German Domination
Research for Online Investors

11/29/11

Soft power is best practiced by those with a long term view.  American’s are too impatient.  We want it all solved…now.  When you take a longer view, you see that sometimes history seems to be on a merry-go-round.  If you miss it this time, just wait, it will come back around to you.  I read an interesting article yesterday courtesy of subscriber George O.

We all know history, Germany and World War I then World War II.  What if Germany could see domination of Europe, without firing a shot?  The pen mightier than the sword you say?  How about bankers mightier than the sword!

Germany has become the de-facto paymaster for Europe.  Greece, Italy, Ireland, Portugal, all look to the Germans to be saved from the ravages of the credit markets.  What will the Germans extract in return?  Angela Merkel, Chancellor of Germany, is steadfast in her demands for more fiscal integration.

Germany refuses to entertain the quick fix.  France wants the European Central Bank (ECB) to print money and buy sovereign debt from troubled countries.  Germany wants sound money.  Investors want the ECB to print money.  The uncertainty of higher interest rates for eurozone countries is causing turbulence in equity markets.  Who knows if European banks can survive writing off bad debt from Greece?

The market is especially afraid of Italian debt.  What if their interest rates continue higher?  What if banks have to write off, or take a haircut, on Italian debt?  The popular perception is that most European banks would be insolvent.  U.S. banks have exposure to European debt, and European banks.  Financial turmoil in Europe would be directly exported into the U.S. financial system.

One of the most popular trades right now is shorting the Euro against the dollar.  The idea is to capitalize on the flight of money from the eurozone to U.S. dollar denominated assets.  It has been a good trade.  Since 10/27 the FXE etf (Currencyshares Euro Trust) has fallen from $141 to $132.

Many traders believe the euro is headed to parity with the U.S. dollar within the next year.  That would drop the FXE to $100, and it can happen if the ECB starts quantitative easing (printing money).  This is what France wants, and traders believe it will happen…it is just a matter of time.  The ECB must become the buyer of last resort of all bonds from countries that cannot control their spending.  That is what Americans believe, because we want a quick fix.

What if Germany doesn’t care about quick fixes?  Maybe they are worried about the future.  Germans believe in sound money, they remember the Weimar inflation after WWI.  Hyper-inflation led to unemployment and eventually the rise of socialism under Hitler.  They also remember Hungary after WWII. According to Wikipedia, Hungary printed so much money, the government consumed an “enormous amount of paper…causing a shortage of good quality security paper.”

The German people want their government to avoid inflation at all costs.

This is where it gets interesting.  Germany could dominate Europe in the next year, without firing a shot.  Germany, along with France, wants to propose tighter fiscal regulations on other governments if they need credit.  It is a gentle push pull.  You want it, we got it, but here is what it will cost you!

In the next few months we could see Greece, Italy, Portugal, Ireland and others succumb to domination by Germany through the European Central Bank and European Commission.  That is, if they want to stay in the eurozone and have access to their credit markets.

If this happens, the ECB will follow Germany’s wishes and not print a single new euro.  Compare this to what the U.S. Federal Reserve is doing and we could see the euro become the World’s Reserve Currency…backed by Germany.

Oh, and remember all of those traders that are betting on the euro going to parity with the U.S. dollar?  We will be witness to a “great unwind” that paints red in quite a few hedge funds.  It could also affect commodity and precious metals prices.

Quote:
He who votes does not have power.  He who counts the votes has power.—Joseph Stalin

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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