Eur Wedge On De Edge


#1661

Hmmm. I suppose it would be a similar payoff. You’d need to be careful about what your cash is currently denominated in. And you obviously wouldn’t benefit from any “radical” ideas around existing debt which may be implemented at the time.

As a relevant aside, my favourite hedge right now is zero coupon 30Yr US Treasuries, on margin.
So, for those who don’t know much about this stuff, a “zero” pays no interest at all and simply returns to the investor the $100k principal on maturity. After the recent bond sell off they are now purchasable around the $30k mark per $100k face. However, most online brokers, Interactive Brokers for example, will allow you to purchase these on margin of just 3% of the principal; so you can guarantee yourself say a $1,000,000 payout from the US Treasury 30 years from now for $30k of margin exposure. Obviously as the underlying price moves around the margin requirements can pick up and could certainly double or more but, nevertheless, for an Irish person exposed to the risk of a devaluation of their national currency, I think they could make a pretty smart element of a portfolio.

***Not a recommendation, read the small print, you may lose your home if you do not keep up repayments (but you probably wont), no guarantees, etc etc etc



#1662

Definitely. After what happened in Cyprus it is beyond fathomable that anybody would keep north of €100k in an Irish bank.


#1663

It moves with real rates.
If you think you’re going to get hefty inflation (wage rises etc. :laughing:) then, sure, Gold will do well.
If you don’t, then it’s going to struggle.

As I’ve said in the Gold-specific thread that also implies that negative rates would be a big help to the yellow metal. And you’ve got a better than evens chance of seeing negative rates in Euroland.


#1664

Daniel,
some interesting thoughts…thanks.

In the event of a (nasty?!?, there is probably no other kind!) Euro break-up I expect to see major capital movement restrictions, a least for a sustained period of time. The more interesting point would be to see if countries pass laws to (eg) increase tax rates for non-residents. For example would Germany introduce a 50% tax on all personal bank accounts held in Germany by non-residents? A break-up would not be orderly and will cause a lot of problems for a lot of people and would most likely include several other countries as well as just those in the Euro zone. I know several people with substantial amounts of money in German banks… they are quite smug about it but I am not convinced that there money is as safe as they think it is…maybe I am just too cautious!


#1665

If that happened your variable mortgage interest rate would double along with your monthly payments. Not exactly a winning strategy.

You UK-based eurosceptics have been saying that for years. And youve been wrong every time.


#1666

That’s true about the interest rate, but you could get it fixed.

They have been saying that for years and they’ve been right. Of course, the creators and backers of the euro (mainly politicians) do not want to admit they’ve gotten it wrong and will do all in their power to keep the white elephant up and running.


#1667

No, it would depend on the new base rate. There would be volatility with an upward bias. It wouldn’t matter though in the long term because the currency would herald the return of inflationary debasement of debt.


#1668

Easy there. Re read my post, as I said: I was a fan of the Euro. I was long it repeatedly last year; I was even long Italian debt last year and through the start of this year. I still wouldn’t short the currency because you’re fighting a large and growing trade surplus (i.e demand for Euro).

And I’m not UK-based.


#1669

Fair enough. But you do seem to have that City of London mentality. Ie its the central banks job to provide you with cheap credit so you can make money on inflation in asset prices.


#1670

I saw somebody recently making a very valid point that Cyprus has already left the Eurozone due to capital controls. And they’re actually quite correct; to wit: if I were to offer you, presumably an Irish resident, €10 Million in a Cypriot bank account … or €8 Million in a Frankfurt bank account … which would you take? I’d take the Frankfurt account every day of the week … proof positive that there are now two Euros!


#1671

In view of the foregoing discussion wouldn’t it make good sense to invest in German property ?


#1672

mmmmm-kay


#1673

While some of the sub-parts will occur, due mainly to outside of the state influences, the part of “a radical change in our politics” doesn’t happen here, hasn’t happened in the past, won’t happen in the future. That’s not how we do it here.

Nothing to see here peasants, move on please.


#1674

Seems like a good gamble for someone to do if they are nearing bankruptcy already. But I really don’t see people lending to the US government at 3% on average for the next 30 years. In which case you’d be wiped out, but you might as well go bankrupt in style.


#1675

I read that a number of times and couldn’t understand it.
I think you may be implying that the US could go bankrupt, which is just silly. They can always meet USD denominated obligations. Presumably you’ve been shorting JGBs for a decade too…worked well?
Also, the yield is closer to 3.9% (though I’d have to check that again). The threat to the trade is significantly higher US base rates, which is why it can only be part of a portfolio - the rest of which should, obviously, benefit from higher rates.
In the context of the thread it would be a very significant winner if/when the Eurozone breaks up - due to the massive flow into USD, and US Treasuries in particular; and its capital requirements (being a zero coupon bond) are particularly modest, especially when funded on margin.


#1676

I was implying that a regular punter about to go bankrupt should try to do as much of those highly leveraged bets as he can. But then I was pointing out that it is unlikely that the yield demanded by the marketplace would stay low enough to prevent him from being stopped out at some stage in the not too distant future. He could get lucky and find that the Fed pisses away God knows how many more trillions buying Treasuries over the next 20 odd years to keep the yield low enough, but I doubt even they would be so reckless.


#1677

But how long can they continue that for a year,ten years etc???

Also, all that money going into US bonds, treasuries etc that just taking monyeo uut of economy somewhere else usually the private sector, which is the biggest weath and job creator that we need?.

But if we have higher rates wouldn’t those higer rates have an negative impact on those struggling with the lower rates? Won’t the higher rates cause more problems that solve?

But surely that wouldn’t be good here in Europe if our cash is flowing in to the USD and treasuries?? Now, I might have rasied soem crazy points so please feel free to go ahead and laugh But I would appreciate some answer and explanantions?


#1678

I’d be interested to hear about how people think a European country dropping out of the Euro would come about?

Would it be that we’d wake up one morning, and it would be fait accompli?

No. That kind of action has only happened one time in the history of the EU - when the Irish government decided overnight that the sovereign and state would take full responsibility for the debts of its indigenous banks. But you have to realise the political context that happened in - essentially the interests of the effectively ruling Irish elite (top ‘layers’ of that elite) were threatened in a particular manner, and the pathological business and political culture of the time fostered the necessary elements of denial and superiority complex that enabled dangerous bilateral action to be taken that worked against the interests of practically everybody else.

But I don’t see that happening with Cyprus, Greece or Portugal, for the reason that* the incomes of the effectively ruling elites or classes there are much more valuable in Euro terms. * (not to mention source of funding of much of those incomes)

Certainly, the economy may experience more and more difficulties, and the middle classes experience greater and greater distress, giving rise to other economic and political impetuses. But what happens in that case happens much more slowly. You will not have something like what happened in Ireland happen.

What happens in this case, is that the political and economic misery becomes more and more strident - gradually, over time, or even in ‘waves’. But the time factor allows these waves to be “assuaged” just enough to damp it down enough to allow things carry on. Through transfer of money essentially, in the form of new bail-outs, loans, interest rate reductions, debt holidays, or other conferments.

Why? Because the Euro is considered too important. It is held to be ‘strong’ money. It is held capable of being on a par with the mighty US dollar. It fosters (and has already fostered) much strengthened economic and trading ties between EU countries. A key enabler of wonderful wonderful free-marketism. Of course, it was also created to foster European unity and put an end to the wars that have plagued Europe in its history. There is still massive faith in the Euro as a currency in spite of its present short-comings (and even in spite of the gold-bug prophecies).

As I said in previous post on this thread, you can be sure that everything valuable to Europeans will be readily sacrificed in the attempt to save the Euro, over time. Even if that attempt is to be a vain one, bound to end up in failure (although that is far from a foregone conclusion at this stage).

I can readily see how presently, money kept in a German bank is worth more than it kept in a Cypriot bank. But that is why Cyprus is presently in quarantine. And it will remain so until such time as the perception of risk associated with Cypriot based investments and holdings is effectively managed.

The key political fact is any class who currently receives an income stream in Euro, would much prefer to keep it that way, even if in the process, their whole economy is destroyed. They will not see their broader interest in that regard. Short term-ism is the reality.

Certainly, there is a growing class - the “keen to retire class” who see a means to better fund their retirements through driving down costs in their own countries, while managing to keep a hold on a strong currency for themselves, whether Euro or gold or German bonds etc.

But this class though rising, is yet far far down the pecking order.

As long as people with incomes are in the majority, these countries will not leave the Euro. On a numbers basis, if unemployment started getting near 50%, then there might be trouble, depending on how the other 50% with incomes could hold onto power.

Worst case scenario, we have another 5-10 years to go before you have a country with a presently well paid public sector, and with relatively high levels of rentier based income streams, dropping out of the Euro.


#1679

what do IB charge for in interest on margin/can you roll it up?? Writing a dollar cheque every year would put a lot of people off - except maybe those who shouldn’t go near the trade in the first place!


#1680

No, there is at least one other precedent - the UK leaving the EMU in October 1990.

The rest of your analysis ignores the fact that in times of extreme economic hardship, it’s usually the people at the bottom who get hit hardest, assuming that “hard” doesn’t include having to sell a couple of helicopters. The severe recession we’ve had for the last couple of years is unusual in that low earners and the unemployed (including pensioners) are receiving much the same level of state supports as they were in the boom, albeit there are more of them. A Euro exit and default could be the straw that breaks the welfare state’s back.

Arguably, however, the “won’t someone think of the poor” argument against exit/default is a bit like using them as a human shield to protect vested interests.

If we really wanted to shake the tree a land tax might do it, but that’s politically problematic for FG/Labour as it’d be portrayed as a culchie tax.