Euro Risk, The China Bubble and "Banksters"   

• In a March 28, 2008 article, "The Demise of the Euro", Forbes' Avi Tiomkin predicted that the Euro experiment would meet its end in less than three years. It is a not-so-secret fact that Germany has long been less-than-enthusiastic about preserving the Euro, as a 2007 Dresdner Bank poll showed that 62% of Germans supported reinstating the Deutsche mark as the country's currency. The conclusion of the Forbes article was to short the Euro, sell investments in Italy and Spain, and buy German fixed income. Substitute Italy and Spain with PIGS (Portugal, Ireland, Greece and Spain), and the recommendation is just as valid today. The Shanghai Composite dipped further into bear territory on further government tightening that so far is having a bigger impact on stock prices than on the property bubble.
  
• With investors also nervous about the Goldman affair evolving into criminal charges in a full-scale witch hunt, the VIX S&P 500 volatility index has surged and investors are seeking shelter in gold. Yet markets perceived as benefiting from a global economic recovery (Malaysia, South Korea, etc.) are holding firm, indicating that the risk trade is not about to die that easily.
  
• While Japan is a bit player in this global drama, the bottom-up economic numbers are generally supportive of a continued recovery scenario as well as ameliorating deflationary pressures. Foreign investors however have no delusions that Japan's recovery is anything but a cyclical recovery, and therefore is likely to be traded like any other cyclical market for, example, machine tools. Thus while 12,000~15,000 over the next six~twelve months is very possible for the Nikkei 225, 18,00 or better would require the same sort of drivers that pushed the index past 18,000 in 2005, i.e., the conjecture that Japan was about to fundamentally change because of a politically strong, reformist administration and a similar commitment by industry leading companies two drivers that are currently lacking.
• JPY versus USD however should continue to be supportive, i.e., move toward JPY100/USD even as JPY continues to remain firm against the Euro. When it comes to discussions about sovereign debt, after all, there is the PIIGS, and then there is Japan. 
  

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