Why Germany needs Greece in the Euro-zone

 

Yes, you read correctly, and no I am not taking a leaf out of the Daily Mail guide to click bait strategy.

I believe that the only way that the euro will survive and flourish is if it agrees on a formal and regular wealth transfer from Germany (read North) to the troubled periphery (read South). Most other fudging strategies at best can only hope to lead to a soft landing and stagnation, and at worst a hard landing, irreparable social division, and devastated economies.

Markets are sentiment led, and so I believe its not too late to resolve. I will do my best to give a simple explanation why.

The euro has hugely benefitted Germany

This is key as some estimate that since the euros inception it has boosted the German economy by between €200-400 bln per annum. In 2010, a McKinsey study estimated that the single currency boosted the regions wealth by €332 billion euros ($424 billion), or about 3.6 percent of gross domestic product with roughly half of that going specifically to Germany.

It's estimated that if still active, the deutsche mark would trade around $1.50, 25% higher than its current value at $1.17. Over the past fifteen years, the euro has been on average around $1.35 and now looks like it might head back to parity. That is a significant competitive advantage for German exporters.

The reason for this devaluation has been the inclusion of periphery nations like Greece, Spain, Italy, Ireland, Portugal.

Whenever the eurozone is in crisis, the price of the euro falls. Last summer when the market was calm, the euro strengthened to $1.40. Before that in 2009-10 when the crisis heightened it fell to $1.19, and in the big bull run heading into the 2008 crash, it hit $1.60.

A clear and easy observation to make is that when crisis and structural instability cause the euro to fall, it is hugely advantageous to Germany.

A word on debt and currencies

The UK just paid off considerable chunks of historic debt, some of which dates back to the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars, slavery's abolition and the Irish famine. This should be a reminder that national debts go back a long way and don't just disappear.

We should also consider that Greece has a troubled history with debt, having been in technical default from between 1932 and 1964, and having defaulted five times since the Napoleonic wars.

The periphery nations will also have debt dating back centuries. This historic debt is priced in the original currency. All new debt is priced in euros.

Most importantly, both old debt and new debt is paid back in euros.

An alternative play could be that during the initial euro price dip, periphery nations took advantage of the German level borrowing costs and favourable currency moves to service old debt. However, regardless of favourable borrowing rates, a 60% increase in repayment costs over 7 years will put strain on any treasury department.

Why is this important?

In the same way that having the periphery in the eurozone has kept the euro discounted when compared to the deutsche mark, from a periphery perspective having Germany in the eurozone has placed a premium on their membership cost.

They entered into an economic union to share a currency with much stronger economies, and for them the euro has seen the value of their operating currency increase.

Prior to joining the euro, borrowing costs ranged in the double figures for most of the periphery 10 year Government bonds. For example, in 1995, the Italian 10 year was 13.45% while the Greek was 19%. When these nations joined the euro, automatically these repayment costs increased because the euro was a stronger currency than the lira and the drachma. Remember, original currencies were valued to the euro, and the euro launched at $1.17.

Lets use the example of Greek 10 year bond sold in 1995 with a 19% yield.

In 2005, half of that bond would have been paid back in drachma, and half in euros. That 19% would actually have been higher in real times due to currency revaluation.

Additionally, from launch to 2008, the euro appreciate some 40% in value. True, the single currency did move below parity for a period shortly after its launch, but it soon strengthened significantly.

This is a big deal.

A roleplay scenario

• Imagine being a periphery finance minister experiencing national debt being revised higher.
• Imagine then seeing the value of the currency the debt has been revalued in climb 40-60% over the following years.
• Imagine having no means to follow the traditional devaluation out of debt route.

Then imagine discovering that another consequence of joining the euro is that you can now borrow at German interest rates.

Debt costs are spiralling due to a soaring euro, but its never been easier to borrow. Prior to the euro, Greece borrowed at 15-25% on a 10 year Government bond, but afterwards at 4% based on the markets assumption that Germany was the underwriter.

It was a classic debt trap.

The periphery had no currency to devalue its way out of debt so options were limited.

We know Greece became an active player in the bond market, and look how its debt exploded during the euro years.

Sadly, there is very rarely a happy ending in the debt game.

So the answer is to pay the Greeks to be themselves?

Well... yes.

We have established that a weak euro is beneficial to the northern nations for the past 15 years, and that the source of this weakness has been the inclusion of the periphery states.

Rather than bail out the periphery nations, layering on more debt, destroying their economies, causing generations of hatred and institutionalising political serfdom, Germany could pay them a cut. Its very simple.

Greece has €300 bln debt. The bailouts it receives could be changed to annual payments solely for trimming down the debt - in exchange for structural reform - because nobody denies that the Greeks and their cohort need to improve things.

Each year, Germany and northern states could pay the periphery to reform their economies. The cost would be offset by the net benefit of having a devaluing force on the economy. In the long run an improved and efficient periphery would no longer be the periphery, but equal partners.

That sounds awfully politically unpalatable

It does doesn't it, which is why we should keep an eye on what happens with ECB QE. The Euro has already been in free-fall in anticipation. The Swiss removed their Euro peg in anticipation. We are just waiting for confirmation.

Germanys contribution to the ECB's working capital represents 17%, so it could b argued that any ECB QE would effectively be said wealth transfer to the troubled periphery. However, the other two big contributors, France (14%) and Italy (12%) look to be real long term causes for concern over Eurozone stability.

Alternatively, the UK and the US have very successful currency unions because there is an understanding that not all regions are economically equal and should not be treated as such. Rather than special case situations, the wealth transfer is one of structure, not bail out.

Until Europe finds its acceptable terms of transfer, I suspect that it won’t find peace and stability.

Thanks!


By Thiago Duarte
Chief Strategist at Duarte Investment Group 
thiago@duarteinvestmentgroup.com
@thiagotrader 

What day is best for you to attend Thiago's FREE Weekly Webinar?

Hi guys,

I would like to ask everyone to take part of the pool on the right side about the weekly webinar which I will give every week without any cost. I just want to see the day of the week most voted so I can book myself every week so we can look at the markets together. 

During the webinar I will show you guys what I am looking at and we will have a talk together. I will also offer everyone to ask questions and comments so we can learn from each other. The webinar will be done on Google Hangout, which gives me the option to save automatically and archived so for those that arent able to attend the webinar, can watch later at any day and time.

5 mins before the webinar start, the link will be posted on my Twitter (@thiagotrader) which you can also see on the right side of this page.
 

Only 6 days left, so please take part so we can the webinar soon.


Thanks!


By Thiago Duarte
Chief Strategist at Duarte Investment Group 
thiago@duarteinvestmentgroup.com
@thiagotrader

The more you trade, the more you under perform (over-trading)

Hi Traders,

I hope everyone had an amazing weekend. This weekend in London was very cold and very strong wilds which did not helped me at all so today I am not feeling 100% but what can I say? I love my job, I love what I do so I wont let that stop me.

Anyway, today I want to talk about something that many people, including myself did on the start of my trading career. If I started knowing this I would have avoided many looses that I had. But to be honest, I knew it but I thought it was not true.

Today I want to speak about 'Over Trading'. It is a very complex topic to speak about because many traders out there wont agree with me. They might say that every single one has your own trading methodology/strategy and they should continue. To be honest, they are right but as my parents always told me: ''Everything has your own limits''.

Sometimes overwhelming feeling that traders experience that makes them want to enter a trade when no trade worth taking is there, is one of the many emotional feelings they must conquer with logical thinking if they want to make money consistently in the market. The most practical way to use logic to conquer the emotions of over-trading is simply to trade less frequently.

• How does trading less lead to bigger profits?

Trading less frequently than you do right now is a very good way to give a boost to your trading account. When you restrict yourself to only entering a few positions a week or even a month, you will naturally give more thought to the trades you take, and you will have a better chance at picking winning trades because of this. Simply put, trading less is a filter, just like trading higher time frames acts like a filter for the noise of lower time frames, trading less is yet another filter that traders can use, think of it as the final filter that you use before entering any trade.

It is a good idea to restrict your trading to a certain low number of trades each week or each month, at least until you become a consistently profitable trader. Let’s say you write into your trading plan that you will only allow yourself to enter three trades per week, if you truly follow this rule you are going to have to use the filter of discretion for each trade setup you contemplate taking because most traders find themselves wanting to trade a lot more than three times a week or less. This technique will work to improve your winning percentage over-time, and it will also grow your trading account much faster than you think.

When we talk on this website about “mastering one price action setup at a time”, using discretion and taking a small number of well-defined and well-placed price action setups is how this is accomplished. Developing your ability to read a price chart and to spot the highest probability price action setups, is something that comes via patience, and you can work on enjoying and improving your patience by accepting the fact that the less you trade the more you are likely to profit. Anyone who has traded the forex market for any length of time knows that often what you “feel” like you want to do, or your first urge after looking at a price chart, is wrong. By deciding to take a small number of trades each week or each month, we force ourselves to step back and really put our objective thought processes to work prior to putting any hard earned money on the line for any particular trade setup.

• You cannot control the forex market:

There is perhaps nothing worse than losing money that you have toiled and sweated to obtain because you were trigger happy in the market. We all can agree that it is exponentially more time consuming and difficult to make money in this world than it is to lose it or spend it, a sort of inverse analogy to this is losing weight; it’s really easy to gain weight but very difficult to lose it.

Armed with the knowledge that losing money is exponentially easier than making money, no matter what the circumstance or profession, it is a very curious fact that so many beginning and experienced forex traders continually give in to the temptation of over-trading. Most traders rationalize over-trading to themselves by thinking that by trading more frequently they are somehow taking advantage of the market or that they are even influencing or controlling the market. The ironic thing about this pattern of thinking, besides the fact that it is completely erroneous, is that the degree to which a trader tries to control the market by over-trading, is about equal to the degree they will experience loss or failure, in essence, by trying to control the forex market it literally controls you by stirring up your emotions.

Unfortunately, the forex market doesn’t care about you, your problems, your emotions, or your life. The market is not a living entity that cares about anyone, it is essentially just a world-wide stage where people have access to leverage, profit opportunities, and loss opportunities, and the degree to which they conquer their own mind is the degree to which they prosper in the market. The belief that many traders harbor that when you trade you are somehow “competing” against every other trader in the world is simply not true, you are competing against only one trader when you enter the market; yourself. You can only control yourself when you enter the market; this is done practically by pre-defining your trading strategy and having a forex trading plan. You have two options as a trader; control yourself and react with sniper-like precision to whatever the market offers you, or get caught up trying to over-analyze what will happen next in the market: also known as being controlled by the market. Just as in life you have the option of letting other people dictate how you feel or dictating your own feelings, no matter what the situation, so in forex you can let the market control how you feel or you can remain in control of how you feel – this is done practically by not over-leveraging or over-trading.

• How to achieve a “less is more trading mind-set”:
Practically speaking, what are some ways that we can begin implementing the knowledge that trading less leads to making more consistent profits in the forex market? One way to do this is to understand that not being in the market at all, or being “flat” the market, is a very valuable position. Think about it this way; if you were to over-trade and lose a bunch of your hard-earned money really quickly as a result, how long would it take you to make back this money at your job? So, essentially you have not only lost money, but you have also lost time, because you spent time to make that money, by simply not being in the market at all you would be much further ahead, this means that not being in a trade is actually a profitable position.

To begin harvesting a less is more trading mindset, start thinking about your time on the “side-line” as a profitable position, instead of thinking that you are missing out on some great opportunity in the market that will never present itself again. The forex market will always exist, unless some global catastrophe occurs and ends human civilization as we know it, there will always be opportunities to profit in the forex market, so there is no need to rush any trade or to over-trade. Knowing these facts and consciously reminding yourself of them is how you develop into a patient and precise trader, it takes a daily effort, you can’t just read this article and then forget about it, you must mentally practice the idea of trading less and you must believe that there is no need to over-trade because there will always be more opportunities. When you really arrive at the mental destination of believing everything in this article, and trading from the point of view that not being in the market is a profitable position, you will actually start to make MORE money FASTER, it really is quite amazing. Most traders never make it to this realization though, because they simply cannot overcome the primitive emotional urge to trade every single possible setup they see.

By using a simple trading method like price action trading, traders have the best strategy to use to develop their discretionary chart reading skills from. Learning to spot the highest-quality price action setups from confluent levels is one of the most accurate ways to trade, it is both an art and a skill, and the art aspect is partially a part of how comfortable you are in waiting for the perfect trade, sitting on your hands until you see a price action setup that is almost screaming at you to trade it.

As Warren Buffet also said: ''Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."

Good Luck!

By Thiago Duarte
Chief Strategist at Duarte Investment Group 
thiago@duarteinvestmentgroup.com
@thiagotrader

Divergence on DXY (Dollar Index) and RSI.

I was just checking this weekly graph of the Dollar Index (DXY) and I just saw a divergence on RSI and price action. As we can see, the US Dollar is making a new high this week BUT the RSI is now. Actually, the RSI made his high few weeks ago.

This is a signal that the current trend is getting into the final steps of the current trend, this does not mean that he will reverse hard to the downside, BUT we can expect a correction near.

Also, the high of this week came into 92.52, very close to the 2005 high, which is at 92.63. Keep this level in mind as can become a big resistance (as 92.50 has been from Thursday).

NOW, the monthly chart of the DXY (Dollar Index) has also reached an important level.

As we can see the graph above, it reached the 0.236% fib which served as resistance in November 2005.

 Good Luck!

By Thiago Duarte
Chief Strategist at Duarte Investment Group
thiago@duarteinvestmentgroup.com
 

BTC/USD has a good potential for the long-term

Hi guys.

Today I want to talk about a pair that I am watching very closely to trade for the long term which in my opinion has a long term opportunity. What I mean about long term is that this trade (if I open) will take more than 2 months, so its a that type of trade that I open, setup the stop-loss and take profit and forget it! Because if I keep watching this trade every single day, I will probably close in one week thinking that 200 pips (for example) its enough, BUT that I can see here is much more than that and for that to work, I have to forget it and probably look every Friday.

Above is showing the four graphs that I normally look in EVERY SINGLE market and they are: 4hr, daily, weekly and monthly. I don't look any other, it doesn't mean that I think the rest does not work but FOR ME, it does not!

Anyway, let's jump into the graphs:

BTC/USD Monthly:

Looking at the monthly chart we can see that we just touched the April 2013's high (359.34) which in this case is very important because we can see that the bears (sellers) tried to make a top at this time but we they didn't hold it and broke this level, it went absolutely crazy!!! We can also see that RSI and Stoch is reach oversold levels.

BTC/USD Weekly:

Now looking the weekly, we can see that this pair might be in a kind of a wedge or maybe some of you guys might call a triangle (does not matter in this case). Also today we just touched the 0.764% fib: 276.34, an important level. Also a very important signal here is the RSI, just touching the 30 line AGAIN! (we did few weeks ago and worked as support)

BTC/USD Daily:

Looking at the daily now, I added the fib extension and we have reached today the 0.5% fib and I have added a trend-line and it just jumped from there. Looking now at the RSI, we can see that it just crossed above the 30 line which also works as a bullish signal.

BTC/USD 4hr:

In the 4 hour charts I normally add more trend-lines because I treat this graph my sketch graph and I use for scalping sometimes BUT I don't use 4 hour to make conclusions or plans!!! I just use to see the levels more clearly and especially impact into some levels (support or resistance). Looking at this BTC/USD 4hr chart, I added some trendlines and a channel and all ends up where we made the low today. To confirm, I want to see a close above the medium line of the channel (dotted purple line). By having a close above of the medium line, we give me more conviction of my view in this pair and more confirmation that we have a low in place.


Conclusion:

From the 4 charts that we just looked, I think we have a great chance to see this pair going up in the long-term. Stop loss I recommend to put at 247.00 level and first Take-profit: 582 (50% fib on weekly) and final Take-profit at: 719.00.

Take care guys and good luck,


By Thiago Duarte
Chief Strategist at Duarte Investment Group
thiago@duarteinvestmentgroup.com

Wait for confirmation before open a trade

Hi guys,

I want to talk today about something that I use every time that I want to trade short or long in every single pair or even other financial markets such as indices, commodities or even stock. Confirmation is very important for me right now in everything really, with entering a trade, close and even hold a bit more sometimes.

I get confirmation in 2 things, candlestick patterns and indicators (stochastics, RSI). I wait for these 2 to give me a signal so I can decide what I will do. But however, I don't allow indicators to make me go to the trade. Indicators own its name says everything, its just to gives us an INDICATION of what MIGHT happen.

Candlestick patterns is a technique of trading that I gathered few years ago and has really helped me to identify opportunities in the market. Here are the formations that I try to find in the graphs:

I try to find these formations on the graphs, but not any graph. I am only looking at daily, weekly and monthly charts. The reason is simple, if I look on smaller graph such as 1 hour for example, I will find many formations but 2 things might happen; i) not follow through, ii) false signal.

Having said all that, wait for the market to act in a zone of support or resistance before you jump in and hope that works. Of course we loose some pips because we waited, but at least we waited and got in with a greater chance to the trade to work.

I hope you guys take this into account.

Take care.

Good Luck!

By Thiago Duarte
Chief Strategist at Duarte Investment Group
thiago@duarteinvestmentgroup.com

Let's go higher in our 'life ladder'

Hi guys,

Today I was thinking about few years ago, when I was not successful at trading. When I used to blow accounts with my own money (even though it was a small account) but it was my own money. I started trading when I was only 16 years old, forex came to me as a way which I could make my life with and be rich. Had big dreams such as trading at a beautiful and sunny beach. Who never imagine doing this?
All these years have been an amazing journey for me. Had a lot of bad moments (trading) which made me thinking many times to give up and do something else but something inside me never let me give up. When I think about the past now, I see like a ladder, every step we have to make a move to go higher, but higher we go the bigger is the fall. But we all need to go higher, dream big because life is made about dreaming and running to achieve these dreams.
It makes me really happy that I did not gave up and I am still a trader today. It has been 8 years... long years...

Having said all that, I recommend everyone to start this year thinking about when you started trading until today, all the things you done wrong and done really well and especially what you have improved. As traders, we always will have something to improve and something to learn, because market always change, market condition always change and the global economy never stops.

This is something that I recommend everyone to think to start this new year positive and focused because this year will be big! I hope you all had an amazing end of year.



Good Luck!

By Thiago Duarte
Chief Strategist at Duarte Investment Group
thiago@duarteinvestmentgroup.com