David Rosenberg's Take On Europe

Tyler Durden's picture

From David Rosenberg of Gluskin Sheff


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.

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Manthong's picture


What are THEY doing right?

knukles's picture

Telling the frogs to get buggered?

maxmad's picture

Rosey knows its over!

connda's picture

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

Shake, and then pour -- third World War.

Popo's picture

I fail to see how Rosie see's Australia as one of the "leaders of the pack".  

Jack Burton's picture

"What are they doing right?" Printing money like bloody mad is what they are doing. They are not in the Euro so they can Print and Print and Print and Print and Print. And they bloody well can keep printing.

Other than that, the UK is fast becoming Pakistan on the Thames! They are in for a fall so hard it will end centuries of English history and culture, what's coming is a third world zoo in what was once a "Green and Pleasant Land."

The Brits used to go to the jungles and deserts for adventure and conquest, now the jungle and desert has come to Britian for benefits and free medical care. And guess what, they are going to stay!

justinius1969's picture

We have the proud pound old chap, with our beloved Queen on it... what could possibly go wrong...  Sing along with me.. "Land of hope and gloooorry"....

chump666's picture

Australia.  Jeez.   Possible third month of deficit has no oil and struggles to keep operations costs down (inflation) - a disaster waiting to happen there, like Canada has a housing bubble to end all bubbles.  Asia outflows continue etc

Europe/Asia goes, so will America.  But UK long behold may just do ok, Gilts will be bid as will the GBP.  EU implodes into a puff of smoke a ton of cash will flow to the UK and maybe into rich northern Europe.  Yes, Norway and Scandinavia (gas/oil).

Jack Burton's picture

Yep!  Australia and Canada massive hosuing bubbles, massive consumer debt bubbles and dependent on resource export to booming China.

China slows, they crash, rising unemployment blows the housing and credit bubbles sky high. Potential disaster zones.

fnord88's picture

Can someone tell me if consumer debt matters if overseas banks go bankrupt? Most of Australia's debt is held offshore, to banks that technically are already bankrupt. When TSHTF what are the chances we have to pay any of it back? Plus when it happens, if gold behaves the way we think it will, Australia will be riches nation on earth.

Element's picture

You mean we'll be able to afford a family home again? Sweet!

But we're definately going to get a debt-deflation depression first, it'll just the symptoms will be considerably milder here than in most other countries.

Treeplanter's picture

It will be tough all over.  Canada has the resources to get by better than most.

Element's picture


Australia.  Jeez.   Possible third month of deficit has no oil and struggles to keep operations costs down (inflation) - a disaster waiting to happen ... - chump666

I often hear this laughably ignorant nonsense about Australia having no oil. Not that this is true, as highly prospective areas have been located, just not developed yet (and I've posted on this before).  But really, who needs reliance on oil when you have so much LNG?  Plus the country can chemically synthesise any lubricant required, as can the USA and Europe.  We have all the bulk feed-stocks needed to do this, so don't lack in any such respect.  We only use imported lubricants because crude is simply cheaper and the infrastructure and suppliers exists - for now.   But when it's not cheaper any longer, then synthetic substitutes WILL seamlessly take over from crude products (they already are! just have a look at the labels saying  "Fully Synthetic" on the oil products at the car service centre near you)

When are 'traders' going to get a fucking clue about basic stuff like this?

Then there's the fact that Australia is also set to become a major liquefied-energy exporter over the next three to five years.  The investment in bringing this online has been colossal, and grand-scale projects are springing up like weeds in a garden.  Many major projects are well underway or nearing completion, ready for export.  Plus farmlands are also turning into massive gas fields, where it was open grazing land a few years ago. It now looks like a sprawling industrial park when lit-up at night, as far as the eye can see.

That's what's happening in parts of Australia now, epic-scale energy development boom. It's so large people are starting to think that it may become too big.  The greater and more realistic risk is not that we'll find ourselves without day-to-day fuel needs met, or it becoming too costly, but that we'll produce so much energy that global prices must take a hit (and impair investments) as we and other large producers flood the market with a wave of new excess production volumes.

i.e. latent production capacity that exceeds existing contractual production volumes. Particularly when long-term export supply contracts to China, Japan, India and Korea are locked in at a know stable price to pay for the initial underlaying development investment.

So it's going to be really tempting to sell excess production to corner markets as competing suppliers try to establish who can supply the most volume the cheapest and most reliably, and thus gain export market supply dominance in the very biggest global markets (very good possibility that will be Australia).  But prices would be especially impaired if demand was also falling away, due to general European, US and Japanese economic depression, as supply was flooding in.

Obviously that would be highly stimulatory from an industrial and economic point of view, and that will lead to economic transition and reinvigorating.

What we are really seeing is the world now is a commitment to a process of, where possible, substituting crude and nuclear with LNG.

Frankly, there is not an will not be an 'energy supply crisis', due to a lack of supply, per-sec, though there very well may be a protracted economic price 'crisis', in many countries.

But what is occurring is a process of transitioning from coal and oil to LNG, used in combustion and for generating electrons, plus a parallel ramping in battery storage capacity, for a short term "Random Access" storage and use of electrons.

These transitions, from one dominant industrial fuel to another have always occurred in the past, and these transitions are always gladual and slow due to previous investments requiring gradual replacement, previously taking 50 to 70 years to complete the switch.

The notion that peak-oil and an actual reduction in crude supplies equates to peak-economy and peak-population though, seems more-or-less a misguided 'Club-of-Rome' type of bullshit, that is destined to be likewise scoffed at in retrospect for it's naivete.

USA, Russia, Australia, Canada, South East Asia and Middle East are all going to be produce stupendous volumes of LNG, for the rest of this century, and many countries are well-placed to create replacement lubricants, as needed an  as the economics lead to inevitable 100% substitution.

l1b3rty's picture
  • Australia
  • Canada
  • Denmark
  • Finland
  • Germany
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Sweden
  • Switzerland
  • U.K.

Yeah right.


xela2200's picture

U.K is AAA? It is nice to have your own currency. I guess.

Desert Irish's picture

sshhhh....just don't tell the Australians.....growth is forever

chump666's picture

Australia is in trouble, 3rd deficit in a row for this year, exports slaughtered.

Mar trade balance -1.6bn (consensus -1.4bn)
Deficit caused by 5.0% jump in imports (exports rose 1.6% m/m)
Q1 export values (volumes x prices) fall 10.4% (separate data showed export prices fell 7.0%)

Ok, would mean that, like Canada, they are running an economy on the housing bubble wealth effect + the AAA rated bonds...but not for long. 




LongSoupLine's picture

not to mention the repeated epic floods and hurricanes they've endured.

Element's picture

You've been watching the MSM again, haven't you?

Take it from someone who lives here, the cyclones were very much over-rated (I know, I went through a couple of them), they affect only smallish strips severely, they have not been especially economically disruptive or damaging.  "A land of droughts and flooding rains" is actually situation normal.

And in 2012 the cyclone season was practically a non-event! No cyclones hit the East coast at all, and only one major in a very isolated desert region in the west - big deal! 

The truth is, the entire outback is curently in an extremely good state of health.  Google this if you doubt it.  Graziers are almost universally delighted with the state of the land, water-holes, feed is abundant, and livestock is fat and healthy.  Crops are also doing extremely well, of course.  This situation will generate massive production yeilds, and profits, and economic regeneration in rural areas for the next two to three years.  The rain and cyclones have been a huge net-benefit to the economy and is actually one of the contributing reasons why we're going to go back into budget surplus.


Just two weeks ago, this:

Australia drought-free for first time in decade

Updated April 27, 2012 16:13:53



That isn't optimism, things are simply pretty damn sweet at present. 

Element's picture


Cult of reason - Australia Heading for ‘Mother of All Hard Landings’



Oh for fuck-sake that article was a joke.  It's valid points are about financialism, as a bubble - well, duh!

REALITY CHECK: prior to 2005 Australia's trade with China was almost but not quite non-existent.

So, we're like, ... you know, ... totally dependent on China now ... huh? .... rriiiiiiight!

China is a Johny-come-lately to our economy's development and size. The Australian economy was well-established and diversified prior to this, as were the minerals and energy sectors.  BHP was a giant before China started buying up iron ore mate. All this occurred long before the bum-rush of trade with China started ramping over the past 6 to 7 years.

The truth is the worst that will happen is we get a debt deflation and cheaper houses, the dumb go broke, as they should, and learn to budget, as they should have, and we go back to what we were doing before we started trading gravel for mouse-clicks, with China.

But what will really happen is this, China may/will depress for a bit, like big deal.  They have latent demand inertia, due to scale, so who really gives a fuck, you just plan for that eventuality, and we do.

Now have a look at two-way trade with India, it's been ramping hard since 2007, even more spectacularly than trade with China initially did.  And at some point Indonesia is really going to take off too ... and that is also going to be massive and lasting.

Dude, we really aren't worried about a downturn or recession or depression in either, or both.  All of these huge Asian State s and populations are generating secular demand and economic inertia by their very existence, and Australia is in the best possible location, as their aggregate resource demand is expressed across the whole region.

As for the AUD, we'd all be quite happy of it fell to 80 cents USD and stayed there for a bit.  Plus China, India and Japan would likewise each find this highly stimulatory, as their input prices in AUD, and resulting consumer price drop would put a sting in their step again.  The reason why AUD is high is because (1) we aren't printing like the rest of them, and (2) the economy has received massive investment in longterm production that will pay large profits and royalties for many decades.  

But perhaps an article like that above helps suppress AUD some, so that's a good thing for Australia and Asia. 

Ultimately, you can believe crap like that article if you want, but not if you want to make serious money, in the longer-term.

Just don't 'invest' in financialism, here, or elsewhere, as you definitely will get skinned.

BTHB's picture

Canada may be rated "AAA", but Rosie's list applies only to national governments, not state or provincial debt. Assuming this to be so, any economic downturn will seriously impact the perilous finances of Canada's largest province, Ontario. Compounding matters is the fact that the provincial government is run by a tenuous coalition of the Liberals and NDP, neither of which are known for fiscal prudence.

How bad are Ontario's finances? The deficit forecast in the 2012-2013 Budget exceeds $15.2 billion in addition to cumulative deficitis exceeding $48 billion since 2009-10. Unlike California, the perennial poster child of good financial practice among the US states that has to pay prior year general fund deficits from the next year's revenues, Ontario's accumulated deficit is rolled over each year, adding to an ever larger total. Net Provincial debt, according to Ontario's statements that accompany its Budget presentation, will exceed 39% in 2012-13.

Why is any of this relevant? The balance of fiscal flows in Canada have been shifting to the West for the past 3 decades, primarily Alberta and BC. There is little evidence this will reverse and seems likely to accelerate, given that PM Harper is from AB and is doing everything he can to increase oil, gas and other commodity exports from the West. As this happens, upward pressure increases on the CAD, and with it, Ontario's uncompetitive cost structure vis/a/vis manufacturing. The most populous province has a hard time competing with $1.00 CAD = $1.00 USD; it will be much more constrained if the CAD rises to $1.05-1.10 USD, as some of Rosie's work suggests. A less competitive manufacturing sector likely means higher unemployment, and with it, higher deficits.

Canada's real estate bubble was mentioned above. This affects two cities almost exclusively: Vancouver and Toronto. The former has slowed considerably in the past 12 months, while Toronto's continues to inflate. I've lived through 3 previous Toronto real estate bubbles, and they never end well. Each of the previous three was accompanied by exactly the same conditions present now: an appreciating CAD, rising energy prices and a swelling Ontario deficit. There's no reason to expect that this time will be any different, other than the magnitude of Ontario's accumulated Net Debt. The Federal Government is unlikely to be forthcoming with any aid when, not if, Ontario's finances tank, and instead of a $15 billion deficit, a $25+ billion deficit is more likely. Hardly AAA, and certainly something that will cause some disruptions more broadly in Canada.

A final thought: Quebec and the Maritimes are in equally dire condition, albeit, not as large as Ontario in terms of population. Beneath the veneer of solid Federal finances is the reality of Provincial restructurings waiting to happen.

Herkimer Jerkimer's picture

Excellent commentary. Thank you.


Except this time, we are leveraged to the teeth with the broken chain of risk/reward by the CMHC, having covered the banks bogus loans.


As my father loved to state, an axiom which the CMHC seemingly doesn't have the faintest, "If you want to swing the axe, you hold the wood."


I you want to make the loan, you hold the mortgage.


Sadly, when this bubble pops, the CMHC... The taxpayer will be on the hook. It will be interesting to see if the government starts pandering to the 99% to save their homes, or does the prudent thing, and lets it collapse.


What do you think I'm betting on?


Prepare for impact.


It's 1987/82 all over again, x10.


I'll be looking forward to sticking my money in the bank, at the right moment, like my mommy did for me, when I was just wee. At 19.75%.





max2205's picture

UK'ed. They bribe better

midgetrannyporn's picture

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...


They wouldn't have to borrow at all if it weren't for the maggot central bankers controlling everything. Politicians are corrupt AND stupid. The billionaire kleptocrat sez to the congressman: "shine my shoe boy, here is a shiny nickel".

Why Not's picture

UK as AAA - a joke, unless vast amounts of North Sea Oil are found

The Alarmist's picture

You know things are going pear-shaped when they have to move an aircraft-carrier up the Thames to project airpower over London.

lolmao500's picture


In surprise move, Netanyahu, Mofaz agree to form unity government, cancel early elections

PM, opposition leader reach dramatic late-night agreement to form national unity government, in which Kadima head Mofaz expected to be appointed deputy prime minister.

Under the agreement, Kadima will join Netanyahu's government and commit to supporting its policies through the end of its term in late 2013. Mofaz is expected to be appointed deputy prime minister, as well as minister without portfolio.

In exchange, Netanyahu's government will support Kadima's proposal to replace the Tal Law, which enables ultra-Orthodox youth to defer national service.

I think this means war with Iran. Soon.

The Alarmist's picture

Germany should have simply exited the Euro two years ago and spared the rest of Europe fromplaying the farce that they were anything more than along for the ride.

dinastar2's picture

Greece has defaulted, Portugal almost, Italy is still breathing thanks to the illusion of the seriuous -earnerst-rigorous face of the new premier Mr Monti but the spread with Germany on T Bonds is rising.France is now a fully socialist country addicted on debt, with a 56% of GNP redistributed through the State.Entrepreneurs are leaving France in strove to the UK.It bodes not nice for the Euro.

Hobbleknee's picture

Sweden is one of the bigggest debtors (public + private) in the world.  How did they get AAA?

luckylongshot's picture

AAA ratings at a time when all countries are forced to join the race to the bottom to keep their exports flowing seem farcical. What we are seeing is the health of economies steadily worsening so the AAA ratings of today are signs of who is least sick rather than who is healthy. What is needed is a transparent method for rating countries that would take the power away from the agencies and give it to the process. This would likely reveal that the AAAs of today would probably be low Bs if compared with countries 30 years ago.

DutchDude's picture

So i guess i better learn to speak Viking then...

Sandmann's picture

to ride off of Germany's strong balance sheet


Germany has not got a strong Balance Sheet 







Germany is in real trouble. Any relief is due to Gerhard Schroeder not Angela Merkel. She has done absolutely nothing except sit on her stool - it was Schroeder who pushed through reforms to make Germany more competitive

fredquimby's picture

"I fail to see how any [euro] country is going to be able to "grow" their way out of their deficits"

Thats because you haven't done your homework mate.


Mark to Market gold is how they are going to "grow" out of their deficits. (i.e The Euro Nuclear Option a la FOFOA)




QuietCorday's picture

My instinct is that Europe is falling because the present crop of politicians were born and formed post-war during a time of peace and relative prosperity, and that most of them are from fairly wealthy upper-middle-class homes. They have no experience of crisis, no experience of anything getting in their way, no experience of hard choices.

They are "fair weather folk" who think politics and governance is about planting flowers, painting hedges, giving away surplus vegetables, and making sure everyone's song gets sung at the village fete. Only when the first storm came, they had no idea they should cover the hayricks, bring in the cattle ... the thought of needing to preserve meat and pickle veg never entered their minds.

Looking back at early 20th century Germany, I do wonder whether the events of those 50 years were largely down to the same problem: leaders, governers and people who only really knew the "golden age of security" of pre-war Germany and Austria. Because they knew no other, they just did not have the tools to deal with the post-great war reality. Eventually, the "solution" for the Germans was a man who, rather than deal with the new reality, simply announced he would bring back the old.

I think this is what Europe and its people are trying to do. In the face of crisis, they are demanding politicians bring back the "golden age" of post-war welfarism and increasing prosperity, regardless of the fact that world has gone and was never sustainable over the long term. But the people will demand and demand, until they vote for the people that pop up and start to say they know how to achieve such a revolution back to an early state of play ... only they will need to nationalise businesses, impose wage and price controls, prevent internal movement of labour, hike taxes, impose rations, and monitor dissent for the sake of "public morale".

And the people, by that point, will go along with it.  

Sandmann's picture

they just did not have the tools to deal with the post-great war reality


Post Great War reality was horrendous for all Combattants - the destruction and loss of life and destruction of monarchies. 


The Left liked Mussolini because he was a Leftist, the Right because he was a Fascist. The Left liked Hitler because he gave them Socialism without Stalin and the Nationalists because they thought he would restore the Monarchy. 

Churchill wanted to pretend the War had cost nothing so put Sterling back on the Gold Standdard at PRE-WAR Parity. 


There was nothing special about German politicians - they lost that is all. The British would have lost without Imperial troops. The French would have been destroyed without the British. Without the Russians the French and British would have lost.  Germans had better soldiers, better artillery, better concrete - their politicians were just as deficient as the French or British