On Monday the president of Germany’s Bundesbank, Jens Weidmann, said there is "no indication euro foreign exchange is seriously overvalued." The comments led to immediate strengthening of the euro currency which translated into dollar weakness.
There was a troubling note to Weidmann’s statement, however. There’s an old saying: “Official denial is tantamount to tacit admission.” In other words, when a bureaucrat insists that a problem is either under control or doesn’t exist, the problem is usually far greater than is being admitted. I can’t help thinking what my late friend and cycle mentor, Bud Kress, would say about the euro zone crisis which everyone thinks has been “solved for now.”
I strongly believe Bud would have said something along the lines of, “The euro crisis is a cancer which is only beginning to metastasize.” Those are the exact words he spoke to me concerning the U.S. credit crisis in 2007 and his words at that time proved prescient. To think that a problem which only a few months ago was threatening to engulf Europe in its own version of the credit crisis has now suddenly been “solved” by the confident pronouncements of a couple of central bankers is hard to fathom. The ECB may well be ready and willing to launch the monetary equivalent of a bazooka at the euro zone debt problem, but history suggests the bank will be seriously challenged before this crisis is over. To date there has been no serious challenge.
If the Kress cycle “echo” forecast for this year is correct, we should eventually see problems begin to manifest in Europe later this year. As the second part of the year progresses and we head closer to 2014 (when the 120-year cycle is scheduled to bottom), the problems in Europe should spread overseas and envelope the global economy, including the U.S. and China. As Kress used to say, “The cycles have a way of bringing out the dirty laundry of the nations.” This time around should prove to be no exception.