The recent turmoil fueled by a disappearance of confidence for a lot of good and very serious reasons probably isn’t over.
I expect worse to come if Europe can’t get its act together and the crisis in the eurozone has definitively metastasized from the periphery into the core.
Besides, the OECD released its composite leading indicators (CLIs) for June 2011. They are designed to anticipate turning points in economic activity relative to trend. And they are flashing amber by pointing to a slowdown in activity in most OECD countries and major non-member economies.
Compared to May, stronger signs of turning points in growth cycles have emerged in the United States, Japan and Russia. The CLIs for Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India continue pointing to slowdowns in economic activity.
Meanwhile, French GDP for Q2 came in at zero growth rate quarter over quarter (stagnation) following a 0.9% increase in Q1 (forecast +0.3%). This factually confirms the general downward trend signaled by the OECD composite leading indicators. By the way, eurozone seasonally adjusted industrial production for June compared with May also fell by 0.7%. Greece non-adjusted GDP contracted by 6.9 % in comparison with the second quarter of 2010, but was nevertheless better than the -8.1% of Q1. All other EU indicators are also declining.
We see signs of growth stagnation all over the globe, which includes China and all the other BRIC countries. The big question is how can we grow out of all our urgent problems without growth? Believe me; it will take a lot of time and pain.
There probably won’t be political willingness in Europe to increase the size of the European Financial Stability Facility (EFSF), which is a special purpose vehicle that aims at preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty. The German government has serious doubts whether even tripling the size of the EFSF would enable it to save Italy because the country's financing needs are so enormous.
Germany seems convinced the EFSF should only be used to rescue small and midsize countries.
And if all this wasn’t enough, German Chancellor Angela Merkel reportedly may not be able to keep her promise of getting changes to the EFSF rescue fund implemented into German law by the end of September.
Given that this issue is at the very heart of the eurozone debate, a failure to reach agreement later in the year could have very significant consequences.
Yes, the time-bomb lies in the eurozone.
The eurozone really only three possible outcomes to the actual crisis. The first is that the region’s authorities decide to go down the route toward fiscal union, which is politically impossible.
The second is that Greece and/or other “weak” nations recognize that things will never get better without having the ability to devalue their currencies and therefore decide to leave the eurozone.
The third is that Germany and, possibly, other “northern” eurozone countries like the Netherlands, Finland, find that any lingering domestic political support for providing aid to southern Europe evaporates as the potential size of the bill starts to become apparent and decide to leave the actual euro structure. Whatever comes out will shock the world, that’s for sure.
In this world plenty of uncertainties and disappearing confidence, while global growth is practically stagnating at best, my preference for long-term investing remains “risk off.”
I can’t see things becoming better anytime soon before becoming worse first. In my opinion, long term investors should be patient and keep their powder dry (cash equivalent instruments) because investment opportunities will be there down the road.
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