Potential Eastern European Economic Collapse Worries Me 14 comments
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The economy and the markets have gone through a traumatic shock unlike anything we have seen in seven decades. You know the story by now - housing bubble collapse, Lehman bankruptcy, subprime mess, credit market implosion, deleveraging, etc.
I believe the market had priced all of this in, and more, given the record spreads in credit and dirt cheap valuations in equity. If we are to break to new lows, then another convulsive shock must occur to the economy. There must be something as big or bigger than what has already been experienced to send the market into a free-fall once again.
Bears argue that the shock is going to be commercial real estate and/or credit cards. I disagree. I believe the market has already priced in the decline for both. The REIT ETF, ticker IYR, fell 77% from the highs, while credit card giant American Express (AXP) fell over 80%. Those are depression-like returns. These are well known and have already occurred. I also believe that both are no where near as threatening as what has already happened in the housing and mortgage markets.
But there is one thing that I believe is not well known, and it does worry me.
And that is the potential collapse of Eastern Europe.
The collapse of the economies of Eastern Europe is an event that could rival or even surpass the collapse of the housing market, and I do not think American investors fully realize the ramifications of such a collapse.
The region is not particularly important in terms of global output. However, it is the exposure of European banks to the former eastern-bloc countries that could cause a chain reaction which could bring down the European banking system, causing the economy to plunge further and markets to collapse once again. Given the hodge-podge of European financial regulation and a patchwork political system, the European authorities are less able to respond to such a crisis than the United States.
By some accounts, the eastern European countries are in worse shape than the Asian countries were at the start of the Asian Contagion in 1997, with sky-high indebtedness and large current account deficits. Western European banks financed the borrowing in eastern Europe, and large defaults could bankrupt the European financial industry.
I do not know if the ultimate denouement is the implosion of the European banking system triggered by a collapse of the highly-indebted countries in Eastern Europe, but it worries me.
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This article has 14 comments:
What do you base this on? P/E's are very high, despite the outright lies of a 13-14 P/E being dispensed by Birinyi Associates, The Wall Street Journal and Bloomberg.
The S&P 500 has a P/E of nearly 60 while the DJIA is at 36 and the DJTA is at 54.
S&P Data: www2.standardandpoors....
WSJ data:
online.wsj.com/mdc/pub...
Note the made up P/E on the WSJ site that is based on data provided by Birinyi Associates, a company with a clear conflict of interest - they are money managers.
Anyone who tracks the trend average of the DJIA tends to come out with a fair value of around 6,000 to 7,000 so that suggests it is overpriced as well.
There is just too much DATA that suggests the stock market is still ovepriced, but in the end we all have to put our money where our mouths are.
BTW, what data do you have that suggests this "dirt cheap valuations in equity"? You didn't provide it and nobody ever does when I ask.
Various western European countries saw a surge in Eastern European immigration a number of years ago. I've seen more than a couple of stories on Bloomberg, and other reputable sources talking about the exodus of the immigrants back to their homelands, as the various economies tanked. I'm not certain how many will be left to roam the streets and living under bridges in Western Europe by 09/10.
On May 05 09:01 AM manya05 wrote:
> Yep, and it gets even more interesting. After accession to the EU,
> the labor markets in Western Europe remained closed for many years
> to Eastern Europeans ("transition period"). Rich European countries
> wanted to delay opening the labor market (especially Germany, fearing
> a flood of Polish), but they had already delayed long enough. Finally,
> the labor markets are opening up to Eastern Europeans just as these
> economies are teetering on the cliff. Watch for an exodus in 09/10,
> there will be thousands of Eastern Europeans roaming the streets
> of Western Europe looking for work and living under bridges. It will
> be bad, really bad.
Now that the banks have cut or even reversed the financing flows, all the "imbalances" have disappeared overnight. Trade is in balance, bank lending conservative ( but not stopped!) and real estate affordable again even at sharply decreased income levels. If the external demand return, I see E Europe to have major upside, not downside risk. Unemployment will probably grow to 15% range, but that's inevitable considering how many people were busy at building and selling the real estate bubble. It takes time to get them employed at something reasonable, meanwhile it helps to keep labor costs in check.
This is not the case of poland and czech who have much larger populations, poland has a housing shortage, with extortionate rents and most 20/30 years olds still living with their parents, its external debt is 225bil dollars (60bil is short term), data from www.nbp.pl/Homen.aspx?.... Thats only 1500dollars per person
Czech republic has a very low cds rate (equal to china's as quoted by seeking alphas tyler durden) and an external debt of around 40bil dollars, again very small
somewhere in between these two extremes are the other countries, in my opinion, romania presents the biggest problem, as it had a large property boom (and subsequent bust), aswell as a large population, if anyone can provide accurate info on this country, it might shed more light on the bigger eastern european picture
Sure, Eastern European economies could collapse. But the earth could also get hit by a meteor. What are the reasons why this could happen?
Yes, I could Google it, but I want to see the actual numbers that indicate that this is a serious possibility. Show me the state of the eastern European economies and their actual connections to western European banks.
Regards
seekingalpha.com/artic...
By far the biggest problem is the many of the East Block countires got home loan mortgages from the Western European Banks and especially the Swiss Banks. An estimated 60 to 80% of Polish borrowed from the Swiss Banks because the Polish Bank charged way to high mortgage interest rate at 13% and the Swiss Bank mortgage rates was lower between 3% to 6%.
So all the Polish borrowed from the Swiss Bank and then last Fall, the Polish currency collapsed 50% against the Euro. It means the poor Polish has to pay double the mortgage to the Swiss Banks because of the currency exchange rates. The is one big reason why East Block countires are in very dire straits and will collapse sooner or later. Just walking down the streets in Poland is pure illusion just like walking down the street of MacMansion in America and every thing looks fine on the outside.
On May 05 09:01 AM manya05 wrote:
> Yep, and it gets even more interesting. After accession to the EU,
> the labor markets in Western Europe remained closed for many years
> to Eastern Europeans ("transition period"). Rich European countries
> wanted to delay opening the labor market (especially Germany, fearing
> a flood of Polish), but they had already delayed long enough. Finally,
> the labor markets are opening up to Eastern Europeans just as these
> economies are teetering on the cliff. Watch for an exodus in 09/10,
> there will be thousands of Eastern Europeans roaming the streets
> of Western Europe looking for work and living under bridges. It will
> be bad, really bad.
The nation of 21.6 million with monthly wages averaging around 260 Euros after taxes saw 8 percent of the population or roughly two million people leaving since the Stalinist government of President Nicolae V. Ceausescu fell in 1989, according to analysts’ estimates. Italy and Spain are the most popular destinations for Romanian workers, where they usually perform manual labor, legally and illegally, and generally for lower wages than local people.
The population of Romania is projected to fall by 29 percent, below 15.5 million, by 2050, according to the Population Reference Bureau in Washington (www.prb.org/). Villages and towns outside Bucharest have been hit especially hard. An employment agency suggested that wages would need to reach levels about three-quarters of those in the West for Romanian workers to return.
On May 07 08:04 PM samba wrote:
> Yes i agree with milkguy, media analysis of eastern europe is very
> distorted, firstly eastern europe can in noone be looked at as a
> group, countries such as latvia and hungary have large problems,
> with an indebted population and a housing bust, however these are
> small countries with small populations
>
> This is not the case of poland and czech who have much larger populations,
> poland has a housing shortage, with extortionate rents and most 20/30
> years olds still living with their parents, its external debt is
> 225bil dollars (60bil is short term), data from www.nbp.pl/Homen.aspx?....
> Thats only 1500dollars per person
>
> Czech republic has a very low cds rate (equal to china's as quoted
> by seeking alphas tyler durden) and an external debt of around 40bil
> dollars, again very small
>
> somewhere in between these two extremes are the other countries,
> in my opinion, romania presents the biggest problem, as it had a
> large property boom (and subsequent bust), aswell as a large population,
> if anyone can provide accurate info on this country, it might shed
> more light on the bigger eastern european picture
Yes, foreign currency denominated mortgages are a major mistake. I find it especially irresponsible in the countries with fluctuating fx rates, such as Poland and Hungary. If homeowners' main future expenditure stream is tied to PLN/SFR exchange rate, it could as well be tied to solar activity or weather patterns on Hawaii - has nothing at all to do with the real economic environment of the family. This could get real painful if Swiss economy improves and usually-prudent SNB hikes interest rates. The borrowers get higher interest rates AND higher principal payments together.
In Baltics (and Bulgaria) the situation is a bit different, as the borrowing goes on in EUR and the home currencies have fixed exchange rates to euro as well. This means that currency risk for these borrowers equals the risk of currency board going under. On one hand, that makes the situation more dramatic, with all sorts of pundits busy forecasting the big D-Day - when it comes, it is supposedly huge. On the other hand, at least Baltic economies are so completely EUR-based already, that very few would practically benefit anything from devaluation of the currencies. Therefore I believe more in the ongoing deflationary adjustment - hefty cuts in both public and private budgets to regain competitiveness. Latvia is in the most difficult position, by some accounts they should cut the 2010 budget by 40% to make the ends meet - very heavy. A positive note is that cutting expenses at the time when everybody else in the world is spending like hell, means painful today, but much more pleasant future.