A Strong Case For the Fall of The Euro

Discussion in 'Economics' started by libertad, Jul 6, 2008.

  1. Link doesn't work.
  2. Euro Bear About to Begin!
    Here�s How �Sub-Niche Traders� Plan to Turn A
    33% Drop Into Repeated Triple-Digit Gains

    By Erika Nolan

    On Wednesday, U.S. stocks entered bear market territory for the first time in 5 ½ years. Yet, at the same time, another bear market began. It’s one that most investors won’t pay much attention to. But it’s one that a handful of savvy traders may turn into a fortune.

    The European Central Bank (ECB) came out with a quarter point rate hike on Thursday. It was its first rate change in over a year. Normally, a hike tends to be bullish for a currency. And yet the euro started heading south faster than a flock of geese in winter.


    Because of the comments of ECB head Jean-Claude Trichet. As we wrote on Wednesday (prior to the meeting), Trichet’s comments would be key—much more than the widely expected hike. And Trichet clearly indicated that the ECB was not likely to engage in a series of rate hikes.

    That was all the market needed to hear to let the euro finally succumb to the economic laws of gravity.

    As Jack Crooks pointed out last week in a sold-out video interview with Justin Ford, the euro is overvalued by roughly a third on the basis of Purchasing Power Parity (PPP).

    The PPP phrase is a mouthful, but it simply compares a basket of what you can buy for your euro, yen, dollar or Swiss franc versus other currencies. Perhaps the simplest way to think of it is the famous Big Mac Index, created by The Economist magazine.

    This takes a standard commodity—a Big Mac—and compares the price you’d pay for it at McDonalds all over the world from Caracas to Hong Kong and Moscow. So if a Big Mac costs $3.10 in the U.S. but it costs $4 Coconuts in FiatLand, then the implied exchange rate should be $1 Coconut currency = $1.29 USD (4 divided by 3.1).

    But if FiatLand Coconuts are trading at $1.55 to the USD, let’s say, then the Coconut currency is overvalued by approximately 20% on a PPP basis.

    Of course, the Big Mac Index is a bit tongue-in-cheek and substantially over simplified, but, in essence, it tells the story. We’re in a world where we all compete for the same basic commodities—from oil to cement to foodstuffs. And not only is the euro significantly overvalued on the basis of PPP, the euro area is at a very vulnerable point in its business cycle.

    A housing bear market in the euro area—especially in formerly fast-growing Ireland and Spain—could cause a lot more economic and financial damage than previously expected. At the same time, wracked by inflation and tight credit markets, economies across the continent are beginning to slow.

    In short, as The Financial Times wrote on Wednesday, “the eurozone economy appears to be slipping towards “stagflation” – high inflation rates combined with low growth.” This, combined with its fundamental overvaluation, does not bode well for the euro in coming months.

    But for investors who are willing to look outside of stocks, it may present the single best opportunity to protect your portfolio in a stock bear market…and make significant profits from sustained downtrends in the euro as well as the pound.

    And you can even capitalize on the new bear markets in these major currencies without going out of your normal stock brokerage account! You simply have to know how to tap into the little known “sub-niche” market of exchange-traded world currency options…
  3. I dunno lib...

    Fear of a currency collapse in the states which is (what I think) is fueling this commodity boom to a certain extent won't be going away anytime soon until the US financial system stabilizes, likely after much pain.

    While there are real issues with EC stability caused by Ireland, and now Szarkozy viewing this as the test of his presidency (and France's influence in the EC), I am reticent to sell the euro short until interest rate capitulation occurs like here in the states. There, they actually seem to care about their currency!

    I expected a dollar retracement well below 1.50 so far this year. Continued dollar weakness is concerning.
  4. Rona1d


    when was that article in the link posted
  5. Rona1d


    the euro is not being overvalued...and the PPP doesn't hold historically