05 March 2010


Mmm… not quite.

With the Euro at $1,35 +/- $0.02, real value, or in this case Euro overvaluation can be found in Purchasing Power Parity, explained simply thus:
The Euro corrected lower in December but remains significantly overvalued against the US Dollar with prices still over 20% above the PPP-implied “fair” exchange rate. The single was the second-worst performing currency against the greenback last month while the spread between 1-year priced-in interest rate expectations for the Federal Reserve and ECB as narrowed substantially as US data took on a firmer tone, suggesting both momentum and yield considerations are supportive of further losses. The critical thing to keep watch out for as 2010 gets going will be whether the market will return to a risk vs. safety dichotomy that characterized much of the previous year or extend the shift towards a focus on economic fundamentals that began to take root towards the final weeks of 2009. The former scenario would offer some support to the single currency, while the latter would allow for continued weakness. On balance, our bias remains bearish.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.
While the Euro has been flying to as high as $1,65, PPP has been consistent at a range of $1,10 - $1,13. The difference is the extent to which Euro-zone occupants are being screwed more than Americans by taxation, cronyism, and “Syndicalism”.

The irony of all of this is that while the Euro rises, the population doesn’t benefit. Not only has it the effect of flattening exports, it costs more and more in Euros to budget what’s expressed in that $1,13 of parity. The money has to leave the Euro-zone and go just about anywhere in the world to get a parity advantage.

Note too: keep an eye out for all of these issues on 19-March and slightly before. It’s the date some Greek government debt comes due, and the auctions will reveal much of what could underlie the coming weeks and months.

04 March 2010

That Sure is One Cozy Looking Ship Container

The belief that we can recover from the economic crisis without compromising our "European Way of Life" is quite simply a pipe dream argues, Polish columnist Marek Magierowski.
What European way of life? Oh... THAT European way of life!
For nearly six months, Florence Aubenas became: "Madame Aubenas," age 48, no specific qualifications — an unemployed woman among others, dozens of others, none of whom recognized her. Day after day, she immersed herself in the formless mass of job seekers, who drift from one underpaid temporary job to another — the legions of the non-skilled unemployed who have no hope of finding real jobs, just odd hours here and there — that is if they are lucky.

To tell the story of people going under
But going back to Marek Magierowski’s point:
A similar situation prevails in the other countries of Western Europe, especially those worst hit by the crisis like Greece, Portugal and the United Kingdom. Remedies employed by governments are systematically similar too — more state involvement in the economy, higher taxes, and the relentless iteration of a mantra to designate the "real" instigators of the crisis: greedy bankers and speculators. And be warned, any state that dares to question the entitlements of this or that social group can expect to assume the consequences of a mini-civil war, with pitched battles between stone throwing strikers and water canon wielding police.
A.K.A.: that much lauded European way of life.

Something you can be sure a population fearful of walking through the rain, and a leadership unwilling to unclench its grip are unlikely to permit.

03 March 2010

Coming Soon: Gravity to be Legislated!

I know you’re all practically peeing yourselves in giddy anticipation:

Brussels to unveil economic plan for next decade
There’s nothing quite as rousing as being forcefully led! It sure puts a smile on the collective European face, even if they did seem to have had their senses of humor surgically removed.
After a decade of the EU's failed efforts to become the world's most dynamic knowledge-based economy, Brussels is laying down a fresh economic vision based on innovation, education and digital technologies. However, it stops short of introducing sanctions to ensure national capitals this time stick to the plan.
The beatings will continue until a fresh economic vision based on innovation, education and digital technologies improves!

Have ou ever had to listen to teachers droning on about the evils of standardized testing, taking comps, and all of that insight-crippling “teaching to the test stuff”? Well here it is on a continental scale. Don’t forget your number 2 pencils, kids!
"The monitoring of progress towards these targets should become an integral part of our economic governance,"
Just as long as that data isn’t going through the SWIFT network.
Under the bloc's new, post-Lisbon Treaty set-up, member states will have no chance to formally debate the proposals ahead of the summit in sectoral councils of energy or finance ministers, giving the commission extra power to force its ideas through.
Any resemblance this has to ‘tractor production quotas’ is unintentional. Completely, and entirely without awareness of irony... unintentional.

02 March 2010

"A lot of Handwringing and Bitching”

Mongolia has a population of 3 million. There seems to be one Euro-über-lider-maximo for each of them:

The treaty came into force in December and is supposed to cure Europe's malaise by streamlining decision-taking, simplifying procedures, boosting common foreign policy, and supplying strong and coherent leadership.

It is early days, but the new regime has started not with a bang but with a whimper. Where there was to be coherence, there is confusion. Where there was to be clear leadership, there are turf wars and rival presidents.

Obama announced last week he was too busy for a slated summit with the Europeans in Madrid in May. When Mongolia's leader, Tsakhiagiin Elbegdorj, visited Brussels last week he was nonplussed by the plethora of "European presidents" whom protocol prescribed he must meet (there are currently four).

The US state department made plain that one reason for Obama's absence is that, under Lisbon, it was not clear with whom the Americans should be dealing.
European speculation on the matter misses on very big thing: it doesn’t matter. Since the EU can effect no real action, there is no reason to take whoever is heading the EU seriously, even if there are enough of them to field a basketball team.
The first EU summit under Van Rompuy's stewardship sees Europe slumped in a mood of unusually persistent gloom. Van Rompuy, Gordon Brown, Nicolas Sarkozy, Angela Merkel and the rest are in charge of a Europe engulfed by a sense of defeatism and decline and exhausted by nine long years of trying to construct a new European regime. The reasons for the ennui are clear. According to senior officials, analysts, and diplomats in Brussels, Paris, London and Berlin, Europe suddenly seems to matter a lot less in the world. Additionally, its leaders appear unsure of how to tackle their single currency's biggest ever crisis, and are engaged in petty power struggles and point-scoring over how to use the EU's new rulebook – the Lisbon treaty.
I’ve got an idea! Maybe another dozen or so summits on some random, unchallenging subjects will give them an air of relevance!