The Curse Of The Euro: Money Corrupted, Democracy Busted – David Stockman’s Contra Corner 07-17-15

Salient to Investors:

David Stockman writes:

  • Germany has set fire to the Eurozone in order to save it. Lending another $96 billion to a bankrupt country makes no sense, while the fiscal targets set for Greece are ridiculous. Greece has a de facto public debt of $400 billion vs. $200 billion of GDP. Within days the entire banking system of Greece will be taken over by the ECB, meaning that depositors will be given a big haircut. Greece will become an outright debtors’ colony and its government will function as page-boys for the Troika occupiers, resulting in political and social upheaval which will spread throughout Europe as Greece implodes.
  • Another recession is coming to Europe. The Eurozone is a fatally flawed monetary union. If any sovereign state of the EU cannot pay its debts, those debts need to be written off or restructured.
  • The euro is the doomsday machine, or more precisely the rogue ECB behind it. The euro will eventually collapse and Keynesian policies will be repudiated and dismantled, but not before European prosperity is extinguished for a generation.
  • Europe had a de facto common currency before 1914 under the fixed exchange rates of the gold standard, which helped produce a multi-decade of prosperity not seen before or since.
  • The ECB printing press has fundamentally falsified the price of debt, produced phony economic growth in the early years and fiscal profligacy after the growth bubble burst after the 2008 crisis, resulting in only 0.9% annual rate of nominal GDP since. The EU-19 debt ratio has climbed steadily towards 100% of GDP since the financial crisis vs. the 60% debt-to-GDP target of the EU treaty.
  • Bond market discipline is fully compatible with national sovereignty and democratic fiscal governance and is a requisite for Europe.
  • Merkel was conned into believing that the original bond sell-off was due to the same speculators who supposedly caused the great financial crisis of 2008.
  • The burst global credit bubbles of 2008 and euro bond crash of 2010 and after had the same cause – central bank financial repression causing government bonds to be underpriced and global investors to scramble for yield; speculators could surf the financial bubbles on the back of cheap carry from the central bank pegged money market.
  • Superstate bureaucrats cannot meaningfully elevate economic growth rates and so enable insolvent state borrowers to grow out from under unsustainable debt. Portugal, Italy, Ireland Greece, Spain – PIIGS – and France prove that quasi-socialist welfare states in the contemporary European setting prove this.
  • When you destroy honest bond markets you eventually end up with Stalinist governance in the name of the free market.
  • Speculators who rode the Draghi bubble made hundreds of billions of profits buying PIIGS debt on 95% repo, and were then positioned to sell their bonds back to the ECB at the first sign of a market break.
  • Spain’s real GDP at the end of Q1, 2015 was still 6% below early 2008, but its debt ratio has risen sharply to near 100% of GDP. There is no possibility of honest fiscal governance in a social democracy like Spain when its debt price is blatantly falsified. Spain’s budget deficit in 2014 remained at 5.8% of GDP so won’t survive another recession, and will be bailed out fueling radical popular movements a la Greece.

Read the full article at http://davidstockmanscontracorner.com/the-curse-of-the-euro-money-corrupted-democracy-busted/

Click here to receive free and immediate email alerts of the latest forecasts.

Where have all the Spaniards gone? – BBC News 10-03-14

Salient to Investors:

  • Fundacion Alternativas said 700,000 Spaniards left Spain between 2008 and 2012. The National Statistics Institute reports 547,890 left in 2013, 79,306 of them Spanish nationals born in Spain.
  • Spaniards are fleeing 25% unemployment and flocking to Latin America, including Brazil, where language barriers are few, the cost of living is lower, and the opportunity to climb the corporate ladder are plenty. 5,739 Spaniards moved to just Chile in 2013, versus 3,700 to the whole of Latin America in 2005 .
  • Spaniards are prized for their European education and background. Spaniards are surprised by the modernity, opportunity and comforts of home in countries like Peru, Chile and Brazil.
  • The IMF predicts Spain to grow 1.2% in 2014, Peru 5.5% , Mexico 3%, Chile 3.6%  and Panama 7.2%.

Read the full article at http://www.bbc.com/capital/story/20141003-why-are-spaniards-fleeing-home

Click here to receive free and immediate email alerts of the latest forecasts.

Europe Gaining Confidence Among Investors in Global Poll – Bloomberg 09-11-13

Salient to Investors:

A Bloomberg poll of investors, analysts and traders showed:

  • 40% see the euro-area economy as improving, more than 4 times the number in May
  • 40% see the world economy as strengthening, the most since January 2011.
  • 52% expect stocks to produce the best return over the next year versus 16% for real estate, 4% for bonds. 48% expect bonds to perform the worst.
  • 19% are bearish on gold, with 44% expecting it to fall in 6 months.
  • 26% see political gridlock over fiscal policy as the greatest risk to the global economy, followed by a weakening Chinese economy. 17% see Europe as the greatest risk to the global economy, versus 33% 4 months ago.
  • 34% said the EU offers one of the best investment opportunities, up from 18% in May, while 18% said the EU offers the worst prospects, down from 45% in May.
  • 53% said the Euro Stoxx 50 Index will be higher in 6 months.
  • 75% said Spain and Italy will avoid bankruptcy.
  • Almost 33% said Greece will avoid bankruptcy, with 54% saying its position in the euro area will be weaker after Germany’s elections this month.
  • 12% plan to buy euros and 9% intend to buy more euro-area government debt.
  • 64% said the US economy is improving.
  • Just over 50% said Europe’s markets are a best bet for the coming year, and 58% expect the S&P 500 to rise into early 2014.
  • 59% said Japan’s economy is improving. 58% expect the Nikkei 225 Stock Average to sustain its rise this year, but only 26% see Japan as a top investment opportunity in the next 12 months.
  • 52% plan to increase their exposure to equities over the next 6 months versus 63% in January, a third are looking to real estate, and 37% like the U.S. dollar. Over 50% are reducing their investments in US Treasury bonds and 38% are fleeing corporate bonds.
  • 15% plan to increase their gold reserves versus 30% a year ago. 25% are reducing their exposure to commodities.
  • 27% are buying emerging-market equities, 27% are selling them. 6% plan to increase their yen exposure, and 3% like Japanese government bonds.
  • 41% are optimistic on Obama’s policies toward the investment climate, while 50% regard him favorably, both the lowest levels in a year.
  • 65% like Angela Merkel’s policies. 50% like David Cameron’s policies. 70% like Abe’s policies. 47% like Xi Jinping’s policies. 13% like Francois Hollande’s policies.

Peter Kinsella at Commerzbank said the structural issues facing the euro and monetary union are being addressed, and the acid test is whether they will lead to job growth.

Andreas Domke at Allianz Global Investors Europe said a surprising broad recovery seems to be under way.

Marie Owens Thomsen Credit Agricole Private Banking said global risk is the lowest in the post-crisis period as investors see little risk of a systemic threat, so there is ample scope for risky assets to climb.

Read the full article at http://www.bloomberg.com/news/2013-09-11/europe-gaining-confidence-among-investors-in-global-poll.html

Click here to receive free and immediate email alerts of the latest forecasts.

‘Dr. Doom’ Roubini: U.S. Growth Picture Is Sub-par – BloombergTV 09-06-13

Salient to Investors:

Nouriel Roubini at NYU said:

There has been a global recovery in the last year with the US recovery and reduced tail risks of a eurozone breakup and a hard landing in China.

The US economy recovery is very fragile, with barely 2% GDP growth expected in Q3, and the improvement in the labor market is partially due to a lower participation rate. US government spending is still falling, a fiscal drag, capital spending is weak, housing is softening, flat consumption in July, and net exports are worsening.

The Fed may taper in September but with the 10-year T-yield close to 3% so any further tightening will hurt the interest rate sectors like housing and capital spending. Any Fed tapering in September should be accompanied by a very dovish statement: a hawkish statement would push 10-yr T-yields well above 3% and choke the economic recovery.

The Eurozone is improving but the problems in the periphery remain unresolved: 5 of the 7 peripherals remain in recession. While the tail risks of a Greek exit and Italy and Spain losing market access have been significantly reduced, the fundamentals problems of the periphery have not been not resolved:  low potential growth because of slow reform, public debts well above 100% of GDP for Italy, Spain and other peripherals that will keep on rising, problems of competitiveness. and some improvement in current accounts that are cyclical due t the recession and not structural.

Italy government could collapse if Berlusconi’s threat to pull the plug on the government unless he gets a pardon or avoids prison is not a bluff, the government will collapse and there will be elections before year-end and the chances of a government lasting more than a year and structural reforms both of which the country needs are relatively low.

The Greek government could fall within 6 months. Portugal and Spain have political uncertainties. Europe has austerity fatigue in the periphery and bailout fatigue in the core.

If attack on Syria is surgical and last only a few days then the further effect on oil prices will be moderated: if the conflict escalates then oil prices would be longer and more persistent and significantly damaging for all oil importing countries.

Emerging markets have had the double whammy of Fed tapering and rise in bond yields and the slowdown of China which has led to a fall if not the end of the commodity super cycle.  India, Indonesia, Turkey, South Africa, Brazil all have current account deficits, fiscal deficits, falling growth, inflation above targets, and social and political problems and elections within the next 12 to 18 months, and ugly policy choices. However, most of these countries are in better shape than in previous emerging market crises in the past decade crises with more flexible exchange rates, war chest of reserves and less currency miss-match so do not expect a repeat of the massive yen crisis of 10-15 years ago.

Watch the video at  http://www.bloomberg.com/video/-dr-doom-roubini-jobs-signal-sub-par-u-s-growth-AJzLRJ1gTcGrHz47j0zFnA.html

Click here to receive free and immediate email alerts of the latest forecasts.

Italy to Spain Beckon as Yields Beat Germany: Real Estate – Bloomberg 07-16-13

Salient to Investors:

Europe’s biggest real estate managers are making their first investments in southern Europe since the financial crisis as low prices and diminishing risk make commercial properties more attractive.

Anne Kavanagh at Axa Real Estate Investment Managers said we are at or near the bottom and starting to see a rotation from defensive to riskier investment, and sees more reality in European pricing than 12 months ago. Countries such as Germany and the UK attract the bulk of investments because of their reputations as havens.

Insurance companies, private-equity firms and sovereign-wealth funds are seeking deals in Spain and Italy as the economic prospects for the countries improve and the likelihood of a euro-currency breakup recedes. Investors are targeting hotels, homes, offices and warehouses, insurers are focused on modern, high-occupancy office buildings on busy streets, private-equity firms are targeting distressed homes held by Spain’s Sareb.

Georg Allendorf at Deutsche Bank Asset & Wealth Mgmt is considering buying real estate in southern Europe for the first time since 2010.

Peter Damesick at CBRE said buyers are attracted by the prospect of an improved economic outlook in Spain and Italy and growing confidence that the euro will survive. Returns in the commercial hubs of Madrid and Milan have become more attractive compared with other European cities after a slide in investment in both countries last year boosted yields. CBRE said yields for prime offices were 6.25 percent in Madrid in Q1, 6 percent in Milan, 4.9 percent in Frankfurt and 4.75 percent in London.

Mauro Montagner at Allianz Real Estate said many international investors are coming back, or coming into the market for the first time, realizing they are no longer like trying to catch a falling knife. Montagner said the market is more dynamic than it appears, and is competing with 8 other investors for an Italian property that probably would not have attracted any interest a year ago.

Magali Marton at DTZ said investment in Spain and Italy fell in 2012 to the lowest level since at least 2001, but will begin to recover this year and return to pre-crisis levels as early as 2014. Marton said Italy’s appeal lies in robust consumer spending and increased political stability as the political class demonstrated its capacity to manage the country and reduce public debt, and says Italy’s real estate market is more promising than Spain’s because of Italy’s strong industrial sector and lack of the construction boom that burdens Spain with an oversupply of buildings. 

The European Commission predicts Spain will grow 0.9 percent and Italy will grow 0.7 percent in 2014.

Spanish property owners face financial and regulatory pressure to sell after holding assets for years to avoid realizing losses.

The IMF said house prices in Spain are still falling sharply and further correction is likely.

Paul Danks at NAI Global said it is a very good time to expand into these markets as the majority of the big-name investors have always been there, but clearly inactive over the last few years.

Read the full article at http://www.bloomberg.com/news/2013-07-15/italy-to-spain-beckon-as-yields-beat-germany-real-estate.html

Click here to receive free and immediate email alerts of the latest forecasts.

IMF Reduces Global Growth Projections as U.S. Expansion Weakens – Bloomberg 07-09-13

Salient to Investors:

The IMF said:

  • Global growth for 2013 will be unchanged at 3.1 percent as US growth slows to 1.7 percent in 2013 and 2.7 percent in 2014. Global growth will be 3.8 percent in 2014.
  • Downside risks to global growth prospects still dominate, with the possibility of a longer growth slowdown in emerging markets, especially if the anticipated unwinding of QE in the US leads to sustained capital flow reversals.
  • Central banks in wealthy nations facing low inflation and economic slack should keep stimulating until recovery is entrenched.
  • Rising longer-term interest rates have hurt emerging markets the most.
  • China will grow 7.8 percent in 2013, and the euro area will shrink 0.6 percent as France, Italy and Spain contract.
  • Growth will weaken in China and other emerging markets as external demand growth has slowed and advanced economy longer-term interest rate volatility has risen. The US is held back by fiscal contraction and Europe will remain in recession.
  • Japan will increase growth to 2 percent growth in 2013 on record monetary easing and increased private demand. Italy will contact 1.8 percent, France will contract 0.2 percent, Germany will grow 0.3 percent. Brazil will grow 2.5 percent, and Russia will grow 2.5 percent in 2013. Developing economies will grow 5 percent in 2013, versus 1.2 percent for advanced economies.
  • Monetary stimulus should continue until the recovery is well-established. The euro area should work towards a fuller banking union, and reform product and labor markets.

Read the full article at  http://www.bloomberg.com/news/2013-07-09/imf-reduces-global-growth-projections-as-u-s-expansion-weakens.html

Click here to receive free and immediate email alerts of the latest forecasts.

UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

Watch the full video at  http://www.bloomberg.com/video/ubs-s-friedman-favors-u-s-stocks-high-yield-bonds-p2pzBodIRoqFJMPLPcixdg.html

Click here to receive free and immediate email alerts of the latest forecasts.

Europe’s Youth Can’t Work Without Growth – Bloomberg 05-28-13

Salient to Investors:

Bloomberg Editors write:

  • 59 percent of Greeks, 56 percent of Spaniards, and 38 percent of Italians and Portuguese ages 16-24 were unemployed in March 2013.
  • It is already clear that Europe’s “New Deal for Europe,” is no “New Deal”.  The scale is still too small as millions of new jobs are needed.
  • Small or medium-size businesses in northern Italy pay 2.5 percent more for a loan than their competitors just across the border in Austria creating an unbeatable advantage for the Austrians – only a banking union will address this problem.
  • Youth unemployment had been rising faster than unemployment as a whole for decades before the crisis. It will take more demand and faster growth to get youth unemployment as low as it should be – like reflate Germany’s economy to create demand for exports from the periphery, and form a true banking union.
  • David Blanchflower and Andrew Oswald said Spain’s homeownership rate of 80 percent causes a lack of rental accommodation that forces young people to live with their parents rather than move to where the jobs are.

Read the full article at http://www.bloomberg.com/news/2013-05-28/europe-s-youth-can-t-work-without-growth.html

Click here to receive free and immediate email alerts of the latest forecasts.

At Last, Germany Secures Total Dominance of Europe – Bloomberg 05-23-13

Salient to Investors:

Jim O’Neill writes:

  • The rising success of German soccer clubs seems to say something about backbone and deep strength. Germany’s economic resilience owes much to the diffusion of its strength across a strikingly diverse range of big cities, uncommon in the rest of Europe.
  • German soccer clubs have to be majority-owned by Germans, and operate under tight restrictions on the use of debt for acquisitions, and by global industry standards, wages consume a small share of revenues.
  • Spanish banks have stopped doling out cash so readily to Spain’s soccer clubs, indicating the seriousness of the euro crisis.
  • English soccer’s stunning revenues disappear into outlandish pay for too many ordinary players. The percentage of revenue spent on wages is far higher in the English Premiership than in Germany’s Bundesliga.
  • Gary Lineker once defined soccer as a simple game in which 22 men chase a ball for 90 minutes and at the end the Germans win. Is European monetary union a currency system in which 17 countries strive to stay competitive and at the end the Germans win?
  • The German economy has been faltering of late as exports to struggling neighbors are depressed, China is slowing, and domestic demand weaker than it might be.

Read the full article at http://www.bloomberg.com/news/2013-05-23/at-last-germany-secures-total-dominance-of-europe.html

Click here to receive free and immediate email alerts of the latest forecasts.

IMF Cuts Global Growth Outlook as Europe Demand Urged – Bloomberg 04-16-13

Salient to Investors:

The IMF says:

  • The global economy will expand 3.3 percent in 2013 versus its 3.5 percent forecast in January, and 4 percent in 2014.
  • The euro area will contract 0.3 percent in 2013 versus its forecast of a 0.2 percent retreat in January.
  • Expect a 3-speed recovery led by emerging markets including China, the US forging ahead, and Europe trailing.
  • A 50 percent chance of a recession in the euro region is the most immediate threat to global growth.
  • Japan will grow 1.6 percent in 2013 and 1.4 percent in 2014.
  • The US will grow 1.9 percent in 2013, and 3 percent in 2014 due to a recovering housing market, improving confidence and the Fed’s accommodative monetary policy.
  • Advanced economies have defused the two biggest threats to the global recovery: a splintering of the euro region and the US fiscal cliff.
  • Italy will contract 1.5 percent in 2013, Spain will contract 1.6 percent, and France will contract 0.1 percent.
  • The ECB has room to cut interest rates further.
  • Germany will grow 0.6 percent versus 0.9 percent in 2012.
  • Developing economies will grow 5.3 percent in 2013 versus  5.1 percent in 2012.
  • Developed countries will grow 1.2 percent in 2013.
  • China’s will grow 8 percent in 2013.
  • India will grow 5.7 percent in 2013.
  • Brazil will grow 3 percent in 2013 and 4 percent in 2014.
  • Inflation remains under control and commodity prices will decline 2 percent in 2013 as supplies increase for raw materials including crude oil and grain.
  • Currencies generally have responded appropriately to recent changes in macroeconomic policies and falling risk aversion.

Olivier Blanchard at IMF said:

  • The main challenge is still very much in Europe, where the financial system is still not in great shape.
  • There is a growing bifurcation between the United States and the euro area. Given the strong interconnections between countries, an uneven recovery is also a dangerous one, and Germany’s slow growth may question its ability to help the periphery.
  • Fundamentally attractive prospects in emerging markets, plus low interest rates in advanced economies, will continue net capital inflows and exchange-rate pressure in many emerging market economies – necessary global rebalancing for the world economy to return to health.

Christine Lagarde at IMF said monetary policy is spinning its wheels because of insufficient financial repair, and the priority must be to continue to clean up the banking system by recapitalizing, restructuring, or shutting down banks.

Read the full article at http://www.bloomberg.com/news/2013-04-16/imf-cuts-global-growth-outlook-as-europe-demand-urged.html

Click here to receive free and immediate email alerts of the latest forecasts.