November 3, 2010 falconadmin

Euro zone turmoil continues. Unemployment for the period reached 10.1%. Germany is being pushed to the center stage in the Euro area for its economic strength, but also, unfortunately, for Germany’s limited success at multiculturalism. The publicity seems to limit its alternatives in taking a strong stance against the weaker Euro zone economies.

Germany celebrated unification day on October 3rd. East/West still have mixed emotions but generally agree though costing about $2 Trillion, the cost is worth the investment. East still has some catching up to do, but it provides a flexible pool of workers to West Germany. And they already speak the language.

This is the third unification for West Germany. This one is between native Germans. After WWII, when West Germany accepted refugees from communism. The 1950/60s saw an influx of mostly Muslim guest workers. Workers, many now citizens, are subject of some debate. Federal President Christian Wulff said, ‘Islam belongs to Germany, too’. Many Germans, including Prime Minister Merkel, are saying otherwise. That may be a pill too big to swallow at the moment. She was recently quoted, saying Multiculturalism has failed in Germany.

Sovereign debt offerings for the Euro zone ugly stepsisters, Greece, Spain, Ireland, and Portugal were barely able to complete financing needs, though over-subscribed. This could be more the need for portfolio managers to show some profit on their books for yearend, than any vote of confidence. Irish debt soared because of its banking crisis, and investors continue to be nervous about Portugal. All need spending cuts and to increase taxes. Also Hungary’s debt is ballooning. Rates have moved steadily higher should any want to repeat trips to the well.

Evidence that the US economy has reached escape velocity is maddenly elusive. There is simply a lack of demand.  The Federal stimulus program is winding down and local governments are contracting.  The entire burden of stimulating demand falls squarely on the shoulders of the Federal Reserve.

The economy is the single most important issue confronting democrats in the mid-term elections. Foreclosures and unemployment are the other two issues on voters’ minds.

American Anxiety for the future is the highest ever before measured.  Confidence is essential for the recovery. And the main thing that is hurting business is uncertainty. Business, as Winston Churchill put it, “is the strong horse that pulls the whole cart”. President Obama does little to counter the impression that he dislikes business. A Bloomberg survey recently found that fully 75% of US investors believe he is against business. American equities delivered a slightly negative return over the ten years up to the end of July.

Low interest rates entice investors out of cash and into riskier assets.  Hi-yield, junk bonds, exceeds $168 billion, more than was raised entirely in 2009. However, the outlook for economic growth and thus corporate profits continues subdued.

Markets have snapped out of their slump, and some moderately better data from America on non-farm payrolls and manufacturing activity is in evidence, but that evidence is far from being upbeat. So long as bad mortgage debt weighs on lender balance sheets, the longer the economy will mimic that of Japan. Japanese equity investors have had to endure two decades of frustration.

American founders had no doubt that they were embarking on a daring experiment, inspired by the ideals of the Enlightenment. Martin Luther nailed his 95 Theses on the door of the Wittenberg Cathedral 493 years ago, yesterday. America still towers over rivals in scientific virtuosity, military power, and the vitality of democracy. Americans are among the most patriotic in the world.  America is indeed a great and exceptional country, but it is not talking about its greatness that makes it so. Roll up your sleeves! Presently, there is an excess of pessimism. We Will recover.

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