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Email this7:15 am
August 9, 2014
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The biggest problem with the Eurozone is that German's economy (and the rest of Northern and Central Europe) is significantly more competitive than economy in Southern Europe. As Eurozone pack them together, those countries which is less competitive cannot devalue their currency to regain competitiveness, so they end up relying on buying German's goods using money that German lend them (from the profit of selling goods to thous Southern Europe countries), this is especially more problematic as the market assume everyone in the zone behave like German, which make financing for government and private entities in those less competitive country become easier. This lead to debt crisis of various countries and burst in property market's bubble as soon as the market become more risk adverse, such as what happen in 2008.
Blame a Canadian economist for this (not pointing name), thanks to his thesis stating that as soon as information, people and money can flow freely across boarders, countries will gradually specialize in one thing in the zone and essentially function as one economic system while completely disregard the difference in culture.
9:45 am
June 24, 2014
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live with problems and chase after stocks.
10:53 am
August 9, 2014
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Brian said
james1988 said
live with problems and chase after stocks.
I would not "chase after" stocks. I would have a strategy and invest in those stocks that meet your short and long-term goals. I think US economy is the one that is going to do well eventually. It will be quite a while for Eurozone to recover. As Jon suggests - Portugal, Italy, Greece, Spain (PIGS) will keep Eurozone from recovering for quite some time.
If you are investing Germany/Dutch/Danish/Austrian stock, you should be fine (assuming situation is not going to deteriorate rapidly), but for the PIGS, they need to suffer from large reduction in price level and salaries (aka severe deflation, as they cannot devalue their currency) before their economy become competitive again, hence imply they are still far from the exit of this tunnel.
Brian: I think our stock is even better, is undevaluated by around 50% (S&P TSX vs S&P 500 over 5 years) while our economy is better thanks to weak CAD. In the long run, as we have the most population that have attain tertiary eduction in the world (more than 50% of total population), a much more well planned social security system that won't tax too much on the future tax payer and keep us in good health, a country that take in many immigrant which help reduce the effect of aging population and spending much less money on defense while having a large mining and oil sector that will only get lager as ice on the North pole melt. we have the best economic system among developed countries. Just need to beware of the housing bubble that may hit us in the next 5/6 years.
8:58 pm
August 5, 2014
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Brian and Jon, isn't the whole point of weakening the euro by using their desperate monetary policies going to help all European economies to export much more.
A current 1.2944 Euro to U.S dollar and even lower against other currencies is really their only game plan that has any real promising impact which can improve anything at all.
I would say that if the Euro to U.S. dollar is not at least 1.18 to 1.22 or even lower then it will not have much of a material impact.
9:32 pm
August 5, 2014
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Tomorrow's U.S. jobs report is widely expected to have a 225,000 jobs gain for August-2014. I think this is why the last 4 days Canada, U.S. bonds and other government bonds have risen anywhere from 8 to 13 basis points with the U.S. 10, 30 year now at 2.45%, 3.21%.
We will see what happens tomorrow but if there is 250,000 or more U.S. jobs created for August-2014 U.S. bonds rates should be stable or slightly higher, 3 to 7 basis points but if the opposite happens with much weaker job growth below 200,000 say 175,000 and less U.S. bond rates could stabilize or fall by 5 to 7 basis points.
It could be worse if prior months are revised downwards as well.
12:22 am
August 9, 2014
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Jack Manning said
Brian and Jon, isn't the whole point of weakening the euro by using their desperate monetary policies going to help all European economies to export much more.
A current 1.2944 Euro to U.S dollar and even lower against other currencies is really their only game plan that has any real promising impact which can improve anything at all.
I would say That if the Euro to U.S. dollar is not at least 1.18 to 1.22 or even lower then it will not have much of a material impact.
That only help the German, that's the reason German are not letting PIGS go, as their situation help keep exchange rate of Euro low, otherwise they will kick the Southern European country out already as it is pricey to rescue PIGS economy and government.
To be honest, this rate is too high for the distressed state, too low for the German.
12:38 am
August 5, 2014
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Jon, I think you are not seeing the big picture. A weaker Euro that gets lower and cheaper against all currencies will help all European exporters.
This is especially true with the U.S., China, India that combined makes up at least 50% of the world's economies.
I agree that Germany will benefit much more than other European countries as I believe it is the biggest exporter in Europe.
2:58 am
August 9, 2014
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Jack Manning said
Jon, I think you are not seeing the big picture. A weaker Euro that gets lower and cheaper against all currencies will help all European exporters.
This is especially true with the U.S., China, India that combined makes up at least 50% of the world's economies.
I agree that Germany will benefit much more than other European countries as I believe it is the biggest exporter in Europe.
I do agree devaluation of Euro help all country in the zone, but looking at 20%+ unemployment rate in Spain and 40%+ in Greece, the current level of devaluation is not enough, so thouse countries can only suffer deflation in order to become competitive again.
11:24 am
September 5, 2013
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August 5, 2014
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Jon, Spain, Greece and other high taxed, high regulation, less productive countries in Europe and outside Europe were in a mess way before the Euro.
Devaluing their currency by 30%, 40% etc. would not help their economies much anyway.
12:30 am
August 9, 2014
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Jack Manning said
Jon, Spain, Greece and other high taxed, high regulation, less productive countries in Europe and outside Europe were in a mess way before the Euro.
Devaluing their currency by 30%, 40% etc. would not help their economies much anyway.
Actually, you haven't seen how regulated Germany's internal retail market and housing market is.....
This is more or less a cultural thing (hardworking vs "drink coffee all day")
But I guess government does play a role in upgrading the economic system. One of the reason why Greece economy is very bad despite they work longest hour in OECD is because they focus on textile and other light industry that are being replace by the Chinese.
3:19 pm
August 5, 2014
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Jon, Germans have a much lower home ownership rate which I believe is 40% to 50% compared to other countries around the world which are in the 60% to 70% range.
This means they have much less debt overall which is why probably Germany did not have a housing, real estate collapse like Spain, Greece, Ireland, Portugal, U.S. etc.
4:57 pm
August 9, 2014
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Jack Manning said
Jon, Germans have a much lower home ownership rate which I believe is 40% to 50% compared to other countries around the world which are in the 60% to 70% range.
This means they have much less debt overall which is why probably Germany did not have a housing, real estate collapse like Spain, Greece, Ireland, Portugal, U.S. etc.
One of the reason why Germany have a much lower home ownership rate is because government in Germany conduct the task of providing affordable housing by rent control which severe limit how much the land lord can increase in rent every year and by cooperative housing where government will provide free land and the members will gather money to build the apartments/houses rather than by encouraging home ownership by reducing interest rate, which is what we and US did. This is just one example in suggesting that Germany's economy are very heavily regulated which lead to 1.) banks in Germany earn a lot more by lending money outward to other countries and 2.) the entire economy focus on export despite they have the largest population in Europe (around 2.5 times of our population). These two reasons are one of the factors that leads to problems in global economy which cause the 2008 financial crisis (German lend money that they earn by exporting to the housing market indirectly through MBS) and the euro zone economy crisis.
5:41 pm
August 5, 2014
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Jon, German bond yields and German mortgage rates are much less then Canadian, U.S. bond yields, mortgage rates so they did the same thing as most other European countries and North America. For example, lower mortgage rates in U.S. FHA loans, Gnmae, Freddie Mac, Fannie Mae, Canada mortgages insured through CMHC.
Germans in general are don't like having debt or too much debt because if they did, they could own houses not much more expensive than renting. I believe their mortgage rates are 1.5% to 2.25%.
Also, Germans don't see housing as an investment but rather just a place to live. In Germany, rents even though are regulated, they can still increase by 15% over 3 year which is still not a small amount.
8:16 pm
August 9, 2014
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Jack Manning said
Jon, German bond yields and German mortgage rates are much less then Canadian, U.S. bond yields, mortgage rates so they did the same thing as most other European countries and North America. For example, lower mortgage rates in U.S. FHA loans, Gnmae, Freddie Mac, Fannie Mae, Canada mortgages insured through CMHC.
Germans in general are don't like having debt or too much debt because if they did, they could own houses not much more expensive than renting. I believe their mortgage rates are 1.5% to 2.25%.
Also, Germans don't see housing as an investment but rather just a place to live. In Germany, rents even though are regulated, they can still increase by 15% over 3 year which is still not a small amount.
That's only a recent phenomenon, as market became risk adverse in Europe, and this is exactly the reason why housing price in Berlin rise shapely in the last few years.
9:25 pm
August 5, 2014
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Jon, German interest rates and mortgage rates have been at least 1% points lower than Canadian, U.S. interest rates for at least the last 17 years.
The other European countries such as Greece, Spain, Italy, Ireland, Portugal etc., had much higher interest rates, mortgage rates before they joined the EU and agreed to adopt the Euro as their currency.
Once again, speculators but they call them investors that borrow and buy multiple properties are doing this with lower interest rates pushing up their prices more rapidly than would otherwise occur.
Meanwhile, most Germans are content renting as they see their place of residence as shelter, place to live and not as an easy, money making opportunity that will payoff based on mostly borrowed money at cheap, real interest rates.
6:51 pm
August 9, 2014
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Jack Manning said
Jon, German interest rates and mortgage rates have been at least 1% points lower than Canadian, U.S. interest rates for at least the last 17 years.
The other European countries such as Greece, Spain, Italy, Ireland, Portugal etc., had much higher interest rates, mortgage rates before they joined the EU and agreed to adopt the Euro as their currency.
Once again, speculators but they call them investors that borrow and buy multiple properties are doing this with lower interest rates pushing up their prices more rapidly than would otherwise occur.
Meanwhile, most Germans are content renting as they see their place of residence as shelter, place to live and not as an easy, money making opportunity that will payoff based on mostly borrowed money at cheap, real interest rates.
Lower interest rate doesn't imply easy credit, banks in Germany are not willing to lend out so much for mortgage as they cannot securitize it and outsource the risk to investor or government, in the case of CMHC and its American counterpart
Reduction in interest rate in the PIGS are cause by the reduction is sovereign debt's interest as the market through thous countries will behave like Germany, which it turns out to be a mistake. As those countries' interest rate reduce, consumer debt and national debt started to raise as those countries consumer habit are fundamentally different from Germany due to culture issues, hence, created the situation of German financial institution lend money out to those countries' consumers, investors and government using money they earn from trade surplus German people and company make on thous countries.
Speculators in housing market are heavily regulated and are virtually non-existence in Germany, the reason Germany's housing price are rising sharply is because of capital flight from Southern Europe as wealthy people in those places move their money to Germany.
I do agree German people doesn't see buying a house as a "dream" that they need to attain, unlike their North American counterpart. I actually believe the Germans get it right as houses doesn't generate cash flow, which is what matters when you want to maintain your consumption level (and disposable personal income) in the long run (you don't always have assets to sell, right ?)
Thrift, to a certain extend, is a good thing in personal level and we should all do it, but thrift as a nation is a problem for global economy as this will create imbalance, notably between 1. China and US and 2. Germany and rest of Europe. In order to resolve this problem Germany need to deregulate their economy and open up their internal consumption market and turn away from having a large net export in their GDP.
7:42 pm
August 5, 2014
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Jon, if the western world and all countries that keep pushing consumer spending and debt being pile up to no end will make things worse in medium and long run.
You call it thrift or some call it frugality, it is called living within everyone's means. Why do you think they keep interest rates so low. It is because they need to keep up with their false promises of robbing Peter to pay Paul.
Who do they think they are kidding? Low inflation, deflation, making real estate being seem such a good place to keep one's money which many know it is so artificially overvalued by all types of interest rates that should be at least 4% to 5%. Interest rates are so low on all countries debt in Europe because Mario Draghi and ECB said they will do whatever it takes. It is a joke.
All central banks are the biggest money manipulators in history and this endless debt orgy by consumers, governments, corporations is the real problem not those people, governments, corporations that are trying or living well within their means.
The false hope of debt and LOW INTEREST RATES=PROSPERITY. Jon, one part of the communist manifesto is a central bank.
They setup the system on purpose to create imbalances like keeping people in debt for their entire lives and giving them a sense that debt is good if used for education, buying houses etc. This does not work for about 80% of the world's population.
It works for banks, financial institutions, hedge funds, mutual fund companies, ETF companies, REIT's and others that make money for their benefit only without using their own savings, investments from hard work, time.
Germans are the smart ones and then are blamed for imbalances. Jon, you just contradicted yourself. If real estate is so regulated in Germany then speculation in higher only higher real estate prices would not be able to occur but it is so what is it? Real estate is regulated or not regulated.
1:18 pm
August 9, 2014
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Jack, a societies' consumption is equivalent to its total income, if everyone in the society decide to live in a very, very thrift manner, this country's economy will not grow, if Dr. John M. Keynes come out of his grave right now, he will probably point his finger at us for the slow growth in economy. Obviously, I don't completely agree with him as high debt level increase the amount of leverage in society and make the economy system more vulnerable to economic crisis. At the meantime, it also reduce the amount of money that can be use to invest which is crucial for future economic growth.
I already mention that CMHC/Freddie Mac/Fannie Mae is a bad idea and will induce bubble in my previous post, I am not repeating here.
Lower interest rate doesn't necessary make people save less and spend more, one can end up saving more because it take them longer to reach their goal or debt while paying back more debt as debt become more affordable. It is the culture of excessive individualism and "style/individual expression" that lead to the problem of consumerism.
Debt is not evil, as long as it is under control, only debt that is accumulating in an out of control manner that is evil. ie: if your income is rising by 3% a year, but your debt is only rising my 1% a year, you are perfectly fine.
I can understand you are angry as you are a saver that are being robbed to help finance "style" and government pension/ welfare in the mean of low rate, to be honest, your anger will soon be resolve as the artificial bubble in assets price cause by QE is about the burst as fundamentally, our economy never really recover as people are busy paying back debt and the cheap loans only cause more money to run after assets price.
Financial institution are not evil either, they are here simply because we need them. Obviously through, they seems to hijack our government and make us work for them instead. Government really need to re-regulate the financial industry and stop institution from becoming too big to fall by limiting their scale.
Germans are the smart ones and then are blamed for imbalances. Jon, you just contradicted yourself. If real estate is so regulated in Germany then speculation in higher only higher real estate prices would not be able to occur but it is so what is it? Real estate is regulated or not regulated.
You probably have something important here, but do you mind clarifying yourself, I have difficulties understanding you here.
10:06 pm
August 5, 2014
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Jon, about Germans being the smart ones really what I am pointing out here is they are prudent and cautious with their money by not getting into a mountain of debt.
They realize that housing is a place to live and is shelter. It is not an investment so touted in Canada, U.S. Australia, Spain, Ireland and many countries that have already faced some real estate collapse like the ultimate case of Japan which is still suffering from 60%+ declines in average real estate prices with no real recovery anytime soon after 25 years.
They did not and do not buy into speculating in real estate like here in North America seeing it as a big payoff in their retirement years.
As for the comment about real estate in Germany being more regulated but speculation has occurred anyway with money coming in from southern European countries wealthier people is that it does not matter how much government or some other authority tries to keep speculation at bay, it will occur because government benefits from investments, commerce, taxes etc. They do not want to kill the golden goose completely.
This is because regulation is not an outright ban of higher or lower real estate prices. In a capitalism model of economies, this can never be controlled. The only place that I know that has a complete control on real estate prices is Cuba which made a law stating that you buy a house and then must sell it back to the Cuban government at the exact same price, not lower or higher. There were recent reforms made in Cuba so I am not sure if this still exists today.
The German government regulates real estate but speculation of higher real estate prices still happened which is why I said it is a contradiction on your part, Jon. Regulation can only do so much. Real estate prices have to be controlled by a socialist, communist or central government so there is no incentive to speculate and drive up prices or crash them either.
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