The Currency Wars Reignite

by Tyler Durden

Via Mark J. Grant, author of Out of the Box,
“Always remember, your focus determines your reality.”

                  -George Lucas

 Our reality has changed in the last twenty-four hours. The Bank of England and the European Central Bank have re-affirmed their old positions since the Fed has changed tacks. The initial reactions will be a spike in equities and a fall-off in the valuations of the Pound and the Euro to the Dollar. These, however, are first blush reactions as the color fades from the bloom.

It may well be, as Europe is in much worse financial condition than the United States, that there is a policy reason for the European positions but it may well also be a calculated move to devalue the major European currencies. Whatever the actual reasons, the European statements have certainly sounded the trumpet that the “Currency Wars” have reignited.

The impact of the Euro/Dollar at 1.25 and then 1.20 will be a positive for Europe as exports rise and a negative for America as exports fall and imports rise. The sword could be double edged though as the Fed, in response, begins to cull back on the more than $1 trillion that it has lent to the European banks. Many truths will be shrouded in mystery but the impact will be there regardless.

It is a dangerous game when the world’s central banks that have been working for the last five years in unison and now they head down different paths. You may expect tears at the seams and various ripping sounds as Europe moves away from the Fed. Mr. Carney and Mr. Draghi have buddied up while poor Ben is left to wander alone.

The trumpets that had heralded “The Three Kings” now sound just for two and the drums that have beat in unison now will sound a disconnected harmony.  America has gone left and Europe has gone right and there will be consequences for both.

I mention one other thing this morning that is surely coming and it will be the hammering of the gong. The ECB has massive securitizations that are being carried at par (100 cents on the Dollar) at the ECB and at the European banks. The losses, with many tied to Real Estate, must be staggering. There will be a time, a moment, after “extend and pretend” runs out when these losses must be faced. These securitizations are guaranteed, in the case of Spain as one example, by the sovereign ($51.6 billion in the case of Spain). Others, I have heard, are guaranteed by the major European banks. The poorer nations in Europe will want the ECB to take the hits, shared losses, but Germany will vehemently object.

France, Italy, Spain, Portugal and Ireland cannot afford the losses. The hits would bankrupt or severely impair most of the European banks. The clock is running and midnight will be approaching sometime during the next twelve months.

I fear what we don’t know and what is hidden. Realization will eventually arrive because it must. A very unpleasant reality will surface. When you shout and scream and make false claims that the money is in the drawer the day will arrive, because you need the money, that you open the drawer and it is not there. That day is one of reckoning. The Europeans will not enjoy it!