A reader sends in some deep thoughts on the crisis in the eurozone, and where it could go next:
As Euro zone equity markets come crashing down today I note we have a fascinating potential replay of the Asian contagion happening right now. In 1998 when the hedge fund community took their final run at the HK$ they decided that because of the currency peg to the $US they couldn’t attack it directly, so they went at it indirectly with massive shorting of the Hong Kong stock market. Their intent was to bring the HK$ down with this shorting strategy and collapse the peg. Over the period of the contagion the Hang Seng dropped from approximately 19,000 to under 7,000. It was only after the direct intervention of the HKMA buying stocks that halted the decline and sent the HK$ speculators running home licking their wounds. The Peg survived.
History repeats as the “currency speculators” have been prevented from attacking the Euro directly via the Euro bond markets by the ECB’s recent QE response to the crisis. So now it appears the hedge funds are doing the same thing they did in Hong Kong in ’98 by shorting Euro stocks with a focus on the banks in hopes of bringing down the Euro.
The question will surface soon….when does the ECB, following the precedent of the HKMA during the Asian crisis, begin actively and openly buying stocks to prevent the total collapse of the Euro?
Stock Investment Mgmt
3556 Main Street