Monday, December 26, 2011

Kyle Bass: Currency Crisis Coming in 3 to 5 Years

Kyle Bass 1 hour interview with AmeriCatalyst 2011 oin November 2011 on his view on the world today. That's very informative, even though it's rather depressing.

Interesting points including:
  • Greece is bankrupt, a full mark down is required
  • Western Economies will fail: Europe first, then Japan, then the USA.
  • Japan has serious debt problems, most people will lose a third of their savings.
  • Investors still don't want to accept reality
  • PE are low, because E is too high and it will come down.
  • We either take pain now, or we take apocalyptic pain later.
  • Central banks will probably just print money and destroy the currencies.
  • The US (government) has the same people who brought up in this mess, to fix the mess. It makes the US a laughing stock.
Click on the link to view. (no embed available)

Friday, December 2, 2011

How to Save the Euro

Axel Merk, Portfolio Manager at Merk Funds has published an update to Merk Insights newsletter entitled "Guide to Save the Euro".

The articles is composed of 3 main parts:
  • Fiscal sustainability
    Fiscal sustainability is about revenue and expenses, but also about perception.
  • Method 1: Surrendering sovereign control over budgeting process
    When a government asks the IMF to help, tough austerity measures are imposed, a de facto handover of sovereign control to an outside agency
  • Method 2: Embracing bond market pressures
    It requires dealing with the reality that low interest rates must be earned. It also means that governments have to embrace the reality that they may have to renegotiate some of their debt.

The conclusion is that we should "expect a muddled combination of increased IMF support, increased fiscal convergence, increased focus on strengthening bank balance sheets, increased involvement to keep banks afloat (the ECB is already debating providing multi-year unlimited credit lines), and increased cost of borrowing for Germany. However, this is likely to remain a drawn out process and the tail risks that European policy makers mess this up cannot be ignored, either. We come back to our initial argument: a lot depends on perception. Perception is a function of leadership and a credible path that is likely to lead to results. The prime minister-elect of Spain wasted his first opportunity to make a good impression. The German psyche has been badly wounded by the botched auction. In typical European fashion, another summit has been announced to discuss closer fiscal integration. In case anyone wonders why this process is so painful, it is because the right decisions are politically so incredibly difficult to make."

The full "guide" can be read at

Peter Schiff: The Real Currency Crisis is Coming to the US

Interview with Peter Schiff on Fox Business News (1st of December 2011) where he explains the Eurozone has severe problems but it's nothing in comparison to the United States and that the real currency crisis is coming to the US to the dismay of Fox Business host.

Monday, November 14, 2011

Jim Grant: Europe Debt Crisis Will Lead to More Money Printing

Jim Grant is interviewed on the 10th of November on Bloomberg discussing the current European debt crisis.

He explains that the ECB is likely to print money and purchase Italian government bonds. It called that the ECB's MF Global trade.

He then talks about the federal reserve and also says to avoid farmland (in the US) as it is now overpriced some places and gives an example where farmland rental yields around 2 to 2.5%, the lowest in 40 years.

This debt crisis may turn to a currency crisis very soon. However, all major currencies (USD, EUR, JPY and GBP) are racing to the bottom and it's difficult to see which one will get there first. Even though the Euro is currently in the spotlight, it's amazingly still very strong against the dollar and the British pound although it may change with the new ECB president who has already lowered the interest rate to 1.25% at his first meeting.

Wednesday, November 2, 2011

The US Dollar, Gold and Politics

In his latest "Gold report", Peter Schiff talks about the politics of Gold investments where he analyses the price of Gold and the US dollar based on which US presidential candidate is elected President in 2012. Each candidate has different views on monetary policies and debt reductions. Here are the results:
  • Herman Cain: Bullish for Gold, Bearish for the dollar
  • Mitt Romney: Very Bullish for Gold, very bearish for the dollar
  • Ron Paul: Bullish for Gold, Bullish for the dollar
  • Rick Perry: Bullish for Gold, Bearish for the dollar
  • Newt Gingrich: Bullish for Gold, Very bearish for the dollar
  • Obama: The Gold Rush is On !
He however mention that with Ron Paul the direction of the price of Gold is more difficult to access as after 2 years in his presidency he would probably put in place a very hawkish president of the federal reserve.

To conclude, if Ron Paul is not elected president of the US, you can rest assured that your Gold investments will most probably do well for years to come.

Axel Merk: Overweight the Japanese Yen

As Greece will hold a referendum whether to approve the austerity measures and the "no" will probably win hands down, Merk Funds recommend over-weighting the Japanese Yen and under-weighting the Euro in the short term.

Here's the the full Merk Insights letter below:
Greek Prime Minister Papandreou is throwing in the towel: by calling for a popular vote on austerity measures now, we believe he is almost assured a no vote. This allows Papandreou to say that he tried everything he could to avoid a default, but the people have spoken. Having said that, as we write this analysis, Papandreou appears to be changing his mind and may cancel the idea of a referendum as quickly as it came about. Still, the message is clear: a default is coming.

The sad part is that Greece has not been able to eliminate its primary deficit (the deficit before interest payments), so that it could have the potential to bounce back upon a default. On the contrary, Greece may fall into chaos or anarchy. The threat of such a scenario, in turn, may prompt European policy makers to instigate a Marshall Plan to rebuild Greece. While we can ponder about the Greek drama, it’s paramount to contemplate the consequences for the rest of Europe and the euro.

First, the good news: market pressures should accelerate reform. Specifically, we expect bank recapitalizations will both be accelerated and increased in scope; if you can’t save the sovereigns, at least make the banking system robust enough to absorb defaults. That’s better than any insurance scheme policy makers can come up with.

Expect dramatic actions by policy makers, akin to those seen in October 2008. Just as policy makers did not initially heed the markets then, the pressure is now on to follow through with substance after last week’s sketchy plan to save Europe, and ostensibly, the world. Specifically, pressure on Italian Prime Minister Berlusconi is mounting rather dramatically to engage in real pension reform. In comparison to both Spain and Ireland, which have seen relative market improvements, the markets have scolded Italy. While it is possible to turn the tide, the longer the wait, the more the market will demand.

What would alleviate the pressure is a commitment by the European Central Bank (ECB) to be the lender of last resort for Italy and Spain. However, that’s unlikely to happen, at least not in the short term. As of today, the ECB has a new leader, Mario Draghi. As an Italian, he will be under pressure to be rather hawkish. His first press conference is this Thursday. He could announce a program to buy unlimited Eurozone debt, and sterilize such activities. However, such a move would take the pressure for reform away. And a central bank’s role is not to make the life of policy makers easy. If Draghi were to pursue the route of least resistance, he could easily be labeled as, well, Italian, in his approach to central banking.

Any revised bailout fund for Italy is likely to cost France its AAA rating. France itself also has lots of homework to do. The lesson here is that policy makers always wait until the last minute to engage in reform; some day down the road, the market will focus on the U.S.; at that stage, the U.S. dollar may be under severe pressure: the U.S. dollar is more vulnerable given the significant current account deficit.

So for now, the drama continues. To summarize, expect more on bank recapitalization and reform. A wild card is whether the European Financial Stability Facility (EFSF) is going to be bolstered in earnest. For those politicians that still believe Greece can be held afloat: stop believing in fairy tails and move on. The market will.

As far as our positioning is concerned, we had increased our euro holdings ahead of the summit last week. We have since reduced it. We had also substantially reduced the yen ahead of that summit. Our outlook calls for substantial volatility in all currencies, except for possibly the yen; as such, our risk assessment is currently favoring the yen disproportionally. As October 2008 has taught us, though, rational investors may be forgiven for changing their view of the world on a daily basis… Stay tuned and subscribe to Merk Insights.

Wednesday, October 19, 2011

U.S. Dollar and Euro - Review and Outlook

Axel Merk & Kieran Osborne, CFA, Merk Funds have just published their outlook for the US dollar, the Euro, the Chinese RMB and several other currencies.

They have a bearish view on the US dollar:
Policy makers in Washington didn’t help appease market concerns: leaving the decision to raise the Government’s debt ceiling to the last minute only exacerbated market fears of a U.S. default and further degraded investor’s view of policy makers; ...Standard & Poors subsequently downgraded the credit rating of the U.S. government, citing the inability of the political leadership to come together and agree on a plan to sustainably rein in the deficit over the long term as a key reason for downgrade. We consider these developments have further eroded the safe haven and reserve currency status the U.S. dollar has held for so long, and continue to view the outlook for the U.S. dollar negatively over the medium to long term.
minutes from the FOMC meeting show there was support for further expansionary monetary policy, or quantitative easing, which would constitute “QE3”. It is our assessment that the likelihood of the Fed instigating QE3 has risen significantly, in part due to the weakening economic outlook, but also because of the composition of voting members next year. All three dissenting voices will be replaced in 2012 and the average monetary policy stance of voting members will become much more dovish (only one voting member is considered a hawk – Jeffrey Lacker, the Richmond President)1. With inflation expectations declining, we consider Fed Chairman Bernanke may again present the need for further easing, arguing deflationary risks have become elevated, or at the very least, that further easing will not generate significant inflationary pressures. We believe the impending FOMC composition may consider this argument compelling, and is likely to err on the side of overstimulation. All of which leads us to believe that the outlook for the U.S. dollar remains to the downside.
even if in the short term there are risk, they are bullish on the Euro in the medium to long term:
Europe certainly has problems, but in an odd way, it is the inflexibility of its political make-up that may lead to a stronger euro over the foreseeable future. ...
Many individual countries find themselves with very weak political leadership, but interestingly, have instigated, in many cases, very strict austerity measures with opposition support. The issues facing the Eurozone are significant, and there is no simple, easy solution; it’s likely to be a drawn out process rectifying years of malinvestment brought about by unconscionably low funding rates for periphery nations (Greece could borrow at rates similar to Germany for years leading up to the crisis). In turn, economic growth may be restrained over the foreseeable future. Note, however, that economic growth is not necessarily a precondition for a strong currency; it is not incompatible to have poor economic growth on the back of a strong currency – just look at Japan.
We believe two key reasons have contributed to Japanese yen strength – weak leadership and a current account surplus.
On the above two factors, the Eurozone is not so dissimilar to Japan: the Eurozone has a broadly balanced current account, fiscal union is disjointed at best, and many individual nations have very weak political leadership. Furthermore, the ECB has a sole mandate of price stability, and is reticent to provide any direct bailout funding or directed asset purchases to the financial industry, or specific sovereigns, for fear of overstepping its bounds (or being taken to court by the Germans).
As a result, we consider the euro can appreciate on the backdrop of weaker economic growth and continued divergence in monetary policies
Finally, they mention they still have a positive view of the Chinese Yuan:
We continue to see upside potential in the Chinese renminbi and believe policy makers will continue to be incentivized to allow the currency to appreciate to tackle domestic inflationary pressures.

The full outlook is available at

Saturday, October 15, 2011

The Death of the Euro

Here's an interesting debate about the Euro on CrossTak, RussiaToday on the 14th of October 2011.

How much liquidity is needed to save the Eurozone? Why go in more debt to overcome deadly indebtedness? And is Germany going to remain the prime sponsor of the euro experiment? Will we see the Eurozone change its boundaries? CrossTalking with Andrew Lilico (Clue: He's the man!), Jeff Madrick (Keynesian clown) and Jon Gaun (Eurosceptic) on October 14.

There is also an interesting part in the interview where they discuss whether TARP solved the US problem or not and Andrew Lilico compares the US debt situation with the one's of Italy.

Friday, September 30, 2011

How to Prepare for a Currency Crisis

Euro Capital interviewed Doug Casey in an interview entitled "HOW TO PREPARE FOR WHEN MONEY DIES"published in Peter Schiff's Gold Report. This is quite an interesting discussion on the US economy, the government role and the future of currencies. The final advice is to accumulate Gold.

Here's the transcript of the interview:

If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007-2009. Catastrophe will come when everybody realizes that the dollar is an "IOU nothing." That's the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this interview with The Gold Report, Doug also identifies some reasons to be hopeful.

The Gold Report: You've been talking about two ticking time bombs. One is the trillions of dollars owned outside the US that investors could dump if they lose confidence. And the other is the trillions of dollars within the US that were created to paper over the crisis that started in 2007. Are these really explosive circumstances that will bring catastrophic results? Or will it just result in a huge, but manageable, hangover?

Doug Casey: Both, but in sequence. One thing that's for sure is that although the epicenter of this crisis will be the US, it's going to have truly worldwide effects. The US dollar is the de jure national currency of at least three other countries, and the de facto national currency of about 50 others. The main US export for many years has been paper dollars; in exchange, the nice foreigners send us Mercedes cars, Sony electronics, cocaine, coffee - and about everything you see on Walmart's shelves. It has been a one-way street for several decades, a free ride - but the party's over.

Nobody knows the numbers for sure, but foreign central banks and individuals outside the US own US dollars to the tune of something like $6 or $7 trillion. Especially during the recent crisis, the Fed created trillions more dollars to bail out the big financial institutions. At some point, foreign dollar holders will start dumping them; they are starting to realize this is like a game of Old Maid, with the dollar being the Old Maid card. I don't know what will set it off, but the markets are already very nervous about it. This nervousness is demonstrated in gold having hit $1,900 an ounce, copper at all-time highs, oil at $100 a barrel - the boom in commodity prices.

Some countries are already trying to get out of dollars, but it could become a panic if the selling goes from a trickle to a flood. So, yes, it's a time bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a theatre catches fire and one person runs out, soon everybody rushes toward the door and they all get trampled. It's a very serious situation.

TGR: You warned early on in the 2008-2009 economic crisis that it would really be more of a hurricane. In the last year or so, we've been in the eye of the hurricane and there's more turmoil to come. Will the other side of the storm be worse than the first? And given the recent economic news, do you think we have moved out of that eye?

DC: Yes, I think we are moving out of the eye and going into the other side of the storm. This storm will be much more severe because we haven't solved any of the problems that caused the hurricane in the first place. The fact that governments all over the world have created trillions of currency units has only aggravated those problems. Now, I expect exploding prices to compound the problems that we saw back in 2007, 2008, and 2009. That will devastate the prudent people in society who saved money. They saved it in the form of currency, and wiping out their savings will be catastrophic.

TGR: That's something you've been saying for years - about this being the "Greater Depression." We are now four years into it, based on your 2007 start date.

DC: Actually, depending on how long a historical scale you look at, you could say that, for the working class in the US anyway, the depression started in the early 1970s. After inflation, after taxes, their take-home pay hasn't risen in real terms for 40 years. But the definition of a depression that I use is "a period of time during which most people's standard of living drops significantly."

Net savings shows that you're living within your means and putting aside capital for the future. In the US, people have been living above their means for many years - that is what debt is all about. Debt means that you are borrowing against future production, which is exactly what the US has been doing.

TGR: So, how long will this Greater Depression last?

DC: It doesn't have to last long at all. It could be quite brief if the US government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations. Distortions and misallocations of capital that have been cranked into the economy for many years need to be liquidated. It could be unpleasant but brief.

The government is likely to do just the opposite, however. It will try to prop it up further and make it worse - compounding the problem by expanding the wars. So, it could last a very long time. In that sense, I'm not optimistic at all. I think there is little cause for optimism.

On the other hand, I'm generally optimistic for the future. There are only two causes for optimism. First, smart individuals all over the world continue, as individuals, to produce more than they consume and try to save the difference. That will build capital, which is of critical importance. Second, expanding and compounding technology will increase the standard of living. Remember that there are more scientists and engineers alive today than have lived in all previous history combined. Those two factors countervail the government stupidity around us. Whether they will be overwhelmed and washed away by a tsunami of statism and collectivism, I don't know.

TGR: You say that the US government is the root cause of this problem. Isn't that putting too much blame for a worldwide problem on one nation?

DC: The institution of government itself is the problem, and the problem is metastasizing like a cancer all over the world. But, sad to say, the US is the most serious offender because it is currently both the most powerful and the most aggressive nation-state. It has been greatly abetted by the fact that the US currency has been accepted globally. The US dollar is, in effect, the reserve that backs all the other currencies in the world. That is why the US government has been the most destructive from an economic point of view. Furthermore, military spending - which in the US equals that of all the other militaries in the world combined - is purely destructive. It serves no useful economic purpose at all. The military is no longer "defending" anything - least of all liberty. It's actively creating enemies and provoking conflict. So, yes, I think the US government is actually the most dangerous force roaming the world today.

TGR: Do you see that changing after the next election?

DC: No. I think the chances of Obama being reelected are high, simply because more than half of Americans are big net-recipients of state largesse. The US has turned into a larger version of Argentina politically, where the electorate is effectively bribed to vote for the biggest thief. It is likely to turn out much worse than Argentina, however. Unlike the Argentines, the US government is fairly efficient. And, unlike Argentina, the US is rapidly turning into a police state.

Electing a Republican might be even worse, though. With the exceptions of Ron Paul and Gary Johnson, the potential Republican candidates absolutely make my skin crawl. So, no, there is no help on the horizon. The US government is spending about $1.5 trillion more this year than it takes in, and it is not going to cut that. In fact, foolish spending to bail things out will increase. And, worse than that, the Fed has artificially suppressed interest rates for three years. Interest accounts for roughly 2% of $15 trillion official national debt, or $300 billion per year. As interest rates inevitably rise, that interest amount will grow. At 12% - and I'm afraid they'll have to go even higher than that - it would add another $1.5 trillion just in interest payments.

I absolutely see no way out without a collapse of the US currency and a total reordering of the US economy.

TGR: When Money Dies, the title of your latest summit, implies some return to a gold standard. How do you see that playing out?

DC: Nothing is certain, but when the dollar disappears - and it's going to reach its intrinsic value soon - what are people going to use as money? Will we gin up another fiat currency like the euro? The euro is likely to fail before the dollar. My suspicion is that people will want to go back to gold. It's not because gold is anything magical, but simply the one of the 92 naturally occurring elements that - for the same reasons that make aluminum good for planes and iron good for steel girders - is most useful as money. In fact, the reason that gold has risen as high as it has is that the central banks of third-world countries - places that don't have large gold reserves, such as China, India, Korea, Russia, even Mexico - have been buying the stuff in size.

TGR: The concept of going to a gold standard seems impossible in the sense that there is only so much gold above ground - 6 billion ounces? Maybe $11 trillion worth? But it's only a fraction of the US GDP. Even with gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do you convert to a gold standard?

DC: In terms of today's dollars, gold should probably be a lot higher than it is. I don't know what the number will be, because a lot of those dollars will disappear in bankruptcies; they will dry up and blow away. It's like a real estate development that was worth $1 billion on somebody's books; when it fails, that's $1 billion destroyed. It's a question of the battle of inflation (with the government creating dollars to prop things up) against deflation (where businesses fail and wipe out dollars). But put it this way: the US government reports it owns about 265 million ounces. Its liabilities to foreigners alone are at least $6 trillion. If they were to be redeemed for a fixed amount, that would require roughly $22,000/oz gold. And that doesn't count dollars in the US itself.

I'm a bargain hunter and a bottom fisher, and bought most of my gold at vastly lower prices. But I think gold is going much higher because most people still barely even know that the stuff exists. As inflation picks up, they are going to want to get rid of these dollars - but what other monetary commodity can they turn to? So, gold is going higher. I'm still accumulating gold.

TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.

Five Favorites Currencies by Peter Schiff and Axel Merck

Peter Schiff of Euro Pacific and Axel Merk of Merk Investments have just release a new report about entitled: "Peter Schiff’s & Axel Merk’s Five Favorite Currencies for the Next Five Years"

The first 4 currencies they select is based on different geographical zones:
  • The Anglosphere: Australian Dollar (Peter Schiff) & New Zealand Dollar (Axel Merk)
  • The Nordic Bloc: Norwegian Krona (Peter Schfiff) & Swedish Krona (Axel Merk)
  • Continental Europe: Euro (Axel Merk) & Swiss Franc (Peter Schiff)
  • East Asia: Singapore Dollar (Pete Schiff) & Chinese RMB (Axel Merk)
The last choice is their wild card:
  • Canadian Dollar for Axel Merk
  • Chinese Renminbi for Peter Schiff
If you want to know the reasons behind their choices you can download the full 23-page report at

Thursday, September 22, 2011

Jim Rogers: The US Dollar is not a Safe haven

Interview with Jim Rogers on CNBC on the 22nd of September 2011.

He said right now he would just hold USD, CHF (Swiss Franc) or Agriculture, although he does not consider the US dollar to be a safe haven in the long term.

Thursday, September 15, 2011

Why is the British Pound a doomed currency ?

I previously talked about the reasons the US dollar is doomed based on my analysis. Today, I'll show why the British pound (GBP) is also doomed based on the research made by Tullett Prebon financial firm and published in their report entitled "Thinking the Unthinkable" part of Project Armageddon.

When considering public and private debt, the United Kingdom is actually one of the most indebted countries in the world as a percentage of GDP with 167% public debt (including quasi-debt obligations, but excluding potential commitments created by financial interventions) and 97% of private debt (mortgage and consumer debt) . That's 264% debt to GDP ratio.

Tullett Prebon concluded that Britain’s debts are unsupportable without sustained economic growth, and that the economy, as currently configured, is aligned against growth.

So they come to the same conclusion as Jim Rogers who famously said the "UK is finished", unless some miracles happen such as an economic growth of at least 2.9 % between 2011 until 2016.

On top of that, the UK external debt (owned by foreigner) is at an amazing 400% of GDP (or 143 000 USD per person ) far higher than in Greece, Spain or Portugal, and if foreigner decide to sell UK debt, the British pound would completely be decimated. The UK, as the US, also has a trade deficit which usually makes a currency weak.

Tullen Prebon explains that bankruptcy is a very possible outcome for the United Kingdom but the idea has not yet made its way into the public mind.

You could read the full report below.

Tullett Prebon Project Armagedon Aug 2011

Friday, September 9, 2011

Jim Rogers: Buy the Euro After Greece Defaults

Jim Rogers is interviewed on CNBC on the 9th of September 2011 where he discusses the possible Greek default and subsequent contagion risks to other PIIGS. He recommend to buy as much as Euro as you can after the crisis, as the Euro would be lower but be a stronger currency in the long term. Jump to 6:55 on the video below to listen to Jim Rogers.

David Morgan - The Currency Crisis Continues

David Morgan of is interviewed by Stellaconcepts on the 8th of September 2011.

David Morgan explains the currency crisis continues (citing the Euro crisis) and that Gold is not in a bubble.

He also gives a possible target of 5000 USD for one ounce of Gold, but as he believes it's actually the fiat currencies that go down instead of Gold going up, he prefers to see the price of Gold in terms of ratio to the stock market or silver. He except the Gold to Silver ratio to return to its historical ratio of 16.

He is very bullish on Silver because of 3 reasons:
  1. There 66% less silver than during the 1980 bull market
  2. Back then, it was mainly a US market and now it's a global market
  3. Internet is there and allow people to quickly buy or sell
Finally, he gives his views on the Comex which he thinks will never (officially) default as there are mainly loopholes and he states that mainstream media is biased against Gold (the barbaric relic).

Wednesday, September 7, 2011

Jim Rogers: The Chinese yuan is the next safe haven currency.

Jim Rogers was interviewed on CNBC on Wednesday 7th September 2011 to discuss the recent move by the SNB (Swiss National Bank). Here are his views on the move and the Chinese yuan:

"The Swiss central bank's decision to set a limit on how much the Swiss franc can appreciate against the euro is "a huge mistake". The move will work for a while, but the market will have more money in the end than the SNB which risks losing a lot of money buying up lots of foreign currencies which they will eventually sell at a loss. Another risk is that the central bank will totally debase the Swiss franc trying to keep Switzerland 'competitive' which will then destroy the traditional Swiss financial industry. So this is a huge mistake for Switzerland since they are going to suffer more either way"

"RMB is best, the US dollar is probably good in the short term, but the absolute worst over the long term. There are various ways to get RMB exposure outside China, investors can now open bank accounts in renminbi in various cities like New York, San Francisco, Hong Kong, Singapore and others and can buy renminbi-denominated bonds in the international markets."

Tuesday, September 6, 2011

Consequences of a Euro break Up by UBS

UBS has written a 21-page report discussing the potential impacts of a Euro break-up.

It explains why the Euro should not exist as it is structured today and "simulate" break-up scenario (weak country leaves, strong country leaves...) and try to anticipate the possible consequences.

To conclude they answer the question "How should investors invest in case of a Euro break-up?" The answer:

The only way to hedge against a Euro break-up scenario is to own no Euro assets at all.

You can read the report below.


CHF is now effectively pegged to Euro at 1.20

In a dramatic move, the SNB has decided to put a floor on the price of the CHF vs Euro, a floor at 1.20 CHF per Euro. This is a defacto peg to the Euro as the Swiss franc is unlikely to decline and this resulted in a massive 8% move in the Swiss Franc / Euro exchange rate a massive move (probably unheard of) in the currency markets. (See chart below. Source: Yahoo Finance)

Another battle has been fought in the currency war and the Swiss Franc is no longer a safe heaven. There remains the Yen (but I wonder why) and possibly the Singapore dollar (SGD) which appreciated around 6% against the USD since the beginning of the year. Of course, there is still gold and silver which should remain the real safe heavens.

Monday, September 5, 2011

Marc Faber: The Euro Will Survive

Marc Faber was asked the question "What is your take on the future of the Euro ?" on Bloomberg Radio (August 2011) and answered:

I think it will survive... but the question is: will it survive as a Euro of France and Germany and maybe 2 or 3 other countries, and the other countries will leave, or will it survive as a Euro of the weak countries and Germany will leave? This is the big issue.

Sunday, September 4, 2011

China purchases Gold to undermine the US Dollar

Zero Hedge has reported on one of the recent Wikileaks cables where China explains its view on Gold in that it helps it undermine the role of the US dollar as the reserve currency and would help internationalizing the RMB .


"China increases its gold reserves in order to kill two birds with one stone"

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

So now let's assume that China bring the level of its gold reserve to the same levels as developed countries.

Rank↓ Country/Organization↓ Gold
Gold's share
of national
forex reserves (%)[10]↓
- European Union Eurozone 10,792.6 60.7%
1 United States USA 8,133.5 74.7%
2 Germany Germany 3,401.0 71.7%
3 IMF 2,846.7 -
4 Italy Italy 2,451.8 71.4%
5 France France 2,435.4 66.1%
6 People's Republic of China China 1,054.1 1.7%

As you can see from the Wikipedia table above, as of December 2010, China only had 1.7% of its foreign currency reserve in Gold, and to reach the level developed countries this would have to reach around 60 to 70 %. Let's say China forex reserves are now 3 trillions USD, it would need 2 trillions USD worth of Gold. At today's price (1880 USD per ounce ~ 66,000 USD per kilogram), it would represent around 30,300 tons of gold. To put that in perpective, a total of 165,000 tons of gold have been mined in human history, the total amount of Gold the USA hold is 8133,5 and the amount of Gold helf by the SPDR Gold Shares ETF is 1239 (May 2011).

So the Gold price would have to go much higher if China decided to convert 2/3 of it forex reserves. This would be a process taking several years (or maybe decades) , and China would finally need to hold less than 30,300 tons of Gold, as the Gold price would go up.

If the US, Europe, Japan or Great Britain experience massive inflation or even hyperinflation, the Gold reserve required by China to reach 2/3 of forex reserves would also decrease.

One last point, that is not directly related to China: Pension funds in the US currently hold around 0.3% of their assets in Gold bullion and gold mining shares whereas the historical norm during between 1960 and 1980 was around 5% and it went to 20% during the Gold bubble in 1980.

Tuesday, August 23, 2011

Axel Merk Remains Bullish on the Euro

Axel Merk, who manages Merk Hard Currency Funds (MERKX), is interviewed on the Daily Ticker (Yahoo Finance) by Aaron Task on the 23rd of August 2011.

Merk thinks the Euro will outperform the US Dollar because the ECB prints less money than the Federal Reserve and Europe has implemented austerity measures, which we have yet to see in the US.

He also believes that after a European fiscal framework is implemented, we should see Eurobonds. However, he warns that this is a long process and there is no silver bullet to solve the current European currency crisis.

Friday, August 19, 2011

Peter Schiff: No ceiling for gold prices

Peter Schiff interview on Russia Today on the 19th of August 2011 about the Gold market, explaining why it is not a bubble (Gold mining companies shares are only 10% higher than when gold topped at 1000 in March 2008) , that he cannot put a floor on the price of currencies (and no ceiling on the price of gold) and that the bubble is instead in US treasuries.

Jim Rogers: World to suffer a new currency crisis by fall

Interview with Jim Rogers on Russia Today on the 11th of May 2011 where he discusses the possibilities of a US dollar currency crisis by fall 2011.

Thursday, August 18, 2011

Why is the US dollar a doomed currency ?

First of all, the US dollar is a weak currency because of the USA current account deficit which stands at 561 billions dollars in 2010 according to Wikipedia List of countries by current account balance. The US is actually last in this ranking (191), with Spain being number 190 with a current account deficit of 6.740 billions.

A large current account deficit is the result of an imbalance between exports and imports.

Second, the USA also has massive debt obligations with current government debt of 14.6 Trillions (Source: Debt Clock) excluding unfunded liabilities. That debt represented 92.7% of GDP in 2010 according to the IMF, and is close to 100% now. Some historical studies (cf. "Growth in a Time of Debt", Reinhart and Rogoff)explain that when a country debt to GDP is over 90%, the likelihood of paying down the debt decreases significantly as it affects economic growth rates negatively.

There are no clear number for unfunded liabilities, as the total debt varies between 60 Trillions and 115 Trillions. But consider this: The total net worth of households and non-profit organizations in the US amount to less than 60 Trillions as of today (See Business Insider Chart below).

Such a large amount of debt will never be repaid, and the US has few options:
  • Default on the debt directly. This is highly unlikely.
  • Massively cut expenditures (e.g. military) and decrease benefits (social security, unemployment benefits) and possibly increase taxes at the same time. This is not very likely and its implementation may not be successful. This would actually be supportive for the US dollar, but painful for the economy in the short term (1 to 2 years).
  • Print more money (e.g. Quantitative easing) in order to pay for debt. This is called monetization of debt. This is the easy way out and the most likely. However, this creates inflation and will lead to a decline in the value of the USD dollar overtime and may even lead to a full blown currency crisis leading to hyperinflation.
  • Tuesday, August 16, 2011

    Mike Maloney: The Coming Debt Collapse and Currency Crisis

    Great 90 minutes video with Mike Maloney where he shows long term investment cycles including a part explaining how a debt collapse will occur followed by massive money printing where a currency crisis will happen with the US Dollar (hyperinflation).

    Monday, August 15, 2011

    Currency Crisis Definition

    A currency crisis - also called a balance-of-payments crisis - is a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. Currency crises usually affect fixed exchange rate regimes, rather than floating regimes.

    A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves, historically usually in the United States dollar, Euro or Pound sterling.

    There are 3 generations of currency crisis models:

    • First generation models: Speculative attacks in the gold market (Fixed exchange rate with a commodity)
    • Second generation models: Doubts about whether the government is willing to maintain its exchange rate peg (Fixed exchange rate with another fiat currency)
    • Third generation models: Interactions between the problems in the banking and financial system and currency crises