Three Gaping Holes In EU "Recovery" Story Could Cost Investors Millions
The whole “recovery” in Europe never made much sense to us.
We are told repeatedly that Europe has passed through the storm, that the EU economy and financial system are on the mend, and that Europe is now the place to be investing.
However, the fact of the matter is that economic data can be fudged for political reasons (e.g. Angela Merkel’s re-election bid in Germany), riots/ protests can be ignored or marginalized by the media, and the real state of bank balance sheets can be hidden as long as you avoid major margin calls or funding stressors.
Indeed, considering that Europe’s problems took years to unfold, despite the clear evidence that its banking system was virtually insolvent, the fact that things appear calm in Europe today doesn’t really say much about the true state of affairs over there.
So what truly has improved in Europe?
Bonds yields have fallen… but when you’ve got sovereign governments (via social security funds), the ECB, and bank of international settlements all buying your bonds… odds are they’ll fall in yield.
What about corporate earnings and revenues? Well if you are comparing your results to 2012 when the entire EU banking system almost imploded, chances are they’ll look pretty good. If you compare your physique to a dead guy, you’ll look healthy no matter how out of shape you are.
And then of course there are European stocks, which have been roaring higher ever since ECB President Mario Draghi stated he would do “whatever it takes” to keep the EU financial system afloat (somehow this claim is more relevant than the actual monetary or banking laws of the EU).
Indeed, EU financials have not only more than doubled since the dark days of 2012… they’ve in fact exceeded their pre-crisis 2011 highs!
But then again, when your Central Bank gives banks access to unlimited capital in exchange for totally garbage collateral priced at 100 cents on the Euro (despite it being worth at most half of that), you’re likely going to see a lot of liquidity move into stocks.
At the end of the day, all of the data points used to claim that things have improved are largely accounting gimmicks. The people claiming that all is well are the same folks who denied there was a problem to begin with… and who, not coincidentally, draw the vast majority of their political and social capital from perpetuating this claim.
So here are some rather staggering data points Europe needs to confront before stating “all clear.”
- As of 2012, an incredible 25% of the total EU population (120 MILLION people) was living in poverty or social exclusion (the number has since increased by four million more… so much for things improving).
- In 2011, child poverty in Spain was an incredible 30%. That was before things got ugly in 2012.
- Youth unemployment in Europe is an amazing 22% with troubled countries like Spain and Greece showing levels more than twice that.
The solution to these problems? Continue to claim that the crisis is over… and put into place various schemes to steal citizens’ money if things get worse again (Cyprus snatched over 40% of all deposits over €100,000 during its recent banking issues).
When you are actively promoting plans to snatch deposits to prop your banking system up (see the recent IMF proposal), you are not in “recovery.”
We don’t know if things will erupt tomorrow, next week or next year. But we do know that the “recovery” is largely a work of fiction… and that the crisis will erupt again at some point.
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Phoenix Capital Research
Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.
Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.