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Monday, October 20, 2008 - Vol. 10, No. 250
U.S. and Europe to Powwow Over International Financial Crisis
These Unusual Developments Point to HUGE Profits in Emerging Market Currencies - FREE "Big Game Hunting" Webinar Shows You How - Watch It Now.
Today's comment is part of a special six-part series on emerging market opportunities by Currency Experts, Jack & John Ross Crooks.
Thankfully, politicians from all the major economies are hard at work to "fix" the global financial crisis.
The Wall Street Journal reports President Bush is expected to host an international summit on the financial crisis. The upshot could be greater international regulation, and a lot more restrictions on trade and capital flows.
The world leaders may succeed in retarding the natural adjustments needed for recovery. They may institute "reforms" that please the populace but could ultimately slow growth after the recovery. But they are not likely to repeal the business cycle. There will be more booms and busts, even after the current historic crisis.
Yet governments continue to rush in where angels fear to tread. Never mind that ultra-loose economic policy in the U.S. and Japan were at the core of the problem...or that government-backed entities Fannie Mae and Freddie Mac turned bad lending into big business.
We've seen this kind of thing before. Politicians make proclamations and new laws and manipulate the markets. But, eventually, market forces always overcome manipulation. And the longer 'the markets have been manipulated, the sharper the adjustment is.
The real lesson to take away from the upcoming summit is that leaders everywhere - from Europe to Asia - are panicked. Shockwaves from the global financial crisis are moving like tumbling dominos around the world. But, for traders, this presents a very clear set of opportunities.
Since the direction is undeniably down, if you target the most vulnerable sectors of the global economy, you'll find the greatest profit potential...and a chance to rebuild your portfolio and even grow it...after the carnage of the past few weeks.
Specifically, you'll find great trading opportunities in the currencies of emerging markets. These are economies that have grown like gangbusters in recent years, but are now changing course with just as much speed...and creating enormous trading opportunities in the process.
On Friday, we saw how we've been able to bag four-digit gains from one emerging market in Central Europe. Today, we look at another immense emerging opportunity in a neighboring country...
The Czech Republic: Why Its Star Is Fading Fast
(And How to Trade it for Extraordinary Profits)
We told you on Friday that Poland's economic locomotive is on the verge of flying off the tracks. This country's success depends on the health of major developed economies throughout Europe and across the globe. Without developed economies powering ahead, Poland doesn't stand a chance.
And not to sound depressing, but the struggles leaking down into Poland's economy predict awfully difficult times dead ahead. And outrageous profit opportunities...for you...are just as closely within reach.
Now let me tell you how the Czech Republic (CR) is facing a similarly difficult situation as its neighbor to the south. And how you can use these new developments for enormous profit potential...
Again, it's a problem of dependence. The Czech Republic is highly dependent on growth and financial market stability across the Eurozone. The major countries of Europe represent the key export markets and the financial institutions funneling foreign direct investment into central European countries. But now, both growth and financial stability in the Eurozone are being turned upside down, shaken, and dropped on their heads.
The needier countries of central Europe have benefited mightily from cross-border investment. As big players in Europe carried the region to greener pastures, the Czech Republic put a great deal of confidence in Europe's financial system. Too much confidence, in fact.
Foreign banking institutions control an estimated 60-80% of all banking sector assets in the CR. But now - almost tragically - these foreign-oriented banks are scrambling to stay afloat. Credit in the financial system is evaporating in a hurry. And, in turn, so is the economy.
Concrete evidence that the Czech Republic is already flying off the tracks remains to be seen. And even though we can't yet point to anything "wrong" with the CR economy - things like sky-high unemployment, runaway inflation, massive deficits, etc. - we can look to the future. And that's where the outlook gets nasty.
Sure the Czech Republic has been a real star in Central Europe, as the government is privatizing and cutting taxes. But don't be fooled - that star has already begun to fade... and fast. Economic growth is tapering off rapidly from its plateau two years ago. GDP growth touched nearly 7% in 2006. Now it's got a date with 4%...and very easily could be less than that.
Czech Republic GDP Growth Is Slowing
Source: KBC
CRs current account deficit will surely increase as foreign direct investment fades and exports feel the crunch that's bringing the rest of Europe to its knees. Unfortunately for CR, domestic demand simply isn't sturdy enough on its own to sustain levels of GDP we've become accustomed to seeing out of CR the last few years.
And that's just the economic gloom peeking over the horizon. It gets worse when you consider the potential for a geopolitical storm set to blanket the country...
Geopolitical Risk Is Bad for Currencies
A lot of issues may be running through our heads amidst the economic turmoil and chaos leading up to the November U.S. Presidential election. But it helps to understand that the political climate across the European continent isn't exactly peachy. And the rising pressures between Russia and NATO have the potential to turn very sour, very quickly.
As has been the case throughout history, Central Europe can become a buffer zone between Russia and Western Europe in the blink of an eye. Favorable economic positioning? I think not. This certainly makes for an unattractive investment destination.
Competing factions within the Czech government are concerned about aligning too closely with the U.S., and becoming its "defense shield" in this dispute. Tension is most certainly brewing. And this geopolitical instability in the region comes at a time when economic concerns require everyone's full attention. A resurgent Russia is a wet blanket to the vital foreign direct investment flow on which the Czech Republic - and Central Europe in general - so highly depend.
There are plenty of financial victims these days. In this particular instance the Czech koruna is the victim. In the CR, economic growth is applying the brakes, country finance and foreign direct investment are set to deteriorate quickly, and geopolitical risks are rising. That's a miserable combination for any country's currency.
Shorting the Koruna:
Like Riding the Euro Downward, But Only Twice as Fast
The reality is that Central European currencies in general are very much a euro story.
There's no getting around that, especially at this point in the global economic cycle. As the euro goes, so goes the Czech koruna.
The difference is this: The koruna moves up and down more than twice as fast as the euro when you compare each against the U.S. dollar. In other words, it's like Wrigley's Doublemint gum - double your pleasure, double your fun...
And double your profit potential while you're at it!
Since 2000, the Koruna Has Soared Against the U.S. Dollar.
Now It's About to Reverse with a Vengeance!
| In the chart above, the Koruna-USD pair is quoted in koruna so the falling line in the chart means it took less koruna to buy a U.S. Dollar. That is, the falling line is the same as the U.S. Dollar falling against the koruna. Now that's reversing and the dollar is rising vs. the koruna. |
We believe the U.S. dollar has bottomed versus the euro. And a dollar bull market rally (euro bear market decline) is now underway. If you're ready to hop on board at the beginning of an earth-shattering trend, you can look past the euro. It will be even more profitable for you to ride the Czech koruna lower against the dollar.
Those holding Czech koruna during the dollar's seven-plus year bear market took a 250% rocket ride higher. A lot could happen in seven years, sure, but we say now's the time to get positioned and stay positioned.
Our one koruna trade so far is up approximately 940% in just under two months. We expect many more opportunities for profitable trades as this currency's long-term down trend intensifies.
Tomorrow, we'll look at opportunities from emerging economies in the Far East that are Moving "Far South..."
JACK CROOKS, Currency Analyst
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