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Euro May Have To Devalue By Mid Year

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In an original interview with Handelsblatt, Felix Zulauf founder of  Zulauf Asset Management in Switzerland has declared that the euro will most likely experience a crisis by mid year and will have to devalue.

euroThe Euro crisis will escalate again says Felix Zulauf. Swiss money manager is preparing for a collapse of the stock market. But even greater is his concern that angry citizens could take to the streets.

The markets were expecting the world economy to recover, but he suspected that neither the economy nor corporate earnings would develop as hoped. Once the distance between “wish” and “reality” became apparent, “it could cause a crash.”

Timeframe? This year. Optimism might hang in there for a while; the second quarter would be more problematic. Over time, downdrafts in some markets could reach 20% to 30%. Despite the incessant insistence by Eurozone politicians that the worst was over, he didn’t see “any normalization.” The structural problems were still there, they’ve only been hidden, “drowned temporarily in an ocean of new liquidity.”

“Look at the economic data,” he said. “There is no visible improvement.” As if to document his claim, the Eurozone Purchasing Managers Index was released. It dropped again after three months of upticks that had spawned gobs of hope that “the worst was over.” Business activity has now declined for a year and a half. New orders, a precursor for future activity, fell for the 19th month in a row. While Germany was barely in positive territory, France’s PMI crashed to a low not seen since March 2009 and was on a similar trajectory as in 2008—when it was heading into the trough of the financial crisis!

Sure, the financial markets calmed down, but only because the ECB pulled the “emergency brake” by declaring that it would finance bankrupt states so that the euro would survive. It was a signal for the banks to buy sovereign debt. Borrowing from the ECB at 1%, buying Spanish or Italian debt with yields above 5%, while the ECB took all the risks—”a great business for the banks,” he said. As a consequence, the banks were once again loaded up with sovereign debt. “The problems weren’t solved but kicked down the road,” he said.

Politicians would muddle through. Government debt would continue to rise. But next time something breaks, the pressure would come from citizens, he said. Standards of living have been deteriorating. Many people have lost their jobs. Real wages have declined. “We’ve sent millions into poverty!” People were discontent. And it was conceivable that “someday, they could go on the street and attack these policies.”

Mid year is the timframe for the euro to hit a crisis. Draghi will have no choice but to “lira-ize” the euro.

Countries were devaluing their currencies to gain an advantage. This “race to the bottom” could escalate to where governments would impose limits on free trade. The devaluation of the yen would hit other countries. In Germany, it would pressure automakers, machine-tool makers, and others. By midyear, he said, “Europe will reach a point when it can no longer live with this euro.”

It would have to be devalued. France’s President François Hollande was already agitating for it. “And he has to because the French economy is in a catastrophic condition. It’s no longer competitive. France is becoming the second Spain.”

But didn’t the ECB emphasize that the exchange rate was irrelevant for monetary policy? And wasn’t the Bundesbank resisting devaluation?

“The policies of the Bundesbank are unfortunately dead,” he said, and its representatives were only “allowed to bark, not bite.” Monetary policy at the ECB was made by Draghi, “an Italian.” He’d push for the “lira-ization of the euro,” he said, “not because he likes it, but because he has no choice.” It was the only way to keep the euro glued together. “Mrs. Merkel knows that too, but she cannot tell the truth; otherwise citizens would notice what’s going on.”

So what does Zulauf recommend ?

Given this dreary scenario, what could investors do? Long-term, equities were a good choice, he said, but this wasn’t the moment to buy.

Gold? That it was down from its peak a year and half ago was “normal,” he said. Currently, gold funds were forced to liquidate, which could cause sudden drops, but it also signified “the end of a movement.” He expected the correction to end by this spring. “Long-term, the uptrend is intact,” he said.

Bonds? They had a great run for 30 years but were now “totally overvalued”—in part due to central banks that had bought $10 trillion in debt “with freshly printed money” over the past five years. Debt markets were completely distorted, but central banks would be able to hold the bubble together for “a while longer.” So he admitted, “Last summer, I sold all long-term debt.”

But where the heck was he putting his money now? That’s when he made his sobering remark, “I’m sitting on cash.”

Source: Testosteronepit, Handelsblatt

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US: Fiscal Disaster Up Ahead

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Excellent video presentation from McAlvaney Wealth Management of the fiscal disaster up ahead and how to prepare for it.

Jim Rickards: US to Devalue Currency

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Jim Rickards gives an interview to Casey Research. Key points are below.

  • Although there was an intention to devalue the dollar(to make exports cheaper) it hasn’t happened so they will try harder.
  • US imports more than it exports so higher import costs will hurt Americans.
  • The FED wants inflation to force people into borrowing and spending by importing inflation from abroad. By 2013 a lot of inflation will show up.
  • Fed’s interest rate policy is really theft by robbing savers by handing over money
  • to the banks i.e wealth transfer or theft. Obama did promise a wealth transfer.
  • The US dollar as a percentage of other nations reserve currencies is decreasing.
  • The FED wants to scare people into spending money by trying to create inflation.
  • The losers will be those who trust the government. The winners will be those who hedge in some gold and silver. 20% would be good. Cash is good in the soft term to purchase other assets.
  • The wealthy often break it down as 1/3 gold, 1/3 land, 1/3 fine art.
  • Fine art investment funds are good for those who don’t want to pay over and above for  art.
  • Stocks will go up, but against inflation it wont be good or if it’s a bubble its risky. At least use tangible assets underlying the stock.
  • Core official inflation rate is rigged because it doesn’t include food or energy costs.

 

 

Wolfson Interview on EuroZone Exit

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Wolfson interview with RT on exiting the euro.

Devalue The Euro To Save It

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A few weeks ago ZeroHedge ran an article outlining the possibilities for the euro after the EU summit. It reached the conclusion that devaluation would be the end point. Joshua Brown reaches a similar conclusion that the only way to save the euro is devalue it, but how do you convince the Germans? The method to do this is the ESM borrowing from the ECB to circumvent the existing rules and limitations of the ECB.

Is it time for Germany to accept the fact that the only way out of economic hell is an export-led recovery, brought about by “dollar parity,” (a one for one exchange rate between dollar and euro) so that peripheral economies can become competitive again?

Is this the part where Germany gets over the fear of 3 to 4% inflation (as opposed to the current 2%) because a bit of inflation is a much better long-term risk than a break-up of the common currency?

Does the ECB need to just suck it up and start printing already? Do they need to blow up (devalue) the euro in order to save it?

Today’s cover story in Barron’s makes a highly compelling case that not only is this the best course of action, it may be the only one left once the austerity mandates and lending facilities have run their course.  The basic idea is that the newly formed and almost funded ESM (Euro Stability Mechanism), which will begin with $500 billion – $100 billion of which is already going to Spain – could borrow from the ECB on an unlimited basis.  This would be the closest thing the Euros have had to what the Fed/Treasury have done here in the states.  It would drive the euro currency value down, allowing Spain and Italy to become more competitive on the global stage for manufacturing, exporting etc, even as spending reforms are adopted.  Germany would bear the brunt of the minor inflation this would induce, but it would benefit from the drastic uptick in economic activity and the cessation of Permanent Crisis Mode that’s frozen so much of the continent (not to mention the threat to the rest of the world that Germany likes to sell to).

Let the currency wars continue. Of course devaluing currencies was exactly what happened during the 1920s and 30s with disasterous consequences globally and it looks as if we are heading down that same path.

Devalue the Euro?

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The fallout from the EU summit will be evident in the coming weeks but with solutions agreed only in principle this still leaves the eurozone in a vulnerable state. The article from ZeroHedge teases out the possibilities but the logical conclusion is for the euro to be devalued.

First of all the EU is limited to act when the market turns nasty on the euro crisis.

If I’m right, after a few weeks things turn south again in the capital markets. Then what?

– More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.

– Cut ECB % rate. Doesn’t matter. It won’t change conditions in Italian or Spanish funding markets one bit.

– A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.

– Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation).Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.

– The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.

– Merkel does a 180 and embraces Euro bonds. No chance in hell.

The US or China are going to start buying EU bonds? Lunacy – not happening.

-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.

There only possible solutions would be along the FX route, i.e.

1) Peripheral countries re-establish their legacy currencies. Spain will reintroduce the Peseta, Italy will bring back the Lira etc.

2) The Euro is split in two. There would be a Northern and a Southern Euro.

3) Germany leaves the Euro and re-establishes the Deutche Mark.

Although, the best solution of all is to devalue the euro.

These are possible outcomes. But I consider them to be unlikely. Too much effort has been taken to create and preserve the Euro for the deciders to throw in the towel anytime soon.

There is one currency option left. Devalue the Euro by 20++%.

This would make a difference. It would go a long way towards stabilizing the real economies of Europe. It would create inflation, something that is sorely needed to devalue the real size of Europe’s debts. Germany would agree to this as it preserves their export-competitive position within the EU, and improves it outside of the EU. The technocrats in Brussels would love it; it’s the only thing left that would preserve the monetary union.

Is this feasible? I say it is. It has happened twice before in history. In 1985 the world got the Plaza Accord that devalued the dollar and in 1987 we got the LouvreAccord that revalued the dollar. In both cases, the global central banks (CBs) and acted together.

With Plaza Accord, the CBs made a joint announcement on a Sunday evening that they would be selling the dollar against major currencies until such time as a meaningful devaluation had been achieved. It worked.

Would the US, China and Japan go for this?

The USA and China would absolutely hate to see a devaluation of the Euro. It would hurt their respective economies. But the deciders in China and Washington also know that a complete breakdown of the EU economy would lead to a global depression.

The timing of something like this is critical. Would Obama instruct the Treasury Department to intervene in the currency markets (via the Federal Reserve)? He would, if it happened in the next few months. The consequences would not be felt, in a meaningful way, by US exporters until after the November election. Obama also understands that if the EU goes belly up before the election, his chance of winning goes down. If the EU tanks, so will the S&P.

China and Japan would have some say in this in order for it to be successful. The CB interventions would have to be coordinated. If the UK and US go along with it, then Japan will be forced to join in.

China is a wild card. If China participated, it would be devaluing its own Euro reserves. It would cost China a few hundred billion dollars. But it would cost China far more if the EU went into the crapper for the next five years.

Source: ZeroHedge

Greece Must Remain In Euro, Otherwise Its Success Outside, Would Encourage Others To Leave

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Normally a country in debt crisis would devalue its currency, suffer short-term pain and then reap the rewards of instantly being cheaper. Although in the case of Greece which doesn’t have a strong export industry it would still have a massive benefit if it was to leave the euro. In the case of Iceland, it successfully devalued and is growing its economy again, although it has mainly escaped the attentions of the presstitutes. There you have it, the MSM and EUssr does not want Iceland’s success story to be told for the same reason it doesn’t want Greece to leave the euro, because it knows this is the correct way to handle the debt crisis and other countries would want to follow.

The elites of the EUssr are desperate for Greece to remain with the euro because its eventual successful recovery with a new currency with cause the euro to collapse. Consider the following article on FT from Arvind Subramanian (a Senior Fellow at the Peter G. Peterson Institute for International Economics, which counts amongst its directors numerous influential Bilderberg members, including former Federal Reserve chairman Paul Volcker, former United States Treasury Secretary Lawrence Summers, and Bilderberg kingpin David Rockefeller). Someone is scared!!!

Expelled from the eurozone, Greece might prove more dangerous to the system than it ever was inside it – by providing a model of successful recovery.

There is an overlooked scenario in which default is not a disaster for Greece. If this is the case, the real, more existential threat to the eurozone might be a very different one, in which the Greeks have the last laugh. Consider that scenario.

The immediate consequences of Greece leaving or being forced out of the eurozone would certainly be devastating. Capital flight would intensify, fuelling depreciation and inflation. All existing contracts would need to be redenominated and renegotiated, creating financial chaos. Perhaps most politically devastating, fiscal austerity might actually need to intensify, since Greece still runs a primary deficit, which it would have to correct if EU and International Monetary Fund financing vanished.

But this process would also produce a substantially depreciated exchange rate (50 drachmas to the euro, anyone?) And that would set in motion a process of adjustment that would soon reorientate the economy and put it on a path of sustainable growth. In fact, Greek growth would probably surge, possibly for a prolonged period, if it adopted sensible policies to restore rapidly and sustain macroeconomic stability.

Examples of successful devaluations

What is the evidence? Just look at what happened to the countries that defaulted and devalued during the financial crises of the 1990s. They all initially suffered severe contractions. But the recessions lasted only one or two years. Then came the rebound. South Korea posted nine years of growth averaging nearly 6 per cent. Indonesia, which experienced a wave of defaults that toppled nearly every bank in the entire system, registered growth above 5 per cent for a similar period; Argentina close to 8 per cent; and Russia above 7 per cent. The historical record shows clearly that there is life after financial crises.

This would also be true in Greece, even allowing for the particularities of its situation. Greece’s low export-to-GDP ratio is often said to preclude the possibility of high export-led growth. But that argument is not ironclad because crises can lead to dramatic reorientations of the economy. India, for example, managed to double its similarly low export-to-GDP ratio within a decade after its crisis in 1991, and doubled it again in the following decade even without a big currency depreciation.

To put in context, Greece’s successful potential exit from the euro could have massive ramifications. Germany may have to concede way more ground to hang on to its free lunch.
Suppose that by mid-2013 Greece’s economy is recovering, while the rest of the eurozone remains in recession. The effect on austerity-addled Spain, Portugal and even Italy would be powerful. Voters there would not fail to notice the improving condition of their hitherto scorned Greek neighbour. They would start to ask why their own governments should not follow the Greek path and voice a preference for leaving the eurozone. In other words, the Greek experience could fundamentally alter the incentives for these countries to remain in the eurozone, especially if economic conditions remained grim.

At this stage, politics in Germany would also be affected. Today, Germany grudgingly does the minimum needed to keep the eurozone intact. If exit to emulate Greece becomes an attractive proposition, Germany will be put on the spot – and the magnanimity it shows in place of its current miserliness will be the ultimate test of how much it values the eurozone. The answer might prove surprising. The German public might suddenly realise that the eurozone confers on Germany not one but two “exorbitant privileges”: low interest rates as the haven for European capital and a competitive exchange rate by being hitched to weaker partners. In that case, Germany would have to offer its partners a much more attractive deal to keep them in the eurozone.

Such a scenario would be rich in irony. Greece is viewed as the pariah polluting the eurozone; its expulsion might make it a far bigger threat to the single currency’s survival. If a eurozone exit creates the conditions for a rebound in Greece, it may prove an infectious model. The ongoing Greek tragedy could yet turn out not too badly for the Greeks. But tragedy it might well be for the eurozone and perhaps for the European project.

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