Friday, 13 January 2012

German growth. Schizophrenia. Banks


Italy and Spain sold more short term bonds than expected at lower yields than expected. ECB’s 3-year loans are working their magic. The “euro-collapse” is postponed further.

German growth

Germany has announced a negative growth in Q4 of -0.25%, and newspaper stories have it that the German Federal government will reduce its forecast for economic growth in 2012 to about 0.75%, Negative growth in Q1, zero growth in Q2 and a slow recovery in second half of the year. It is entirely in line with the view I have stated several times before: We are in the middle of a European recession and sometime around March/April we will reach the turning point.


On 19 July last year, Origo made a call that stocks were in for a major correction. We based this forecast on a number of factors. Most important was that on a backdrop of sharply falling growth, stock markets had their Wile E. Coyote moment, while the (high quality) bond markets were right all along.

Again, we have a situation where the stock markets are on average trending upwards, while the (high quality) bond markets stubbornly cling to excessively low yields. But this time it happens as the growth prospects are in fact improving or about to turn the corner. Despite heroic attempts from the London-based financial press to keep the pressure on the euro, the various initiatives to lighten the financing squeeze on Europe’s troubled countries appear effective. The European recession may well end up having an average length (7-9 months) and an average depth (a total output loss of 0.75% to 1%).

Where does that leave us in terms of asset allocation? Well, judge for yourself. One can side with the bond markets and remain depressed. Or decide to see the positive signs and side with the stock markets. As opposed to the turn in March 2009 or August 2011, the signs are not yet all pointing in the same direction. But it appears that the “perma-bears” have a harder time to make their way into the headlines.

According to FT, a certain large CSwiss bank is now offering its hedge fund clients a product that allows them to short European banks – even if shorting bank stocks is banned in several countries. I will not discuss the morality of this manoeuvre. Would be akin to discussing something that does not exist. Pure metaphysics!). One thing is, however, clear. Once this particular product is offered to retail investors, the European banking crisis is close to being over. Yet another of my “hillbilly indicators” based on nothing but a long memory.

European Banks
RBS is caving in to demands from Bank of England and the British finance ministry (who owns a not insignificant 83% of the shares in RBS). It will mainly lead to cuts in the investment banking activities. Deutsche Bank wants to sell its asset management division. I am afraid none of it points to a solution to the banking crisis.

The banks trade at depressed prices because nobody can figure out which banks are really rotten. They all mark their assets to fantasy instead of using mark-to-market. They have not yet taken the necessary write-offs on goodwill. If we could finally get a couple of major banks to fold, it would end up being good news for the sector – after the initial shock. As it is now, the entire sector is priced for a meltdown.

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