Japan has been stuck in a deflationary death spiral for decades. So over the last two years, the country has debased its currency to stimulate growth.
By triggering inflation, Japan hopes to stimulate exports and force its population to spend and invest. Savers be damned!
Granted, this isn’t a new strategy. The United States does it all the time, letting the dollar decline to keep us hyper competitive on the world stage.
Now it’s time for the eurozone to do the same, making today the opportune time to enter a short position on the euro…
Euro Short: Take 2
Longtime readers will know that I recommended shorting the euro as the financial crisis enveloped the world.
Well, today another crisis is looming… one that could be even more devastating for the currency than the banking crisis.
You see, the eurozone faces a ton of issues that it can’t seem to escape. Including…
- Massive structural issues with an aging population in half of its countries.
- A social welfare system in places like France which encourages idleness.
- Massive immigration liabilities, thanks to loose borders.
- Out-of-control taxation, which penalizes consumption.
- Financial basket cases like Greece, Spain, Portugal and Italy.
- Unemployment numbers that make the United States look outstanding.
- And a currency that’s overvalued by almost every measure of purchasing power parity.
To top it off, the eurozone is fiercely nationalistic, which prohibits competition that would allow for lower prices.
Again, the easiest solution to these problems – the answer that politicians will always embrace first – is to push for even lower rates… maybe even negative interest rates, which has been suggested. (Negative rates occur when you have to pay the bank to keep your money on deposit.)
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By flooding the market with more money, the value of the euro will decrease, causing inflation along with export growth.
There’s no question that the euro is headed in that direction. Indeed, the euro’s decline is inevitable, and a fall of 20% in the next 12 to 18 months isn’t out of the question.
The good news is, there are two simple ways to profit as the euro declines…
Euro Play #1: ProShares UltraShort Euro ETF (EUO). This ETF allows you to capture twice the daily gains of the euro versus the U.S. dollar. Keep in mind that these ultra ETFs reset daily, and they don’t produce cumulative gains.
Euro Play #2: CurrencyShares Euro Trust (FXE). You can also short the CurrencyShares Euro Trust by using put options, which can go out as far as two years. This limits your liability to what you have invested in the option and allows you to use strike prices as low as 100 (1 to 1) as far out as January 2016.
Bottom line: The eurozone is in trouble. Its economies can’t grow and it’s running out of options. Shrinking the value of its currency is the only choice left.
Ahead of the tape,