Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Don't Fear the Euro Currency

Currencies / Euro Oct 23, 2010 - 06:04 AM GMT

By: Michael_Pento

Currencies

Best Financial Markets Analysis ArticleWhen the euro hit a low of $1.1917 against the US dollar on June 7th, 2010, the airwaves crackled with assertions that the European common currency, beset by Greek debt problems and intra-union discord, was destined to trade at parity with the greenback. They were wrong. Since then, the euro has risen over 17% against the dollar, hitting $1.3961 today. The current upswing, delivered courtesy of the Fed, has at least temporarily silenced the euro's critics. It should also serve to impugn the notion that the US dollar holds a permanent position as the world's reserve currency.


To be clear, I have always felt that the euro is just another flawed fiat currency. However, since its inception in the 1990s, it has earned my begrudging respect. Most analysts have reservations about the euro, but I see cause for some confidence.

Together, the 27 countries that comprise the European Union represent the largest single market in the world. Its GDP on a purchasing power parity (PPP) basis was $16.5 trillion in 2009, which is greater than the $14.2 trillion US economy in that year. The economies of the 16 countries in which the euro is legal tender produced a GDP of about $10.5 trillion on a PPP basis. That is equivalent to 74% of US total output in '09. Therefore, the economy of Europe, however measured, is similar in size and scope to that of the US and should be viewed with the same gravitas.

Rather than the comparative size of the two massive markets, the primary issue is that the US dollar accounts for 62% of global central bank reserves, even though it represents less than 25% of global GDP. In comparison, the euro represents just 26% of FX reserves. Why does the US economy deserve such a tremendous over-weighting of central bank reserves, and is this a net benefit to dollar investors? I argue that since their currency holdings are so vastly concentrated, global central banks are in a tenuous and vulnerable position. Should they ever need to reduce their dollar holdings - especially in concert - it would place tremendous downward pressure on the US currency. Meanwhile, no such over-owned condition (along with concomitant pent-up selling pressure) exists for any other currency.

Currently, the gross national debt of the US stands at 93% of GDP. The European Commission projects that their gross national debt will reach 84% of output this year and 88.2% in 2011. The Congressional Budget Office projects our national debt to reach over 100% of GDP in 2012, whereas the national debt of the EU will not reach 100% of output until 2014, according to the European Commission. Finally, US interest rates are much lower than those of the eurozone. From the looks of it, it's not the euro analysts should distrust, but the dollar.

But What Happens the Next Time Down?

Investors the world over have traditionally flocked to the US dollar for safety. Many well remember the fall of non-dollar currencies in 2008, when the Dollar Index surged 27% and crushed most commodity prices, including gold. How do we know that the next international crisis won't cause the same global flight into the "safety" of US dollars and out of secondary currencies like the euro? The answer can be found in comparing the Fed's current approach with the strategy it employed two years ago.

Ben Bernanke's initial response to the credit crisis of 2008 was fairly muted. Given today's era of accommodation, it may surprise investors to be reminded that the Fed left interest rates unchanged throughout the entire panic period from April 30ththru October 8th, 2008, despite the fact that the S&P 500 dropped 37% during that time. And Bernanke only slightly increased the monetary base by $160 billion during that drubbing in equities. So, given the uncertainty and confusion that reigned and the Fed's promises of stability, global investors flocked to the dollar, as they have done in Pavlovian fashion ever since the Bretton Woods Agreement was signed more than 65 years ago.

However, since the initial crash, the Fed has abused the dollar so disastrously that the remaining well of confidence has dried up. Ben sent out a fleet of helicopters to demonstrate to the world that he would not tolerate the appreciation of the USD or allow price levels to contract. While other central banks are beginning to tighten policy, the Fed has only promised more "quantitative easing."


On the fiscal side, lawmakers in Washington have diverged from their counterparts in Berlin and London by refusing to consider any measures that would address growing debts. While austerity takes hold around the world, profligacy still runs rampant in the US.

In short, we are sending a loud and clear message to global investors: "You will be severely punished for seeking shelter in our currency and bond market!" The monetary base has doubled since the crisis, to $2 trillion, and the announcement of another dramatic increase is expected at the conclusion of the next FOMC meeting on November 3rd. The Fed has engineered robust "growth" rates in all the monetary aggregates, but yet has gone on record for the first time in its history saying that the rate of inflation is too low. All this has resulted in the US dollar losing nearly 13% of its value since June.

I went on record last summer saying that selling euros (or most any other currency) to buy US dollars is sort of like exchanging your ticket on the Titanic for a ride on the Hindenburg. The only safe forms of money are those that act as a store of wealth, preferably because their value will not be recklessly diluted by fiat. The Fed has put the world on notice that the dollar can no longer be viewed as a safe-haven currency. No such notice has been posted by the European Central Bank. And although no fiat currency is really safe, it is clear some are abused much less than others.

During the next phase of the crisis, it is likely that investors will be more cognizant of these facts than they were in 2008. As a result, I would expect them to seek shelter outside the dollar, perhaps in other currencies but also in commodities and precious metals. The days of panic dollar spikes may finally be over.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free newsletter. Click here for more information.

By Michael Pento
Euro Pacific Capital
http://www.europac.net/

Michael Pento is Senior Economist and Vice President of Managed Products for Euro Pacific Capital. He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets.

Copyright © 2010 Euro Pacific Capital, Inc.

Disclosure: Euro Pacific Capital, Inc. is a member of FINRA and SIPC. This document has been prepared for the intended recipient only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Data from various sources was used in the preparation of this document; the information is believed but in no way warranted to be reliable, accurate and appropriate. Euro Pacific Capital, Inc. employees buy and sell shares of the companies that are recommend for their own accounts and for the accounts of other clients.


© 2005-2022 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