U.S., EU and China – Possible Futures
Vega submits:
I’ve discussed the challenges facing the US, EU, and China many times. Today I’ll discuss some possible outcomes to their problems and how we can position for (or at least hedge against) these possible futures. When discussing anything beyond the immediate future, we always need to maintain a great deal of humility. So, view these less as predictions than as possibilities.
As I read experts debating the future of the European Union, they seem to talk past one another. The EU bulls basically argue that the EU is politically committed to maintaining unity and will do whatever it takes to avoid dissolution. There are some extreme bears who argue that a break up is inevitable, but most simply argue that the EU is unsustainable given its current labor dynamics. An outcome that would thread the needle between many of the smartest bulls and bears is for the Euro is devalue significantly but remain intact. The heart of the problem of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) is that their labor is uncompetitive both compared to other EU members and the world. If the Euro fell by 25% vs all other currencies, this would cure half the problem. The PIIGS would then be competitive relative to the rest of the world, although intra-EU disparities would remain. The result would be that Germany would become super-competitive and likely start accumulating large reserves. That would eventually cause problems, but they would be less pressing and less severe.