1 July 29, 2013 (Updated August 8, 2013) “Europe is getting better.”I keep hearing this on TV and just shake my head. I often wonder whether or not the person speaking those words has actually traveled there to see what’s really goin g on. I believe it’s quite safe to say that many of them have not.The photo below is a prime example. On July 25 th , CNBC was discussing this very subject and used the graphic below as evidence that Europe is “bottoming”.Just a few days ago we did see better than expected PMI data for the Eurozone , but let’s take a look at each point quickly: “UK GDP is up 0.6%” – Excuse my cynicism, but since when has 0.6% been considered a good number? Everything is relative I suppose, and this is theirbest number since early 2011. However, as this chart from theLondon Telegraphshows, GDP has been in gradual decline for nearly a decade.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
As you can see from Ifo’s own data, this data has been trending down for the last few years as well.
CNBC actually proves my point because their final two data points aren’t “green shoots” at all. Yes Spanish jobless claims
fell, but it fell to 26.20% from 27.16% in the previous quarter. Any improvement is good, but let’s cobble together morethan one month before we start calling for a change in trend. Anyone that pays attention to employment data points
knows that there is a myriad of ways to manipulate the data. The media is so desperate to put a good face on what’s
happening that they often intentionally misrepresent data to make it sound better than it is.
France is not only a problem, but it very well may be the “pale horse” of the continent. I’ve stated for months now that
people are wildly underestimating the problems that will come from France. Now we see that French jobless claims are
hitting record levels. Almost 3.3 million French are out of work and this is indicative of the vast majority of Europe. I’ll
circle back around to France in a bit.
To be sure, there are some pockets in and around Europe that aren’t doing poorly, but like any puzzle, we must step
back to see the full picture. What strikes me as interesting is how any piece of data that is “less bad” is immediatelyheralded as the sign of a bottom or nascent recovery. Just because something is declining at a slower rate doesn’t mean
there is improvement. It likely means that it’s difficult for things to get much worse without some exogenous event.
Based on the data I’m about to present, I believe that things in Europe are actually worse than they’ve ever be en.
Beginning with the PIIGS, Greek GDP is expected to contract by 7% by year’s end. Industrial output is down 4.6% year-
over-year and the little manufacturing they have was also down 1.8%. Lending to business continues to fall, deposits are
still leaving banks, and unemployment is a stifling 27.6% up almost 1% from last month (under 25, it’s over 55%). Almost
1.4 million Greeks are out of work.
The IMF has handed down a -1.8% forecast for Italian GDP, which is now down ~10% since 2007. PMI’s are still in
contraction - Manufacturing in June ticked higher, but services fell and both are below 50, unemployment is over 12%
(great compared to the rest of the periphery), Its debt has ballooned to 130% of GDP in the last year (up 650bps from
2012), the YTD deficit is now 7.3% from just 2.9% in 2012, and S&P downgraded their sovereigns to one notch above
junk saying that Italy needs to run a surplus equal to 5% of GDP just to stabilize the debt ratio.
Are you seeing a recovery yet? I’m not either, even though consumer confidence for Jul came in at 97.3 better than the
expected 95.5 and 95.8 from June and their July manufacturing PMI came in at 50.4 from 49.1 in June. Q2 GDP just came
Portugal’s GDP forecast is -3%, their deficits continue to widen and total debt to GDP sits at a staggering 370%. Public
debt is nearing 130%, up 1500bps year over year. There is no coming back from numbers like that. This makes no
mention of the fact that Portugal also has to raise 23% of GDP is new funding for this year, and 22% for next year. From
where will that money come?
Spain still faces near record unemployment at 26.2% as of the last report, with youth unemployment double that. Publicdebt is expected to surpass 100% of GDP in 2014. Housing transactions were down 3.7% in May year-over-year and
mortgages were even worse down 29% year-over-year. Perhaps the most frightening is that a massive corruption
scandal has recently exploded in the highest ranks of political office adding unneeded fuel to the social uprising fire.
Even Ireland is now struggling again after showing signs of life. GDP is down in four of the last five quarters, the budget
deficit for 2014 has exploded to exceed 7% of GDP, and unemployment is still in the low teens.
According to EuroStat, Euro area (EA17) sovereign debt as of Q1 2013 is now an astounding 92.2% of GDP. That figure is
up 400bps year-over-year, nearly 5%. There is not once single economy in the continent I can find that is growing at that
rate. The IMF is forecasting a second consecutive annual contraction of 0.6% for the Eurozone in 2013. Is it not obvious
by now that contrary to Keynesian thought debt is a burdensome obstacle preventing these countries from even
attempting a recovery? In their latest quarterly report, Lacy Hunt and Van Hoisington make this very point:
“ Astronomical sums of money have been expended by both monetary and fiscal authorities
since the crisis. With the benefit of hindsight it is clear their efforts have not aided economic growth,
but rather the balance of their actions has been counterproductive. The Fed has maintained the Fed
Funds rate at near-zero levels, and it has tried to lower longer term rates through a series of
quantitative easings. The effect of each of the quantitative easings was the opposite of the Fed’s
intentions.”
That comment was specifically directed toward interest rates, but it all serves the same purpose as the Fed implemented
these policies to stimulate aggregate spending and create a favorable environment for companies to hire new people.
All that has happened with these policies, both in the US and in Europe, is that equity markets have caught fire enriching
a portion of the population but widening the wealth gap more than anything. Hunt and Hoisington say that the
“recovery” has passed most people by:
Based on the standard of living, as measured by the real median household income, this entire
recovery has bypassed the consumer sector. The standard of living has contracted regularly in
recessions, but this is the first time deep into an expansion that it has continued to erode. The
current standard of living is unchanged from 1995 (Chart 5).
Germany and other creditor nations. The defense minister was caught red-handed stealing. Recently, a
pharmacist was caught illegally selling prescription medication. He had a powerful government friend intervene
on his behalf and stopped the investigation cold. (I will say this particular story has a good ending as the brand
new health minister fired the pharmacist anyway.) Another pharmacist was caught telling elderly patients their
medication wasn’t covered by their insurance and forcing them to pay cash so she could reap payment twice.
Employees basically cannot be fired and those that do are given six months of employer paid benefits. How
many employers can afford this?
I could tell these stories all day long…and they wonder why things aren’t getting better?
Being confronted with common sense has done little to change how the people think. Strikes are common place.
One never knows when busses or trains will stop running, whether or not the trash will be picked up (trash was
8ft high in many places right before I left Athens), one year strikers managed to close the airport. In an economy
largely dependent on tourism, the Greek people are slitting their own throats with this behavior. It’s no wonder
that tourism this year may likely be the worst they’ve have in the last decade or longer.
This allows me to segue into reason number two, the people. In my opinion, the people of Greece are as much
to blame for their situation as anyone. Forget the easy argument like continuing to vote for the same corruptpoliticians over and over again. Forget that the media is totally in the pocket of the far left and almost no
dissenting opinion is allowed (and if it is, those people are excoriated live on the air, while the other side gets a
pass). Wait…that’s starting to sound familiar, but I digress. The Greek people for too long have depended on
government for everything. No one has any retirement savings because they had a government pension. Now
those pensions have been slashed because there is no money. They want their healthcare for free even though
someone is working to provide that care, they want medicine for free even though someone has to research,
study, and develop those products at great expense, for many years the people received “bonus checks” around
the holidays (!!), they want a month off for vacation (ok, who doesn’t want that?) and on top of it all, they don’t
want to pay their taxes. How convenient for them.
Greece is the living embodiment of the late Lady Thatcher’s well known quote: “The problem with socialism is
that eventually you run out of other people’s money.” I would also quote Winston Churchill here as saying, “We
contend that a country trying to tax itself into prosperity is like a man standing in a bucket and trying to lift
himself up by the handle.”
For many years now I have stated simply, “There is no out for Greece.” They have no recourse, there is no
solution, and there is nothing for Greece until the people change how they think about life and government’s
role in their lives. Excessive government has destroyed the country, but the people wanted it and now they have
to deal with it. Without a sea change in ideology to one of self-reliance, the rule of law, and limited government,the depression in place now will continue on for a very long time. One can’t get out of debt by adding more debt
all the while running a negative balance of payments. This is something every American should pay close and
careful attention to because we are following their insidious example to the letter.