I have long been a critic of the European Union’s overly tight monetary and fiscal policies. Although Mario Draghi has now loosened the spigots, he has done so at the constant whining from European technocrats who have steadfastly clung to the quaint notion the union is working for all society’s members. Let’s not forget that one of history’s greatest Central Bank mistakes was made by the previous ECB Chairman just five years ago.
Most Central Banks realized the 2008 credit crisis was a game changing affair. But not the ECB. They reluctantly lowered rates to help the global financial system, but the moment things settled down, ECB Chairman Jean-Claude Trichet raised rates back up. And not just once, but twice!
Acting against inflation was “in the interests of all members and partners of the single [European] market and single currency”, and would help boost economic confidence, Jean-Claude Trichet, ECB president, said on Thursday.
Help boost confidence! Ha! It ended up ushering in the European debt crisis.
This mistake is akin to mistakenly scoring the game tying goal on your own net in the seventh game of the Stanley Cup and then on the very next shift, putting in the winner for the other team. But this mentality is prevalent throughout Europe. The elites just don’t get it. Even today the Germans are still screaming about reducing the deficit:
GERMAN FINANCE MINISTER SCHAEUBLE SAYS WORLD MUST REDUCE HIGH DEBT LEVELS TO STRENGTHEN RESILIENCE OF BANKS
I would instead suggest Schaeuble take the day off and go home to read Joseph Stiglitz’s book, “The Euro.”
I have been meaning to write about this book for quite some time. I read it this summer, and although I don’t always love Stiglitz’s theories, I found myself nodding in agreement for almost this entire book. Stiglitz spells out the awful toll the tone deaf European elites’ policies have wrecked on European society. I found these great charts from the Real-World Economics Review Blog.
I understand these charts are just of Greece, but the whole European Union has underperformed economic potential due to ridiculous EU policies. Instead of repeating Stiglitz arguments, I will suggest you spend the time to read his book.
However I would like to bring Stiglitz’s theories together with the events of the past week. The ruling elites have been underestimating the frustration of the average person for quite some time. BREXIT and Trump are both examples of the rejection of the elites’ policies. This movement towards “throwing the bums” out is gathering momentum.
The European Union is the poster child of elite government policies gone amok. Although the fundamental principles underlying the union might be noble and just, the actual implementation is not working for the average society member. Eventually there reaches a tipping point where the ruling elites cannot convince the masses to “just stick with them a little longer.” We have reached that point.
I don’t know if it will be Italy, France, Spain or some other EU member, but a European country will pull the pin on the Euro sometime in the next year. The next BREXIT / Trump “World’s biggest F U” will come from Europe. It is only shocking the EU politicians have managed to keep it together this long.
In both cases, neither BREXIT nor Trump resulted in the end-of-the-world calamitous outcomes the elites predicted. Europeans will look at these events and surmise these scare tactics don’t deserve the worries spouted in the media.
It is only a matter of time before the EU unravels, and BREXIT/Trump might prove to be the catalyst.
I am shorting the Euro.
I expect this huge boring range to be broken on the downside.
Although it is fashionable to be long US dollars, I am not nearly as bullish as the other hedge fund punters. I will write about this more in the coming days, but I am selectively looking for places to sell USD, so I do not want to be short Euros solely against US dollars.
Like a mope, I have been lugging around a short EURGBP rate for quite some time, but over the past week it has finally started to work.
There are so many levels I like this trade, and now that it is finally ticking the right way, I am going to double up my position. I watched this great interview on Bloomberg TV with a guest who I unfortunately forgot his name, but he went through the game theory of May’s negotiation for BREXIT. He correctly concluded it made no sense for May to even begin negotiations with Merkel or Hollande as by the time the deal would be ready to sign, there will most likely be new leaders with whom she would have to renegotiate. This whole “hard” BREXIT hysteria is such a big pile of shit.
Worries about BREXIT are overdone, and the media is once again underestimating the pissed off’ness of the average voter. I expect a surge in leave EU support in the coming months. I am selling the Euro against most currencies, but most especially the Pound.
BREXIT, Trump, next up; Europe.
So long Hillary…
I must admit I am a little disappointed that Hillary didn’t win the Presidency, but not for reasons you would probably expect. You see, I was more excited than a six year old on Christmas eve about the possibility of a First Gentleman. And not just any First Gentlemen, but Bill Clinton! For the past ten years I have methodically collected a whole folder of mind blowing pictures of the former President. Whereas other former Presidents like Jimmy Carter are busy building houses for the homeless, or others quietly painting in their ranch studios like George Bush, Bill Clinton has been jetting around living a life that rock stars would shake their heads at. And with all those late nights, I have some great pictures I was gleefully rubbing my hands together at the thought of incorporating into my letter.
Alas, the Clintons will now disappear from public life, and I will have no reason to use my treasure trove of gems. So with that, I wave Hillary (and Bill) a big (or maybe not so big) goodbye.
Thanks for reading,