Europe

Is Italy the next black swan?

There are a number of economic issues in the world which could provide the next economic shock and shake world markets. A prime candidate is Italy and its banking. system. Italy in the past has relied on currency devaluation to maintain its international competitiveness. Italy’s entry into the European Union made devaluation impossible and the economy is now in very bad shape. In recent years there has been an accumulation of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. The Italian banks alone have USD 400 billion in bad loans, equal to about 20% of Italian GDP. The Italian economy is ten times larger than the Greek economy and there is no way that the European Union has the ability or capacity to bail it out.

In October or November there will be an Italian constitutional referendum and Prime… Continue reading

“Euro zone shudders to a halt”.

This is the headline from the August 15 issue of the UK Financial Times. The European Union has a GDP larger than the United States so its economy is a major contributor to the world economy. The European Union economy has now reached a critical stage and over the past year the IMF has issued several downgrades so it seems that the European Union is moving closer to recession and/or deflation.

A recent review by John Abernathy offers three scenarios for the European Union.

  • Europe could very slowly return to a normal sustained recovery.
  • Europe could lapse into a deflationary cycle similar to Japan.
  • The European Union asset bubble could burst with a rapid fall in equities and other asset prices.

Confidence within the European Union is low and the rate of recovery over the past six years since the GFC has been extremely weak, bond yields are very low… Continue reading

Potential black swans for 2014

Quantitative easing is expected to continue to stimulate strong equity markets during 2014.  Equities entail increased risk, part of which is related to unknown factors which are external to the company.  Investors should be aware of these unknowns or black swan events which could trigger a market correction during 2014.   The following five potential black swans are considered to be most important:

  • A banking crisis in the European Union.
  • Economic issues in China.
  • Potential Asian conflict (China, Japan or North Korea)
  • Further escalation of conflict in the Middle East.
  • The Japanese experiment.

A banking crisis in the European Union is possible and this is a major risk. The European sovereign debt problem has not been solved and heavily indebted and leveraged countries are only able to borrow at reasonable rates because of ECB guarantees.   It is a question whether the ECB can continue to… Continue reading

Reflections on the world economy

We are witnessing a world asset bubble stimulated by very low interest rates and continued quantitative easing by central banks.  The United States economy is critical to world economic growth but despite a surging equities market, its economy is only making weak progress when one considers the huge levels of quantitative easing delivered from its central bank.   New house construction, a driver of the economy is weak and disappointing and despite very low interest rates Americans seem reluctant to apply for mortgages even though mortgage rates are at historic lows. One assumes that this is mainly due to the demographic problem of… Continue reading

The German elections and the European Union crisis

Why is it that European central bankers and politicians seem to be revelling in self-congratulations rather acknowledging the fragile state of the European Union economy? Perhaps the upcoming German elections may explain why the European Union predicament is being set to one side. Certainly the German electorate has become increasing intolerant of the further bailouts of their Mediterranean neighbours, particularly Greece, and Angela Merkel no doubt sees this as a serious barrier to her re-election.

Consider the major issues. Greece has received more than €200 billion in bailouts and despite a haircut on its debt and some measure of austerity there is almost certain to be another haircut because Greece simply does not have the capacity to repay its debts. But even if the latent Greek crisis and the very high unemployment rates across most of the European Union are ignored, the economy and political situations in many Eurozone countries… Continue reading

Equities are ignoring the world fundamentals

Quantitative easing continues to spur most world equity markets. The markets are now ignoring some of the very significant events that are now occurring in the EU where the fundamental issues continue to deteriorate. In Cyprus there are problems which continue to deepen with an estimated $28 billion required to bail out this tiny economy and now in Italy there are serious issues with the political deadlock.

In Greece the underlying unemployment rate has now risen to 27 per cent. But perhaps it is with France that we should have the most concerns. If president Hollande does understand the economic issues in France, he has completely failed to convince the electorate of the urgent need to implement reforms and stimulate the French economy. There is now a strong likelihood that the French economy provides the next economic crisis in the EU and because it is the second largest EU economy… Continue reading

IMF warns that Australia is vulnerable

The IMFs recent appraisal of the world economic status does not make pleasant reading.  Global economic outlook continues to deteriorate and there are risks of a much more serious recession ahead.

But things are not so rosy for Australia either. Although Australia has risen to be the 12thlargest world economy, the slowdown in China casts gloom over the resource industry which has carried the Australian economy now for the last 5 years.  The IMF has now downgraded economic prospects for Australia.  With a severe slowdown in the resource economy there is little prospect that the remaining sectors in the Australian economy will have sufficient growth to maintain its growth and there is little cause to support the optimism of treasurer Wayne Swan.

The EZ situation now becomes critical and if depositors in Greece, Spain and Italy lose confidence and increase the flow of funds out of their… Continue reading

Gloomy outlook for Australian market

There is now little optimism in the Australian market and this is unlikely to change over at least the next month.   The RSI divergence on the S&P500 below, suggests that markets will have a high probability of falling further in October.

There is little positive news from any major economic region at the moment.  But it is all about the EU with even the so called “fiscal cliff” in the US not rating more than a passing mention.  Recent protests in Greece and Spain are not going to make in any easier for their respective governments to implement the austerity measures needed to obtain more bailout funds.  It makes the Greek default look imminent.  But Spain is a much bigger economy and with 25% unemployed austerity is not popular.  Spain has deferred application to the ECB for assistance but that will need to… Continue reading

No cause for market optimism

I am afraid that there is not much to be optimistic about with the current market. The Australian market is unlikely to do much now until we have a resolution of the EU situation. China continues to look shaky and this will not change until their change of leadership next month reveals what economic changes are likely.

The World economy is really all about the Europe now since even a massive quantitative easing from the US apparently has had little more than a short term impact on the markets.

The EU is China’s biggest trading partner and it is now very much in recession with unemployment continuing to grow. In Asia it is not simply a matter of China slowing, with most other Asian nations now showing a significant slowing. We wait for outcomes in Europe to determine which way the markets will go. The ECB has given… Continue reading

Australian market continues to languish

Where are the markets going?  Little has changed over the past year.  Are we any closer to a resolution of world events which are an impediment to a bull market?  

The EU situation drags on with the inevitable default by Greece looming closer. But Spain is now a more critical case and the Italians could put Berlusconi back into the top job at which time the Italian crisis will deepen. The illusions of a socialist solution to France’s woes have been exposed and Hollande is facing the realities of an economy which is in trouble and banks which have a big exposure to southern European debt.

The more recent news is that China is slowing although it is not clear by how much. This leaves the United States with a slowing economy, a dysfunctional administration and a huge debt. In the US markets the NASDAQ is… Continue reading

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