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I have an MBA in Finance from the Booth School at the University of Chicago and a masters degree in Industrial Engineering from the University of Cincinnati. I manage our investments and advice my friends & family on financial decisions. I work in Marketing Research using stats to support... More
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  • Where is Europe heading?
    GDP
    There is an ongoing separation going on between countries that form the European Union. 
    • Germany (world's largest exporter, 47% of GDP) backed by 2 successful programs to stimulate demand(original cash for clunker, Q209 +0.4%) and reduce unemployment (cut in payroll taxes, Unemployment peaked at 8.3% in August, Down to 7.7% in October) appears to have cushioned the blow from the collapse of global trade. France with Cash for Clunker and government spending appears to also have cushioned the blow from this crisis.  Both countries grew their GDP in the 2nd quarter but may run into problems as the government programs get phased out and the rise of Euro reduces export competitiveness.
    • Britain is still struggling to get back to growth (Q2 GDP -0.6%), limited by the deleveraging of the British consumers from 2 decades of consumption beyond their means.  The modest recovery of property values will moderate the negative wealth effect and help bank balance sheets get towards positive.
    • Italy is going through serial recession behavior reminiscent of Japan over the last decade and has also been slow to recover with more limited government action given the high level of current debt.
    • Spain (Q2 GDP -0.1%), Ireland are dealing with complete implosion of the property bubble over the past decade that was responsible for much of their explosive growth.  Ireland is dealing with a banking problem fairly similar to the US related to drop in property values held on bank balance sheets.  Spanish big banks were much more prudent in their lending, so other European and smaller Spanish banks had been fueling this bubble.
    • Belgium, Netherlands, Austria are all dealing with severe banking crisis tied to loans to sub-prime US customers and Eastern European loans.
    Switzerland is dealing with drop in global trade and a banking crisis (US customer & tax evasions).

    Going into 2010 Europe is in no growth territory unless US consumer & US Dollar comes back with a bang or European Consumers start spending and Banks start to recover from the crisis.  Inflation has been modestly deflationary (EU Aug09 -0.2%) and is likely to be low given the high unemployment and unused production capacity.  Manufacturers in Germany (PPI Sep09 -0.2%) and elsewhere are seeing reductions in input costs, the rise in crude prices are being offset by rise in Euro.
    http://seekingalpha.com/instablog/302753-plant-the-seeds/33089-economic-structure-of-europe


    Government Debt, Currency & Trade

    One of keys of the ongoing has been the size of the government rescue package.  Germany has enjoyed an interest spread of  upto 1% in issuing debt to fund the rescue and so was able to be more generous than other countries like Spain, Ireland that had their rating reduced and UK that is on negative watch, Italy with debt to GDP >100%. Smaller countries like Greece & Portugal have also struggled to sell government debt.

    Swiss faced a rapidly appreciating franc that threatened their exports and created problem Franc loans in Eastern Europe.  They started issuing dollar debt to weaken their currency and added to the money supply.

    Britain spearheaded the money printing (quantitative easing), ECB, Swedish and Swiss Central banks followed suit.  The excess money may have offset the destruction of money supply from reduced economic activity but still created serious concerns about future inflation.  This has weakened the pound more given the aggressiveness of BOE and Euro strengthened because of lower level of government debt and lower level of printing.

    The collapse of trade affected 4 champion exporters (down over 20% YTD)Germany , Switzerland, Sweden & Italy.  Cross EU trade has been hit by the UK, Spanish, Ireland consumptions decreases.  Global exports have been affected by the US consumer.

    Long FIEUX HAINX DFE JAOSX

    More posts on Europe
    http://seekingalpha.com/instablog/302753-plant-the-seeds/26878-scandinavia-viking-or-valhalla
    http://seekingalpha.com/instablog/302753-plant-the-seeds/24917-behind-the-iron-curtain-lessons-from-the-asian-contagion-whats-ahead-for-european-banks
    http://seekingalpha.com/instablog/302753-plant-the-seeds/23797-putin-s-years-of-decline-ahead-russians-along-for-a-bumpy-ride
    Oct 29 6:17 PM | Link | 2 Comments
  • Economic Structure of Europe

    Central Europe has been the heart of the European economic engine since the guns of WWII were silenced and cold war started to form. The beginnings of this was the reconstruction effort helped by a massive American aid package (Marshall Plan).  Post war most things needed to rebuilt, goods needed to be replaced and people, factories started the economic revival that characterized Central Europe and Germany in the 50's and 60's. 

    The manufacturing capabilities in Germany, Sweden, Switzerland started to feed the growing markets in US and UK.  They also started plowing back their export earnings to fund directly or indirectly consumer finance in importing countries and keep the dollar from weakening.  The simultaneous emergence of Japan and then other Asian exporters all fed into this central dynamic that made the American Consumer the most important cog in the world economy and the US dollar the means of trade.  The Thatcher and Reagan eras created a consumer revolution that fed these factories.  The British consumer became very important to all European manufacturers as well.

    The emergence of Euro enhanced trade for a while, because it simplified global trade and settlements.  However, as the Euro started to strengthen both because of dollar weakness and other countries diversifying their reserve holdings, this affected the export competitiveness of European manufacturers in Non-Euro countries.  European development had also targeted lesser developed areas like Spain, Portugal.

     When Sub-Prime started to unfold the Europe had 5 internal engines and 2 external ones.

    Internally

    • UK consumer, using the lavish consumer credit to extend far beyond their current or future incomes
    • German, Swiss, Swedish, Italian manufacturers with world class products that were in high demand in other countries and compensated for low German consumption and high savings
    • French Government & private spending that created a slowly growing economy that resulted in high unemployment but also did not cut back as drastically in the face of a financial tsunami as private companies everywhere did
    • EU and Private money flooded lesser developed countries like Spain, Portugal, Ireland and created a property bubble that burst along with the US and left a mess in some banks
    • Eastern Europe developed as a source for manufacturing outsourcing and also for Western banks to funnel savings to faster growing economies for higher returns.

    Externally

    • US consumer starting in the 80's and continuing went on a spending binge and stimulated economies all round the world.  The world is trying to adjust as this giant shrinks and no one seems able to fill the gap.
    • China increased bilateral trade with Europe and unlike the US imported European goods
    Long FIEUX HAINX DFE JAOSX
    Oct 26 5:17 PM | Link | 1 Comment
  • Housing connection to the Broad Economy?

    My thoughts on housing and the economy

    - Housing activity: New Construction, Real Estate are not a huge part of overall economic activity.  Which is why housing went into a depression in 2007 but economy didn't start to really plunge till end of 2008.

    - House Assets are the biggest part of the balance sheets of both households and banks. Relative small change in prices can really affect the solvency of banks (Net Equity=Assets-Liabilities) especially with overleveraged banks (Net equity 2-7%)

    - Recession took its toll because banks stopped lending because of their fear of bankruptcy and consumers stopped spending because their fear of foreclosure and bankruptcy.

    Should housing prices stabilize, the unemployment risks will play through, but the banks and individual solvency will improve as they continue to earn income to plug their balance sheets.

    What is a risk is that housing prices continue to decrease, I feel that is lower but not zero.

    Long GE

    Tags: GE, Housing, Banks
    Oct 09 4:19 PM | Link | Comment!
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