Don’t Trade With Aliens

There is a group of human beings whom I find to be unintelligibly mysterious.  In fact, I believe them to be aliens who, while visiting earth occasionally, actually reside in a space ship floating in the interstellar ether.  I am referring, of course, to currency traders.

For the most part, other kinds of traders — guys who make it their profession to trade things like stocks or bonds or commodity futures — are normal people.  For the most part, currency traders are nuts.

There is simply no explanation for the euro rocketing up far above the dollar since the US victory in Iraq.  Yesterday (5/6/03) the euro closed above $1.14.  The aliens at UBS Warburg are predicting the euro will go to $1.20. 

One reason given is the money flows into European bond markets.  Irresistibly attractive, claim the aliens, are 10-year German government bonds at 4.07% and Italian government bonds at 4.27%, as compared to the paltry 3.82% for US Treasurys.

This is conclusive proof currency traders live in outer space, believing that 0.45 of 1% is too high a risk premium to pay for betting your life savings on the credit worthiness of the US rather than that of an Italian government.

Pricewaterhouse Coopers is now projecting that the best to be expected from the French and Italian economies this year will be at little over 1%, Germany’s under 1%.  2004 will be worse.  Euro-zone unemployment is now at 8.7% and heading towards 9.  Germany is at almost 11% unemployment.  The French Finance Ministry projects the government deficit will be 3.4% of GDP for 2003.  Germany will be higher.  This is far above the upper limit of 3% agreed upon for euro-zone membership.  The US’ “record deficit” that worries the aliens will be coming in at around 2.8% of the $10+ trillion US GDP.

 Donald Rumsfeld’s quip about “Old Europe” is pinpoint apt not just politically but economically.  The major economies of continental Western Europe, particularly France and Germany are aged, inflexible, unresilient.  The American economy is the opposite on all three counts.

There is no possible rational reason for betting that euro-based economies will outperform the US over the foreseeable future.  Yet the currency traders in rocketing up the euro over the dollar are making precisely that bet.  For whatever reason, currency traders are indulging in a spasm of collective insanity similar to the dotcom delusion of the late 90s.

Since rationality is too much to expect of them, it is best to ignore this market entirely.  Ride the DOW and Nasdaq, place your investment bets where you otherwise feel comfortable, but it’s best to let the currency traders sail off into space all by themselves.