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Why is George Soros Short the Euro? MUST READ!

Posted by Larry Doyle on March 3, 2009 6:10 AM |

In very short order, I have gained a deep respect and regard for our Economic All-Star, John Mauldin. I have come to appreciate that Mauldin and I view the market through the same lens focused on the global economy. While many media outlets focus on the day to day, if not hour to hour trading activity, I believe they are truly missing the forest for the trees.

While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.

Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” Assuming those visiting Sense on Cents have an interest in the markets and economy, this piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review.

Jensen initially provides a backdrop of the collective guilt across all market participants in this global economic meltdown. The U.K. government is targeted by Jensen for their total lack of fiscal discipline in the process. He further adds that the outlandish banking compensation was a direct correlation of the leverage employed. Jensen focuses on the preponderance of supposed AAA rated CLOs (Collateralized Loan Obligations) backed by corporate loans and credit cards. The leverage employed by the European banks dwarfed the leverage employed by U.S. banks.

To this point Jensen’s analysis is enlightening but not earth shattering. He then enters into the rate of expected defaults on the European banks’ balance sheets, the exposures to eastern Europe, and the specifics of mortgage borrowing by eastern European citizens from European banks. I started to get a little queasy.

Jensen’s comparisons of the details in this crisis relative to the Asian crisis experienced in the late 90’s is scary. His focus specifically on Austria and the level of their debt exposure is also daunting. My queasiness increased.

Please read the Mauldin/Jensen report in its entirety so you can gain a further appreciation of the pressure in that part of the world and the implications for these economies, countries, and their political stability. Last Sunday evening on NQR’s Dollars & Sense, I spoke at length about the global government funding needs. On that very topic, Jensen writes:

Public debt to rise and rise

. . . the banking sector cannot, in the current environment at least, raise sufficient capital to stay afloat, so more, possibly a lot more, tax payers’ money will have to be put forward. This can only mean one thing. Public debt will rise and rise. The official estimate for the UK for next year is already approaching 10% of GDP, an estimate which will almost certainly rise further. We probably have to get used to running 10-15% deficits for a few years, a fact which seriously undermines the notion of government bonds being next to risk-free.

BCA Research has calculated the effect on public debt in a number of countries, as a result of further bank losses being underwritten by tax payers. Obviously, those countries with the largest banking industries (as a % of GDP) will be hit the hardest.

Mauldin and Jensen are clearly on the cutting edge of the weakest link in the global economy today. In light of this color, there is no surprise why George Soros is short the Euro.

I would never raise undue anxiety, but this situation is very fluid and needs to be watched daily. I will be doing that as I try to help you navigate the economic landscape!!

LD

  • divvy trader

    so is there a liquid way to play this ? ie an ETF consisting of all EU banks/brokerage firms one can short vs long something like XLF in USA ?

  • Larry Doyle

    Trader,

    I hope you like the site. Not knowing people’s individual situations I am hesitant to make trade recommendations.

    I hope you can understand my reasoning.

  • lizzy

    Great source LD. If I was understanding correctly the banking problems in both Europe and the U. S. are related to excessive leveraging; insufficient capital. Both banking systems had some exposure to subprime type debt but the European banks also have exposure to debt from Eastern Europe. It is incredible that mortgages were offerred in nonlocal currencies.

  • Larry Doyle

    It truly is amazing but the banks viewed the eastern European consumers as a new source of borrowers and thus a new source of revenue. Not dissimilar to a lot of the sub-prime lending that occurred here in the U.S.

    The link in the gloabl markets was the existence of these CDOs (collateralized debt obligations) which pooled the collateral, structured it, and sold the different bonds all around the world. Jensen’s piece highlights how a lot of European banks purchased what seemed to be AAA rated bonds. Those bonds were structured to pay the investor probably .4% over their cost of funds. They are now down at least 50 points!!!

    What a mess.

    The fact that the mortgages were made in non-local currencies added a massive layer of risk that I am sure a lot of borrowers had little to no appreciation.

    That John Mauldin is a great resource.






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