Outlook Notice how quickly the euro recovers on the slightest sign of improvement in what are still dire and awful conditions. Greece may sell some assets but nobody in his right mind thinks the process will be fair or solve the ultimate issue of spending too much and taxing too little. One-time asset sales are an emergency measure that just push off the day of reckoning—which is what the EMU has been doing all along (it’s usually called “kicking the can down the road”). Belgium has been without a government for many months. The Italian prime minister is a clown. Leaders can’t agree on Greek default—it’s either unthinkable or inevitable, depending on who’s talking. Noyer says it would be an unimaginable nightmare. Well, no. It’s all too easy to imagine. Greece has defaulted many, many times before. The world has a lot of experience with default. The world does not end when a country defaults and the eurozone does not need to break apart if Greece defaults. Some banks will risk failure and some of them are German, but so what? German banking is famously badly managed. Germany can afford bank failures. It’s an interesting hypothetical to ask whether the euro would be so resilient if Germany were not growing like Topsy and racking up giant gains everywhere, including employment. The answer, strangely, is probably “yes,” and that’s the virtue of the union—somebody else would be growing (at one time it was Finland, remember?). It looks like the euro has some truly lasting resilience that the dollar, as the reserve currency, does not have. We have to accept it—the reserve currency is always at risk, if only because so many outsiders own its currency. As the euro becomes a bigger part of sovereigns’ reserves, it may lose an increasing amount of its Teflon coating. (Be careful what you wish for.) Finally, moral outrage may have no place in financial analysis, but we find it very annoying that Goldman can determine with a single report whether millions of people get to eat or drive this summer. The upcoming Memorial Day weekend is the beginning of the “driving season” in the US and with gas at nearly $5 (in Connecticut), a large number of people will be staying home and not spending. High energy prices, as we all know, feed inflation expectations and dampen consumer spending. Where is the CFTC? Bottom line, can the euro recover 100% of the recent drop? Yes. We don’t expect it, but it’s not outside the realm of the possible. What we do expect is on-going crises until Greece finally defaults, and the euro downtrend to persist until then—but punctuated by corrections like the one we have today. SPOT CURRENT POSITION SIGNAL STRENGHT OPEN DATE OPEN RATE POSITION GAIN/LOSS USD/JPY 81.86 LONG USD WEAK 05/13/11 81.57 0.35% GBP/USD 1.6135 SHORT GBP WEAK 05/16/11 1.6180 0.28% EURO/USD 1.4109 SHORT EURO WEAK 05/06/11 1.4396 1.99% EURO/JPY 115.51 SHORT EURO WEAK 05/06/11 116.70 1.02% EUR/GBP 0.8743 SHORT EURO WEAK 05/09/11 0.8802 0.67% GBP/JPY 132.10 SHORT GBP WEAK 05/06/11 131.60 -0.38% USD/CHF 0.8805 LONG USD WEAK 05/12/11 0.8877 -0.82% USD/CAD 0.9759 LONG USD WEAK 05/16/11 0.9744 0.15% AUD/USD 1.0574 SHORT AUD WEAK 05/06/11 1.0676 0.96% AUD/JPY 86.57 SHORT AUD WEAK 05/06/11 85.76 -0.94% USD/MXN 11.7060 LONG USD WEAK 05/16/11 11.7688 -0.54%

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