Has anyone even noticed that the Rydex CurrencyShares Euro (FXE) broke out today? Has anyone noticed that the euro, which was the "gang short of a lifetime," has suddenly turned into a powerhouse?
Has anyone noticed that Europe has not been decked by higher oil either, at least not yet, and that it seems to be getting stronger?
Things are more at odds with reality than I have seen for some time. First, why would anyone want to own the euro? I think everyone, including the Germans, knows the Greek deal will break down and break down quickly. That means the euro will either have to be broken up and Greece kicked out, or even more money will have to be printed. Why would anyone want a totally broken currency?
The answer can't be that it is too heavily shorted. I am not buying that. I think the answer must be that people are buying European assets by the boatload, and they are levering to do so. You need euros to do that. These banks are selling everything that's not nailed down so they don't have to raise capital, and I believe U.S. institutions are feasting on them, something they can't do without buying euros first.
The oddest thing, though, is that if Europe is slipping into a Great Recession, something that should be happening given the declines in the economies and the price of Brent, how can anyone take that chance?
Here's what I am thinking. Europe was faced with tremendous deflation. Horrendous deflation. The powers that be have obviously decided to reflate. That means that if you are nimble, you buy assets now and then sell them as the reflation becomes obvious to everyone. At the same time, the pump price just doesn't seem to affect the people in countries that have been focused for years on reducing the use of fossil fuels. Layer on top of that the fantastic rally in sovereign bonds, and you have a currency in great demand.
I am keeping this in front of me at all times, because we know numbers are too high from energy, but they could be too low from currency.
I am a huge bull on oil and think it goes higher. But if we get this kind of action when it goes higher, what happens if it stabilizes or goes down? I think the euro rallies, we rally, and it turns out that 12x S&P 500 earnings really was cheap after all!