Will the Euro's "Crisis of Confidence" Affect Amerika?

Will the Euro's "Crisis of Confidence" Affect Amerika?

by M. N. Artiste, June 4, 2005

The Euro accelerated its fall last week, not only continuing its 2005 decline but breaking down altogether following the Dutch and French "No/Non" vote on the new EU constitution. Wildly irresponsible but amusing remarks from Italy about the need to abandon the Euro and wallets, to return to the good old days of the Lira and wheelbarrows made the headlines, and shrivelled the ECB's manhood like a skinny dip in an alpen stream during December...at night in the middle of a blizzard. Chaos ensued and now we are all guessing about what will happen next!

Here is a sampling of current news about the new crisis:

Euro's Much Exaggerated Death

Euro 3 Year Chart Showing Relative Strength Index (RSI)

The gravity of this situation can be overstated, and as with many problems, fear itself is what causes the most damage. Tangible, costly effects will be seen however and the shock waves will reach Amerika.

Approximately 30% of global currency trades involve the Euro and the EU's economy is nearly as large as Amerika's. The Euro's decline reduces the value of Amerikaner holdings on the continent and will surely increase the cost of Amerikan exports to Europe, thus adding to Amerika's massive trade deficit problem.

Also, growth of the Euro as a "store of wealth" by central banks and investors around the world has been growing. These holdings have suffered losses in 2005 of more than 10%, and if the Euro is now seen as an unsafe storehouse then the US dollar becomes relatively more attractive -- which will likely add to the US trade deficit problem.

I expect that next week Euroland politicians will attempt to put the hobnailed jackboot on speculation concerning the Euro's demise. Things could get out of hand! Very ugly situations could develop as the passengers flee the sinking ship. But I cannot know for sure how this will play out in the end.

Interestingly, Sweden and Norway gave their citizens a referendum on adoption of the Euro and the vote was "No". But twelve other Euroland countries went ahead and surrendered their currencies without a vote by their citizens.

I cannot know how Europeans feel about their political masters, but I do recall that there was overwhelming popular opposition to the Iraq War but only token opposition by the political overlords. My guess is that the average citizen of Europe is ready to nunchuk any EU bureaucrat that shows his face in public. Still, Europeans are so civilized and polite compared to the average American, except for the Irish and EU soccer hooligans :), that there will be lots of talk and zero Molotov Cocktails or truck bombs. The crisis should fizzle out as people become bored with the whole thing, except for one tiny fact: people everywhere seem to care more about their money than anything else.

On the positive side, we see that gold is receiving buying attention lately. The price of gold in terms of Euros is rising, thus reversing the long-standing correlation between the two:

Gold in Euros

This may herald the long awaited day (by gold bugs) when people the world over begin to abandon "fiat currencies" and shift their "stores of wealth" to gold. If true, that would be bad news for globalization (hint).

The effect is also seen in the Swiss Franc:

Gold in Swiss Francs

Meanwhile, the Yen has continued to devalue against gold, so this is nothing new:

Gold in Japanese Yen

From the price action of gold in relation to these currencies the future that awaits us may be adduced: monetary and financial discipline are being abandoned by governments and central banks around the world! The next major global recessionary event will not be met with authoritarian austerity measures, but with 24-7 operation of the money printing presses and political bread and circuses.

All of this bodes well in the long run for gold and other storehouses of wealth. Harry Browne's dictum of 1/4 allocated to gold, 1/4 to bonds, 1/4 to stocks and 1/4 to cash never looked so wise as now!

In the event that the edifices of globalization and the financial systems remain standing after the Bushian and EU tsunamis pass over -- and assuming that an individual Amerikaner is free from detention by the secret state polizei -- Amerikan Dollars may be converted into electronic or "book entry" forms of gold and other commodities. For example, symbols "GLD", "IAU", "CEF" and "PCRDX" offer opportunities to rapidly debark the sinking ship. A discount stock brokerage account, held in abeyance for the opportune moment, provides the ability to execute such a transaction with a mere $10 commission. For example, 2000 shares of GLD could be purchased in 5 seconds at a cost about $84,400, with a commission cost of only 0.012% (not counting annual expenses in the instrument of around .5%).

It is said that chance favors the prepared mind, and how true that is. Unfortunately, human nature often prevents us from fully capitalizing upon opportunities even if we have fully prepared. Fear and Greed work against us, always, and oftentimes we behave like sheep, running hither and yon seeking the greenest grass abroad and ignoring the wolves at home -- at which point we reverse course and abandon everything fleeing the wolves. That's no way for Manly Men to behave. The trick is to know the truth and act with courage, determination and alacrity when Opportunity Knocks, in spite of our Fear, but to also act rationally and never in a mood of Greed, which inevitably causes losses in the long term.

Here is a tip about price changes in commodity-like items such as currencies, gold and what not (but excluding stocks and interest rates.) On the weekly charts above, the RSI indicator above the 70 line often indicates an imminent fall in price, while a RSI below the 30 line often indicates a rise in prices. The RSI indicator provides short term insight only and does not signal the long term prospects of the commodity in question. What it tells you at these extreme weekly values is that speculators in the futures markets are likely to move to the other side of the ship. Or, to put it another way, no pun intended, the RSI below 30 tells you that the water in the pot is so hot that all of the frogs who were going to jump out already have...

For patient Amerikaners, the recent rise in the dollar is a tremendous opportunity. But it is only a potential opportunity -- an opportunity to, at some point, sell dollars at a high price. The timing is in question, of course, and for that we look to the weekly RSI:

US Dollar Index

and perhaps Mr. Steve Saville's commentary which suggests that the US dollar rise may last into the middle of 2006:

Saville

Remember friends, money is a tool we must use to do things, preferably Constructive Things and Wise Things. So, in the famous words of Bill & Ted:

"Be excellent to each other."

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Mr. Artiste's hobbies include writing mathematical logic software; tending bonsai and goldfish; philosophical speculation; and being a Meddling Beezelwort for the Jackboot of Authority. He presently resides in Occupied Amerika within the fiefdom of Austrian strongman, Arnold Schwarzenegger. He also considers "The Blues Brothers" to be the greatest movie ever made :)