Euro to zero: why the worst is yet to come

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While markets breathed a collective sigh of relief as the European Union moved towards another deal to bail out Greece, not everyone’s celebrating. We spoke to Brian Whitmer of Elliott Wave International whose views should send shivers down the spine of anyone who thinks the worst is over.

Didi Mae Hand, Investors Chronicle: So, Brian what do you make of the political and economic landscape in Europe right now? Is the Euro going to survive this crisis?

Brian Whitmer, Elliott Wave International: No, I don’t think the Euro’s going to survive. The situation’s escalated. Two years ago, we were dealing with a corporate debt crisis, now we are dealing with a sovereign one. We are entering the worst phase of the crisis in the markets, in our view.

DMH: When do you predict the markets will crash?

BW: Put it another way, I don’t see the credit-cycle reaching its final bottom any time before 2014 or 2016. In terms of price, let’s say for your FTSE 100 index, I’m looking at the price territory reached during the 1987 crash, which is somewhere between 1500 and 2500. So that’s somewhere between 60 and 75 per cent below today’s prices. It’s essentially the same in Germany’s DAX and France’s CAC 40, where we are looking for a drop of well over 50 per cent over the next few years. But I don’t expect to see a crash tomorrow, although we are heading for the autumn season which is a traditionally weak period in the markets.

DMH: Even with Europe’s leaders meeting as we speak in Brussels, do you really think nothing can be done to rein in this crisis?

BW: I think the second bailout they’ve cobbling together won’t make any difference to the long-term trend. We’re still talking about Greece and Portugal today, but what were going to be talking about three to six months from now is Italy, Spain and France. We’re going to be seeing this debt-crisis spread and migrate from the periphery and into the core European countries.

DMH: But the Euro has already survived the first bailout. Can the future really so bleak for the single currency?

BW: Yes, because in terms of saving it, the essential problem is the massive build-up of debt and credit over seven decades, until the year 2000 high. We’re in the process of deflating that debt now, but essentially what needs to happen is that the level of credit in society needs to come back to a level where economic production can support principal and interest payments, which we’re no where near at the moment.

DMH: So what do you suggest people do?

BW: The trouble is the authorities are going to fight this tooth and nail but what really needs to happen is for bankers and politicians to get out of the way and let the markets resolve this. Let bondholders and the lenders who willingly made these loans take losses. As painful as that’s going to be, it needs to happen and we could get through this relatively quickly if it were allowed to, but it won’t be. So, the crisis will drag on.

DMH: In the event of the collapse you envisage, do you see countries returning to their pre-Euro currencies? Will the strongest country – Germany - return to the Deutschmark?

BW: Yes, that exactly what I see. Ultimately, I think countries will be kicked out of the union or try to leave voluntarily and that opens up a whole other host of problems, but that’s the long-term result.

DMH: So how will this all play out in the markets?

BW: Well, effectively what we are expecting to see is an even stronger phase of the bear market. Back in March 2009, we saw extreme pessimism and got really excited, predicting a rally and partial retracement of the 2007-9 decline, which is exactly what we saw across peripheral Europe in Portugal, Italy, and Spain. We rallied for most of 2009, and the stock markets petered out in late 2009 to 2010. They’ve been drifting lower ever since and now it looks as though they’re starting to accelerate lower as well. What we are anticipating is that same pattern emerging in even the largest markets.

DMH: Really, even the FTSE?

BW: Well, the FTSE 100 and the DAX have held up and even carried higher than we originally thought, but I think as this crisis spreads through the core of Europe, we are essentially rolling over here. Again, we’re looking for a stronger phase of the bear market than we saw two and three years ago.

DMH: This all seems a bit familiar.

BW: It’s interesting, things are sort of aligning similarly to where they were in 2008. Back then we had the Lehman Brothers collapse, or what I like to call a ‘light-bulb’ moment where suddenly the markets woke up and the authorities realised they could no longer contain the crisis. Despite all the meetings and the billions in bailout money, the markets have been drifting lower and the credit crisis is escalating. I think we are coming into another ‘light-bulb’ moment now in 2011, but this time we are dealing with whole countries and their sovereign debt crisis rather than corporations. It’s an escalation of what we’ve already seen therefore.

DMH: Sounds pretty grim. So, what can investors can do to protect themselves from all this?

BW: I’d absolutely suggest erring on the side of caution. We recommend having the bulk of assets in the safest and shortest-term cash and cash equivalents with the safest banks and essentially to ride out this bear market in what we think is going to be a severe period of deflation.

DMH: Is there even a safe currency to hold at the moment?

BW: Well, we’re loving the US dollar right now. The bearishness enveloping it has been so overwhelming over the last year that we think the dollar is reaching a major low amongst world currencies, whereafter it should be one of the strongest markets going. In Europe, we suggest the Swiss franc.

DMH: What about government bonds?

BW: First, I’d say Swiss Cantonal Bonds are the safest, then the US Treasury and German Bunds. There’s a continuum of safety, and based on this bear market we recommend the safest cash or cash-equivalent.

DMH: Surely gold is the best thing to buy in a crisis like this? How do you see that faring?

BW: Gold’s been strong, and in the past we’ve recommended a core position in gold as a crisis hedge, but we don’t recommend gold at today’s prices. If you look back to 2008 both gold and silver sank during the worst days of the crisis along with everything else. People were shunning just about every other asset class and putting their money into the US dollars and Swiss Francs. I think that today there’s a lot of hype surrounding gold I reckon the size of the next drop in gold and silver is going to surprise a lot of analysts.

DMH: Thanks for talking to us today, Brian.

BW: It’s been my pleasure.