Talk of a Greek Exit Gets Louder

By May 23, 2012, 10:45 AM Author's Blog  

The dollar is moving onward and upward this morning, as the two-day calm in the currencies was lifted overnight, and the dollar is swinging its mighty hammer once again. The euro (EUR) has slipped to its lowest level since August 2010, and we all know that when the euro is taking its turn on the slippery slope, the rest of the currencies are following, and that’s true this morning.

Grexit — that’s what is being talked about this morning. Grexit is a “Greek Exit,” See how I put the two together? Simply genius, eh? HA! Seriously, this talk of a Grexit has really put the euro against the ropes

This talk of a Grexit is really beginning to get loud, folks. But let me be perfectly clear here: Leaving the euro is NOT the answer to the Greek problems, and I truly believe that a few years from now, the Greeks will regret this Grexit.

Bloomberg had a great article this morning that listed what the Greeks would have to do in a 46-hour period should they decide to leave the euro:

“Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.”

I was on a call with a couple of other analysts a couple of months ago, and this topic of a Grexit came up, and I was alone in my thought that leaving would be very difficult and messy. I think this will be the case should the Greeks decide to leave the euro.

This Grexit talk has really gotten louder since the caretaker government of Greece made overtures about “renegotiating the terms of its bailout.” Hardliners in the eurozone will NOT go for that, and knowing that, the markets are preparing for a Grexit. That, my friends, is the main reason the euro is taking a ride on the slippery slope.

When I say the “rest of the currencies” are following the euro down the slippery slope, that doesn’t include Japanese yen (JPY), which is a currency on its own course. I’ve said all there is to say about the yen, so I won’t bore you with repeats.

I say don’t go against the trend that’s in place, and that trend is to flock to the so-called safe havens — dollars and yen. Swiss francs (CHF) used to be in that category, but with the “games” the Swiss National Bank (SNB) played with the franc last year, traders don’t want to touch francs with someone else’s 10-foot pole!

And who knows? The SNB could be selling francs into this dollar strength, to further weaken the franc. I wouldn’t put it past them.

One of the anti-dollar investments — oil — has really seen its price plunge, and that’s not surprising to me, given the dollar’s strength right now. You see, it’s all about the petrol-dollar.

But what’s going to happen to the petrol-dollar next month, when Iran opens its Oil Bourse, in which oil can be purchased with any currency, not just dollars? Maybe not right away, but should the Oil Bourse gain traction, it should be a real pain in the side of the dollar and the U.S.

I can tell you right now, folks, that all the saber rattling with Iran is not truly about their nuclear capabilities. The reports I read say Iran is 10 years away from a weapon of mass destruction, but you won’t hear the U.S. leaders say that, because they have to keep the focus on Iran’s nuclear capabilities. The real reason that all this saber rattling is going on is that Iran is going to open this Oil Bourse.

Now, that’s probably something you hadn’t heard or read about. But that’s me — always digging for the stories that fly under the radar. Like the story I saw go across the screens briefly yesterday — The U.S. Commerce Department has imposed tariffs of 31-250% on Chinese solar panels. Back in 2001, when I wrote the white paper called The Decline of the Dollar, I began to write that white paper because President Bush had just affixed tariffs on Japanese steel.

And while being protective of American Industries sounds good, the unintended consequences is that protectionism is one of those things that cause chinks in a country’s currency. So like in 2001, the hit to the dollar didn’t come immediately. I think this hit to the dollar will follow suit, and it will be some time before we see it cause harm to the dollar.

The European Union (EU) summit is going on as my fat fingers type away here this morning. This summit is going to be a real dogfight, and that won’t help the euro any. In the blue corner, we have French President Hollande, who wants to pull off the austerity measures and promote growth with spending (same old dookie, right?), and in the Red corner, we have Germany’s Chancellor Merkel, who will dig her heels in on the austerity measures.

But things can’t be that bad. A German auction of bonds/debt this morning saw great demand, and the issue was oversubscribed, and the yield for 10-year bunds fell to the lowest level in some time. And France also saw good demand at their bond auction this morning. And yes, just here in the U.S., where the Fed buys 61% of Treasury auctions, the European Central Bank (ECB) could very well be doing the same. I don’t think so. But I could be wrong!

One of my trading partners (thanks, Shauna) sent me some research her firm had done on India the other day — and folks, it doesn’t look good. This morning there is an article in The Times of India talking about an Indian default! “Market players are starting to worry that India’s deepening economic crisis and political paralysis could drive Asia’s third-biggest economy into default, according to the International Financing Review.”

Gold is down another $15 this morning. There just doesn’t seem to be anything to stop this slide as another anti-dollar gets whacked by the dollar strength. And we’re coming into the “traditional slow months” for gold and silver… the summer months. Last year was an exception, as gold hit its high during the summer, but you have to go back to last summer. And remember that the debt ceiling debacle was taking place, along with a downgrade for the U.S. Gold should have been going higher with stuff like that going on! And lookie, lookie… what do we have here?

Another round with the debt ceiling, which should come about by late summer. Are you with me that this could get really ugly with this being an election year? That’s why I think — and is my opinion, which could be wrong — that this current dollar strength will last until late summer.

Then from Forbes:

“Add it to the growing list of people going after JPMorgan Chase. Employees are suing the bank over the $2 billion trading loss that they say hurt their retirement plans.

“A lawsuit filed on behalf of JPMorgan employees says their retirement accounts fell in value after news broke about the trading loss, Reuters reports. That’s because the plan holds JPMorgan shares, which have dropped 18% since the loss was announced on May 10.

“The complaint, filed in U.S. District Court, Southern District of New York, names the bank, its CEO and chairman Jamie Dimon as well as former CIO Ina Drew, who resigned soon after the loss was revealed, as defendants. According to the suit, the defendants violated the federal Employee Retirement Income Security Act which gives plan participants the right to sue for breaches of fiduciary duty.”

OMG, what’s next?

To recap: The two-day calm in the currencies ended overnight as fears of a Greek exit from the euro are really strong after an EU official said that there would be no renegotiating of the bailout terms for Greece. The EU summit begins today and should become a real dogfight between the southern countries that want to spend and promote growth and the northern countries that want to continue the austerity measures. Gold and oil — the “anti-dollars” — are getting sold because of the dollar strength.

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