Day: February 6, 2013

Feb

2013

The European House of Cards is About to Collapse

The following is an excerpt from our most recent issue of Private Wealth Advisory. In it we outline how the EU’s economy is beginning to collapse again, at the precise moment that Spain, Italy and Greece are becoming embroiled in major corruption scandals.

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The house of cards that is Europe is close to collapsing as those widely held responsible for solving the Crisis (Prime Ministers, Treasurers and ECB head Mario Draghi) have all been recently implicated in corruption scandals.

Those EU leaders who have yet to be implicated in scandals are not faring much better than their more corrupt counterparts. In France, socialist Prime Minister Francois Hollande, has proven yet again that socialism doesn’t work by chasing after the wealthy and trying to grow France’s public sector… when the public sector already accounts for 56% of French employment.

France was already suffering from a lack of competitiveness. Now that wealthy businesspeople are fleeing the country (meaning investment will dry up), the economy has begun to positively implode.

The first sign of this came actually came from Germany. As we noted a few months ago, Germany had prepared a working group to examine the impact of an economic collapse in France.

German Finance Minister Wolfgang Schaeuble has asked a panel of advisers to look into reform proposals for France, concerned that weakness in the euro zone’s second largest economy could come back to haunt Germany and the broader currency bloc.

Two officials, speaking on condition of anonymity, told Reuters this week that Schaeuble asked the council of economic advisers to the German government, known as the “wise men”, to consider drafting a report on what France should do…

“The biggest problem at the moment in the euro zone is no longer Greece, Spain or Italy, instead it is France, because it has not undertaken anything in order to truly re-establish its competitiveness, and is even heading in the opposite direction,” Feld said on Wednesday.

“France needs labour market reforms, it is the country among euro zone countries that works the least each year, so how do you expect any results from that? Things won’t work unless more efforts are made.”

http://uk.reuters.com/article/2012/11/09/uk-germany-france-economy-idUKBRE8A80MN20121109

This German concern has proven to be well founded, as the recent spate of French economic data has been truly horrific.

Auto sales for 2012 fell 13% from those of 2011. Sales of existing homes outside of Paris fell 20% year over year for the third quarter of 2012. New home sales fell 25%. Even the high-end real estate markets are collapsing with sales for apartments in Paris that cost over €2 million collapsing an incredible 42% in 2012.

Since the EU Crisis began in 2008, France and Germany have been the two key countries backstopping the implosion. The fact that France is now facing an economic implosion does not bode well for the future of the Euro or the EU.

The other sovereign backdrop for the EU, Germany, is also experiencing an economic slowdown.

The German economy was hit hard by the euro zone crisis in the final quarter of last year, shrinking more than at any point in nearly three years as traditionally strong exports and investment slowed, the Statistics Office said on Tuesday…

Gross domestic product shrank by 0.5 percent in the final three months of 2012, the worst quarterly performance since Germany fell into a recession during the global financial crisis in 2008/2009 and only the second contraction since it ended.

The parlous fourth quarter pushed overall growth for the year down to 0.7 percent, a sharp slowdown from the 3.0 percent registered in 2011 and a post-reunification record of 4.2 percent in 2010. The 2012 figure was a tad below a Reuters consensus forecast for growth of 0.8 percent.

http://www.reuters.com/article/2013/01/15/us-germany-gdp-idUSBRE90E09Q20130115

Thus, we find that Europe’s primary political market props (EU leaders including ECB head Mario Draghi) are coming unraveled at the precise time that EU banks are showing warning signs and the most important EU economies are heading sharply south.

2013 is going to be a very interesting year for Europe.

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Phoenix Capital Research

Feb

2013

These Guys “Made” 2% of Their Country’s GDP Last Year

Over the last 30+ years, the Chinese government has maintained control of the economy by gradually implementing reforms that permit greater economic freedom to its citizens.

The citizens in turn have gone along with this scheme because they believed that the system would permit them a greater quality of life and the potential of getting rich before they got old.

In broad brushstrokes, the data supported this view: starting with the re-opening of formal trade arrangements in 1971, China has undergone a near unprecedented level of economic transformations. The country’s per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.

In those 20 years, official statistics indicate more than 300 million Chinese ascended out of poverty with accompanying dramatic changes in lifestyle, professions, and diet: between 1985 and 2008, average Chinese meat consumption more than doubled from 44 pounds to 110 per year.

Moreover, the China consumer (which most analysts believe has been suppressed) saw a tremendous change in habits, with consumer spending rising an average of 9% a year for 30 years. Even high-end luxury goods manufacturers such as Burberry and Tiffany’s opened stores there during the boom.

However, this all came to a screeching halt in 2008. As the global economy collapsed, China found its export driven manufacturing economic model was terribly flawed. The Government, in a panic, unleashed a stimulus program equal to nearly 18% of China GDP.

This plan worked until two items developed:

1) The Global Central banks let the inflation genie out of the bottle.

2) The Chinese population began to notice that while it was suffering, many ruling party officials were living high on the hog.

Regarding #1, with nearly a third of its population living off less than $2 per day, any bump in food prices hits China much harder than the US and other developed nations. With food prices hitting record highs in 2008 and then again in 2011, China began to face massive civil unrest.

Regarding #2, China’s government has a history of rampant corruption. Between 1991-2011, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991. By way of perspective, imagine if members of US Congress fled the US taking $2 trillion+ with them (US GDP was roughly $7 trillion in 1991).

This corruption continues today. If anything it’s gotten worse:

The CDIC report, which was obtained by the Economic Observer newspaper, suggested that nearly 10,000 luxury homes had been sold by government officials in Guangzhou and Shanghai alone last year.

It also claimed that an astonishing $1 trillion (£630 billion), equivalent to 40 per cent of Britain’s annual GDP, had been smuggled out of China illegally in 2012.

Economists and experts cast doubt on the figure, but said the flow of money from China was dramatic. Li Chengyan, a professor at Peking University, suggested that a total of roughly 10,000 officials had absconded from China with as much as £100 billion.

http://www.telegraph.co.uk/news/worldnews/asia/china/9815998/Chinas-Communist-party-cadres-launch-property-fire-sale.html

Let’s provide a little perspective on the more conservative number in the above article. £100 billion translates to roughly $157 billion. China’s entire GDP is $7.3 trillion… so Chinese officials stole an amount equal to roughly 2% of China GDP in 2012 ALONE.

An equivalent case for the US would be if it were discovered that members of Congress fled the US taking $300 BILLION with them last year. Bear in mind, if you added up the total net worth of every politician in Washington you wouldn’t come even close to $300 billion.

And Chinese officials stole the equivalent of this in ONE YEAR. Not over the course of a decade but in a single year.

In a country where the average college grad makes $2,500 per year, this kind of corruption is a MASSIVE problem for the Chinese government. Which is why those betting on China continuing to grow at a breathtaking pace are overlooking some of the larger cultural problems the People’s Republic is facing today. With inflation on the rise and corruption becoming more and more apparent, China has MAJOR problems on its hands. And massive stimulus will only exacerbate them.