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Economy in Brief

German IP Continues To Press Ahead In The Face Of Growth Pessimism
The Dire Straights Of Europe And Other Fairy Tales Or, The Walk Of Death?

by Robert Brusca June 8, 2010

IP over board! That's right IP is brimming over with growth. German IP is up sharply in April and it is a race with the IP from Italy- of all places. So this raises a question: how many European optimists can you fit in one of those picturesque, red British Telecom phone booths? Answer- all of them! ...that is if you can find any at all.

Phone booths? Who care about a phone booth except Clark Kent? I know what you are thinking, in an age of cell phones (or mobiles if you are a Brit) who gives a ding-dong about phone booths? But there you go again changing the subject. No one wants to talk about optimism. Everything right now is about pessimism and that is the point. So lets dot he unthinkable and talk about the empty phone booth.

The end of pessimism is not like waiting for the end of days- There is in fact no better time to talk about optimism but when things are so dark and bleak. It's sort of like horror film. You don't need to have seen 'it' to 'know' what's going to happen, you just need to know how long the movie is going to be and to pick you spot... No matter how grisly and unwatchable the movie, in the last 10-15 minutes, the worm will turn and someone will somehow vanquish the killer vampire, the bug from outer space or the depraved sadist psycho-killer or whatever. The difference is that in markets we don't know exactly when it will end. Bear markets don't come with a time-stamp. We do know that the bear market will end, for stocks, for the euro, and so on. Everything ends (well maybe not the oil leak in the Gulf of Mexico- note that the NY Times, the custodian of language, calls it a 'leak', not a gusher).

Description as reality - So that raises another point, and that is that things often become what they are described to be, making the metamorphosis from what they really are.

Man bites dog is no story; stocks fall forever is a GREAT story - And, to come full circle, that is sort of why everyone is so pessimistic. Everyone has a thousand reasons why things are so bad. It's good to remember that there is a circle of securities trading that revolves around the evolution of economic data and news. And even the most basic trader knows that news makes money and if you can get out in front of the news, that's the safest place to be. Any way that a trader can manipulate the news can help him (or her) to make money. So there is no lack of traders trying to feed the beast with stories of how bad it is or how bad it is going to be, in order to extend the trend and keep the trading environment 'safe;' safe for traders at least. We have visited this subject before.

Phases of the market and the moon and the milky way - Markets have up-phases and down-phases and right now we are in a down-phase, for stocks and the euro and up-phase for gold; oil is not quite sure what it is doing it is just plain 'phased out'. I will remind you that there are accumulation and distribution phases to market trading and if ever there was a distribution phase this is one. Stocks have been sold to extremes the euro has been sold to an extreme and the all the easy money has been made. Whatever moves are left to these current trends they will reap profits for those who already have the positions passing the riskier trades onto the Johnny-come-lately investor. Don't let that be you. So Johnny don't come late, just go quietly. There is no sense in getting short by trying to make money over already-been-spilled-milk.

Reality bites ...back - Economic forecasts for Switzerland today were just lifted. German data are looking good. Yes Spain can be added to the list of countries undertaking austerity with public sector blow-back. But what profession takes pay cuts sitting down? Not firemen! Not policeman! Not teachers! Not Wall Street! OK point made. Blowback is part of the process, it's NOT NEWS!

Fairy tales can come true, but what if they do? - Meanwhile the underlying disturbing development everyone is watching with baited-breath is Germany's early move to adopt some austerity. How risky is this after all? On the face of it this seems a little bit like a fairy tale in which the king that likes the goose's golden eggs so much he wonders what its flesh tastes like. Germany should not go there and disrupt the golden egg of growth by messing with fiscal policy. But even if it does, it's far from clear to me that it would do enough damage to seriously disrupt the recovery that is in process. That's right Germany's flirtation with austerity is another red-herring for weak growth.

Achtung baby... NEWS FLASH!! German growth does not depend on German demand! In Germany, the recovery is substantially about exploiting FOREIGN DEMAND. Yr/Yr capital goods output is up by 14% intermediate goods output is up by 21%. The output of consumer goods is up by 1%- yes that also is Year over year. How much more damage to that +1% Yr/Yr growth can Germany do? Oh, and over three months German consumer goods consumption is falling at 5.8% annual rate while overall IP is rising at a 21% annual rate. So do we even care about the German consumer? Achtung baby, but none for the German consumer.

What Germany wants, what Germany needs - The issue in Germany is that it 'is needed' to promote domestic consumption but that it 'needs' to do this for the rest of the world not for itself. But Germany 'wants' to attain more fiscal discipline so it will throw the consumer under the bus and that will not affect German export growth. But it could make for a good horror movie called "Schnell II' starring Keanu Reeves and Sandra Bullock as unwilling runaway bus drivers. Whether domestic private consumption lags or contracts in Germany does not seem to matter much; the consumer seems destined to be a footnote in Germany's expansion which for Germany will press ahead on export-led growth fueled by a weak euro. This fiscal tact, of course, is a very selfish act by Angela Merkel who has problems of her own. As for any politician, self preservation is job-one. But let's also remember that killing off growth never did any politician any good (you can think about eating the goose and talk about it, but actually eating it is something else). What Merkel needs is the appearance of fiscal consolidation much more than severe fiscal consolidation. .So keep that thought active, as the pessimists swirl overhead sucking the very life out of optimism like the death eaters circling and closing in over the inert body of Harry Potter. Not to spoil the movie, but Harry did escape.

Not as bad as it seems - Put Europe in perspective. Growth is actually much better than people give it credit for. The downside risks are not a big as they seem when you factor in the politics of the situation (politicians need to seem to be people of action more than they need to be people of action except in a real crisis -which this is not). And pessimism has the bit in its teeth and is running wild, completely out of control. If Diogenes were alive today he could go hunting for an honest-optimist in Europe, but he clearly would run out of oil for his lamp before he would find one. Few in the financial markets ever give you an honest opinion and fewer still are optimists. Diogenes would be looking for a needle in a field of haystacks. In the markets everyone has a trading position and that gets in the way of a good honest opinion every single time. So the best approach always is to think for yourself. Read the papers and be skeptical. Ask yourself, "does what is going on the market make any sense?" That is always a good place to start. Joining a rally or sell off you don't really understand is one of the most dangerous things you can do.

Total German IP
Saar exept m/m Apr-10 Mar-10 Feb-10 3-mo 6-mo 12-mo Quarter-to-Date
IP total 0.9% 4.3% -0.2% 21.6% 10.0% 13.2% 24.2%
 Consumer -1.2% 2.0% -2.3% -5.8% 2.5% 1.0% -3.8%
 Capital -1.0% 5.3% 1.2% 23.8% 9.6% 14.1% 18.1%
 Intermed 2.8% 3.8% -0.1% 29.1% 14.6% 21.1% 36.7%
Construction 2.6% 24.4% 0.0% 166.0% 16.6% 5.1% 171.3%
MFG IP 0.6% 3.9% 0.0% 19.2% 9.9% 14.1% 20.5%
MFG Orders 2.8% 5.1% 0.0 36.7% 32.2% 29.8% 44.3%
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