David Kotok: The Euro Will Not Fail, But The Coming Weakness Will Make European Businesses Way More Competitive


Here’s some smart and refreshing perspective from David Kotok of Cumberland Advisors on the medium-term outlook for Europe:

We do not expect the euro to fail as a currency and we do not expect the ECB or the EU to dismember.  This is true even if Greece defaults.  Would the United States dismember if Rhode Island defaulted on its municipal bonds?  We think not.  Did the revelations about Robert Citron and the Orange County California pool and bankruptcy dismember the entire US Muni market?  No.  But it did create a terrific buying opportunity when the market swooned and all Munis sold off for a few weeks.
We believe that the weakening of the Euro will make the companies in many European countries much more competitive on the world scene.  Machine tool makers in Germany which compete against those in Pennsylvania now have a 10 per cent price advantage when selling to China.  The didn’t have it a few months ago.  The same is true for French winemakers or French nuclear reactor technology sellers.  The weaker the euro becomes the more competitive European exporters will be in the world markets.  And the weakening of the euro will not add to inflationary pressures in the Eurozone because the negative output gap is huge.  That means the ECB will maintain its present very low interest rate policy throughout the crisis with Greece and likely for the rest of this year.
Also, note that the crisis is strengthening the dollar since it is now the default currency choice in the world.  A stronger dollar means any inflation pressures that the US economy may experience are diminishing.  The Fed knows this which is why it will remain on a low interest rate program for the rest of this year.
At Cumberland we see this as a developing opportunity to reposition in Europe with a higher allocation and more selectivity.  Not today but the time to trade gets nearer every day as the crisis unfolds.
For the moment we continue in the strong dollar mode.  Our US ETF accounts are fully invested and we expect the US stock market to go higher.  Our target of 1250 to 1300 on the S&P 500 index remains.  We expect full closure of the “Lehman gap.”

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