JOHN TAYLOR: THE EURO IS IN A “DEATH STRUGGLE”
John Taylor, the world’s largest FX hedge fund manager joined Bloomberg this morning to discuss his outlook for the global economy. He says the Euro is in a “death struggle”. Via Bloomberg TV:
Taylor on the outlook for the euro:
“It is absolutely incredible. It’s a death struggle for this currency. It is really worse than I could have dreamed it being. And unfortunately it has a bleak outlook ahead.”
On whether there will be a breakup of the euro:
“Probably. Some parts of the euro will have to be out. There is no way Greece or Portugal can stand it.”
On why the euro is not back down to $1.20 given its bleak outlook:
“What’s stupid is that the ECB is holding it up. Why are they holding up the euro? One of the problems, besides the ECB, is the banks are shrinking, and the banks are selling all of their offshore assets and bringing them back to Europe. That means in fact there is a persistent buyer of euros and it’s their own financial institutions.”
On why the euro spiked in October and went back down in November:
“It is really hard. For me the outlook is bleak, but there is always the hope that the bleaker it gets the more the governments are going to wake up and do something. It gets to be this bipolar situation. The worse it is, then by God something will happen. That is what happened yesterday. We had articles coming out over the weekend saying that Europe had 10 days to live. The next thing you know, boom, the euro is way up. If it is that bad, [Angela] Merkel has to wake up and do something.”
On the yen:
“The market does not know what the hell to do with Japan. Things are very quiet in Japan. The economy is not growing very much. We have gotten over the earthquake thing. Toyota made the comment yesterday they will have to move business offshore. It looks to me like the dollar yen is going to rally slightly. On the other hand, if Europe collapses, then money will move back into the yen because it is safer than Europe. Then people are scared of the United States because God knows what Bernanke is going to do. Of the four currencies, you’ve got Europe and England is very close. The U.S. has Bernanke to worry about. Japan is just sitting there. It’s like a rock. It is not growing or shrinking, it is just there. It is safe in a way.”
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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18 Comments
I agree with John Taylor and others who have bearish views on the Euro and on European banks, a coming deep recession in Europe, aka the Armageddon view. Unfortunately that has been the crowded trade, and now all the shorts are covering, driving this rally higher. How long will I have to wait before I make any money and get rewarded for being “right”. Now the market is responding to hopes that Taylor will be proved wrong by the EU politicians getting their act together at the last minute, and saving the world at the Dec 9th meeting. How many of you go along with the hopes of the bulls?
@larry
i have to agree with the tenor of your post.
assuming the eu leaders agree to some kind of bi-lateral grements that require italy and spain to submit to eu budgetary review, opening the way to some kind of ecb/imf/eurobond type activity, then the market will think everything is hunky dory.
except this more europe rather than less europe involves more debt rather than less debt, and i can’t see that the periphery has solved its competitiveness problems that gave rise to the credit imbalances.
so this type of “solution” may take the pressure of immediate insolvency off the table, but it doesn’t save the eu from a recession and, since austerity is likely still to be the theme for the periphery, perhaps a deep one at that.
plus, i wouldn’t be surprised if what the eu comes up with is a half-measure, owing to german reluctance, which only postpones (and perhaps aggravates) the need for credit writedowns.
Currency speculators don’t need to understand economics (and from his comments John Taylor doesn’t). They just need to understand what other speculators are doing and be ahead of the game.
It’s more akin to fashion than economics…… Do I stock up on thigh high boots this autumn or will Gaultier be pushing the tartan trews look?
Ah…Japan again….The bane of conventional economic thinking. 2 “lost decades” and they still don’t understand. It’s going to be a long depression.
Can I put a bit of a different spin ( coming from someone who had no idea what investing was until 25 y.o? )). Why everyone is so focused on things we measure the wealth in – euros, dollars. If you rename euros into marks or liras or wahtever you don’t get wealthier. Wealth is created by productive activity not by what we measure it in.
So, what if euro collapses? The banks will be closed for 2 weeks before new currency can be printed. This is nothing for Europe. There is practically no business activity over there in December-January anyway. The buildings will still stand, the factories will still work, the crops will still grow.
The only ones for whom it is big deal is bankers and americans, who are slaves of the stock markets through their pension plans. If you talk to an average european, they are not in a panic mode at all.
@es
i actually believe merkel thinks along these lines, and that she really is the only eu leader who really cares about the eu’s ultimate best interest.
i think she wants to see a eurozone which is fiscally and politically stronger and unified, but that the only real way to get there is to suffer some financial stress along the way.
either you bail out the banks and have the populace endure terrible austerity, or you have bank shareholders suck wind and see towards a day where the populace might prosper (assuming that each country adopts germanic reforms to their social wlefare system).
sarkozy just cares about keeping the french banks solvent until the next election
Europeans have a lot more skin in the game than they know as most private insurance is tied to bonds of some kind, most of them sovereign.
Having a few of the weaker members leave the EMZ (perhaps temporarily) or default wouldn’t necessarily kill the euro. However there is palpable tension between France and Germany and this could prove fatal if the rift becomes too wide.
One scenario would be that Italy threatens to default or leave the EMZ if it doesn’t get some support from the ECB. And since French banks hold a lot of Italian debt, France might be inclined to take Italy’s side.
No matter what happens, some kind of European recession seems likely.
http://www.project-syndicate.org/commentary/feldstein42/English
Is there any mechanism in place right now for vertical creation of new Euros?
thanks,
rhp
The treaty restricts national central banks from buying their own debt. So, there is no direct link between central bank and treasury. The ECB could resolve this by stepping in, but the treaty also restricts that. So the countries really have a solvency issue. The only way to change this is for the ECB to step in and for the ECB to become connected to a central treasury.
Well, I thought your ZH diagram was kinda cute!
OK, so if there has been no vertical creation of euros since Jan, 1999, and euros have been lent out to various and sundry borrowers, including sovereign gov’ts by financial institutions with claims on future payments including a 4% interest charge, then it seems to be that within 18 years time (rule of 72) there would end up being a demand for double the amount of euros than was available, and all euros would end up in the hands of the lenders. This would lead to incredible concentration of euros in the hands of the few with not only sovereign troubles (which are being passed onto the tax payers) but also DIRECT trouble with the populations, to the degree that loans are being made directly to the private sector.
While I have followed prag cap for about a year now, and have a better understanding of vertical and horizontal money creation and currency issuers versus users, I haven’t ever really seen the interest charged on use of money, leading to an increased NEED for money very clearly detailed. And I don’t think I’m that “dumb”………. (but maybe I am).
The euro is in a bigger mess than I thought!
Paying down debt destroys money. But interest payments just freak me out. I can’t seem to think through that process. I wonder if there is a phobia related to that.
ps. Cullen, if you have any control over autoplay on videos, please show some compassion and turn it OFF. What little mental and emotional stability I have left thanks you.
pps. To sweeten the pot, I have a Hello Kitty Pez Dispenser I will send to you.
That’s Bloomberg’s fault. Annoying, huh?
Just a thought: what if the Euro actually got stronger not weaker as a result of the developments? Some of the PIGS leave because no matter what they do they won’t be able to make themselves competitive unless they default AND devalue. The remaining countries by definition will be financially sounder (assuming their banking systems can be rescued in a sane way) and could integrate more easily fiscally. I don’t like it when everybody is expecting the same outcome and are positioned accordingly.
There is no teling if the Euro goes up or down in a panic because there are way too many variables – everything from the terms of redenomination to the flow of funds. But the conditions for a successful political union of Europe are given here
http://www.project-syndicate.org/commentary/feldstein42/English
They need to have a single labor market, a central EU taxing authority, and internal fiscal transfer mechanisms. The EU currently has none of these.
Everyone talks their book !
An article in today’s FT by Otmar Issing, a former member of the ECB, shows how little is understood about how a currency works and why the Euro is heading down the plug hole in its current form:
“the situation in the euro area is fundamentally different from the US or the UK. No one would argue that the Fed should guarantee the debt of individual states. No need because there are strict limits for debt financing by US states. This is also a fundamental principle of European Monetary Union (EMU) as it was designed by the Maastricht Treaty and presented to the people in countries getting the euro as the currency.
This is not a flaw in the institutional arrangement of EMU, but the prohibition of monetary financing is an indispensable element for a stable currency. Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.”
In hard or soft times, Bob Farrel’s 10 rules still hold. Now I read no. 9 two times a day, early morning and before going to bed.
9. When all the experts and forecasts agree — something else is going to happen.
It’s good than people speak about this and that and it’s free. But in my experience about 9 over 10 traders loose money in the long run. Tipically because they don’t follow strict rules but their emotions, so they loose. And we are just at the beginning of a long and boodly currency war where everything and its opposite could happen. If you are not an insider the possibility to gain big money in trading is remote.