’ll tell you my story.
http://www.linkedin.com/in/lonelytrader