David Rosenberg's Take On Europe

Tyler Durden's picture

From David Rosenberg of Gluskin Sheff

MY TAKE ON EUROPE

Europe is a mess, politically, economically, and fiscally. LTRO gave a short lifeline and at the same time bound the ties even more tightly between bank balance sheets and government bond performance. For all the backslapping, LTRO was a failure, pure and simple. Just as QE — for if QE had been a success, nobody would be looking for a third round (more like the fourth).

I fail to see how any country is going to be able to "grow" their way out of their deficits, barring ECB debt monetization or via German acceptance of a common fiscal policy, which would then allow profligate sovereigns to ride off of Germany's strong balance sheet. The problem is that the German economy is starting to soften, and along with that I expect polls to start showing lesser support for providing backstops to the periphery. And from a geopolitical standpoint, an ever-isolated Germany spells even more instability. Gold and the gold mining stocks should be a beneficiary.

In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis — tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany's coalition is looking shaky in the aftermath of the faltering state election results for the CDU's (Christian Democratic Union) Free Democrat coalition partner.

This is quite a potent brew — financial insolvency, economic fragility and political instability.

Now we have governments, led by Mr. Hollande, who want to adopt "growth agendas" at a time when eroding credit quality is increasingly impeding fiscal borrowing capacity. The French vote comes quickly on the heels of the Dutch government collapse and is joined by a fractious election result in Greece. Germany and other pro-austerity/structural reform entities are the big losers. Then again, how cash-strapped sovereigns who need Germany's comparatively strong financial position embark on this new anti-fiscal-probity drive is an interesting question.
More uncertainty, more volatility, more risk-aversion likely lies ahead — and along with it, a further deterioration in government financial strength.
As it stands, globally, since the time the Great Recession took hold in 2008, we have seen the total value of government debt backed with AAA-ratings decline from over a 50% share of total outstanding sovereign credit to less than 10%. Quality is scarce, and as such should be owned.

In sum, this is not the backdrop for sustained risk-on investment behaviour. Both Bob Farrell and Walter Murphy see the current corrective phase in the market being extended over the near and intermediate term. I'm not sure I'd want to bet against them, even if Mike Santoli in Barron's and Paul Lim in the Sunday NYT are advocating a "buy the dips" strategy.

In terms of scouring the globe for countries that are currently being rated AAA by all three agencies, here they are:

  • Australia
  • Canada
  • Denmark
  • Finland
  • Germany
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Sweden
  • Switzerland
  • U.K.

If we did a further overlay with respect to the most attractive "real yield" characteristics — low inflation and attractive coupons along with strong national balance sheets — we would find Norway, Australia and Switzerland leading the pack.