Will the EU Collapse?!
Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss the possibility of an EU collapse. Watch the Trader Tip Episode for more information!
You can read the episode transcript below or watch the video that follows.
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Mark my words, this is going to be one of the hot stories in the media coming very soon. We went back 10-11 years ago back into 2010, 2011, 2012. The hot story back then was would the Euro survive? Would the EU survive?
One of the traders who worked for me and works for me now, worked for a fund that was the EU breakup fund, that the whole fund's mandate was to trade the breakup of the EU and the collapse of the euro, but on July 26 2012, Mario Draghi came out in a famous speech in London, and basically said, the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough is what he said, and that turns the whole thing. Now, one interesting aspect of this I want to cover is there are investment thesis is, they're investment themes that seemed like they could work, but then they don't follow through, and what happens is the average trader then forgets them. I think this is a big mistake.
When we have a fundamental theme that we believe in, and I have themes like this, including the euro, the EU collapse, and the collapse of the euro. When we trade something, we need to have both the fundamental and the technical criteria in place to confirm the theme. We can trade things on just a technical basis, they're better when we have fundamentals. When the fundamentals are strong, I won't trade it if I don't have the technical criteria. If I have a strong fundamental thesis, like the EU will collapse, but the technical criteria is not there. Then what I do is I inventory the theme, I keep track of it, but I put it to the side while it's dormant. Then what I'll do is once a month, I'll go through this list of themes, I'll check and see, do they get activated? If they do when they become active by technical criteria, I move them off of my potential theme list into my active themeless. Then I watch them all the time. Let's go through an example.
We talked about the euro. There are major structural issues in how the euro currency was constructed. The primary issue is that when they first set up the European Union, all the different countries agreed to abide by certain fiscal guidelines, but one by one certain countries, particularly the "PIGS", Portugal, Italy, Greece and Spain. They started cheating and not living up by the mandates they agreed to when they set up the EU. They started spending more money than they were allowed to spend. They started earning more debts than they were allowed to incur, and so in doing that, you had a country like Germany, who was very fiscally conservative and a country like Italy, that was very sloppy, and undisciplined, but they're supposed to be the same. They're not. It happened back in 2010-11, and 12, was the interest rate differentials between these bonds started widening, and as these bonds started widening the interest rate differentials widened, it put pressure on the Euro. If somebody like Greece collapsed, or Italy collapsed, or Spain collapse, who was going to pay for it?
There's two scenarios. The EU would collapse, and a country like Germany would say, "No, we don't pay for anybody. We take care of ourselves," in which case the Euro collapses and Germany goes alone. Or Germany agrees to pay for them, which now they're shouldering the loss of bad actors, bad behavior. It's a very difficult difficult situation and that has never gone away. All it's really happened is ECB came in with a what Draghi called the bazooka to get people to calm down.
Well, for a short period of time, ie 10 years, it worked, but it never solved the core problem, and the core problem, actually, over time, has only gotten worse. This theme was dormant for seven years. It was dormant for basically about three years 2012-15. It had a temporary breakout down, which we can see in 2015, and then it went back back to a range, and then when it went back to range, and it was no longer meeting technical trend criteria, it went dormant for seven years, but now recently, the Euro is meeting new technical criteria for a new breakout down, a new trend down. Now it becomes active, it moves off the dormant potential theme list and it moves to the active list.
Now we'll be watching it every day, every week, every month, and this is a chance to get on a macro themed based move, that could be a monster move. Let's talk about this a little bit. The Euro is breaking out down, and it's very possible that the Euro could have a pretty fast move down to 85 to 90. This is what we would expect, and we're watching. Now, what's interesting is at the same time, the Euro dollar, there's two sides to the coin, there's the Euro side, which we talked about, we're going to flip it over, and we look at the dollar side. There are several issues with the dollar, you can see the dollar actually broke out more recent or broke out first before the euro. This is $1 index, and the two biggest components of the dollar index are the Euro and the yen. The Yen has big problems. This has been also one of my themes that was dormant on a potential theme list for years, and it got activated last year. We've been watching this since last year.
With the Yen, we basically have the Japanese government cannot afford to raise rates, so the currency is getting destroyed. That is influencing the dollar index. Now you have a three part puzzle. The Yen is weak, the Euro is now potentially weak or weak, and the dollar is strong because the Fed is aggressively raising rates. Chairman Powell said they're going to overshoot, they're going to make sure that they raise them basically too much to make sure that they really squash inflation, that's really bullish for the dollar, and then you have this situation where the whole world, the whole emerging market world has all their debt, denominated in dollars. As the dollar gets more and more expensive, the debt service actually gets more and more expensive, and it could cause the dollar to explode, we can actually see dollar really is kind of exploding, it's basically starting to go parabolic. These are all themes, they have multiple fundamental reasons for what's going on, and the technicals are validating.
Will the EU collapse? I don't know the answer to that in the short term, but I do believe it's going to happen and I do believe the Euro is going to be under massive pressure, and this could accelerate into something really ugly. The technicals will guide us in what to do. With that stay tuned every Tuesday for additional webinars like today's Trader Tip Tuesday that will teach you different ways to think about your trading that can help take your trading to an elite performance, to an elite level. Have a great week. God bless. I'll see you next Tuesday.