Measured yr/yr, EZ industrial output has been mildly underwater since a new downturn
accelerated in late 2011. This, coming on top of an incomplete recovery from the 2008 -
2009 deep recession, has resulted in a zone-wide rise of unemployment to the 12% level.
The more recent economic downturn reflects the intense liquidity squeeze imposed by the
ECB in the wake of a deceleration of the broad deposit base and credit growth as the bank
pursued inflation in 2010 which, realistically, had nowhere to go but down, anyway.
The liquidity situation bottomed in the middle of 2011 and has been improving reasonably
steadily since. If left on trend, there should be monetary and broader deposit bases that
are sufficient to underwrite noticeable EZ economic improvement by the latter part of 2013.
There is a risk to this assessment and that is that a liquidity trap is now being observed
reflecting hefty austerity programs in the more troubled countries coupled with regulatory
changes in banking which are forcing banks to allow loans to run off to reduce financial
leverage and build liquidity. Over the past few years, EZ credit outstanding has fallen by
$300 bil. easily (This data does not include deposit and credit info. post the ridiculous
and vengeful official actions brought against Cyprus, actions that could reduce EZ deposits
and shift more of the loan book beyond the EZ.) A better economy should follow the much
stronger liquidity environment, but the aforementioned impediments could stretch out the
The euro area stock market remains nearly 35% below its 2008 peak, and has been in a
broad trading range since mid -2010 when the Greek crisis and the monetary liquidity
squeeze both took hold. IEV Euro 350 Longer Term
The second IEV chart in the deck compares the IEV with the euro, the German ETF EWG
and the SPX. The IEV has entered a short term downtrend and both it and the EWG are at
risk of violating their respective uptrend courses from mid-2012. The euro has already
given way. The classical cyclical timetable, which interests me, would suggest better
euro area stock performance come this autumn. IEV 2010 -2013
US interest in the EZ is mixed. Some players think they see substantial longer term value
in EZ stocks given the very substantial discount to the 2008 highs, while many other players
see too many impediments to growth. The Cyprus affair is regarded as rank official
stupidity by most senior and successful investment players, myself included.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!