The Euro Is Still Doomed

The euro has enjoyed a nice rally in 2017, up recently almost 3.7% for the year.

And if you read the headlines, Europe seems to be headed for a solid 2017, even after the U.K. invoked Article 50 – officially starting divorce proceedings from the European Union.

But everything isn’t really candy cane forests and gumdrop mountains in the Eurozone.

Not by a long shot.

In fact, a year-long rise in the Eurozone’s annual rate of inflation came to an end in March. Consumer prices were 1.5% higher than a year earlier, a sharp fall from the 2% rate seen in February. This increases the likelihood of the ECB sticking with its loose monetary policy for the near  term.

And let’s not forget about the French election, which, depending on the outcome, could mean the euro’s on borrowed time. If Marine Le Pen pulls off a victory, the euro is toast.

No matter how you stack it, the euro has become the endangered species of currencies.

But, even if the French elections go the way of the Netherlands, the fundamental flaws of the Eurozone remain, notably:

Unsustainable debt levels – It’s not just Greece. Italy, Portugal, Cyprus, and Belgium also have debt levels larger than their country’s GDP according to the latest data. And as a whole, the Eurozone has a government debt-to-GDP ratio of over 90%.

A bankrupt banking system – Italy is on the brink of an enormous public bailout of its toxic-loan-riddled banking sector. Without a bailout, we could see another full-blown financial crisis that could bring down the European financial system.

Diverging competitiveness remains unsolved – The EU has failed to address the gap in competitiveness between the lean north and the bloated south.

To make matters even worse, the complete failure of the EU to address the migration issue leads me to think that the Eurozone is on a path toward another lost decade.

From a technical standpoint, the euro is toast. Take a look at a weekly chart of the euro below. You can see that the euro has been in a downtrend against the U.S. dollar since 2014, the long-term trend has not been broken.

The bottom line: the recent rally in the euro is nothing more than a bounce in a long-term downtrend that ultimately leads to the end of the euro currency. So, don’t fret if the euro rallies a bit further from here, even if it temporarily breaks above the downtrend line shown above – it’s nothing more than a short-term bounce. Remember, false moves like these are made to shake people out of the trade, before the true trend is revealed.

Good investing,

Mike Burnick

 

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Comments 9

  1. OLCAY BALLI April 3, 2017

    Thank you mike:)

    Reply

  2. Werner April 3, 2017

    Mike,
    Your analysis is correct in every respect. The French élections are really a very dangerous factor. Whilst I fully agree with you that the European debt is unsusainable, I think that the US debit situation is roughly as bad as the one in Europe. It really remains to be seen whether your banks are that much more solid than the European ones. As to the migration situation, the US is lucky enough not to have any nearby border with the countries where those refugees come. But who has sown the terror lately in the Middle East. Europeans have hardly been better in the 19th century. Good luck to everyone….

    Reply

  3. Jackie Daugherty April 4, 2017

    Thank you, Mike, for your updates. I very much appreciate them…they’re helping me keep on track. I have to admit, Larry’s death rattled me and I found myself having doubts about my ability to follow his plan, so your updates are helping rebuild my confidence.

    Reply

  4. Will April 4, 2017

    The euro is doomed along with the concept called the EU, the technocrat swamp in Brussels has seen to that. They have destroyed the sovereignty of the nations within the EU and have sucked the blood of the people dry. Instead of the EU bringing the nations up to the highest level, they sink to the lowest level. What Mike writes about leading to the end of the euro will apply to the end of the EU as well.

    Reply

  5. Jack Armstrong April 4, 2017

    Mike: What do you mean by “the euro.” The Eurozone? The euro currency v dollar? As measured by what? I would like to view your ‘euro’ chart. What symbol do I use?

    Reply

  6. Will April 4, 2017

    If the Euro is toast, why did you have Real Wealth Report members raise the stop price on EUO to the point we were stopped out? Now that we’ve been stopped out do you recommend getting back in on a bounce or just let it go?

    Reply

  7. MICHAEL BOLIN April 4, 2017

    I hope you’re right about it being a short-term bounce. Right now I’m short 4 June futures contracts, with losses on each. Big losses.

    Reply

  8. James April 17, 2017

    What’s gonna happen to GDP at factor costs and at Market Prices? What’s gonna happen to the solow steady state level of income? I think we could be in for a period of stagflation falling output and rising prices. The GDP deflator for Europe doesn’t look as good as it looked before the crisis in 2008. Are we now in for a gold tranche. Or a return to the Gold Bullion standard. We might just be in for the biggest boom the world economy has ever seen. More human beings are self employed and bearing the entrepreneurial risks involved in organising, land, labour and capital and bearing the risks involved in production. Could we see market equilibrium in the future and consumer and producer surpluses maximised in the future. How’s this gonna effect the solow steady state level of income. What’s GDP at factor prices and at market prices gonna look like? I predict we could see an increase in the non accelerating rate of inflation, how’s this gonna effect the natural rate of unemployment, the cyclical rate of unployment that the economy fluctuates at. Personally I think we should use Keynesian economics and try and build out way out of a recession. Adam Smith believed in the four canons of taxation, that we needed economy, certiantu, convenience and equity in our tax system. That we needed more progressive taxes, taxes to move income money from rich people to poor people. What we have in fact is a regressive tax system, a system whereby people pay for television licenses and money is moved from poor people to rich people. John Stuart Mill and Karl Marx always believed that socialism would eventually replace capitalism and he’s been proved right in the end. Globalisation has taken more than a billion of the 8 billion people who live in the world, entire universe out of poverty. Globalisation has also seen to freerer international trade and more consumption of a wider basket of goods. How’s this all gonna effect the consumer price index, the laspeyre index and the paasche index. I think we are gonna see huge increases in demand for mining stocks, futures, options, leveraged exchange traded funds, unleveraged exchange traded funds. How’s this gonna effect call options and put options buying gold and selling gold? Are we in for a gold avalanche? What’s gonna happen to the prices of other precious metals such as silver?

    Reply