The Eurozone is back in the news again and – needless to say – it isn’t good.

The problem is Spain. Unemployment is almost 24%. Among those under 25, it’s 50%. Last year, the budget deficit was 8.5% of GDP. Tax revenue is down sharply. And the IMF projects that this year’s deficit is going to be another stunner.

This is a much bigger problem than Greece… or Ireland… or Portugal. Why? Because Spain’s economy is more than twice as big as those three countries combined.

Germany and France want Spain to bite the bullet and follow austerity measures. But the Spanish government is acutely aware that its citizens don’t want austerity, they want growth. They want jobs.

There is concern that Spain will drag the rest of Europe into recession. Remember: Europe is about one-fifth of the world economy (roughly equal with the United States). The 27 members of the European Union are the world’s largest importer (excluding exports to each other).

So while politicians dither, the clock keeps ticking. And investors on both sides of the pond keep wringing their hands. They shouldn’t.

Yes, politicians throughout the West are famously spineless, afraid to act (and therefore offend some special interest group) and always ready to kick the can down the road, especially past the next election. But, ultimately, the financial markets will force them to do the right thing.

How can we be sure? Because it always happens, and it’s happening now.

Opinions and talk are worth about what you pay to hear them. But investment capital is precious. And it doesn’t stick around where it’s treated poorly.

Note that interest rates on Spanish government bonds have already pushed up to 6%. This is a warning shot across the bow. Spain well knows that it cannot afford to keep borrowing at 7% or higher. At that point, its deficit becomes immediately unsustainable.

The Lesson All Politicians Learn

Ultimately, markets force politicians to make the tough decisions. At last they can tell their constituents the truth: “We simply have no other choice.”

All politicians learn this in the end.

Bill Clinton’s most famous quote wasn’t “I smoked it, but I didn’t inhale” or “The era of big government is over” or “I did not have sexual relations with that woman, Miss Lewinsky” or even “It depends on what the meaning of the word ‘is’ is.”

As Bob Woodward reported in his book The Agenda, Clinton was astounded to learn that he couldn’t just take whatever executive action he wanted or pass populist legislation to stimulate the economy. The markets would tell him what he could and couldn’t do.

Or as Clinton put it, “You mean to tell that the success of the economic program and my re-election hinges on a bunch of ****ing bond traders?”

Ah, daylight at last.

I’m not saying Europe isn’t a mess right now. It is. I would certainly stay away from European banks or Spanish bonds or euro-denominated debt of any kind right now. But in the end, financial markets will force Europe’s politicians to act responsibly.

And that’s a good thing.

Good Investing,

Alexander Green

Bill Clinton, Euro, Europe, Eurozone, Politics, Spain

How the Euro Crisis is Good for Your Portfolio

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 12, 2011: Issue #1662

I’ve been a table-pounding bear on the euro for almost two years now. With each passing day, that currency looks more and more like a failed government experiment.

Painful, structural changes are needed – and the profligate Greeks need to be booted out. And, even then, the euro is likely to continue its decline against other major currencies.

But the euro, perhaps in altered form, will survive. So don’t believe the doomsters who say we’re headed for another world financial calamity like we faced in 2008.

Too many investors are nervously sitting on the sidelines, missing great opportunities in today’s market. If you understand how the euro crisis is a good thing, you can start making serious money again. Here’s why…

Aside from being Chief Investment Strategist for Investment U, I also oversee the investment decisions of The Oxford Club – an exclusive community of like-minded investors. As I write, we currently have 21 open positions in our Oxford Trading Portfolio. Our average gain on open positions is 36 percent, even though our average holding period is 197 days.

During this volatile year, we also stopped out of 17 other positions. Five of these were sold at a loss. The other 12 were profitable. Our average total return on these 17 trades was 21 percent. (By comparison, the S&P 500 is up two percent for the year.)

One of the reasons we’ve prospered is that we ignored all the macro-economic squawking from week to week and focused instead on finding great businesses selling at compelling prices.

“That all sounds well and good,” an investor told me the other day. “But what are you going to do when the Eurozone collapses?”

Despite all the gloomy forecasts, that won’t happen.

One of the main reasons is Germany. Officials and citizens there aren’t panicking about the problems in the Eurozone because, in some important ways, they see it as an opportunity.

Yes, problems there are serious. Greece is a complete basket case. Italy, Spain, Portugal and Ireland have too much debt, too. But their problems are more manageable.

Germany knows this – and understands what’s at stake in the Eurozone. Germany is a world-class exporter. Yet because it shares a currency with weaker nations, its currency is cheaper and so, too, are its exports. The currency union has been like rocket fuel for Germany’s exports.

However, Germany doesn’t want to be put on the hook for bailing out smaller, spendthrift nations. And the country is particularly sensitive to criticism that it’s attempting to dominate Europe politically or economically.

So Germany is hanging back, treating the crisis much as the Republicans treated the debt-ceiling impasse earlier this year. The Germans see this as an opportunity to secure important policy concessions rather than an emergency to be solved at all costs.

Who can blame them? German unemployment is seven percent and falling. Deficits there are coming down. Germans don’t want to dictate to other union members. They want them to take responsibility and make serious reforms to their unemployment insurance system, their healthcare sector and other pieces of the welfare state.

Politically, these measures will be tough to swallow. That’s why we seen so much leadership turnover in Europe lately. But the time for half-measures is over. Even Sarkozy had told French citizens the uncomfortable truth: The state is simply unable to provide existing generous benefits much longer.

Once Europeans understand this in their bones, the necessary reforms can be made. And then, who knows, Americans may get serious about entitlement reform, too.

So don’t expect a financial catastrophe in Europe. These problems are serious and will take time to work out. But the currency crisis is a much-needed catalyst for important changes.

Recognize that and you can return to world equity markets with confidence – and start meeting your investment goals again.

Good Investing,

Alexander Green

Currency, Economic history, Economics, Economy of the European Union, Euro, Europe, Eurozone, Germany, International economics, Modal logic

There Goes the Euro… Again: Why the U.S. Dollar is Set to Rebound Against Europe’s Single Currency

by Alexander Green, Investment U’s Chief Investment Strategist

Thursday, November 18, 2010: Issue #1391

Eleven months ago, I began forecasting that the U.S. dollar would rise sharply against the euro.

Like most contrarian plays, it was widely mocked at the time. But it turned out to be a pretty good call until the middle of the year. That’s when the dollar started wilting again.

Today, however, the greenback is oversold once more and due for a bounce back. Here’s a quick rundown of what’s happening, why it’s happening – and what you should do about it…

Europe’s Turbulent 2010

I made my bullish case for the dollar near the end of 2009 for two primary reasons…

1. The problems with the U.S. economy and national debt burden were widely recognized and fully priced into the currency.
2. The problems in Europe were even worse. Debt as a percentage of GDP was just as high or higher in most countries across the pond. And nasty developments in the weaker member states were creating a problem for stronger ones.

As the financial crisis in Greece grabbed headlines earlier this year and began to weigh on the euro, the dollar rallied sharply against it in the first half.

But a bailout from fellow European nations and the International Monetary Fund shored things up – at least temporarily – and caused currency traders to begin focusing again on the large and growing U.S. budget and trade deficits.

That – plus the Fed’s announcement of “QE2″ (its latest round of quantitative easing) – has put the greenback on the defensive once more.

The Fed Keeps Pumping, While the European Dominoes Keep Falling

But two recent events indicate the dollar is set to resume its rise…

1. While the Fed is injecting $600 billion into the bond market to keep rates low, fixed-income investors are taking things into their own hands. The market is afraid that the Fed might be losing its grip on future inflation and fixed-income investors are voting with their feet, undoing Bernanke’s plans by selling off bonds and driving long-term rates higher. In turn, this is making the dollar more attractive to international currency investors.
2. There are fears that Ireland will default on its debt. This would be a much bigger blow to the euro than problems in Greece because major European banks hold more of Ireland’s debt. And there are fears that if Ireland needs a bailout, so will Spain. Spain is a potential precursor to Portugal. And Italy isn’t far behind either. Can you spell d-o-m-i-n-o-e-s?

“It’s been simmering for a while,” Scott Brown, chief economist of Raymond James & Associates, said this week of the European debt problems. “Now it’s coming to a complete boil.”

What to do?

Is Your Portfolio Ready for the Euro’s Next Tumble?

Don’t sell your foreign-currency denominated stocks, as share price appreciation can easily outstrip the negative effects of a weak currency.

But for investors keeping score in greenbacks, this is not a good time to have large holdings in euro-denominated bonds or bank accounts. These investments are likely to post negative total returns if the euro sinks to fresh lows against the dollar… as I believe it will in the months ahead.

The rap against the euro when it made its debut in December 1995 was that the member states had such disparate economies that they would find it impossible to march to the same fiscal and monetary policies.

For a while, it looked like the eurozone might pull it off. But today, the luster is gone. The euro could easily fall 15% or more against the dollar over the next six to 12 months.

Govern your portfolio accordingly.

Good investing,

Alexander Green

Business/Finance, Currency, Euro, United States dollar

Why the Euro Has Further to Tumble

by Alexander Green, Chief Investment Strategist
Thursday, May 6, 2010: Issue #1254

Being a contrarian is a lonely business.

If you’re a regular reader, you’ll know that ordinarily, I am market neutral on stocks, bonds, currencies and commodities.

The truth is that markets are reasonably efficient. So most years, I don’t stick my neck out and make any market calls on any asset class.

That’s because the vast majority of the time, most assets are neither grossly undervalued, nor wildly overvalued. Rational, self-interested investors keep prices close to true value.

But I am not an efficient market theorist. Investors are always self-interested, yes. But they are not always rational. And I most certainly do not believe that all publicly traded securities are efficiently priced all the time.

That would be lunacy…

Anomalies develop (and opportunities alongside them). Sometimes, these anomalies develop into outright bubbles. When that happens, you will always see eye-popping valuations paired with extreme sentiment. (In other words, sky-high prices and unbridled optimism or rock-bottom prices with extreme pessimism.)

What surprises me is how few investors recognize a bubble, even when it’s right under their nose and they have many thousands of dollars at risk…

Bubble Watch

For example…

• When I warned about the dangers of Internet stocks over a decade ago – I actually quit my Wall Street firm to take possession of my soaring pension shares – most respondents told me I was clearly ill-equipped to recognize the nature of opportunities in “the New Era.”
• Readers similarly scoffed at my warnings about the housing market five years ago. “Real estate always goes up,” they reminded me.
• At $150 a barrel, I wrote a column calling oil “The Mother of All Bubbles.” Demand was already waning and supply was rising as oil hit a new all-time high on various “peak oil” theories. It then quickly lost nearly two-thirds of its value.
• Five months ago – again, right here in Investment U – I predicted that the much-maligned dollar would soar against the euro. And yet again, my readers insisted that I was grossly mistaken and that a weaker dollar was “the ultimate no-brainer.”

Except it wasn’t…

Europe’s Monetary Policy Mish-Mash

Today, the euro hit a 14-month low against the dollar ($1.2689) on increasing recognition that Greece’s fiscal problems are bigger than expected, more expensive than expected and potentially contagious.

Trust me, this is far from over. The 16-member states in the Eurozone are about to start bickering like an old couple that has locked the keys in the car.

Understandably, weaker states don’t like having their economic policies dictated from Frankfurt. And stronger states don’t like spending billions to bail out their profligate brethren from years of fiscal mismanagement.

“Preposterous” Expectations for the Euro Against the Dollar

When the euro was born on January 1, 1999, skeptics rightly worried that the then-11-member states were too divergent to share a single currency and monetary policy.

These fears were well-founded. And the euro promptly plunged on world currency markets to well under $0.90. Today, we know that problems among member states aren’t just possible… not just probable… but right here, stinking to high heaven on our doorstep.

Yet the euro is still trading around $1.27.

Expect it to hit $1.10 by the end of this year – and trade at parity with the dollar sometime next year.

Sounds preposterous? Yes, so I’ve heard.

Good investing,

Alexander Green

Editor’s Note: Find out how The Oxford Club’s “market neutral” investment approach, combined with a keen eye for lucrative contrarian recommendations, led the Hulbert Financial Digest to rank the group’s Communiqué in the top five investment newsletters over the past 10 years.

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Behavioral finance, Business/Finance, contrarian investing, Economics, efficient market hypothesis, Euro, Finance, Financial economics, Financial markets, fundamental analysis, Stock market