PIIGS debt has performed well since Draghi pledged to do whatever it takes to save the euro. A central bank can conceal liquidity problems with money printing and the threat of more money printing, but it cannot fix deep rooted structural problems. Spain, Italy and the rest of the periphery still suffer from inflexible labor markets, an ill-fitting common currency and oodles of economic red tape. Spain is also muddling through the aftershock of its burst property bubble.
The mainstream media glosses over these problems using a sell-side industry shill to make its point:
“We currently favor Spain over Italy and we think the outperformance can continue,” said Russel Matthews, a money manager at BlueBay Asset Management in London, which oversees $56 billion. “The fundamental picture in Spain is likely to improve more than in Italy. The economy is slightly more dynamic and has a better chance of taking off.”
Italy’s economy has no chance of taking off, so Spain’s chances are little better. Both economies will shrink more than 1.5% this year and are affected by different levels of political turmoil. Reforms and budget cuts have ground to a halt, and only a revival of Euro-market woes will push these countries in the right direction.
Those bonds have gained nicely in the last year, but he who sells first, sells best.
The mainstream media enjoys taking a small data set and extrapolating optimistic results from it. While German industrial production rose in July, using this data to proclaim an end to the Eurozone recession is poor analysis. Today’s Chart of Truth shows what has occurred after this number rises to around 2%. Since the eurocrisis began, Germany has avoided a deep recession but not stagnation. Going forward, decreasing output in China, Germany’s best customer outside the Eurozone, will continue to create economic headwinds for the German economy as one good month does not a recovery make.
Uncle Ben giveth, and he taketh away. Emerging markets have been contracting since early 2012, and the markets finally catching up to the fundamentals. Central bank money printing can distort markets temporarily but eventually things like supply and demand get in the way of central planning. Despite the swoon since May, emerging markets are still expensive. Europe’s rally since the Draghi pledge has also made its stock markets very expensive. If something cannot continue, then it will stop. Good luck trying to figure out when.
Every industrialized economy has been underperforming in its own special way since the onset of the GFC in 2008. The U.K.’s unemployment rate jumped from just about 5% to over around 8% where it remains stuck today. The labor market must be in even worse shape than we thought. Carney has promised to maintain easy money until the rate falls to 7%, which will be two points above expansion lows. Just as in the U.S., money printing will levitate all sorts of asset markets while failing to create a labor recovery, but this will not prevent Carney from adhering to central banking dogma.
The Dutch economy has stagnated since the beginning of the eurocrisis. Unsurprisingly, the Dutch are extremely realistic about this. Mediocre economic figures are routinely spun into the msm recovery narrative here in the U.S., but the Dutch tell it like it is. ING believes that the Netherlands will return to growth in 2014, but I am not so sure. There is still a lot of air in the Dutch property bubble, so real estate values will fall further and bad loans will rise in response.