How to Short the Euro as it Heads for the Abyss
by Martin Denholm, Senior Editor, Investment U
Tuesday, May 18, 2010
The euro is headed for extinction.
That’s the blunt assessment of the 16-nation European single currency from investing legend, Jim Rogers.
And he told CNBC recently that it will happen “in the next 15 to 20 years.”
Given recent events, that might be optimistic…
“The Money Pit”
Ever see The Money Pit? It’s a 1986 movie, featuring Tom Hanks and Shelley Long as a couple who spend a fortune renovating their house, only to see it go to waste, as the place systematically falls apart. It’s truly cringe-worthy as each new catastrophe unfolds.
The Eurozone is apparently trying to re-create it. Except unlike Hollywood, this movie is real.
Having haggled their way to a joint 110-billion euro bailout package two weeks ago, the European Union (EU) and International Monetary Fund (IMF) probably didn’t expect to be back around the table last week, making a new deal.
“Okay, no messing around this time,” they said. “Let’s hit ‘em with a 720-billion euro ($889 billion) bailout.” Of that…
- The EU will toss in a fresh 440 billion euros ($543 billion) in the form of new loans to indebted nations. That’s in addition to 60 billion euros ($74 billion) in existing deals.
- The IMF unleashed 220 billion euros ($271 billion) from its vault. (And if you’re reading this as an American, glad that it’s not your money funding this, think again. The IMF gets most of its money from the United States – specifically, American taxpayers.)
The question is: What good will it do? There’s simply too much debt to bail out all the indebted nations in a region with a desperately flawed “one-size-fits-all” monetary policy system and a currency whose days seem numbered.
And like the house in The Money Pit, it’s like throwing good money after bad. Following a brief, two-day rally, currency traders finally saw the bailout for the house of cards that it is, culminating in the euro sinking to a four-year low of $1.23 against the greenback on Monday.
So much for the euro once being thought of as a viable No. 2 currency to the U.S. dollar. The fact that the EU, IMF and European Central Bank are willing to artificially prop it up in the face of trouble kills its value and its credibility.
So what next for the battered single currency?
Five Ways to Play the Crippled Euro
On May 6, my colleague, Alexander Green, told readers why the euro has farther to tumble and to expect the euro to trade at $1.10 by the end of 2010 and at parity in 2011. BNP Paribas shares the latter forecast.
So here are some simple investment options to consider…
- CurrencyShares Euro Trust (NYSE: FXE): This is the ETF that tracks the performance of the euro. It’s a very popular and liquid ETF, with an average daily trading volume over the past three months of just over one million shares. But 3.1 million shares per day are changing hands at the moment. It hit a 52-week low of $122.47 on Monday. It trades like a stock on the NYSE and you can buy/sell short shares outright, or play the options.
- ProShares Ultra Short Euro (NYSE: EUO): If you’re particularly bearish on the euro, this is the ETF for you. The fund offers twice the return of the euro’s daily moves against the U.S. dollar. So for example, if the euro loses 1%, this fund should return 2% to investors. (Be careful, though, because the flipside is that if the euro gains against the greenback, you’ll lose twice as much.)
- ProShares UltraShort MSCI Europe (NYSE: EPV): If you want to steer clear of currency fluctuations directly and instead play the news from a stock angle, take a look at another ETF in the ProShares group – the UltraShort MSCI Europe.Consider this one if you want to play the impact of Europe’s woes on European share prices. The fund invests in stocks that make up the MSCI Europe Index and, like EUO, offers twice the inverse performance. It’s also experiencing a massive spike in volume – up 206% from its average three-month daily volume of 457,559 shares to more than 1.4 million.
- Global X FTSE Nordic 30 (NYSE: GXF): As the name suggests, the ETF invests in shares of Scandinavian companies in Sweden, Denmark, Finland and Norway. Among the four countries, only Finland uses the euro, while the others have remained outside the Eurozone. This gives you exposure to major European companies’ shares (Nokia, Ericsson and Volvo, for example), a region rich in natural resources, and also offers protection against the financial mess further south.
- Gold:Even as the U.S. dollar rallies against the euro, the United States has still shown that it shares the same philosophy as Europe when it comes to financial trouble: If in doubt, bail ‘em out. Policymakers in both areas clearly aren’t afraid to devalue their currencies when the you-know-what hits the fan.And that bodes well for gold. If you’re familiar with commodity trading, you can invest in gold directly through futures options. There are also a range of gold ETFs available, such as the SPDR Gold Trust (NYSE: GLD) or the Market Vectors Gold Miners (NYSE: GDX).
And as for the long-term future of the euro… forget it.
The Cure for the Eurozone’s Ills
I’m with Jim Rogers and countless others in thinking that it’s only a matter of time before the euro goes the way of the dodo. Former Fed Chairman Paul Volcker also touted the breakup of the Eurozone late last week.
As a native Brit, I look at the mess in the Eurozone bloc with a “thank goodness we’re not part of that” view. Of course, we’re hardly sitting pretty ourselves, saddled with a £166 billion ($241 billion) public sector debt, but at least we have the “worst-case” option of making our own decisions and devaluing the pound if need be.
However, David Cameron and the new Conservative-Liberal Democrat British coalition government obviously want to avoid that. Next week, it will announce how it will slash £6 billion in spending immediately to reduce Britain’s enormous debt – a central policy goal in the Conservative election manifesto. No doubt the Conservatives have debt-ridden Ireland in mind, whose budget-slashing measures have proved reasonably effective.
Repeated intervention to prop up the Eurozone’s debtors and the euro is akin to slapping a Band-Aid on a broken leg. It just masks the symptoms and, as Rogers says, “weakens the fundamentals of the euro.”
His solution? “I’d let Greece go bankrupt, because then everybody will say the euro is a serious currency.”
Couldn’t have put it better myself, mate.
As it stands, the debts are still screaming. And lawmakers, rather than kicking reckless nations like Greece out of the Eurozone and standing strong with its more fiscally prudent nations instead, are in full-on bailout mode, delivering repeated kicks to the euro’s nether regions in the process.
And when they’re done, guess what? Those debts will still be there, gnawing away at the integrity of the Eurozone.
The answer? Get countries to commit to not spending money they don’t have, living beyond their means and repeatedly breaking the rules.
And by “commit,” I don’t mean give them a mere slap on the wrist if they don’t obey. (I’ve lost count of the number of times that the EU has dished out useless warnings to nations that breached the Eurozone’s “no debt above 3% of national GDP” mandate.)
And I certainly don’t advocate offering them a bailout if they’ve run around like Imelda Marcos in a shoe store. Give them a reasonable chance to mend their lavish ways (but don’t hang around, waiting for them to get beyond the point of no return) – and if they won’t do it, toss them out and leave them to fend for themselves before they drag others into the abyss with them.
Best regards,
Martin Denholm
Related Investment U Articles:
- EU Summit Produces a Long-Term Solution for a Short-Term Crisis
- The PIIGS Are Getting Sloppier… Here’s How to Clean Up
- What the Greek Bailout Means for the Eurozone
- How to Play the Collapse of the Euro
- Greek Tragedy is a Warning to Washington
3 Responses to “How to Short the Euro as it Heads for the Abyss”
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I would rather sell the EURO short against the Canadian Dollars.
As far as I am concerned the US Dollar is in much worse shape than the Euro, and even lost 36% against the CAN$ from 2009 to 2010.
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Your article should warn against using leveraged ETFs for anything but day trading. All leveraged ETFs lose in the long-term.
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Yar, forget ETFs, if you want to sell the euro then sell it. Against everything. It’s not a hard concept. Most x platforms give investors ample leverage anyway. ETFs are for ‘tards.
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