This Could Be The Next Billion-Dollar Trade

George Soros made more than $1 billion in September 1992 on a simple idea – that Britain’s currency was out of whack and would fall apart.

John Paulson made more than $1 billion in 2007 on another simple idea – that housing was out of whack and would crash.

Billion-dollar trades do happen. And they’re often on big, simple ideas (in hindsight)… They’re often bets that natural order will return.

[ad#Google Adsense 336×280-IA]Today, I’ll share with you what could be The Next Billion-Dollar Trade…

It is a big, simple idea.

Something is out of whack… And it’s similar to the currency trade that made Soros $1 billion in 1992.

Back then, England had pegged the pound to Europe’s “Exchange Rate Mechanism” – the predecessor to today’s euro currency.

This “peg” was initially put in place to “promote economic harmony” between England and the rest of Europe. But Soros and fellow hedge-fund manager Stanley Druckenmiller realized the situation in England meant this “peg” couldn’t possibly hold. The economies of England and the rest of Europe were too different.

Soros and Druckenmiller knew the British pound would “crack,” so they put their bet on. And you know the rest – they pocketed over $1 billion on the trade.

A similar situation is setting up today in Denmark…

Just like England did in 1992, Denmark pegs its currency to the euro today. But this is foolish…

There’s one obvious truth here today: Everybody knows that holding your cash in Denmark’s currency is much safer than holding your cash in euros. Denmark is rated “triple-A” – while the eurozone includes the crumbling economies of Greece, Spain, Italy, and Portugal.

So people across Europe are smartly selling their euros and buying Denmark’s triple-A-rated currency – the krone.

As you might imagine, this has put Denmark in an unsustainable position. Money is flooding into Denmark.

Denmark is fighting all this money coming into the country – for the purpose of maintaining a pegged exchange rate to the euro.

To keep its currency pegged to the euro, Denmark’s central bank is doing two things…

1) The central bank has cut interest rates in Denmark to below zero. (Yes, interest rates are negative in Denmark, discouraging people from putting money there.) So now, in Denmark, cash in your mattress is better than cash in the bank. Unbelievable!

2) The central bank of Denmark is selling kroner and buying euros. Denmark’s foreign currency reserves have more than doubled since 2008, hitting a record-high last month (and the month before that… and the month before that). It’s foolish and crazy that the central bank is selling its good currency (the krone) to buy a junk currency (the euro).

These two things – negative interest rates and choosing to buy a junk currency with a sound one – are not the natural order of things.

The natural order of things will reassert itself at some point. The situation is coming to a head. Just this morning, Bloomberg news reported “Denmark named Lars Rohde as new governor of its central bank to next year take charge of defending the krone’s peg to the euro that is currently being tested…”

There’s a chance Denmark will get rid of its “peg” to the euro at some point and end this foolishness. Once that happens, Denmark’s currency will soar… maybe by 20%-25%. That will move it in line with the other “safe havens” in Europe outside the euro, like Switzerland and Norway.

I don’t know how long Denmark’s central bank will choose to spend good kroner to buy bad euros. The experts say the Danish will buy bad euros forever.

I think they are underestimating how much money could flow into the Danish krone. When you combine the huge money flows into Denmark from Europeans and global speculators who understand this simple idea, there is no way Denmark will continue to defend the peg. Buying euros will waste taxpayer money – for no good reason at all.

So I think the odds of Denmark’s euro-peg cracking are much more likely than “the experts” think.

The reason is that big speculators can bet on the euro-peg cracking for very little cost – by simply buying the Danish krone and shorting the euro.

Unfortunately, this isn’t a trade you can easily do through the U.S. stock market. But if you are confident in your currency trading, this might be a trade worth considering…

No guarantees – but it could be The Next Billion-Dollar Trade. It has the hallmarks of the trades that Soros put on in 1992 and Paulson in 2007. It is a classic setup.

Good investing,

Steve

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Source: DailyWealth