The EU was meant to be a voluntary association of sovereign and equal states that surrendered part of their sovereignty for the common good. It has turned into a relationship between creditors and debtors that is by its nature compulsory and unequal. When a debtor country gets into difficulties the creditor countries gain the upper hand.
The rules they have established merely perpetuate this state of affairs. That is liable to be politically unacceptable and it has the potential of destroying the European Union altogether. Only the creditors are in a position to prevent this outcome but they do not seem to show any inclination to do so.
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This is along the lines of what I’ve been postulating for a while. The Eurozone in its current form is a recipe for disaster. There must be a change in policy or the project is doomed to failure.
Weekly Bull/Bear Recap: Dec. 3-7, 2012
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
+ The U.S. economy is showing resiliency and leading indicators are pointing to continued growth:
- The Institute of Supply Management’s Non-manufacturing survey indicates that the service sector, which accounts were roughly 80% of the U.S. economy, is starting to pick up steam. New orders, a leading indicator, rise from 54.8 to 58.1. (50 demarcates expansion/contraction). Furthermore, order backlogs cross the 50 mark into positive territory.
- The US consumer continues to defy bearish forecasts. Car sales rise to a five-year high in November, despite fiscal cliff fears. A clear uptrend has been reestablished.
(Source: Motor Intelligence)
- Corelogic announces that prices in October rose 6.3% year-over-year, the largest increase since 2006. Plunging inventory will lead to firming prices over the coming year.
- The BLS Payrolls November report today shows a decrease in the unemployment rate to 7.7% (the lowest since December 2008) as well as a better than expected 146,000 jobs created. Averting the fiscal cliff (lawmakers will come to an agreement; Republicans will relent) will result in a release of pent up business investment, resulting in accelerated growth this coming spring. Stock markets are sniffing out this strengthening tailwind.
- Finally, resilient economic growth in the U.S. is spilling into Mexico, evident by rising consumer confidence and improving business conditions.
+ There are more signs of a bottom in China’s economic growth. The National Bureau of Statistics releases its Non-manufacturing Purchasing Managers Index, which increased to a 3-month high of 55.6 and doing its best to emulate a 13-month high mark in HSBC’s manufacturing PMI as well as a 7-month high in the country’s official Manufacturing PMI. Meanwhile, the property market has clearly stabilized; there is no housing bubble. Bellwether companies, such as Dow Chemical, see signs of reacceleration. Stabilization in China and resiliency in the U.S. is translating to a healing global economy.
+ In Europe, periphery sovereign paper has been quietly rallying. The Italian 10-year yield is now in a clear downtrend (3-yr view); a major potential bearish catalyst is falling by the wayside. Europe continues to muddle towards a resolution. Furthermore, when looking at Germany’s DAX, it sure doesn’t look like the wheels are falling off the engine of European growth.
+ Longer-term, rising wages in China, increased flexibility of U.S. labor unions, and rising transportation costs are various factors resulting in a wave of “onshoring.” Meanwhile, the Department of Energy announces that oil production is now the highest in almost 15 years, while a highly anticipated report on natural gas exports sets the stage for a significant increase in investment. These factors will act as steady secular tailwinds for economic growth in the years ahead.
- Investors are ignoring a growing divide between Democrats and Republicans on how to resolve the Fiscal Cliff and growing uncertainty is resulting in a precipitous drop in business investment, eerily similar to 2008.
— (Source: Briefing)
- Bullish investors’ hopes that the worse has passed in Europe is pure poppycock. Eurozone retail sales sink 1.2% in October, while a slew of PMIs continue to show deep contraction; worse, austerity looks to proceed. Moreover Germany, the locomotive of European growth, presents a terrible batch of economic data this week: industrial production is now cliff diving, retail sales plunge 2.8%, and the Bundesbank chops its growth forecast for 2013 (but the weakness is temporary…..riiight <sarcasm>). Contagion hits Finland, a country already skeptical of continued bailouts to the South, while in the UK, dreadful factory data raises fears of a triple-dip recession. In Greece, more than 1 out of every 4 people are unemployed, while France’s unemployment rate hits its highest level in 13 years (youth unemployment hits a record high). Finally, political uncertainty is remerging in Italy, with Monti’s government seeing ever-thinning support for continued austerity. Continued weakness in Europe is infecting other major economies, such as Brazil and India.
- While the bulls may celebrate today’s better than expected jobs report, behind the scenes, the job market is actually weakening. The unemployment rate fell because less people are in the work force (a decline in the participation rate). In addition, a net revision downwards of 49,000 over the prior two months points to a much weaker job market than many believe. Meanwhile, buried in the ISM’s Non-Manufacturing Index, the employment sub-index is on the precipice of contraction, at 50.3, while in the Manufacturing Index, the sub-index is now contracting for the first time in 3 years. What’s more, Gallup reports that its measure of unemployment has risen significantly, and job creation has stalled. Challenger Gray & Christmas, an important consulting firm, reports that job cuts are coming down the pipe over the coming months.
Weekly Bull/Bear Recap: Jul. 2-6, 2012
+ The U.S. economy continues to grow; recent data is only a pause that refreshens.
- The consumer is resilient in the face of slowing economic conditions abroad. The National Restaurant Association reports that performance and expectations for May are near 2006 levels. Meanwhile, auto sales rebound, surprising most analysts.
- U.S. Rail Traffic continues to show an expanding economy and two key sectors of the economy, autos and housing, are poised to lead a re-acceleration of growth.
- Construction spending for May surges the most in 5 months, signaling that activity has finally bottomed and will be a job creator in the quarters to come.
- Speaking of job creation, ADP reports a stronger pace. Meanwhile, jobless claims fall under 380K for the first time since mid-May, planned job cuts plunge to a 13-month low, and the Monster Employment shows growing labor demand. While the BLS job report is below expectations, wage growth firms up and the average workweek ticks higher.
+ Gas prices have plunged over the past 3 months, while ISM Prices-Paid subcomponents are in deep contraction territory. Conditions are ripe for the Fed to initiate another QE and confirm that central banks are coordinating policy, causing a turn in sentiment and a powerful rally.
+ Meanwhile, China has plenty of ammunition for additional stimulus. However, the economy is stabilizing on its own as per China’s non-manufacturing index, which rises to a 3-month high of 56.7. There will be no hardlanding in China. Monetary officials are loosening monetary policy, setting the stage for a strengthening recovery over the 2nd half of the year.
+ German factory orders come in better than expected and is good news for the exporting powerhouse. Global growth has weakened but will stabilize soon.
- Investors are giving the thumbs down towards solutions presented at the latest European summit . Spanish yields are back within striking distance of 7%, while Italian bonds are above 6%. Core-countries are reneging on providing unconditional help to the periphery. A crisis of confidence is set to fragment the Eurozone. We are at most weeks away from a negative worldwide financial shock, leading to a global recession.
- Merkel is under increasing pressure from officials in her native Germany. The CSU, the Constitutional Court, and now the President of the Bundesbank are making it clear that political will in Germany has been exhausted. A referendum must take place. Meanwhile, the Greek government is set to collapse again soon. The ECB cut interest rates, but it isn’t enough for the QE-addicted market. Finland says the “unthinkable.”
- U.S. economic data continues to point to increasing sluggishness and ultimately a recession. The ISM June’s manufacturing index turns in its first contraction print in 35 months; important leading indicators — New Orders and Backlogs — are in solid negative territory. While ADP shows an improved labor market, the BLS has a different account of its health. Weekly consumer metrics are showing significant weakness and outlooks in the retail sector are getting slashed.
- Global economic data continues to disappoint. Euro-area unemployment climbs to a record 11.1% in May. The bulls were wrong, Germany did not decouple from the rest of Europe, as May’s PMI fell to a 3-year low and weighted on a gloomy Eurozone PMI. Slumping New-Orders for most PMIs signal global recession has arrived. Globally coordinated interest-rate cuts smell of panic.