Europe's Own 'Day of Rage'

03/10/2011 2:27 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Friday’s “Day of Rage” in Saudi Arabia could yet prove more peaceful than the same-day ministerial summit on Europe’s debt crisis.

The participants have agreed to disagree for weeks—not to say years—on the proper common solution to their varied problems. They’re not going to hash it all out this week.

Greece, Ireland and Portugal are being charged exorbitant interest rates because they’ve been saddled by the European powers-that-be with unsustainably deflationary economic policies.

Yet the powers-that-be—that is, German Chancellor Angela Merkel—are on the shortest of leashes from the German voters, who hate the notion of subsidizing foreigners.

The “competitiveness pact,” pushed by Germany and France with the aim of synchronizing economic policies, was meant to paper over that crack but has had to be scaled down to what’s achievable, meaning vague statements about common principles.

Is This the Moment of Truth for the Euro?
More like a moment of dare—as in, I dare you to bet against a currency that’s gained 17% against the dollar in nine months.

That low point came soon after all of Europe came to a far-reaching agreement on a massive rescue plan.

Whereas all the disagreements since seem to have damaged the euro not at all.

European Central Bank chief Jean-Claude Trichet has the markets convinced that European rates are headed higher, perhaps as early as next month. But even if Europe could afford higher rates while paying $120 for a barrel of crude, it certainly can’t afford them, and $120 crude, and the dogma that Greece and Ireland and Portugal will be just fine as long as they keep on cutting.

So perhaps buyers of the Euro are anticipating a series of rate hikes, not by a united Eurozone, but by its affluent northern rump, once the perennial weak sisters have been sent packing.

Or perhaps they know that expectations for a collective European response to the crisis are so minimal,  nothing short of a brawl would seem out of line.

In this sense, Friday’s summit is a lot like the “Day of Rage” protest called for in Saudi Arabia the same day: a bit of public theater likely to prove anticlimactic after a big buildup. And then we’ll hear that not much has changed, nor will change in the way Europe—or Saudi Arabia—is governed.

But something has changed: The very different regimes’ very real flaws have been laid bare. This week should bring a reprieve, not a new lease on life.

The Upshot for Investors
This morning’s downgrade of Spanish debt by Moody’s, and the resulting market tumble, underscores Europe’s fragile state—one that probably can’t sustain a series of rate hikes.

That suggests the euro’s rally has overshot its mark. The common currency remains exposed not only to the risk of defaults by overextended members, but also the likelihood of slower growth on the continent, which will be disproportionately hurt by the higher fuel and commodity prices.

One way to leverage expectations for a weaker euro is with the Market Vectors Double Short Euro ETN (NYSEArca: DRR) which aims to return double the euro’s losses against the US dollar.

This trading vehicle is down 13% in the last two months and 28% since the euro bottomed in June. But it’s enjoyed an overdue bounce over the last two days.

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There’s support at $41, marking the top of the euro’s rally from early November, close enough to the current price to nurture hopes for a double bottom. As for the upside, the DRR was almost at $59 nine months ago.

And the European crisis is closer to a solution only in the sense that markets will soon impose one on bickering politicians.

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