Michael Howell talks to Investment Europe: Euro could go 20% lower, 18th March 2013


Mike Howell, managing director of CrossBorder Capital, says the data on eurozone liquidity points to a further 20% weakening in the single currency.

In a jaw-dropping turnaround eurozone equities have leapt from the bottom of every advisor's investment picks to the top in barely a year. Strangely, the outlook 12 months ago looked to us much better than today, justifying the subsequent sharp share price rally. Looking ahead into the rest of 2013, we do not think that likely returns from eurozone investment compensate for the bigger risks.

Let's be clear. We are not taking here of a disintegration of the euro. Its integrity looks safe, but what is at issue are three things: the value of the euro against major national currencies, such as the US dollar; the underlying health of the eurozone economies and whether its banks and national governments will continue to be funded.

In this context it is puzzling that the ECB has just allowed its balance sheet to shrink in size by a whopping one fifth. Correspondingly our indexes of ECB liquidity have plunged dramatically in just a few months. Eerily, this also happened ahead of earlier eurozone crises. If the monetary shoe were on the other foot and the US Fed had just let its balance sheet skid 20% lower, we doubt Wall Street would be still be setting new highs. Money moves markets, and the key lesson that Fed chairman Ben Bernanke has taught us since the 2008 Lehman Crisis is that the size of central bank balance sheets is directly and positively related to the level of asset prices and very negatively related to risk premia.

 For the full story: http://www.investmenteurope.net/investment-europe/opinion/2255361/euro-could-go-20-lower-says-crossborder-capitals-mike-howell

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