Tea Leaves and Europe

U.S. economic growth – heavily concentrated among the wealthiest segments of society – is pretty solid. While the jobs people have might not be stellar or provide earnings comparable to pre-recession times, more people who are active in the American employment marketplace have jobs. But while World Bank estimates have raised U.S. GDP growth numbers from 3% to 3.2%, the prognosis for the rest of the world seems to be going in the other direction, a factor that sooner or later will impact us.

“The 19-nation euro area is projected by the World Bank to grow 1.1 percent in 2015, down from a June estimate of 1.8 percent. China will expand 7.1 percent, down from the 7.2 percent pace the bank projected in October and a 7.5 percent estimate in June. Japan will expand at a 1.2 percent clip, down from the 1.3 percent projected in June, according to the bank.” Bloomberg.com, January 13^th. As oil prices resumed their drop, and U.S. markets reflected a perception of instability, the inherent weakness in Europe was dramatically brought home by a financial move in Switzerland on January 15^th.

Since 2011, in order to keep the Swiss franc from skyrocketing in value, destabilizing the financial markets, and yielding to pressure from local exporters, the Swiss National Bank had locked the ratio of the Swiss franc to the euro at a maximum 1.2. But as the euro seemed to be free fall, this situation was no longer tolerable to the Swiss. So they unilaterally unlocked that ratio, and the financial world went into shudders. The Swiss franc shot up instantly, by as much as 23% (18% vs the dollar), before settling down by four percentage points. Currency trading firms, heavily reliant on the 1.2 ratio, saw their values plunge all over the world.

For example, “Shares of FXCM, an online currency trading service, plunged nearly 90 percent in pre-market trading on [January 16^th] after the company said that it might have breached regulatory capital requirements. The company said on [January 15^th] night that its clients had suffered losses of $225 million in the wake of the shock move by the Swiss. Trading in the shares were halted when the stock market opened… In the wake of the Swiss National Bank’s abrupt reversal, the British firm Alpari UK, a foreign currency broker, said on [Janaury 16^th] that it had entered insolvency as a majority of its clients sustained losses in excess of their account equity.” DealBook.NYTimes.com, January 16^th. Currency traders/brokers all over the world, great and small, took severe hits to their values, albeit most did not suffer the catastrophic losses that slammed FXCM and Alpari.

Not only are the economic fundamentals throughout Europe shaky, from the growing resistance in Greece to austerity measures (see below) to the seeming inability of larger nations like France to meet financial targets, but the Islamist attacks in Paris and the almost-attack in Belgium added to the global consternation reflected by Boko Haram in Nigeria, the Taliban in Pakistan and ISIS in the Levant as well as the conflict in Ukraine further erode confidence in Europe. Despite the precipitous fall in the cost of oil and gas, Europe’s rather complete reliance on fossil fuel imports from volatile regions only amplified the instability.

The impact on the overall Swiss marketplace reflected the surge in the franc in other ways. “Stocks in Switzerland were down more than 4 percent and investors fled to perceived havens like German government debt. Swiss government bonds, also a haven in times of turmoil, rose sharply in price, taking the interest rate of the 10-year bond, which moves in the opposite direction, below zero for the first time. In effect, investors are paying for the privilege of holding Swiss assets.” DealBook. Even at a negative interest rate, where investors effectively are paying to own Swiss francs, there were plenty of takers.

Greece just elected a government that has made it clear that that country cannot meet its EU bailout obligations and will not continue to live under what it believes to be a crushing austerity program imposed by its creditors. “The failure to reach a deal brings both sides closer to the precipice: Greece’s current agreement expires at the end of [February], and putting together a new one will be much more complicated than tweaking the existing one, officials said. However, even without a deal, the horse-trading could theoretically stretch out for weeks or even (if the European Central Bank is willing) until June, when Greece faces the hard deadline of a big debt repayment that it can’t possibly meet without money from somewhere else.

“[The February 16^th EU meeting with Greek representatives] was short by Brussels’ standards and (seemingly) bad-tempered by anyone’s: Eurogroup chairman Jeroen Dijsselbloem and European Commissioner Pierre Moscovici were both visibly exasperated in a joint press conference at the lack of progress in finding the elusive ‘common ground’ that would allow a classic, Euro-style compromise.” Fortune.com, February 16^th. Can the EU even survive a Greeck defection from the EU?

These are the tea leaves in a whole pile of macro trends. Generally, Western nations with limited natural resources and heavy commitments to social programs are faring worse than expected, and the “recovery” they need has been most elusive. Switzerland, clinging to its banking secrecy laws and political neutrality, has managed to hedge its bets by moving its rather flexible capital anywhere in the world where there is money to be made… with little consideration for regional or local issues. In effect, Switzerland is a free-floating economic nation that purposely does not align itself with any region or political system, avoiding global conflicts and controversy wherever it can. They listen to speeches from NATO leaders and Russians alike and shiver at what they perceive to be percipient war-mongering.

Not so with the rest of the Western world, with heavy military and security challenges and larger heterogeneous populations to deal with. What seems like a complex and difficult-to-comprehend financial twist – like the revaluation of the Swiss franc noted above – is nothing more than a tea leaf reading of the rise of Asia and the decline of the West. It reflects the pendulum of history, a cycle that has repeated itself for millennia. With one huge caveat, at least when it comes to planet earth: the ability of people to migrate to a “new world” is not available anymore, and even the existing fields have to deal with the expected changes from global climate change. The European Union is stuck in its own mud.

I’m Peter Dekom, and understanding mega-trends does being with amalgamating all the tea leaf readings into comprehensible patterns reflecting expected change.