Forget about MF Global’s bankruptcy – it’s a symptom, not the cause. Forget about Italy – again, symptom. Investors are waking up to the harsh reality that the European Union, through the euro, is structurally flawed. A Union by name only, the EU has been based on the false premise that a central bank can be completely disconnected from the political and fiscal processes. In fact, by proving the null, the EU actually shows us how un-independent (sic) our own central bank is.
In fact, in one day, we erased the gains from any EFSF boost. For those who got squeezed out of their euro shorts…well, you should have known better. For all those who are still long the euro…well, hold on.
By writing down the Greek debt, the EU has given the other at-risk countries motivation to push for restructuring. It might be a good idea for the to try now rather than later. With Italian yields at 6%, it’s already too expensive for Italy to refinance on its own, but might end up being relatively cheap for the EU to try to restructure before Italian spreads completely blow out. Then again, any restructuring beyond the current funds will probably tip the French scale and trigger a downgrade. Not sure how much longer Germany can hold out, but more importantly, I know that no German politician will be strong enough here to push through bigger bailouts without some serious clashes with the general population.
So who’s happy here? Probably the only place that’s happy on the continent is Turkey. For years they tried to get in. They argued that they had better financial conditions than many current members, and better demographics than the entire continent. Mostly for xenophobic reasons (surely it wasn’t financial), the Europeans refused. Now, Turkey is sitting pretty as it has a growing, young population without the overhang of needing to bailout Greece. Now THAT would have been ironic. Come to think of it, maybe Turkey can buy Cyprus from Greece, or have China buy it for them. Crazier back room deals have happened, and I’m sure I’m not the first to suggest it to them. Over the past 5 years, Turkey has certainly been the winner.
(For reference, that’s a roughly 27% outperformance.)
Now, I’m not suggesting Turkey is a buy here. It has its own problems, including rising fundamentalism and an army-controlled economy. All I’m saying is that bad European decisions aren’t a recent occurrence and should be viewed on a longer horizon as part of a pattern. In that light, I am obviously staying short the euro.
Relevant ETFs: FXE, EUO, UUP