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Euro-zone Crisis, What Germany is Doing Wrong

Currencies / Eurozone Debt Crisis Jul 29, 2012 - 05:45 AM GMT

By: Bloomberg

Currencies

Best Financial Markets Analysis ArticleJohn Taylor, founder and CEO of the world's largest currency hedge fund FX Concepts, spoke with Bloomberg TV's Sara Eisen and said that Draghi's promise to do what's needed to preserve the euro will result in a weaker currency as the ECB prints more money than its counterparts. He said that Europe's crisis is in the "second or third inning...it's in the beginning. You've got a long way to go."


Taylor went on to say that Germany has to "realize that every time they sell a Mercedes to somewhere in southern Europe they're only borrowing German money to do it and they are never going to pay for that Mercedes. Either Germany has got to write off the Mercedes because they won't ever pay for it, or Germany shouldn't sell that Mercedes. But they don't want to admit that."

Taylor on whether he's optimistic on the U.S. economy:

"No. It sounds like the game that everybody plays in equity earnings. We knocked the number down so we can beat it a little bit. A couple of weeks ago, we were at 1.9%. Everyone said 'oh gee whiz, 1.9 isn't so exciting.' And then we knocked it down to 1.4%. And now we come in at 1.5% and we beat it. It's not that good."

On whether the U.S. economy will get worse in Q3:

"Yeah. I mean this is what we call stall speed where you can't tell what's going to happen and stall speed implies maybe you're going to stall."

On whether stall speed implies recession:

"Maybe. You don't really know what's going to happen from here. We are not adding jobs. And it's not a good place to be."

On whether the Fed will add more stimulus next week:

"Yeah. I think something's going to happen Tuesday/Wednesday. Obviously reported on Wednesday. And most likely, it's going to be Bernanke teasing us a little bit saying that QE is coming."

On whether he expects QE in September:

"Yeah...we just had some [weaker economic fundamentals] today. Even though everybody thinks are ok, they are not ok."

On whether he still likes the U.S. dollar:

"I do because Europe's going to do more quantitative easing or LTROs or SMPs or something. You're looking at which is printing more money and the one that prints more money, their currency goes down. I would argue right now that the ECB is going to print more money than the Fed."

On the euro rallying:

"Mario Draghi says I'm going to print a lot more money in order to make the euro strong? No, in order to make the euro weak. In order to save the euro...It's a short-term thing. I really believe it's a short squeeze. And today, we have not only Draghi, we have Merkel and Holland coming out saying we will do everything we need to save the euro...It's a sign that these guys are desperate. And I can't say that I think those are good signs.

On where Europe is in the fight to end its crisis:

"Considering that Friday afternoon and it's time to go to the baseball game or whatever, it's like the second or third inning although it's in the Olympics so maybe you have to talk in those terms...It's in the beginning. You've got a long way to go. The fact of the matter is we're still dealing with the liquidity issues--not the solvency issues and not the structural issues that are even beyond solvency that we have to have in order to create a Europe that will function without having summit conferences every month or so."

"I think they certainly are [getting closer] and their hearts are in the right place but you've got 17 different countries that has to vote on it and 27 countries have to vote on it in some cases. They're an awful lot of bumps in this road before we get home."

On whether he's adding to his euro shorts right now:

"No because I'm a little nervous that something might happen. It's a pull your hair out market. I am short too many euros already so thank you very much I don't want to get shorter."

On what Germany is doing wrong:

"They have to realize that every time they sell a Mercedes to somewhere in southern Europe they're only borrowing German money to do it and they are never going to pay for that Mercedes. Either Germany has got to write off the Mercedes because they won't ever pay for it, or Germany shouldn't sell that Mercedes. But they don't want to admit that. But that's a fact of life."

"They're either going to write the check or go through a very, very severe recession because nobody's going to buy Mercedes because they haven't got any money. Because Germany's not writing the check. So you can't get out of that fact."

On whether Spain should leave the euro:

"Yeah. Everybody's in the same spot. There lots of ways of measuring the deterioration of a currency and going all the way back to 1974, when Spain became a market based economy, you can see that currency depreciate on a regular basis the same amount every year. It just goes down and so they have to devalue. It's the only way they're going to get their act together again."

"They should restructure the euro so it allows devaluation or they should tie all the countries up. Mississippi exists in the same state in the same country as California. How do they do that? Well, it's because California ships Mississippi money every year. So Germany can ship money to Spain every year. They don't want to do that. You have to look at reality."

On whether he's worried about a hard landing in China:

"No. I think they have too many dials to twist in China. They can manage it...I'm not sure [we've seen the bottom in China] because I think they're trying to dial very slowly. And so I think that the turnaround's going to be slow, but I don't think there's going to be a crash. It's going to be quiet. Easy."

"I'm expressing that by liking Asian currencies and Australia. Obviously, they're exporting and selling stuff to China, buying stuff from China. So there's a lot of inter Asian pacific trading going on. And so that's very good. That's the best part of the world."

On the yen:

"It's a strange currency. Their interest rates are at zero. The U.S. interest rates are at zero. Europeans are getting close to zero. So those currencies can be compared as even. So you have to say which one is printing the most number of currency and the answer is the yen printing the least. So therefore there are fewer yen around so it should be worth more...The Bank of Japan really isn't -- they're not walking the walk. They're just talking. They're not printing the money. The U.S. and Europe are way out printing Japan so Japan's got to come out and drop yen bills from helicopters or something rather to make the yen weak."

bloomberg.com

Copyright © 2012 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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