| Friday, 19 February 2010 23:18 |
The Euro is doomed to fail
I picked up Adventure capitalist by Jim Rogers and was ready to read it through during Chinese New Year. Just as I turned out the first page of the book, I saw this column of author’s conclusions and I was amazed to see a strong point made – the Euro is doomed to fail. Looking at how things played out today, I regret not picking up this book earlier. In fact, as I read financial times this morning, I saw a column on James Grant, a celebrated U.S bond analyst, who had supposedly told his clients to buy some Greek credit default swaps (CDS). These CDSs serve to protect the clients in case of a bond default by Greece. All these show one thing. There are numerous analyses out there that are speaking the truth, and all you have to do is filter. Easier said than done, isn’t it? This is probably why I dislike economics so much. The coin always has two sides. I’m not a master of what’s happening now so I can’t pinpoint the issue exactly. All I know about the situation is that many countries are going bankrupt. If you were to rewind back into history, Sterling pound was facing the same issue Greece is facing now. Was Euro a utopian plan? I guess it is tough for so many countries to coincide their plans today. You see, Greece’s economy is around $300 billion. There are many other countries in Europe right now that may go down the same path Greece is heading now. Will they get bailed out eventually? Probably. It doesn’t matter. What I know now is that we have money to make these days. The Euro/Dollar play has been really volatile. In matter of months, Euro has dropped 10% against the dollar. While 10% seems really little by most people with only equity background, think of 10% in terms of the amount of imports and exports that a country makes. The number is huge. Nonetheless, for small investors like us, we have to seek leverage through either Forex contracts or online FX trading platforms. I have also been wondering how students like us can trade CDS. It will be interesting to be part of the collapse should something like Russia in 1998 happens again. It is probably my nature to bet something to go down. I love shorting. On the other hand, I guess one can opt to buy some US dollar. It is about time we have more serious upside to the dollar and even U.S bonds. During this research discussion meeting that I have with my research sub-commers, I mentioned about the tandem between U.S bonds and German Bunds and that U.S bonds have recently moved away from this relationship and posted almost twice the amount of gains that German Bunds made. This is probably a sign of what’s happening today. More people will be seeking for safety havens and looking for U.S bonds. Dollar will appreciate but for how long? Doesn’t U.S.A have her fair share of problems too with more than 10 trillion of debts? My president asked why isn’t Dollar depreciating these days? My answer: The market is never rational. Will Euro fail? It is highly possible. Everyone knows, but when, we don’t know.
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So you expect a tighter political union to be formed. Well, I don't know about that. To me, having an union that seek to tie economics of different calibre and different constituencies is an utopian idea. It is like communism in my opinion. The idea is great and ideal but when humans are in play, we all know that corruption can never go away.
I don't really know much Copenhagen climate change. From what I remember, I think the result is not that successful and a lot of people are complaining about the waste of resources to hold such a meeting. Nonetheless, I'm of no position to comment about it.
I shall probably quote Jim Rogers - "No currency union has ever survived in history. No free trade pact has survived in history".
This underlies a lot about human nature. If I'm not wrong, Soros was also saying that Euro was a political decision but not an economical one.
I think this is a pretty good read. So maybe you want to check it out - http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/03/02/europe-on-the-ropes.aspx
euro is not financially or economically mature. And, it's failure is possible if fiscal policies &governance will be separate as it is today. However, once a tighter political union is formed, the EU will certainly become a real power and the problems of euro (the currency) were mostly be solved.
Will such a political union be formed? Yes.
First, they have to, or not only the currency will fail but also their other interests will ignored as well (just recall the Copenhagen climate change which is an Euro initiative).
Secondly, they have the required level of unity, determination, vision and audacity. Just comparing the ASEAN and the EU, the members of the EU have done much more than those of the ASEAN. Their courage to form a single currency itself is one of the many unthinkable achievements they have made
The euro will be volatile, and the debt crises are far from over. However, the euro will survive (probably amended somehow ) as the consequences of its failure makes the failure unbearable.