Friday, February 5, 2010

Commodities, the Nation of Greece Conspire for a Terrible Week in Europe

If you own stocks, this week probably wasn't your favorite. Still, it could have been worse; you could be European. The EU got smacked around this week in a scene not unlike the penultimate brawl in Road House, you know, when that dude with the stick beats up all of the bouncers at the Double Deuce. Take a look at the Euro over the last three months:
Then go ahead and change the view so that you're looking at the price over one month. I'm not a geopolitician, but from what I understand, Greece, Portugal, and to a lesser extent Spain, are all having terrible times restructuring their debt, so much so, in fact, that investors are fleeing EU investment vehicles for the "security" of American government bonds and the US Dollar. The dollar, in essence, this week fed on the ballooning deficit of three EU nations and the fears they brought to investors. The side effect here is falling commodities prices, as gold, copper, and oil all declined significantly over the last few days, thanks primarily to steady increases in the value of the dollar. Gold, for example, is down about $60 from where it opened on Thursday.
I find this notable for three reasons:
  1. The EU is experiencing the WORST of both possible worlds, as a collection of economically diverse, fully autonomous nations beholden to one central economy and currency, when one country suffers, EVERYONE suffers. This would be the equivalent of a debt crisis at an Illinois community bank making the dollar worthless in Japan. To what extent is Greece's fiscal stability the business of other EU nations? How beholden is Greece to EU nations helping it out of a jam?
  2. Commodities prices are decreasing as a function of a strengthening dollar against the Euro, specifically. The dollar has been falling against the Yen all month while moving more or less sideways against the Loonie. With all of the global trade that goes on, I would not have expected a simple shift from European to American investments, on its own, to have that sizable an effect on commodities prices; typically you'd need the dollar to get stronger against EVERYTHING for this kind of pricing plummet.
  3. Investors are fleeing Europe for the stability of the dollar. That's the US Dollar. The currency of the nation with 10% unemployment and interest rates of functionally 0. The nation with a $1.4 Trillion deficit. The nation currently fighting two wars. If the US economy is somehow the world's safe-haven right now, that does not bode well for the world.


Marc Jorgensen said...

Fascinating commentary Chuck. I am little surprised this is the first time in the euro's ten year history that is causing some to seriously question the viability of the euro. Combining a diverse array of European political and economic interests is a risky flaw.

Charles said...

Thanks Marc,

As you probably guess I agree completely. The trouble is, I don't know what the EU does to solve the problem. Re-isolating the economies would hurt them internally, but as long as they have their current structure, one country's problems become all of their problems.

Marc Jorgensen said...

One thing for certain is the barriers to entry will increase along with the length of review before a new country will be admitted.

P.S I have heard some new stuff from The Posies, looks like they have been doing some touring as well. I heard a clip on NPR about them a few months ago and Ken Stringfellow converted his salary in euros into dollars, it was about $100,000.

Charles said...

Interesting analysis Marc. I wonder how long such a process change would take to implement?

Also, glad to hear it about the Posies. I actually dug some of their old albums out and was listening to them just last week.