Gekko

National Review, June 30, 1997 by John Dizard

When you read military history, you find that the timing of great victories and surrenders was often a big surprise to the winners. The U.S. Army was planning for a huge offensive against the Kaiser that was to be launched in 1919. Informed people believed the conquest of Japan would take place sometime in 1946. Defense Department war plans and budgets drawn up in the late Eighties confidently projected a continued Soviet threat throughout the Nineties.

As the faithful Gekko reader will know, I believe the launch of the Euro -- the proposed single European currency -- would be a disaster for the participants, and a threat to world trade and financial stability. I had come to think that the struggle against this creature was going to drag on until well into the next century. Helmut Kohl and Jacques Chirac had thrown up impressive political Siegfried and Maginot Lines in defense of European Monetary Union. "Convergence trades," or bets by my speculator friends that the policies imposed by the Maastricht Treaty to get the Euro going would drive all interest rates together, had rewarded the believers. As late as last month, I actually had an Italian supporter of the Euro laugh in my face at the suggestion that a delay or cancellation was possible.

I should have remembered those essays by Arthur Schlesinger on the permanency of Soviet rule. (I'm not sure Arthur does). On June ninth, the new French Minister of Finance, Dominique Strauss-Kahn, called for a delay in the signing of the European Union's "stability pact." France, he said, needed "probably more than a week" to approve the pact, which was due to be ratified in Amster- dam by June 17th.

This confession is much like Emperor Hirohito's announcement after Hiroshima and Nagasaki that the war situation had "developed in ways not necessarily to Japan's advantage." France does indeed need "more than a week" to contemplate signing the stability pact. The agreement would effectively require the new Socialist government to prostrate itself before the Bundesbank's idea of financial virtue which, in turn, would mean the instant abandonment of the Socialists' election promises. European Monetary Union is an essential ideal for them. Getting elected, it would seem, is even more essential.

This is just a delay, I hear you say. Surely they can put it all back together.

Not that easy. The schedule for the introduction of the Euro is set by treaty. If the governments miss it, it is very unlikely that the differing notions of what the Euro will mean would stand the test of public scrutiny and legisla- tive or (in Germany) judicial approval.

In other words, the Euro would seem to be as dead as vaudeville. There will be fitful revivals, but they'll close pretty fast. There's good and bad news for the U.S. in this. It is likely that some countries, including France, will now react to their competitiveness problems by continuing to devalue their curren- cies. That means our exports to Europe will suffer somewhat. On the other hand, the Euro-imperial notion that the continent would take away some of America's attraction for the world's savings is likely out the window.

Bernard Connolly, the apostate Euro-official who is our favorite expert on Continental monetary policy, says, "The key point in Germany is that until now anybody who said the Euro was a non-perfect idea was branded a Nazi. Now respectable people are saying it."

It is a little known fact that Chirac had privately asked his Euro-allies back in March if they would be so kind as to postpone EMU. When Kohl refused, Chirac was forced to call early elections. He didn't know just how bad a dis- aster they would be. Now that both the French and German leadership are being forced to give up on a hard EMU and a powerful challenge to American "hegemony," they'll have to devalue in tandem.

So -- my speculator friends can play this by shifting out of convergence trades and betting instead on a decline in, say, the Italian bond. Reversing those positions may prove to be a bit of a challenge even for such clever players as Long Term Capital in Connecticut.

I was trying to get some quotes on the palladium market in early June when the person on the other end of the line said "Look --don't you get it? There just isn't any metal around." Indeed, just when I thought the platinum group metals couldn't get any higher, they did.

Now, at the beginning of a long bull market, which is what we're facing in the PGMs, you can get some spectacular corrections, but that doesn't mean the rise is over. The panic on the side of the PGM bears has me a little nervous -- things are almost too good at the moment.

Still, not many equity people believe in the PGM play just yet. So while the U.S. palladium/platinum mine, Stillwater, has moved to the American Stock Exchange, it's only moved up a couple of bucks to around $25 and change at this writing. Even if there's a short-term correction in the metal, I think SWC is heading higher.

An editing gremlin took over my little mention of Afghan pipeline politics in the last issue. For the record, I think that the Taliban should moderate their demands on the people under their control, and settle on a coalition govern- ment. Then we could get a pipeline to the Caspian energy reserves that wouldn't be under Russia's thumb. But the hard liners in the Taliban are not acting very nicely, so betrayal and revenge are having yet another day in that sad country.