A European QE? Why the Euro, and Maybe the EU Itself, Is in Danger

Greek, Irish sovereign debt issues are 'beginning of the end,' says macro fund manager Dailey

[Photo Credit: The Council of the European Union] Didier Reynders (left) and Carsten Pillath of the E.U.’s Economic and Financial Affairs Council at a meeting on Wednesday. [Photo Credit: The Council of the European Union] Didier Reynders (left) and Carsten Pillath of the E.U.’s Economic and Financial Affairs Council at a meeting on Wednesday.

Looking at the long-term trends, says James Dailey, the current troubles with Greek and Irish sovereign debt mark “the end of Bretton Woods II,” and he suspects that the European Central Bank, “with the Chinese and the Fed, will do a version of quantitative easing to bail out the banking sector in Europe.”

In an interview on Tuesday focusing on the current troubles in Europe, the global macro approach followed by Dailey and his colleagues at TEAM Financial Managers in Harrisburg, Pa., suggests that the “fiat currencies are at their end,” he said, and that the “massive” sovereign debt problems in Europe “are a symptom of this ending,” warning that “it’s going to be messy” in a process that might take decades to play out.

Caused by “global overconsumption fueled by debt,” Dailey (left) said that while “austerity is great in theory,” he suspects that the most likely response to the European debt problem will be a monetary one at first that won’t solve the underlying problem. “Politicians can’t print gold or oil,” he says only partly tongue in cheek,” but “they can print money.” He uses a Thomas Jefferson quote to illustrate the global problem: “The problem with democracy is that the people will always vote themselves benefits they can't afford.” While quantitative easing won’t change the “economics, it will liquefy the banks enough to kick the can down the road with Greece and Ireland, with the countries able to pay back with a devalued currency over time.”

The big question, says the CIO of TEAM Financial, which runs money in both separate accounts and a newish mutual fund, is whether “the European elite in northern Europe,” especially Germany, “can assuage their populations in order to digest continuous bailouts of southern Europe and

Ireland,” or whether shareholders and debtholders of the many troubled banks in Europe—especially in Switzerland and Germany—will be forced to take a “haircut” instead. The stress tests conducted of banks in Europe in the spring, where many banks are leveraged “30 or 40 to 1,” he charges, “didn’t stress anybody,” but now he thinks it’s “the dollar’s time to rise.”  

Dailey says starkly that “ultimately, Europe is dissolving. The Germans will say we're throwing out the Greeks, the Spanish, the Portuguese, maybe the Irish,” using the analogy of the United States, where “if we didn’t have our political unity, would North Dakotans pay for a California” bailout?

As for how to invest under the current scenario, he suggests that it’s “important to have some insurance against monetary policy,” which is why he would recommend shorting the euro and going long on the Canadian dollar, for instance.

The TEAM approach is to embrace the fact that the markets are “random and chaotic in the short term," so he suggests buying tangible assets or multinationals paying dividends, and perhaps even start buying gold “after it tanks in the short term.” Buying dollar-denominated U.S. fixed income is, he suggests, “the worst place to be right now, other than Greek debt.” As for clients, Dailey recommends explaining to them “what’s going on with the monetary system” and allocating part of their portfolio to macro managers, which he sees as a shortcoming of many RIAs’ asset allocation strategy.

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