Why The Attack On Euro Is Justified In The First Place

Bureaucrats on both sides of the Atlantic are whining about the speculative "attack" on the euro. This political pressure is way off base, and the decline has further to go.

If you wanted more proof that Washington and Brussels are clueless, here it is (via Bloomberg):

The U.S. is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests, as Europe and the U.S. step up scrutiny of the funds' role in the Greek debt crisis.

The Department of Justice sent notices to save the records to at least some of the hedge funds whose executives attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8, said the person, who declined to be identified because the information is private.

The European Commission said [on March 2] it will investigate trades in sovereign credit-default swaps in the wake of the Greek crisis, which has pushed the euro lower and prompted officials to warn hedge funds they shouldn't try to profit from the woes of the region's nations.

As a U.S. taxpayer, this "scrutiny" absolutely sickens me. As a trader, this news indicates the euro's decline is likely not done, and may well just be getting started. (Politicians get shrill and angry when cornered - and if all other measures look hopeless, they blame the speculators.)

NOW We Get "Scrutiny"?

As we walk through the logic, first let me put on my ticked-off taxpayer hat. My extreme annoyance at the DOJ's "investigation" here boils down to this. The hedge funds being investigated did not receive a single penny of taxpayer-funded bailout money.

And yet, the too-big-to-fail Wall Street entities that ROBBED TAXPAYERS BLIND - after getting bailed out with hundreds of billions in taxpayer funds - were never investigated at all.

There is nothing illegal, or even remotely illegal, about buying and selling large quantities of an international currency. Commodity and currency markets have no restrictions as to "inside information." There isn't any such thing.

So why the DOJ (Department of Justice, no relation) is poking its nose up hedge funds' skirts, I have no idea - except maybe as a sop to Brussels. But what I really want to know is, why didn't anyone take a good hard look at the way the big Wall Street houses (ahem, Government Sachs, cough cough) managed to rob taxpayers blind on more than one occasion?

The evidence on the AIG (AIG: 28.08 +1.37 +5.13%) fiasco is plain as day and enough to make you sick. Treasury Secretary "Turbo Timmy" Geithner gives all appearances of being in it up to his neck, regardless of claims to the contrary, with his Wall Street buddies being on the receiving end of billions in ill-gotten gains. Worse still, later evidence showed Goldman Sachs (GS: 167.18 +3.57 +2.18%) to be the epicenter of toxic asset creation - the very swill that Goldman stuffed down clients' throats, turned around and shorted themselves, and nearly blew up the financial system with.

Yet none of that - nothing involving the clear and direct misappropriation of hundreds of billions or even trillions in taxpayer funds - gets truly "looked at." No, the DOJ doesn't have time for that. Instead, they have to go poke around a couple of guys who never took a penny from the government and had the bad form to give their opinion on a currency trade over dinner. Good grief.

No Crying Allowed

In the movie A League of Their Own, Tom Hanks has a great line. "Are you crying? There's no crying in baseball!"

I'd like to similarly grab the whiners on the European Commission and yell, "Are you crying? There's no crying in forex!"

Look. The euro is a "big boy" currency. It should be able to fend for itself. Furthermore, speculators did not create this situation. Greece did. And the whole eurozone did.

The currency markets are the biggest, deepest markets in the world. We're talking trillions of dollars in transactions, of every stripe imaginable, every single day. And the euro is not some podunk little currency. It is (or once was) No. 2 to king dollar… a contender for the world reserve currency throne. The euro-weenies crying wolf over a couple of hedge funds need to grow a spine.

It is, of course, true that major speculative interests are "attacking" the euro. We flat-out predicted this would happen some time ago. But here is the thing: Speculators don't attract strong targets. They only go where there is weakness… where the attack is justified in the first place.

To understand the logic in this, imagine if the evil speculators decided to "attack" Berkshire Hathaway (BRK-A: 125000.00 +920.00 +0.74%) and drive the share price down 50%. What would happen? Buffett would laugh out loud. He would delightedly borrow every nickel he could to buy back shares at their artificially depressed price, and the speculators would get carried out on a gurney.

It's the same thing with currencies - especially big, liquid, world-reserve-candidate currencies. You can't manipulate a market like that for long without getting your head handed to you.

In other words, the euro isn't vulnerable because George Soros and his pals decided to beat up on it. It's vulnerable because countries like Greece have been racking up huge debts and perpetrating acts of gross fiscal irresponsibility for years and years.

On an even bigger picture level, the euro is vulnerable because it is based on an impossible business model. The eurozone as a concept - the monetary union of 16 disparate countries without political or cultural union - simply doesn't work.

It gives the appearance of working in good times, but that's not what matters. What matters is how well the model holds up in bad times. Before now, the euro had never truly been "stress tested." And now we can see: Just as many predicted, the result of the euro's first true stress test is a big fat "F."

A Greek Bailout Will Not "Resolve" the Problem

All of the above is obvious for anyone with eyes to see and ears to hear. That's probably why European politicians are so freaked out. They know the euro's problems run much, much deeper than just Greece.

There has been a lot of chatter in the financial press about a potential "resolution" to the Greek debt crisis. There has further been plenty of assumption that, once Greece's problems are "solved," the euro's problems will be solved too.

Nope. No way. Not by a long shot.

Greece is not a standalone problem. It is more like the tip of a very large iceberg - an iceberg of runaway spending, broken promises, and the creeping specter of deflation.

With the Greece situation, the financial base has been remarkably off base in their reporting. Every time the euro-weenies, er, European politicians move closer to a "deal," the press gets excited, as if the close to the crisis were at hand. And yet the talks keep running into a brick wall - Germany.

Angela Merkel, the German Chancellor, does not want to give a single euro to flailing Greece. She is willing to extend friendship, diplomacy, verbal support, the whole nine yards of empty talk… everything but the goods. This is because German citizens are dead-set opposed to bailing out irresponsible eurozone members.

The prudent and sober Germans look to Greece and see a country that threw lavish spending parties for years, went to great lengths to hide the true extent of its debts, and doesn't even have a functional tax collection system. Beyond that, the Germans know that if they give Greece a check, they may soon have to write another check to Portugal. And another, to Ireland. And yet another, to Italy. And then there is the big daddy of them all, Spain.

This chorus line of bailout candidates means no easy way out. If Greece gets a bailout check, the other guys line up for checks. If Greece doesn't get a check, they go to the IMF (International Monetary Fund) - and IMF involvement makes the eurozone look like a failure. (The Argentine peso springs to mind…)

The Supreme Irony

The supreme irony is that a lower euro would actually be GOOD for Europe. Why? Mainly because a cheaper currency makes exports more competitive. (This is exactly why China holds down the value of its currency, so it can sell more goods abroad.)

Politicians hate speculators as a general rule, but that is true for a simple reason. Politicians are always and forever fighting the forces of Mother Nature, and speculators make a living carrying out nature's work. The reason you rarely find animal remains on a forest floor is because those remains get recycled back into the ecosystem so quickly. Feeding on market dislocations, speculators have a similar sort of job. "I'm just the undertaker," Soros once said.

If it makes sense economically, politically and logistically for the euro to be trading at a much lower valuation - say, back to $1.25, or even all the way down to a buck in $USD terms - then speculators will see that imbalance as an opportunity and get to work. And it certainly makes sense for the euro to be trading lower in this case.

On a continent-wide basis, the eurozone is struggling. An overly strong currency makes it hard for exporters to do their part in bringing about economic recovery. The too-strong euro is also slowly strangling the weaker members of the eurozone, who have no palatable options for dealing with the threat of deflationary downward spiral other than taking crushing levels of debt.

Worse still, the traditional IMF medicine of deep spending cuts and painful austerity measures generally leads to one thing: Mayhem in the streets, of the sort Greece is now experiencing. Angry pensioners facing down cops in riot gear is not a pretty sight.

Hey Idiots

As Mark Twain once remarked, "Suppose you were an idiot - and suppose you were a member of Congress. But I repeat myself." Across the pond, Twain's sentiment holds just as true. The European politicians frothing at the mouth over an "attack" on the euro fail to realize that a less expensive currency is perhaps the one thing that increases the eurozone's chances of survival.

Again, a lower euro means less pressure on countries struggling with debt-depressed economies and deflationary headwinds. It means more revenue for exporters and bigger reported profits for European banks with substantial operations abroad. And it means a more accurate reflection of the euro's longer-term prospects, given the severe loss of credibility at the ECB (European Central Bank) and the heavy fiscal housecleaning that now must take place in the euro zone.

All the above explains why supposedly evil speculators are "attacking" the euro. It's because the speculators understand basic economics… believe that the euro should be structurally lower for a whole host of reasons not of their own making… and are looking to profit through a little forced awareness and common sense.