DislikedVery interesting post PT. I share a few of your reasons, not sure if some of your points are true and I disagree with some others.Ignored
EZ economy is faltering [not really is bottoming and flattening considering the EZ as whole]
- Perhaps that statement wasn't exactly explained properly but the reports and expectations are that there are a very high number of European corporates which will default on their debt in the weaker EZ economies
Capital is flowing out of EZ [not really, last ECB numbers show an important influx of healthy and quality money going back to EZ...1st time since the debt crisis started]
- Yes there is healthy "real money" flowing back into the EuroZone according to the latest ECB report. However, the net capital flows are still outbound. Just look at the overall trade deficits in the EZ (Excluding Germany)
Liquidity is not always capital [agree] and in this case EZ liquidity is debt [not true and not at all...on what are you basing this comment]
- EZ banks are holding loads of toxic sovereign debt from the EZ peripheral countries and some northern ones too. There are only a small handful of EZ members with a debt to GDP ratio at or under the required 60% and also very few with a budget deficit at or under 3%. Furthermore as indicated above, there is an expectation and high risk of corporate debt defaults which would force the banks who lent them the capital to write down these bad debts. The liquidity in these EZ banks is provided by the ECB and is collateralized by the said toxic assets. Therefore, the liquidity is effectively debt.
1. Businesses in Europe are losing money [not true..base on what?]
- Why else would they be at high risk of defaulting on debt?
3. There is effectively no rate differential any more between US and EZ [NO !!! not true that's IMO a very wrong statement. 0.25% to 1% is a huge difference ..thats why the euro is still 30% more expensive than the dollar....the next macro move in the pair will come from there 100% Guarantee]
- I said "effectively" because potential rewards from carry trades on a 0.75% spread are not enough to outweigh the risks of investing in EZ businesses who are having a hard time servicing their debt.
5. The ECB is expected to cut rates further [Not true not all. why do you say that]
- Because that is what the market expectation is. I never said it was fact. I said they are "expected to", and as you know, Mr. Market is driven by expectation (Perception) and not reality. Although, perception often becomes reality.
Now I just want to let you know that all the above that I have stated and commented on was not supposed to be an analysis from a financial adviser's perspective. It was only meant to demonstrate why we are seeing the Euro decouple from other risk assets (High yielding assets if you will) as opposed to seeing it appreciate and depreciate with the equities and commodities markets. Clearly from the charts, one can see that there is a major adjustment underway whereby there may be some quality capital being repatriated to Europe by the rich Europeans according to the ECB, but the reality is that the yield seekers are now looking to the US rather than the EZ to invest their capital... at least for now anyway.
You know I have much respect for your knowledge in these matters so feel free to rip apart my reasoning here, as this is how I learn also... through constructive criticism
Those who say it cannot be done should not interrupt those who are doing it