Dennis Gartman Of The Gartman Letter Is Interviewed On The Euro

Posted By on February 27, 2010

Written by Lara Crigger  -  Posted February 27, 2010
  Dennis Gartman is the mind behind The Gartman Letter, a daily newsletter discussing global capital markets. For over 20 years, The Gartman Letter has tackled the political, economic and social trends shaping the world’s markets, and Gartman himself is a frequent guest on CNBC, Bloomberg and other financial media outlets. Recently, IndexUniverse Associate Editor Lara Crigger sat down with Gartman to discuss his thoughts on the fate of the euro, including how Greece could doom the dollar, why you should dump dollar-denominated gold and whether inflation or deflation is yet in store.

Crigger: Recently we’ve been seeing the dollar trade higher relative to the euro. Is this due to strength in the dollar, or is it weakness in the euro?

Gartman: The latter. Actually, the euro isn’t just weakening relative to the U.S. dollar. The euro is weakening relative to the Australian dollar, the New Zealand dollar, the Canadian dollar. While it’s holding its own relative to the other European currencies that are not members of the European Monetary Union—the pound sterling and the Swiss franc—the euro is very weak relative to dollars overall. So I think that argues that the euro that is weak, not the [U.S.] dollar being demonstrably strong.

Why is that so? It’s because of the problems that are extant right now with Greece. We know the problems that Greece has fiscally, and if Europe—or really, Germany and France, because for all intents and purposes, that’s who the European Monetary Union really is—if Germany and France come to Greece’s aid, then who’s next? Maybe then Portugal. And if they bail out Portugal, then Spain’s next. Where does it stop? It doesn’t.

Crigger: So which is worse for the euro: a Greek default or a Greek bailout?

Gartman: I think a Greek bailout would be worse. Again, if they bail out Greece, then it’s only a matter of time before the next group asks to be bailed out. If they were to throw Greece out of the European Union and out of the political union, and say, “You know what guys? You never had the stream of income that you said you had; you have a horrifyingly tax-averse public, who is at the same time even more horrifyingly willing to drink at the trough of federal payments … you lied to us. You’re out.” If they did that, then maybe that would be beneficial. But are they really going to do that?

Crigger: With this bleak situation facing the European Union, is the euro doomed?

Gartman: Yes. For all intents, I think the euro is doomed. There were many who said they didn’t think the euro would make it past the first important recession. Well, this is really the first important recession since the creation of the euro. And I’ve been surprised it has lasted as long as it has. Honestly, I think the euro is a doomed currency.

But these things take time to play out. The euro will still be extant by Feb. 28. It will still be around by March 30. It’ll probably still be around by the end of April, and the end of this year, and it will probably still be here a year and a half, two years from now. But I think these are terminal problems that the monetary union and the political union are facing, and it’s only a matter of time before it ceases to exist. Will it happen overnight? No. It will happen in a slow, very painful, long-standing, horribly drawn-out, ugly affair.

Crigger: A few years from now, when we look back at this time, are we going to say the Greece crisis was the turning point?

Gartman: I think the turning point was in late November of last year. That’s when I think the market began to understand that there were problems coming. What was important was that the technicians saw it first. The euro broke its uptrend that had extended back for 18 or 20 months. Now we understand why it broke.

Crigger: The European Monetary Union expended so much time and effort in creating the euro. Won’t that help propel the euro forward?

Gartman: That has propelled the euro forward. That’s why the euro made it to fruition in the first place, in that so much mental capital and political capital had been expended in the 20 years to get it up and running. So much so, that even though Germany was not enamored with the notion of a unified currency, everyone else had spent so much time and there was so much invested in it, that they had to go with it. They had to bring it to the market.

Crigger: Switching gears a little, do you use ETFs in your currency trading?

Gartman: Oh yes. All the time. The FXC [CurrencyShares Canadian Dollar Trust; NYSE Arca] for Canada; FXA [CurrencyShares Australian Dollar Trust; NYSE Arca] for Australia; FXY [CurrencyShares Japanese Yen Trust; NYSE Arca] for the yen—these are all very good, very liquid and very deep ETFs. If you’re going to be long various currencies, they’re probably the better medium to be long in.

The problem ETFs have is that if you want to get short, those ETFs are not very good mechanisms. For whatever reason, they’re just darn difficult to borrow. You can’t get short of them. But that doesn’t preclude you from buying deep in the money puts, which act very much like the underlying instrument itself. So if you want to be short and you can’t borrow the currency ETF, then go use the IMM [International Monetary Market] futures. But on the long side, ETFs are very efficient.

Crigger: Which ETFs are best to play the weakness in the euro?

Gartman: Well, if you can get short of FXE [CurrencyShares Euro Trust; NYSE Arca], that’s the most efficient way. It tracks, for all intents, tick for bloody tick to the spot rate of the euro in the foreign exchange market. That makes it very efficient. But like I said, getting short of it can be difficult.

Crigger: Why did you recently recommend your readers dump their gold holdings priced in U.S. dollars and purchase it in other currencies?

Gartman: When you are a buyer of gold, you are essentially taking a short position in the U.S. dollar. There’s an inherent short position in the U.S. dollar incumbent in a long position in gold. But I prefer not being short of the U.S. dollar right now; I prefer being short of the euro, the Swiss franc and the British pound sterling, and I wish to be long of gold.

So if I want to put those two together, owning gold in euro terms (or sterling, yen, Swiss franc and so on) has proven to be demonstrably less volatile than owning it in dollar terms. Even during the correction, when spot gold went from $1,250 down to $1,050, it lost around 18-19 percent. Gold in euro terms only lost about 8 percent. Now, I’m not happy about losing money any time, but I’d much rather lose 8 percent than 18 percent.

What’s really interesting is that gold in euro terms is well above the high that gold in dollar terms made in early December. Gold in euro terms is actually at new highs. So if you’ve been long gold and short euros, creating a synthetic long gold in euro terms, you’re actually feeling pretty good. You’re ahead of the game. You’re so far ahead on the euro side of the trade that the entire trade is enormously profitable, whereas if you had bought gold in U.S. dollar terms, you’re still behind by quite a bit.

Crigger: At the beginning of this year, you predicted that the U.S. would surprise everyone with how strong its economy would perform this year. With the mediocre economic data that has been coming out so far, do you still feel this is true?

Gartman: Oh yes. I still believe this is true. I think we’ll all be surprised how strong that growth will be. It will be 3-4 percent, probably, much greater than people anticipate right now. That still will be well below what is normal, or historically average, but it’s certainly above what most expectations are.

Crigger: Do you think the U.S. economy is headed for inflation, deflation or neither?

Gartman: I think it’s headed for modest inflation, as far as input prices are concerned, and I think it’s headed for continued, relentless deflation as far as wage rates are concerned. The group in the U.S.—and really, in any industrialized country—who is screwed is the uneducated worker. He’s got no chance.

In the old days, the automobile worker in Detroit used to look across the river to Windsor, Ontario and think that that was his competitor. Now, if there’s still a viable automobile industry in the U.S., their competitor isn’t in Canada—it’s not even in Mexico. It’s in China, Indonesia and India. The era of the worker earning $50-60 an hour in the automobile factory is over. It’s just over, and it’s not ever coming back.

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