Vancouver Investment Advisor Ritch Wigham

Euro Panic 101

Please take a long look at this chart:

So, what do you see?

In the last 30 days the Euro has come from a low of around 119 up to a current intra day high of 130.

The level of panic that was evident at the start of June with the immanent collapse of the world financial system due to Euro default was deafening. I was inundated with calls from people panicked that a new sell off similar to the one we all bled through in late ’08 early ’09 was about to happen again. For some reason that fear is still running through this market place in spite of almost all of the negative indicators becoming more positive, not more negative.

Follow me:

1. Gold has stabilized at roughly $1200/ounce.
2. Copper has stabilized around $2.95/lb
3. The Euro as you have seen above has recovered $.11 and seems to be quietly (since no one but me seems to talking about it) re-establishing a “normal” level vs the U.S. dollar.
4. The bond markets seem to be able to absorb whatever is being printed whether it is Greek Euro debt or U.S. Treasury debt at much lower returns.

So what is going on?

First of all it seems rather evident to me that if you are still afraid, “quit it”. The markets whether I understand why or not have once again done their job of re-establishing the working relationships that they need to function all on their own. To me the most telling argument is that the Euro dollar has recovered as much as it has. What this tells us is that the U.S. dollar needed to decline to maintain its relative advantage for exports against what appears to be a relatively more competitive Euro zone. I know some people have a hard time either believing this or understanding this, the reality is that a cheap currency is the best tool to stay competitive relative to your trading partners.

So if you had bought U.S. dollars through the purchase of treasury bonds from the Euro zone in Euros’ back when the Euro was trading at say 144 to the U.S. dollar and then sold those treasuries when the Euro dropped to 120 to the U.S. dollar you can now buy 15% more U.S. treasuries than you held then, back if you so desire.

This now has been the currency trade that I tried to convince everyone was going on, when no one wanted to believe me, when I said that is why you buy U.S. treasuries at virtually no return a year ago. It wasn’t then and isn’t now the interest rate that is fuelling the massive movement into the bond markets we saw in the last two years with interest rates at historically low levels, it is still a currency trade. This is why you should also not be afraid of the stock markets.

Money managers in Europe have now been given an opportunity once again to swap some of there strong Euros back into U.S. equities at a very reasonable level. 130 buy’s a lot more IBM than 120. The Dow also now has more than 40% of its profits generated internationally as opposed to less than 10% in the 1980’s for example. In past times we would call this arbitrage now it is simply a currency trade and has the function of helping to stabilize the markets internationally when one area gets out of line with another. So if Proctor and Gamble is not doing so well in the U.S. it can make that up in Asia where it had never really profited before. But then becomes a more attractive buy for an investor in Europe where the currency has appreciated against the dollar.

So everyone please re-read what I wrote 05/25/10 “What Are You Still Waiting For” and take a breath and start to take some action. The world isn’t perfect but it’s not so bad either!!

Talk to you soon

Ritch

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