Tuesday, February 15, 2011

Euro-Zone Growth Weaker Than Expected

A crane operates behind a row of discarded refrigerators in Duisburg, Germany. German growth slowed to 0.4% in the fourth quarter from 0.7% in the third.

LONDON—Euro-zone growth was slightly weaker than expected in the final quarter of 2010 as Germany was hit by severe winter weather, France's economy failed to accelerate, and Greece and Portugal contracted, preliminary official data showed Tuesday.

Euro-zone gross domestic product grew 0.3% for the second consecutive quarter in the period from October to the end of December, the European Union's Eurostat agency said. Economists were expecting quarterly growth of 0.4%, according to a Dow Jones Newswires' survey last week.

On a year-to-year basis, GDP was 2% higher than in the fourth quarter of 2009—up from growth of 1.9% in the third quarter but short of market expectations of a 2.1% expansion. For the year as a whole, the euro-zone economy grew 1.7% in 2010, following a record 4.1% contraction seen the previous year when the single currency area was in the grip of a severe recession due to the credit crisis and drop in global trade.

In the currency area's largest economies, German growth slowed to 0.4% in the fourth quarter from 0.7% in the third, France expanded 0.3% for a second consecutive month, while Italian GDP rose just 0.1%.

Among the smaller states at the center of the euro zone's debt crisis, many of which have introduced severe austerity measures, Greece contracted 1.4% on the quarter, Portugal shrunk 0.3% and Spain grew just 0.2%.

In a separate release, Eurostat said the 16 countries that shared the euro at the time had a combined global goods trade deficit of €500,000 million ($677,350) in December following a revised €1.5 billion deficit in November. Economists were, on average, predicting a €1.2 billion surplus.

The breakdown of the data showed euro-zone goods exports totaled €133.6 billion in December, a 20% increase annually, but imports grew 24% to €134.2 billion. However, exports were 5% lower on a monthly basis in December, while imports fell 5.6%. For the year as a whole, the euro zone's trade surplus shrank to €700,000 million in 2010 from €16.6 billion in 2009 as the rise in imports outpaced that of exports.

Exploiting Inflation to Advantage: Trade Play

Click to enlarge image

How to Play Expected Inflation From the TIPS Spread

By: Kirk Lindstrom

The “TIPS Spread” is a simple comparison between the yield of Treasury Inflation Protection Securities (TIPS) and the yield of conventional U.S. Treasuries with the same maturity date. You calculate the TIPS Spread by subtracting the current yield on TIPS from the nominal U.S. Treasury bond yield for the term in consideration.

The “TIPS Spread” tells you what Treasury bond investors, on average under normal conditions, expect for the average inflation over the term. Those who expect inflation to be higher than the spread will buy TIPS. Likewise, those who expect inflation to be lower than the spread buy regular U.S. Treasuries.

For example, today the 10-year TIPS has a base rate of 1.32%. When you subtract that from the 10-year Treasury yielding 3.63% you get a difference of 2.31%. This means Treasury investors "break-even" in TIPS vs. regular U.S. Treasuries if inflation averages 2.31% over the next 10 years. TIPS will do better if inflation is higher.

Likewise, the longest maturity available is the 30-year TIPS which has a 2.16% base rate. When you subtract that from the 30-year Treasury yielding 4.69% you get a difference of 2.53%. This means Treasury investors "break-even" if inflation averages 2.53% over the next 30 years.

This chart shows the historical base rates for TIPS with maturities of 5, 10, 20 and 30 years back to 2004 plus the "expected inflation" rate using the 10 and 30 year TIPS spread.

Exchange traded funds that invest in TIPS include:

  • iShares Barclays TIPS (TIP)
  • PIMCO 1-5 Year U.S. TIPS (TIPZ)
  • Schwab U.S. TIPS (SCHP)
  • Managed mutual funds that invest in TIPS include:
  • Fidelity Inflation-Protected Bond (FINPX)
  • Vanguard Inflation-Protected Secs Inv (VIPSX


The author owns a very small amount of gold hidden in the house for bribes if we see Armageddon but I own "treasury inflation protected securities" (TIPS) mutual funds (like the ETF TIP or managed funds FINPX, VIPSX) and Series I-Bonds as well as individual TIPS. He also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P500, for both inflation protection and income. Unless something major changes with the markets, he plans to buy the 30-year TIPS with the 2/15/2041 maturity date on the auction that closes on 2/17/2011 directly through a broker for regular and ROTH IRAs.

Argument to Abandon EU

► European Parliament, Strasbourg - 24 November 2010

► Speaker: Nigel Farage MEP, UKIP, Co-President of the EFD group;

► Debate: European Council and Commission statements - Conclusions of the European Council meeting on economic governance (28-29 October)


Good morning, Mr van Rompuy,

You've been in office for one year and in that time the whole edifice is beginning to crumble, there's chaos, the money's running out - I should thank you; you should perhaps be the pin-up boy of the Eurosceptic movement.

But just look around this chamber, this morning. Just look at these faces. Look at the fear. Look at the anger. Poor old Barroso here looks like he's seen a ghost.

They're begining to understand that the game is up and yet in their desperation to preserve their dream, they want to remove any remaining traces of democracy from the system. And it's pretty clear that none of you have learnt anything.

When you yourself, Mr van Rompuy, say that the euro has brought us stability. I suppose I could applaud you for having a sense of humour, but isn't this, really, just the bunker mentality?

Your fanaticism is out in the open. You talked about the fact that it was a lie to believe that the nation state could exist in the 21st Century globalised world. Well, that may be true in the case of Belgium, who haven't had a government for six months, but for the rest of us, right across every member state in this Union - and perhaps this is why we see the fear in the faces - increasingly people are saying, 'We don't want that flag. We don't want the anthem. We don't want this political class. We want the whole thing consigned to the dustbin of history.'

And we had the Greek tragedy earlier on this year, and now we have this situation in Ireland. Now I know that the stupidity and greed of Irish politicians has a lot to do with this. They should never ever have joined the euro. They suffered with low interest rates, a false boom and a massive bust.

But look at your response to them. What they're being told, as their government is collapsing, is that it would be inappropriate for them to have a general election. In fact Commissioner Rehn here said they had to agree their budget first before they'd be allowed to have a general election.

Just who the hell do you think you people are?

You are very very dangerous people, indeed. Your obsession with creating this Euro state means that you're happy to destroy democracy. You appear to be happy for millions and millions of people to be unemployed and to be poor. Untold millions must suffer so that your Euro dream can continue.

Well it won't work. Because it's Portugal next, with their debt levels of 325% of GDP, they're the next ones on the list, and after that I suspect it will be Spain. And the bailout for Spain would be seven times the size of Ireland's and at that moment all of the bailout money has gone - there won't be anymore.

But it is even more serious than economics. Because if you rob people of their identity. If you rob them of their emocracy, then all they are left with is nationalism and violence. I can only hope and pray that the Euro project is destroyed by the markets before that really happens.

EU's Contribution to Economic Growth Questioned

EU leaders in better days

Experience has taught us not to take the labels the European Union chooses to place on its many and various "pacts" at face value.

The Stability and Growth Pact was cooked up in 1996 and singularly failed to meet either of its two goals. Patently, the euro zone has neither been stable nor characterized by strong growth.

So it is with the new Competitiveness Pact, which German Chancellor Angela Merkel and French President Nicolas Sarkozy are trying to foist on their counterparts in the rest of the euro zone, so far without much success.

Few of the measures being proposed under the pact are likely to make the euro zone's members more competitive, either within the currency area or relative to other economies in the rest of the world.

Instead, they are intended to improve the public finances of the "peripheral" members by ensuring that they behave more like Germany. And on one issue—corporate taxation—the pact looks likely to damage rather than enhance competitiveness.

While it may not be what its authors claim it to be, many of the measures included in the pact are of value, such as raising the age at which workers are entitled to start claiming pension payments.

But the German and French governments haven't done a very good job of selling the pact, and that's partly down to the fact that while it involves pain and political risk for other euro-zone members, it ignores most of the problems that confront the bloc's two giants.

Finance ministers from the euro zone are working Monday and Tuesday to find compromises that will make a deal possible by the time European Union leaders meet at the end of March. But even if a deal can be reached, the euro zone may not have done itself many favors. Not for the first time, it has drawn attention to the fact that it needs to improve its long-term growth potential, without doing so.

Agreeing to raise the retirement age makes an awful lot of sense for the euro zone. Standard & Poor's estimates that without further reforms to state-funded pension programs, German government debt will rise to more than 400% of gross domestic product by 2050, French government debt to more than 403%, Italian government debt to over 245%, and Spanish government debt to over 544% of GDP.

And enshrining limits on borrowing and debt levels in national constitutions doesn't seem a bad way of restoring trust in the financial management of euro-zone governments, which don't have a great deal of credibility left.

But it's unclear how either of those two measures would directly boost competitiveness, or the ability of euro-zone businesses to produce world-beating goods and services at low cost.

The steady loss of wage competitiveness relative to Germany has been one of the troubling and underlying causes of economic difficulty for a number of euro-zone members since the launch of the single currency. Putting an end to wage indexation does look like a move that would help the competitiveness of the small number of countries that still indulge in the practice, which ensures that a relatively high inflation rate is inevitably translated into higher wages without any guarantee of increased productivity.

But the clearest sign that the Competitiveness Pact isn't about competitiveness is the proposal to set a minimum corporate tax rate, which would undoubtedly be higher than the lowest rates currently applied by Ireland, Cyprus and Hungary.

In a paper published last week, five economists from the Organization for Economic Cooperation and Development, working with Christopher Heady from the University of Kent in the U.K., examined the impact of tax changes in 21 developed economies over the past 34 years.

Their conclusions aren't ambiguous. If the goal is to boost growth, "corporate taxes appear to be the taxes that should be reduced most."

Ireland's 12.5% corporate tax rate has long rankled with German and French policy makers. Their main objection is that companies looking for access to the EU market set up in Ireland in order to minimize their Europe-wide tax payments.

Ireland gets the jobs, but at the cost of depriving other EU members of corporate tax revenue. And they argue that leaves Ireland with a narrow tax base and makes its public finances vulnerable to the collapse of a single sector—such as construction.

There is an argument to be had, and France and Germany may be right. But this isn't about competitiveness, it's about boosting tax revenue.

The EU did have a competitiveness pact: the so-called Lisbon Agenda, which was launched in 2000, ran until last year, and was intended to raise the bloc's long-term growth potential. It promised a great deal more than it delivered, and any serious attempt to make the euro zone more competitive would revisit the Lisbon goals and make sure they were met at the second time of asking.

The Lisbon Agenda had promise because it tried to compare EU members with other parts of the global economy, identify where they were weak, and where there were better ways of doing things.

Reviewing progress over the 10 years of the Lisbon Agenda, the Centre for European Reform awarded top marks to the Netherlands. And therein may lie a glimmer of hope.

Arriving at the meeting of Euro Group finance ministers Monday, Dutch Finance Minister Jan Kees de Jager made it clear his government has much to contribute.

"It's not a diktat as such, but we can't just accept the ideas of France and Germany," he said of the Franco-German pact. "The Netherlands has ideas about this too. We do need to discuss competitiveness and strengthening it is very important. But …this proposal is just a starting point for discussion."