In this newsletter, he discusses the choices to be made by Germany and tries to understand why Germany is so generous:
- The exposure of financial institutions towards Greek debt. A lot of progress has been made in making the European banking system more robust; the envisioned 53% write-down of Greek debt is priced into markets already. Concerns regarding outright exposure to Greece have abated. Rather, concerns linger about the inter-dependency across financial institutions, the potential “contagion” as other countries – and thus financial institutions across Europe and beyond - may be considered at increased risk of default.
- In 2010, Germany exported €5.9 billion worth of goods to Greece, a 10.2% drop versus the previous year. While significant, Germany’s $3 trillion economy could stomach losing exports to Greece.
- Germany’s desire for peace in Europe.
He goes on to explain that "Another price has been paid on the monetary front. Since November 1, 2011, when Mario Draghi became President of the European Central Bank (ECB), we’ve witnessed a seismic shift in how monetary policy is being conducted. While we applaud Draghi for his clarity and determination, his decision to provide almost €500 billion in three-year financing to banks (LTRO) at a mere 1% may come at a tremendous cost."
For now, the market appears ecstatic but it may lead to serious problems down the road.
After talking about the currency crisis, he discusses about the opportunities:
Massive short positions previously built-up need to be unwound. As central bankers around the world hope for the best, but plan for the worst, lots of money is being printed: by the Fed, the ECB, the Bank of England (BoE) and Bank of Japan (BoJ), to name the prime instigators. Commodity currencies, i.e. the Australian Dollar (AUD), New Zealand Dollar (NZD) and Canadian Dollar (CAD) should be the main beneficiaries. While these currencies have performed well, Australia is undergoing some domestic political turmoil and Canada’s fate is closely linked to that of the U.S.; as a result, the NZD would be our favorite in that group. Having said that, geopolitical tensions and monetary easing have boosted oil prices in particular, causing headwinds to global economic growth and, with it, also to commodity currencies. If those headwinds play out further, we would make the Norwegian Krone (NOK) our preferred choice, as Norway benefits from rising oil prices, as well as providing investors with relative safety in Europe. It’s not surprising that gold, the one currency with intrinsic value, continues to appreciate in this environment.