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Wednesday, December 19, 2012

Time to short Germany?

 London, Dec.19, stock tips .-  What’s the best-performing developed economy over the last decade? That is an easy question.
It wasn’t the U.S., and it certainly wasn’t the U.K. Both those economies turbo-charged their performance with debt, and then discovered that there was no such thing as a free lunch. Japan? Obviously not. It remained stuck in its second lost decade. High-tax France? It turned a trade surplus into a yawning deficit. You could make a case for Australia and Canada, but right now both look as if they might have been simply riding the commodity boom – with a nasty crash lurking just around the corner.

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ThyssenKrupp AG is only one of several world-class German industrial giants.
It was quite clearly Germany. It has grown consistently through the last decade — as fast if not faster than any other major economy. It has turned itself into an export powerhouse, selling almost as much around the world as China, and without the benefit of cheap labor, and with all handicaps of high welfare costs and relatively short working hours.
Germany exports $1.547 trillion of stuff every year, which is a bit more than the far-larger U.S., and almost twice as much as Japan. Its total debts remain low, and it racks up big trade surpluses year after year. It has becomes the treasurer of the euro zone, and the world’s most financially stable major power. It is the country everyone else looks to for bailouts — a sure sign of economic success.
If the first Wirtschaftswunder, or miracle economy, ran from 1950 to 1970, the post-unification Germany of the last decade was a second one. But now it looks to be over. Or kaputt as they say in Germany. For investors that means that shorting German equities and bonds may well be one of the best plays of 2013.
The latest economic data coming out of Germany suggests its mighty economy is starting to wobble. Industrial production — and this is still very much an industrial economy — shrank by 2.6% in November. The Bundesbank now projects growth of just 0.4% in 2013, compared with a forecast of 1% growth six months ago. It might well turn out to be a full-blown recession.
True, economies go through cycles. Even the strongest suffer the occasional downturn, especially when the whole world is struggling. But there are three reasons for thinking that something far more serious is about to hit Germany.
First, much of the boom of the last decade came on the back of the explosive growth of the emerging markets, and China in particular. Just take a look at where all those German exports go. Its neighbors in the euro zone account for only 40%, while the rest of the world accounts for 60%. Exports to China have quadrupled in the last decade, and now account for almost 6% of the total, while exports to the U.S. have dropped from 10% of the total a decade ago to about 6% now.
The trouble is, German exports are highly concentrated — and also vulnerable.
Mechanical engineering, automobiles and pharmaceuticals account for the vast bulk of what Germany sells around the world. It boomed as a supplier of precision-engineered capital goods and machine tools to the emerging markets.
But those economies are developing fast, and transforming into consumer economies. Increasingly, they won’t need German machines to build their factories anymore — they will make their own. And as they get richer, those countries will need fewer capital goods, and demand more luxuries. A German car is always going to be a prestige product. But the newly rich Chinese or Indonesians will want American smartphones, French wines, or Italian clothes — not the kind of stuff that German companies make.
The Germany economy benefited hugely from a phase of emerging markets growth, but that phase is now over.
Two, the euro-zone recession is catching up with it. Economies such as Italy and Spain will stay stuck in recession for a long time. The Italian economy is shrinking by 2% this year. The Spanish economy shrank by 1.4%. The French economy is stagnant. So not only is the demand for the 60% of German exports that goes to the rest of the world likely to stall, the 40% that goes to the euro zone will suffer as well.

'Abe trade' expected to flourish

Fresh from a landslide election victory, Japan's next prime minister, Shinzo Abe, pressed ahead with his top priority of reviving the sickly economy, vowing a hefty spending package and increasing pressure on the central bank.
True, domestic demand could take up some of the slack. But Germany has never developed the kind of credit-card economy that allows the U.S., for example, to ride out slumps in global demand.
If exports suffer, it is very unlikely that German shoppers will come to the rescue. Nor will the government. Despite what you might read, German government debt is high. At 82% of gross domestic product, it is not as high as Italy, but is comparable to the U.K., and higher than Spain. That doesn’t leave any space for a major stimulus from the state.
Three, the bills for the euro-zone debt crisis are falling due. So far, it hasn’t cost any real money — just an endless series of fudges and promises. In fact, Germany has made a profit on the money that has been used to bailout the periphery. It costs less for the German government to borrow than it charges the Greek and Irish governments for the loans.
That can’t last.
Sooner or later much of the Greek debt will have to written off and so will much of the Italian and Spanish. The bills will end up in Germany, either directly on the books of the government, or else on the balance sheets of banks that will have to be bailed out. That will lead to an explosion of debt at a time when the economy is sliding into recession — and may even force cuts in government spending.
For investors, there is a clear message in this. While some of the main European bourses such as Italy and Spain look relatively cheap, so long as political troubles can be overcome, German assets look way too expensive. The benchmark DAX index(ITF:DX:DAX)   will crash and bund prices will fall sharply as Germany’s liabilities become evident.
The big short right now? Germany. .... Continue to read.
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