Why wouldn’t you short the Euro?

As the famous German mathematician Carl Jacobi used to say “Invert, always invert”.

And so this week I ponder the somewhat rhetorical question of what’s stopping me from an all out bet against the Euro?

But first for those who need a little refresh – some background facts.

According to Dealogic, European banks need to refinance approximately €1.3B of maturing debt by end of calendar year 2012. (Bank run anyone!) Greek bonds are yielding 24% and Moody’s just announced Greece is a 50% chance of default! Spanish unemployment is over 21%! Portugal has sought EU Financial Aid! The list of danger signs for the Euro currency and hence the potential for the Euro currency to plummet in value goes on and on and on!

The players who really cleaned up back in the 2008-09 crash were those that managed to see what others couldn’t or refused to see. Refused? Yes, plenty of people back then simply would not believe that the housing market could implode or that banks in the USA could fail. Although they could read the scary data on low doc loans they simply refused to believe or act. I think we have the same thing happening right now in Europe. The facts are there in plain sight but people refuse to wake up and accept the unpleasant truth and instead blindly hope that somehow, miraculously, things will be ok.

So on the facts it seems to me that the Euro is a massive short. So why wouldn’t I short the Euro? Well firstly, occasionally miracles do happen. Secondly, there is the issue of timing. While it might be more a matter of when not if the Euro comes crashing down, every EU intervention pushes the day of reckoning down the road a bit further. Shorting is a painful experience if the trade moves against you, as there are potentially unlimited losses. Hence you need to carefully think about what trades to use as a hedge and be prepared to hold on for a wild ride till your trade works out.

So that’s the backbone of my thoughts on the Euro. Next week we will continue with this question and look to none other than George Soros for some inspiration and comparison to his infamous GBP short which “broke the Bank of England”.

Till then, Happy Trading.