Goldman Sachs economist, Jim O'Neill, shared with Bloomberg today his view that euro pessimism is way overdone. He suggests the obvious contrarian play: bet on a euro rebound.
Of 600 people he addressed at a conference recently, he was struck by the fact that only three predicted the currency would strengthen. He told Bloomberg:
In my experience of being in the foreign exchange market for 29 years, that makes it virtually guaranteed that the euro isn’t going to go down much further.
He suggested the euro could stabilize around $1.20, calling speculation of a euro breakup "ridiculous:"
This is 60 years of history in the making, so the idea that the euro simply falls apart at first test of its credibility, I think it highly unlikely ... it might well be in 20 years time it doesn’t exist but the idea that it’s not going to exist in the next year because the market is worried about Spain and Portugal’s funding requirements is ridiculous.
Contrary to rampant euro-bearishness in the markets and here on Seeking Alpha, I'm also bullish on the euro and European equities, but for additional reasons and over a longer time horizon. Why? Because, as I lay out here, without much fanfare, Europe from an economic policy perspective has become more like the US, while the US has become more like Europe.
Europe, particularly its outer periphery (Eastern Europe, Ireland and the Baltic States), is getting more competitive.
Europe has been making (and has been forced by financial markets to make) some of the hard and necessary policy decisions America is putting off (and which safe-haven flows in financial markets are allowing it to continue putting off). With these trends underway for more than a decade and likely to continue, that means a convergence of equity valuations and currencies.
For a glimpse at how far the US has to go to make the kind of competitive adjustments Europe already has, Zero Hedge has a great comparison chart here with the full article here. It's hardly complete (and ignores the more radically competitive changes made by Eastern Europe, the Baltic States and Ireland) and doesn't even touch on the continent's wide, deep and grossly underutilized pool of human capital, but it's a great start at getting to the real issue in assessing Europe and America's future trajectories.
And there's also the immediate boost the euro's sharp drop provides to European exporters -- it's bolstering Europe's export competitiveness at America's, and the rest of the world's, expense.
Additional Note About the So-called "Flash Crash:" Beyond the technical gobboly-gook and search for culprits, the real story here is that there isn't much underlying support for the US equity "rally" -- there's not much "there" there, i.e. no conviction. The "flash crash" was a very real crash that exposed a fundamental lack of investor confidence in the US market, the overall economy and the outlook, and that's only been reinforced by market activity since then.That seems to be the basic issue a lot of people are dancing around while focusing on the technical and mechanical aspects of the crash. It wasn't just a "flash crash." This car's a lemon and needs a lot more than a technical tune-up.