Friday 2 September 2011

How to play the end of the Euro?

For many years, indeed, since before the thing even came into existence, lots of us have decried the possibility that the euro might work. The "Great Moderation" (i.e. monetary cyanide) of 2001-2007 hid the effects, but this latest recession has brought home the truth.

The Gordon Brown answer to the financial crisis in 2008 was to move the Bank debt to the public sector and this has hastened the end of the Euro as many for many Euroland countries, notably Ireland, this exposed the level of debts as far to high for the Country to ever pay off. Look at Greece today, 24% of GDP going on debt repayment; that is GDP not Government spending - and this is with the bail-out.

Unsustainable. With Germany's Mr Wulf and others decrying throwing good money after bad then this is the endgame. It may take another few months, but I am convinced the Euro won't see the Olympics. Germany is not going to bale it out and the current situation will end in a disastrous crisis.

So what will happen:

1. The German, French and UK banks are going to go bust as they hold much of the foreign debt of the PIIGS. So I guess we need to find a Eurobanks short ETF - difficult to find one as many are run by Duetsche Bank which will be one of the first to go down in the crunch, but perhaps Germany will save its own banks so this one will get paid?

2. Gold - not a hard choice to be long gold, paper or physical. With currencies in a mess Gold will go up...however only after a mass liquidation event has pushed the price right down, possibly below $1000. This is why short positions are my top pick. In 2008 Gold hit $600 briefly (that is when I bought it, thought I was clever selling at $900)

3. Currencies, clearly the Euro will be suspended, so no positions here can be predicted. CHF is very over-bought already, so I where do we go, Long Norwegian Krona. There will be a flight to safety to the dollar too so that will be a short-term trade. The British Pound will go down with our banks, sadly.

4. Commodities - Again, a crash will signal a global downturn so I expect a big sell-off, but a re-bound here will be quicker as the rest of world adjusts to Europe and the USA's reduced place in the world and our growing population globally sucks up more demand - still that is a 1 to 2 year view and will be no good in the short term.

5. Cash and out - I am unsure about the idea of watching from the sidelines. There will be no QE next time to boost the economy (if so, then hyperinflation and total wipeout unless all your money is abroad which unless there are some Hedgies and global wealthy class people reading this is unlikely). With the UK pound collapsing real value cash could lose 25% easily. It may be more prudent to be diversified elsewhere.

6. Next steps. Clearly things are going to get tough, one thing even Missus Cityunslicker has picked up on maybe the chance to buy some very cheap PIIGS holiday property as their currencies get whacked. At least we can drive there if we can't afford flights anymore...

OK, so what about that as a strategy - any other ideas? What are you going to do?


Mark Wadsworth said...

I was thinking, buy German (or Dutch) govt bonds AND buy Greek bonds.

If the bail outs continue, you'll make a fortune on the Greek ones; if the Eurozone countries disentangle themselves, you won't lose much on the Greek ones but surely the German (or Dutch) ones will strengthen (in currency terms if not in actual selling price denominated in EUR).

Ryan said...

Ever read "of mice and men"? Buy a farm and a shotgun

Old BE said...

As a person of very small net worth, my main plan is to time my next booze cruise to France in between the demise of the Euro and the demise of the pound.

Forget gold, I am buying claret!

CityUnslicker said...

MW - I have considered by Greek 2 yrs that come due before this year end, with a 42.5% margin its tempting...but of course they could sink to 60% which will be a huge capital loss or default entirely (which the Greeks will do when the cart falls over, why only default 20% - best to start again). My appetite for risk is rather crazy though....

andrew said...

For the ridicule of all...

First State Global Emerging Markets Fund (or anything that is not Europe or the US)

To reverse the old saying, if Europe gets Infuenza, the rest of the world may get a sniffle.

It is clear that something will give, not least because everyone expects that something will and banking (private, listed or soverign) runs on confidence.
Exactly what / who and where the chips fall is the question here.

It reminds me of the old Lloyds excess of loss story.
After a lot of fear and confusion, a very few people got v. rich, some people got v. poor and a lot of lawyers got business.

If you have a strong stomach, you could pick a bank (Barclays/ Citibank) as the banks left standing will do quite well.

BE's comment on wine is fairly good as the price of top bordeaux seems to be somewhere between equities and gold - and I have accidentally profited out of it.

Old BE said...

Ha, except I meant as a way to enjoy the paper in my bank account rather than to profit from it :-))

If we are going to have a short sharp shock of dire poverty then a decent bottle or few will help ride it out!

My "investment" won't be in the top end stuff, just a slightly better class if vin de table...

Richard Elliot said...

If the banks go down they we are all screwed (again, but probably worse this time).

There will be the traditional flight to safety, so gold and the USD (even if it isn't that safe) will benefit.

Holding cash and some NS&I inflation linked savings isn't a bad idea.

I see quite a few downside risks in the Emerging Markets, but a) it will still look better than the West b) there is no where else for the money to go.

I think the carry trade will unwind. Short positions in the AUD and NZD?

I probably won't take any of my own advice and get burnt badly!

Sean said...

Dunno, I am going for a two week survival strategy based on what happened in Argentina 10 years ago.

A case of UHT Milk, rice and pastas and some of that quick cook bread. Soups, Energy drinks and tinned meats.

I have a generator, but I will not be packing away the camping cooking gear this winter, just in case.

And no I am not kidding.

Anonymous said...

CU, you are turning into the 'bad man, make him go away'. Is the news so slow that you gotta wheel out 'the end is nigh' ?

I just hope your current doom and gloom is really just trying to wip up some debate ? This blog is getting rather depressing, life and the markets just go on (famous last words)

Still, BE has the idea, alcohol, that takes the edge off it.

Cheer up ffs.

James S said...

I've a rolling stock of pasta rice & sauces good for a month or so. Doesn't take up much space and saves money, why not? :) UHT milk though? eugh.

Anyway! I'm currently Long NZ Bonds, Blue Chip UK bonds (on the premise that they're probably safer than bank accounts not covered by gov guarantee).

Thinking of bringing the NZ money home and moving into USD.

Peter S. said...

Well, for what it's worth I transferred my - very modest - savings from sterling to Peruvian soles in 2007, which has enhanced its value (ok I do live in Peru, which helps). That, plus property in Lima (undervalued and rising fast) and Panama City (overvalued and rising fast but a great place to live) and I'm keeping my fingers crossed...

CityUnslicker said...

Anon - I managed to write this before the markets dropped another 2.5% this morning. The last two years you will have seen that i was a raging bull and laughed at the bears.

I am not laughing now but am ready to hear any line that suggests there is some way out of the mess for Europe. I would accept the US muddling through and the UK and would back that except for the Euro crisis which is, unfortunately, existentail.

However, if you want me to write more good news stories I can crank up BQ!

Sebastian Weetabix said...

I've always enjoyed contrarian investing, so last week I bought a load of Barclays & HSBC shares. Since everyone is saying the banks are doomed I thought I might as well pile in. Looking at our own business I can't help thinking prophecies of imminent collapse are rather overblown, unlike 2009.
If they really are doomed we are all f***ed anyway, so I thought it worth the risk, on the assumption that most of the poison has been dealth with & Euro debt will be monetised.

Talking with a (mainland) Chinese colleague t'other day, discussing business in general, he said a couple of interesting things which matched my own prejudices (post-judices? I lived there for a bit), viz:
1. no one really makes money in China except for middlemen
2. the way to make a real killing is to take a Chinese company to a western IPO
3. there is a MOUNTAIN of mis-allocated cash & shitty debt

In other words, you ain't seen nothing yet, and the China bubble when it bursts is going to be nasty.

Lord Blagger said...

I think your analysis is right. The UK and most of Europe is up shit creek.

The UK tax take is 600 bn.

Debts are

Borrowing 1,000 bn
Civil Service pensions 1,300 bn
State pension 2,400 bn
State second pension (serps) ???
PFI, 380 bn
Nuclear decomissioning 100 bn
Guarantees for BT, Post Office pension funds
Black holes in the other public sector 'fully funded' schemes?

Even that ignores the really really big problem. 50% of people have less than 5K in savings. They will insist on being bailed out in retirement.

In other words, the government is even more geared up that any hedge fund I've come across, and that doesn't take into account core spending.

So you have to look at what's going to happen and that means considering the timescales.

The UK is relatively secure in the short term. Long maturities on the borrowing, partial defaults on the pension promises. Interests are low.

However, that can change. They won't cut spending to the levels to stop the debt rising (deficit to a surplus). So when interest rates rise, the problems kick in. When tax revenues don't rise, problems kick in.

So what will the government do?

Tax more, which makes it worse.

Steal pensions - see Hungary, Argentina.

Tax immoveable assets - property, pensions.

Capital controls.

Limits on withdrawals from banks, and then bankrupt them.

So I can see these things as an option.

Physical gold in an ETF held in Switzerland.

Borrow lots of money - its cheap, and inflation is dealing with it.

Inflation linked gilts - short term. Long term - its an immoveable asset. They can default and you have no recourse.

Property overseas? Not in Spain as an example. Think about it. Wait, buy repossessed property cheap. Spanish government desperate for cash. Who does it tax? Voters or people owning second homes living outside Spain? The second, because don't vote in Spain.

Land is one option, because it generates crops, and they can't hit food production.

Utilities I think are another option. Cash generating. Likewise supermarkets. Both are the last to go on spending fronts.

At some point the Green issue is going to bite back. People will object to paying well over the odds for the Green idiots penance.

Other than that, buy a small holding. Get one where you can generate micro power - water is ideal. You also need a wood, so you can grow your own fuel.

In other words set yourself up to minimise costs.

Lord Blagger said...

The problem with China is debt. How much of China's debt is funded by debt? I would estimate most of it.

It's the same problem as the UK except its companies

Bill Quango MP said...

However, if you want me to write more good news stories I can crank up BQ!

Don't involve me. I've been looking at carrefour.

Carrefour, the world's second-biggest retailer behind Walmart, announced a shock €249m (£221m) half-year loss on Wednesday and warned that the situation would get worse before it gets better.
USA - Obama magic doesn't extend to the economy.
Euro - The cans becoming too dented to kick very much further. need a new can altogether.

Is this a good time to max out the mortgage? Is it possible to have runaway inflation and near zero interest rates? Will Mr King end up saving us all by making our 1 bed flats in lousy areas worth £1 million each, and a salary of £75k become the average.

All the homeowners would have their mortgage debts reduced to some 20% of equity instead of 120%.
Its happened before, sort of.

Of course, if you're not a homeowner....that £1,500/week rent might look a bit steep.

topic for another day.

Edvard said...

The best Eurozone breakup bet I know of is going long inflation in a Southern country. Italian TIPS for example (if you hedge the fx, interest rate and credit risk).

One of the more nuanced, less short-term crash effects of a Eurozone breakup will be that southern countries revert to their long term higher inflation rate.

Anonymous said...

CU, @3.36 I know what your are saying regarding bears, which is why I've followed your blog for so long. Even so, at the time of writing I hadn't even studied ftse, hey it's still Summer holiday. First week back at the desk, damn depressing.

The ups and downs of the markets during August and September, where is the trade Volume ?
Next week and the week after the real barrow boys will be back. I predict 'a riot' ? No ! The peaks and troughs will be flattened out. I don't doubt there is trouble ahead, but as I said previously cheer up, talk it up it is not in the German / French interest to lose the €, it will not happen.
Although at $3 these look good NASDAQ:SWHC
JC. (same anon)

Popcorn salesman (sale now on) said...

Breaking News +++

The US Gov is to sue large American banks - BoA. GoldiesSocks, Barclays US operation, etc - for the damage their financial shenanigins did to the economy/currency/mortgages etc

Is this a good thing?
A bad thing?
Who will win?
Any chance of Dave or Gideon doing likewise in the UK?

Place your bets.

Budgie said...

So banks follow government regulations and nearly go bust; then are are bailed out by governments; then the government sues the banks' socks off so that the banks go bust?


Budgie said...

CU, you know my take on the euro. It should be wound up, and done carefully, and with honesty (!), there would be far less damage than the current policy of continually kicking the can down the road.

But. But, the EU elite are so completely wedded to the euro, and the EU itself, that they will not be honest even to themselves. Consequently they will try any trick to keep the euro going.

That includes making Greek and German taxpayers suffer. It also includes forcing through a "Tobin" tax which will principally impact on the City. Thus the EU intends to force the UK to pay at least some of the price.

If the EU does succeed in making the UK pay (and we are stupid enough to comply - trust Cameron on this anyone?) they may avoid the doom for the euro so avidly predicted here and elsewhere.

CityUnslicker said...

Budgie, Greek bonds at60% on two year yields, no way back. I trust Cameron not to buckle onTobin tax, it's all his finders after all.

Steven_L said...

If you're worried about ETF's 'not being paid' then why not just short a suitable long ETF?

James Higham said...

The first essential is currency. SDRs are the precursor to what are essentially going to be ration books and it will go from there. Many people are presupposing there will still be choice in what we do.

Anonymous said...

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