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| Daily Jurojin - Monday, May 11, 2009 |
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Monday, May 11, 2009 The path ahead for the euroThe new week begins as the old one ended. The United States has the highest rate of unemployment in a quarter century, while around 5.7 million jobs have been lost since the recession began. Soon, we'll be able to say that the recession has been with us for two years. We won't harp on about how bad things could get. Most people seem to be taking heart from the turning point in the economy's fortunes. Indeed around the globe a reduction in the velocity of contraction has spurred investors to buy equities and shun bondsThe perception that a full-blown recovery is merely six months away has persuaded investors that if they don't act fast, they'll miss the boat. And others see rising prices as too good an opportunity to miss. A new trend is here, which means the odds are once again stacked their favor and so why miss the chance to make a fast buck? Now that the spring is here, we have to admit that things do look better than just three months ago. Perhaps that's simply a factor of the warmer spring weather as fresh seasonal life gets breathed into the housing market creating the illusion that things are turning back to normal. As that thought has permeated currency investors' minds, they have started to lighten the load somewhat on the dollar front, favoring instead the single European unit, the euro, which last week sprang back to life above $1.3630 for the first time in about six weeks. We're long enough in the tooth to realize that you can't fight a trend and we see it as part of our mission here to time all and any position entries finely. But there seems something fundamentally flawed in this latest bout of euro strength. Going back about six weeks, the euro bolted on signs that the Fed was about to start easing through quantitative methods. Investors began to fear inflation down the road. The jury is still - and is likely to remain - out on whether inflation will result from the Fed's purchases of government and corporate paper to help spur lending practices. The market then worried itself into an early grave as to whether the European Central Bank would do the same. And courtesy of the apparent turning point in the recession, the ECB has got away with offering to buy just Eur60billion worth of high-grade European corporate debt. That'll do a fat lot of good. So the dollar got it in the neck first from the perceived recovery and the assumed loss of the dollar's safe haven status. Second, investors chose the euro over the dollar as a result of the relative doses of quantitative easing attributable to each. The ECB in one sense is hitching a ride on the coat tails of the actions of the Fed. At the end of the day, we believe that the dollar is far from toast and that investors are jumping at the euro for all the wrong reasons. They are as premature as equity buyers are today. The reason we state this is because over the coming months investors will realize two things. First, the recovery will remain elusive. A slowdown in the pace of contraction is not necessarily the same thing as a rebound in economic health. Second, the recovery when it finally arrives will be far less robust than investors currently expect. The main reason is that the financial system will be more heavily regulated and there will be no return to the credit lending practices of yesteryear. That's a massive detractor from growth. We'll sign off today with an article from the front page of Saturday's edition of the Financial Times. The article notes the trend in baby-boomers returning to work in their 50s/60s when they should be primed for retirement. Mutual funds decimated by the economic collapse have left soon-to-be-retirees short of cash. In one case a couple's nest egg made up of two townhouses worth $450,000 each have seen their combined values wither to $275,000. Despite an overall rise in the rate of jobless to 8.9%, the number of over-55-year olds joining the labor force has risen by 800,000 at the same time. We think it's time that people started to redefine their expectations of economic recovery. That term is not consistent with a return to former glory. After this recession is through, expect a far more conservative pace of growth. With European growth sadly lacking that of the U.S. in recent years, one can only speculate over what their rate of growth will be going forward. Their failure to adopt quantitative easing at this critical stage of the recession will very likely come back to bite them. That's not a good omen for the euro. The Supreme Council of the Secret Order of Jurojin |
