"God bless us every one!" said Tiny Tim, the last of all.
Charles Dickens, A Christmas Carol
Commentary & Analysis - Hodgepodge
Year-end 2013 review…
I was going to prepare a year-end review; until I read Professor Dave Collum’s 2013 review and analysis of the markets. Simply put, Dave’s review of it is the best single summary of the markets and economics you will find anywhere, in my humble opinion. You can access it at the links Part 1 and Part 2 below. Enjoy!
Europe loses Ukraine and the energy noose tightens
Vladimir Putin is on a role. First he blunted the West’s attempts to topple the Syrian leadership, and in the process stymied the Qatar-Turkey gas pipeline to Europe. Next he re-captured Ukraine, placing it solidly back in the Soviet sphere (Georgia has been taken off the table too by Russia, as evidenced by its recent elections, much to the chagrin of neocon warmongers in the US Senate and elsewhere). In an effort to show-off his Christmas cheer, Mr. Putin released Russian oligarch Mikhail Khodorkovsky and a couple of punk band Pussy Riot members (likely Putin was scared off by the US gay contingent being sent to the Sochi Winter Olympic games by President Obama). And to that point, Putin’s essays on freedom, liberty, and traditional values of late resonate much more with the heartland of America than anything coming out of our own twisted Federal government, in my opinion. But in all this, besides the fact Russia seems to be re-emerging as global policy maker at large, the loss of Ukraine could be very bad news for Europe as it relates to energy.
According to Leto Research:
“The EU imports 90% of the natural gas that it consumes, 35% of which comes from Russia. Half of these imports from Russia are transported via the Ukraine. This 50% of 35% of 90% may not seem to be a big deal until one fits it into the larger picture of Europe’s steadily deteriorating energy dependency ratio. Europe’s overall energy import dependency ratio has been climbing steadily from 42% in 1995 to 54% in 2010 to 55% in 2011. Import dependency for oil is 95% and for natural gas 90%.”
This is a big deal, especially since Germany abandoned nuclear power as a result of the Japanese Fukushima nuclear disaster. Germany is leading the way for the industrialized world with the efficient use of renewables, but it’s a big gamble and the jury is still out.
The key point: The United States energy revival means companies manufacturing inside the US shores have an absolute energy cost advantage over competitors in Europe. This will likely mean continued real money flow (FDI) will favor the US over Europe for years to come.
US Dollar Index – What’s the point?
Is there any point in following the US dollar index as a measure of US dollar strength? Effectively, you are looking at the flip-side of the euro when you use the US dollar index as your measurement stick.
US $ Index weightings:
Japanese yen 13.6%
Pound sterling 11.9%
Canadian dollar 9.1%
Swedish krona 4.2%
Swiss franc 3.6%
Swiss is pegged to the euro and the Swedish krona is highly correlated with the euro. Add the three together and you get 65.4% weight of the total index. So, if you are trading US Dollar Index futures it might be a lot more efficient to just stick with euro futures or euro spot.
Maybe the healing is over for the euro
There is a lot of talk about hedge funds gearing up to buy mortgage and other paper the European banking system will be off-loading in 2014 in an effort to fortify their balance sheets. No doubt money flow from international investors to European banks will be relatively euro positive. Now that many seem to be growing complacent about Europe is healing, surmising the crisis is over once and for all, I have my doubts.
1) Italian citizens (and others) are increasingly restless as unemployment rises
2) Despite some growth, the debt profile (debt to GDP) continues to deteriorate for most periphery countries as tax revenues decline.
3) Banking reform – Minimal at best despite the PR. The result will be more deflationary pressures across the region as European banks seem to have little incentive to lend (negative deposit rates at the ECB anyone?).
4) Neo-anti-establishment political parties are growing and strengthening across Europe.
5) Declining manufacturing competitiveness due to energy cost disadvantage will bite.
6) Germany’s elite is becoming increasing disenchanted with the single currency experiment.
EUR/USD Weekly View Next Page
Black Swan Currency Options Service… 4-Wins and No losses…so far…
We have taken off four trades since the service began in October; all of them have been winners:
Using options on the currency exchange traded funds (ETFs) is an easy way to play currencies. It is an equity-based product, you can trade it using your standard stock-brokerage account. And given our methodology of always buying long as the opening transaction (using these options as a pure directional bet keeping it simple), your risk is limited to the cost of the option (plus commissions).
Get yourself a little Christmas gift for next year; something that should pay for itself many times over.
Merry Christmas and Happy New Year! And thank you for reading Currency Currents.
Black Swan Capital