Stocks are getting hammered this morning as those “evil speculators” continue to sell the Euro. The plunge in the Euro has been dramatic this week – off 3.75%. Despite an EU that vocally challenged speculators , they have been entirely unable to control the free fall. The Euro is off another 1.1% as of this writing.
As regular readers know, what frightens me most about the situation in Europe is that the market appears to be sniffing out this inherent weakness in the currency. After all, the solvency crisis is catching all the headlines, but it’s the currency crisis that should be scaring investors – the solvency crisis is only a symptom of what is actually a much larger problem. That is clearly beginning to catch-on as investors begin to realize that the fiscal austerity, Euro TARP and the ECB’s nuclear options will not fix the inherent problem and in fact has the potential to make matters worse as Europe looks to be on the verge of continued economic weakness.
There have only been a handful of times in my life when I was very concerned about a major market dislocation. The last time I felt like this was in the first week of October 2008 when I wrote that the market was susceptible to a crash. Although I don’t think we’re due for quite such a dramatic event I do continue to believe investors are overlooking the gravity of the situation that confronts us. The inherent flaws in the Euro cannot be fixed thru government bailouts and ECB intervention. They can only be fixed thru real reform. In my opinion, this will likely mean one OR two eventualities:
- Germany takes its massive trade surplus and leaves the union.
- Smaller nations (such as Portugal and Greece) realize it is in their best interest to defect and default.
In the long-term, the Euro remains unworkable. The imbalances under the single currency system will remain regardless of policy approach. Without one truly unified government and treasury the problems will persist. In addition, Germany’s trade position will continue to act as a tax on the surrounding nations and this will continue to cause glaring disparities in monetary policy approaches.
It looks to me like the market is moving beyond the Greek bailout sooner than I expected. The sharks are coming for the Euro. They see a wounded animal and the market is beginning to realize that there is no good long-term fix besides a substantially weaker and/or potentially dead Euro. The uncertainty this could cause in the coming months is too great for me to fathom. The EU has gone “all-in” with a very poor hand. The market will eventually call their bluff and when it does it will not be pretty.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.