Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15
Peter Schiff on U.S. Dollars, Drachmas and Debt - Video - 14th Apr 15
The Ultimate Middle East Dilemma: Time For Us To Stop Intervening? - 14th Apr 15
Greece Debt Default and Drachma By End of April? - 14th Apr 15
Coming to Terms With the American Empire - 14th Apr 15
The Ball is in the Stock Market Bulls Court - 14th Apr 15
Tech Stocks Bubble: Different this time? - 14th Apr 15
Stock Market Sixth Sense - 14th Apr 15
Separating Gold and Silver Stocks Saints from the Sinners - 14th Apr 15
Conservatives Bribe Labour Voters by Extending Right to Buy to Housing Association Tenants - 14th Apr 15
Stacking Silver = Simple Solution - 13th Apr 15
Why Markets Ignored Weaker Payrolls - 13th Apr 15
Tory Attack on Ed Milliband Backfires as Labour Takes Opinion Polls Lead - 13th Apr 15
A "Digitalized" Stock Profit Play Mr. Spock Would Love - 13th Apr 15
New Credit Crunch Underway: Can Recession Be Far Behind? - 13th Apr 15
Western Interest in Gold Continues to Decline - 13th Apr 15
Stock Markets Breaking Out Worldwide - Buy the Dips Ride the Trend - 13th Apr 15
Silver Price set up to get Whacked Again - 13th Apr 15
Gold Price Dome Cap, Fall Below $1000 Likely - 13th Apr 15
Stock Market Accumulation or Distribution - 13th Apr 15
BLS Economic Propaganda, Truth – The Cure for Cognitive Dissonance - 12th Apr 15
A Case for Monetary Independence - 12th Apr 15
Drought and the Failure of Big Government in California - 12th Apr 15
Stocks Bull Market Continues - 11th Apr 15
Why the American Consumer Will Never Be Back - 11th Apr 15
End Of Islam, Hinduism And Christianity And Rise Of The Age Of Humanism, Spirituality And The Universal God - Sanadhana Dharma - 11th Apr 15
Gold And Silver Nothing Of Substance Going On. Fiat “Dollar” Controlling? - 11th Apr 15
The Most Dangerous Financial Headline I’ve Seen Since 2008 - 11th Apr 15
Alibaba Pggybank Investment Will Make You a Millionaire - 11th Apr 15
Ghosts In The Machine - Population Growth vs Food Production - 11th Apr 15
Gold-Futures Short Covering Rally - 11th Apr 15
Is Bitcoin Price Going down Some More? - 11th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

Massive Currency and Debt Devaluations Lie Ahead

Currencies / Global Debt Crisis May 22, 2010 - 12:07 PM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleThe run-up in the stock market from March 2009 until last month was sharp and rewarding … for some. But there was one problem, it came with disproportional risk. You see, the stock market rose to an extent that it was pricing in perfection … a V-shaped recovery … a return to normal.

That overly optimistic view on the world can make for an ugly ending …


Because if there’s one thing we can assume after enduring a global meltdown of historical proportions, it’s this: A sharp return to normal is highly unlikely.

That common sense approach to risk aversion should be clear. And it’s why I find it troubling that stock market professionals have been scrambling to explain the recent decline in global stocks and other high risk investments.

They tell themselves, “This is just a healthy correction … earnings momentum is strong … the fear weighing on stocks is unwarranted.”

Then they quietly ask, “Is there something bigger going on?”

The answer: Of course there’s something big going on! And it’s sitting right under their nose, plain as day.

It’s a sovereign debt crisis, which is putting the world’s largest collective economy, the euro zone, in jeopardy.

And It’s Not Just Europe …

People around the globe should have gotten the wake-up call from the crisis in Europe. But denial is a strong emotion to overcome, especially for the stock market bulls that make a living from rising stocks.

Greece's problems are spreading around the world.
Greece’s problems are spreading around the world.

As I’ve warned in several Money and Markets columns, the problems in Greece aren’t just a European problem. Greece’s troubles have not only exposed the structural flaws of the European Monetary Union, but have also exposed the structural problems in the global economy.

Government officials around the world have attempted to put problems on hold for the time being, with the hope that they can deal with them later under better circumstances, when economies are stronger. They’ve responded to the debt problem by adding more debt. And that “crisis response” has only exacerbated a dynamic that created the crisis to begin with: Easy credit … i.e. debt.

We have benchmarks on how this likely turns out …

Historically, financial crises typically lead to sovereign debt crises. And sovereign debt crises typically lead to currency crises. All this is a recipe for tough economic times ahead.

Sovereign Debt Crisis Paving the Road for the Currency Crisis

The sovereign debt crisis is still unfolding. And a currency crisis is now upon us. When Europe chose to go all-in by pledging backstops for the downward spiraling weak countries within the euro zone, they made a conscious decision to devalue the euro and to inflate away the debt.

For those like the euro zone, which are backed into a corner, a currency and debt devaluation become the only option.

And with economies around the globe burdened with debt, addressing problems through currency devaluation becomes highly competitive.

You see, currencies are only valued on a relative basis, that means someone’s currency has to win the least ugly contest, and as a result appreciate against world currencies … in this case, it’s the U.S. dollar.

Meanwhile, three out of four of the most liquid currencies in the world — the euro, the pound and the yen — will likely be dramatically devalued before it’s all said and done.

As for the euro, many have been throwing around the possibility of the euro going to parity against the dollar.

Let’s take a look at my chart below to see just how low it can go …

Euro Weekly

The euro broke an eight-year trendline two weeks ago. It then retested that line last week following the announcement of the Emu stabilization plan, and it promptly failed.

This week, the recent downtrend in the euro breached the 2008 lows of 1.2330, a significant technical development.

Now we have the guidance of technical support levels that plot retracement points from the euro’s move off of the all-time highs of 2009 (1.60) to the all-time lows of 2000 (82 cents) …

  • Support #1, the 50 percent retracement level, tested this week … and held, so far.
  • The next support level comes in at 1.1205 (Support #2).
  • And then parity to the dollar comes into the picture (Support #3).

Don’t expect the euro to decline in a straight line. The European Central Bank wants the decline to be orderly, and will likely be intervening at levels along the way to slow the pace.

The Organisation For Economic Co-Operation And Development (OECD) puts a fair value on the euro at about $1.16 based on purchasing price parity. But in times of stress, financial markets and currencies are known to overshoot.

The Big Picture …

To get an idea of where financial markets are headed, it’s important to have a good grasp of the big picture, perhaps never more important than today.

For that analysis, I’d like to revisit an IMF study on 122 historical recessions. This study found that recessions that are global and synchronized with financial crisis tend to have slower recoveries than average recessions, typically running about five years before long-term trend economic growth resumes.

Considering the structural problems surrounding the global economy, we could be in another storm.
Considering the structural problems surrounding the global economy, we could be in another storm.

As an investor, that should give you a perspective on where we stand in the current downturn …

If you mark December 2007 as the beginning of the U.S. recession, we’re just half way through it.

Although economies are growing again, it’s highly probable that what we’re seeing now is just the calm before another storm. Or it’s a stimulus-induced surge off of low levels of economic activity that quickly deflates back into economic malaise.

Given the structural problems the global economy is facing, the “storm” scenario is most likely … in fact, I would argue it’s already well underway.

Regards,

Bryan

P.S. For more in depth analysis on the currency markets and specific recommendations on how to both profit and protect yourself from the unfolding currency crisis, I’d love for you to join me in my monthly newsletter, World Currency Alert. For more details please click here.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014