Wednesday, January 30, 2013

Italy's Economy Needs Soprano

By Grant de Graf

Italy continues to wrestle with its own set of economic woes, a victim of one of the latter casualties of the European economic crisis. Lackluster business performance, a build up of government debt and a deepening recession are leading to alarm bells that would jump start any troop of Rockettes at Radio City Music Hall in Manhattan, New York City.

The only thing is that we are in Italy and we need a performance that will raise eyebrows, but will not have everyone jumping out their seat.

Austerity, as with the rest of Europe, has not worked well for Italy. It has resulted in slower growth, a further increase in debt and business activity is grinding to a halt.

A lower influx of tax income has prompted Uncle Giuseppe (Italy's version of Uncle Sam) to peruse a tax hunt for businessmen who have sought to evade their respective tax burden. As if that would help. Uncle Giuseppe misses the point. If every Italian citizen had to pay their full liability in tax, it is unlikely to make a dent on the economic tragedy which has struck home. This is because the essence of the problem lies in the European blueprint for the Euro Zone, which has been imposed on Italy.

To start with, it is unrealistic to control monetary policy centrally, at the EU level and then expect fiscal policy to be implemented locally, by Italian politicians. The two instruments have very different agendas and an instruction from either source (monetary or fiscal) is likely to be heard by the other.

Add to that the yoke of the Euro currency and Italy's inability to export goods at competitive prices, which it could do under the system of the Italian lira, I would say things are about to get hot.

Imposed austerity has only aggravated Italy's cause (as with so many other member nations of the EU) and indeed it is less likely that the street will stomach another round of austerity measures. If the future path for Italy's politicians is at stake, which it is, politics may well be the catalyst which throws off the yoke of austerity and prompts the country's leaders to inform EU officials, with true local fanfare, to go fly their kites.

This may not be such a bad thing. Seemingly, it will prompt Europe into recognizing that it is time to make make some adjustments.

Further Evidence that the EU is in Denial

By Grant de Graf

Further proof that the crisis in the EU is deteriorating and the the recession is deepening, is found in an article in the Economist's Free Exchange, "Tracking the euro-zone economy in real time." 

The article reports:
"As of the third quarter of 2012, the euro zone economy is officially in recession. GDP in the euro area shrank 0.1% in the three months to September after contracting 0.2% in the second quarter. That marks four consecutive quarters of flat of falling growth. Output fell sharply in peripheral economies like Spain and Italy but also tumbled in core countries like Austria and the Netherlands.
Conditions look like getting worse. An analysis of recent data points by Now-Casting, which publishes "real-time" economic forecasts, points toward deeper contraction in the fourth quarter of 2012. And on the current pace, the euro zone's recession will continue through at least the first three months of 2013."
The unfortunate truth, is that you can wrap the injury in as many bandages as you like, but when you take the x-ray, the illness, a function of an economic blueprint which has clear failings, will still rare its ugly head.

Instead of dousing the wound with morphine, the infection has to be removed, before a long term recovery can begin. In short, the solution is hampered by the lack of politicians who are imbued with the skill to throw aside misplaced ideals. They are ideals which have become the baggage of the architects who helped father their blueprint, the function of which is leading to Europe's collapse. Absent are leaders who need to do what is necessary, to bring together common interests and fight for a cause that will be beneficial for Europe as a whole.

Euro Zone Weekly GDP in Real Time (Provided by

U.S. Economic Contraction Hits Economy

By Grant de Graf

The contraction of the U.S. economy in the last quarter of 2012 comes as little surprise.

The nation's gross domestic product shrank for the first time in 3 1/2 years during the fourth quarter, declining at an annual rate of 0.1% between October and December, the Commerce Department said Wednesday.

Although one can expect GDP to adopt a more positive track, growth is bound to be constrained. Additionally, the possibility of a European fallout remains possible and there no evidence of any initiative which may spur growth in the U.S.

At best, it will remain lackluster and while there is always room for a surprise, no one is buying tickets for the show.

Real estate could always make a comeback, but there still needs to be an improvement in core economic growth for any sustained solid recovery.

To realize solid growth and to circumvent the dangers which face the economy in respect to the fiscal cliff debate, the U.S. needs a national blueprint, supported by both Democrats and Republicans, which will facilitate the high levels of business expansion which the economy needs.

Economist John Mauldin joins WSJ's Markets Hub with an outlook on the U.S. economy, and his take on the Federal Reserve's effect on the stock market. Photo: Getty Images.

European Economic Performance Suffers Blow

Grant de Graf

In yet another blow to the European Debt Crisis, the latest economic statistics underscore the severity of the recession and the absence of a recovery, despite higher levels of confidence and optimism in the EU.

Spanish gross domestic product fell 0.7% from the third quarter and 1.8% from the same period a year earlier, Spain's National Statistics Institute, or INE, said in a preliminary reading. It said output for the whole of 2012 fell 1.4% from 2011.

The statistics once again show the futility of the austerity measures (vs stimulus) which are being propagated in the EU as a source of hope for economic recovery. Although the reduction of government spending in certain unproductive sectors are necessary, optimizing public expenditure towards projects that will stimulate economic growth are paramount.

While the example of stimulus in the United States has proven to be a more effective means in circumvented a deep recession (than austerity), the lack of a clear and focused stimulus plan, will impede a strong and sustained recovery, and strengthen many a critic's view that officials are simply "kicking the can" and that a "pick-up point" will be necessary at some point on the road.

Europe will need to learn from the example and mistakes of the U.S. Additionally, Spain will need to exist the Euro if it and Europe wish to avoid the same fate as the Dodo. The quicker European officials can come to their senses and realize that that they need to formulate a new EU blueprint that will allow for the exit of the Euro for weaker countries, the sooner Europe can start to focus on achieving real economic growth and regaining its position as formidable powerhouse on the globe.

Dow Jones's Paul Hannon looks at the continued divergence in euro-zone economies despite the slight improvement so far this year. With the euro also rising, he questions the strength of a future recovery.

EU Regulatory Challenges Highlighted

The WSJ reports in an article "In EU a Test of Wills" the realization by EU officials that the challenges related to increased banking regulation could constrain growth in the EU and delay or short circuit an economic recovery.

At odds are the restrictions which are being applied by regulators to banks and which effectively eradicate the benefits of a single market for financial services, unimpeded by national boundaries. This includes the prevention of moving funds across national borders, together with several other restrictions.

At least officials are aware of the hazards that could impact a recovery, but whether EU officials have the political muscle and will, to prevent regulatory obstacles taking their course, remain questionable.

Dichotomy of Stock Performance With GDP

By Grant de Graf

In an interview with the WSJ, hedge fund manager, Oscar Schaffer, describes the unusual correlation between stock performance and GDP. (See "Stock Performance Enigma") Greece and China (among many other countries) are examples where the performance of stocks are inversely correlated to GDP. Although GDP in Greece disappointed, stocks experienced all time highs. Conversely, China which displayed an expanding GDP, incurred a retraction in stock trends.

Schaeffer defines stock performance being correlated to other factor like earnings and the inflow of funds. He anticipates that when bond yields start to increase, there will a long term outflow of capital from (long term) bonds into stocks, as investors are likely to be concerned about capital losses in the bond market.

However, the equation is not so simple and linear. The performance of stocks will ultimately depend on many other economic factors and should the risks in stock investment increase and the impact of a European fallout weigh against the U.S., investors may well direct capital towards short-term income yielding bonds and reduce their exposure in stocks.

Stock Performance Enigma

Hedge fund manager Oscar Schaefer explains that GDP growth doesn't always correlate with stock returns. And he tells us why Hertz shares will zoom higher.