Tags: dollar | eurozone | long-term | investors

Eurozone Will Remain Extremely Vulnerable for the Foreseeable Future

By    |   Tuesday, 23 October 2012 10:57 AM

Caterpillar, which is the world's largest maker of construction and mining equipment and is considered as a good global economic growth indicator, reported its best third-quarter sales and profit in its history, notwithstanding that 2012 has been a “disappointment” because of lower-than-expected growth in the United States and China and with much of Europe in recession. The firm expects sales growth for 2013 to be slower than in the previous three years, as the global economy is in decelerating mode, with modest improvement in the United States, China and most of the developing world, but continuing difficulties in Europe. Long-term investors could do well to take Caterpillar’s expectations of a not-so-comforting recovery in 2013 into account when considering overall investment decisions for the time being.

Of course, Caterpillar isn’t painting the kind of daunting outlook for 2013 as is Stanley Fischer, governor of the Bank of Israel and former chief economist at the World Bank, who said last week that the world is “awfully close” to a recession.

Everything will depend on how the United States and Europe will or will not be able to address the various serious threats to their respective economies.

In the United States, it will be the urgent challenge of not stumbling over the fiscal cliff. In Europe, it will simply be a question of how the peripheral states of the eurozone can come back, as soon as possible, to sustainable growth; come out of their respective recessions, or even a full-blown depression as is the case in Greece; and become competitive once again and create many, many jobs. I’m sorry, but to me that looks still light-years away.

After what came out of last week’s EU summit of European leaders in Brussels, Belgium, about, among other things, the creation of an EU “banking union” and the Single Supervisory Mechanism that would ultimately encompass more than 6,000 eurozone banks, I can’t share that official optimism because I can’t detect one single solid fact that assures me the worst of the EU crisis is over. On the contrary, I’m convinced positive sentiment toward the eurozone is unlikely to last far into 2013, as the banking union by itself can’t end the crisis because only a huge debt restructuring of the peripheral countries of the eurozone and a cheaper euro can save the euro. At the same time, Europe will have to invent how to grow out of austerity without imposing "internal" devaluations. Long-term investors should also keep in mind that the European Union would need new treaties (yes, plural!) whatever happens. How many years that could take is everybody’s guess.

In the context of all this and as an illustration of the difficulties the peripheral countries are facing, the Bank of Spain just released its monthly economic bulletin, wherein it states that the country’s third-quarter gross domestic product (GDP) contracted 1.7 percent year-on-year, from a contraction of 1.3 percent in the second quarter, and employment in the third quarter fell another 4.5 percent from a year earlier. The government might have no other choice than to impose more cuts, as the Spanish central bank now expects a deficit of 6.3 percent, which is well above the so-called allowed EU deficit-to-GDP ratio of 3 percent. Interestingly, last week’s EU summit made it clear that Spain would remain responsible not only for all its sovereign debt, which is, in my opinion, nothing more than pure logic, but also the debt “in” Spain, and that’s something a lot of optimistically inclined investors haven’t understood yet.

Yesterday, Moody’s Investors Service downgraded five of Spain's regions, including the economically important region of Catalonia, of which Barcelona is the capital. Again, when will Spain start growing again while keeping its “forced” austerity implementations? I must say, I don’t know.

In its latest World Economic Outlook, the International Monetary Fund states that Europe remains the biggest risk to the world economy. I don’t know if Europe will be the catalyst of a serious market correction, which, in my opinion, is on its way, whatever happens.

That said, long-term investors should keep in mind the eurozone will remain extremely vulnerable for the foreseeable future if a serious economic shock, like a sudden spike in the price of oil, should occur. This would provoke massive transfers out of bank deposits located in the peripheral nations to other “perceived” safer places, as is in fact already taking place. In addition, Sergey Lavrov, the foreign minister of Russia, said today that a military scenario in Iran can’t be ruled out.

As far as I’m concerned, and in accordance with the 7.25-year cycles (since 1980) as well as the 34-year cycles (starts in 1932 with 17 years up and 17 years down), I still see very serious broad-based bear markets ahead that should bottom out somewhere from June 2016 on that could even stretch into 2017, when both cycles practically coincide at the bottom.

In case this time is not different from what history has taught us so far, the dollar should perform very well over the next four years and could even move well above its highs of 2009 and 2010, which would be completely contrary to what many professionals are betting on today. As far as I’m concerned I continue to prefer the United States and the dollar. Of course, as always, we’ll have to wait and see.

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In case this time is not different from what history has taught us so far, the dollar should perform very well over the next four years and could even move well above its highs of 2009 and 2010, which would be completely contrary to what many professionals are betting on today.
Tuesday, 23 October 2012 10:57 AM
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