Europe
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UK
24 Oct 2022 |
Labour will have a much tougher time trying to discredit the new UK prime minister
Including the one just selected, there have been eight prime ministers of the United Kingdom since Maggie Thatcher left that post in 1990; seven have been Tories (Conservative Party), and one has been a member of Labour. The newest resident of 10 Downing Street, Rishi Sunak, has made it clear who he most idolizes: Margaret Thatcher. On its face, the optics of having been through four Conservative Party PMs within the last three years and three within the past seven weeks should bode well for Labour going into the next general election, which must be held no later than early 2025 (the last, held in December of 2019, was a landslide victory for the Tories). But Rishi Sunak is no Theresa May, nor is he a Liz Truss; the left will be in for a bit of a surprise as they feign insult at every turn and begin their interminable attacks. At age 42, Sunak will be the youngest prime minister since William Pitt the Younger assumed office—at age 24—in 1783. Indian by heritage, Sunak’s mother was a pharmacist and his father was a general practitioner in the National Health Service. After graduating from Oxford, he received his MBA from Stanford while living in the United States. Although he was Boris Johnson’s chancellor of the Exchequer (think Treasury secretary), he resigned this past summer after questioning his boss’ ethics. He has experience in the world of investment banking, working at Goldman Sachs and as a hedge fund manager in the US. Following in his idol’s footsteps, Sunak believes in lower taxes and controlled government spending; though he did oversee the massive furlough program which made payments to the millions of Britons who lost their jobs during the pandemic. He enters office at a critical period, as economic conditions in Great Britain continue to deteriorate. Facing the twin culprits of weak economic growth and rampant inflation (stagflation), his honeymoon period will be short. However, his real-world experience in finance should serve him well, despite the loud and obnoxious voices of his critics. Rishi Sunak may never breathe the rarefied air of the Iron Lady, but we expect him to be a highly effective PM—to the chagrin of his haters. We will also make the bold prediction that he will still be in power for the next general election, which he will proceed to win. For investors wishing to take advantage of an economic rebound in the UK, look at EWU, the iShares MSCI United Kingdom ETF. One of its top holdings—Diageo PLC (DEO $165)—is an inaugural member of the new Penn International Investor fund. |
ECB DFIR
0.75% 08 Sep 2022 |
Despite severe recession risks, the European Central Bank raises rates 75 bps
Typically, in the face of a potentially severe economic downturn, a country’s (or region’s) central bank will begin lowering interest rates in response. In an illustration of just how wrongheaded the ECB’s decision was to go negative with interest rates back in 2014, Europe’s central bank has been forced to do just the opposite: raise rates. It began back in July, when the ECB raised its deposit facility interest rate from -0.5% to 0.00%—a 50-basis-point hike. Now, due to runaway inflation (primarily caused by the energy crisis), the bank has been forced to match the Fed’s most recent action and raise rates another 75 basis points, to 0.75%. In addition to putting downward pressure on inflation, this move should also shore up the euro, which recently dipped to parity with the strengthening US dollar. The irony of the ECB’s needed move is that the European Union is simultaneously pumping hundreds of billions of euros into the economy to help families deal with skyrocketing energy costs. Basic economics says that when a central government pumps money into an economy, inflation naturally increases. Eurozone inflation rose to 9.1% in August and is expected to hit double digits in September. The ECB, like the Fed, has an inflation target rate of 2%. It has a long way to go before getting anywhere near that number, unless a severe recession grinds the European economy to a halt. It has been a full decade now since the key European rate has been above zero. ECB President Christine Lagarde, meanwhile, has signaled more hikes to come. These hikes are needed, but they will only increase the likelihood of a deep recession hitting the continent this winter. |
Energy
Crisis 25 Aug 2022 |
Europeans face a harsh winter thanks to skyrocketing energy prices
Americans have certainly noticed their energy bills rising this year, and the problem will be exacerbated this winter when most households switch from their electricity-powered a/c to natural gas-powered heating systems. In fact, one in six American households now have overdue utility bills—the largest percentage on record. But Americans’ problem is nothing compared to that of their European counterparts, who now face an astronomical spike in energy prices. The long-term average price in US dollars for one million British thermal units (MMBtu) of natural gas imported into Europe is $4.20. Today, that figure has skyrocketed some 718%—to $34.35—from its average. Electricity rates in Germany are now six times higher than they were last year, while the French are facing €900/megawatt-hour energy prices—ten times the cost as last year. France’s issue has been magnified due to its nuclear energy problems—over half of the country’s reactors are offline due to maintenance, repair needs, or river issues (reactors need massive amounts of river water for cooling; water levels are low right now, and temperatures are unusually high). While governments grapple with how to best help their citizenry with out-of-control prices, there are no easy answers. The long, hot summer in Europe will morph into a frigid and painful winter, much to Putin’s delight. We have been underweighting both developed and emerging markets in Europe due to a host of economic issues. First and foremost is the continent’s massive energy crisis; a problem which came about due to an overreliance on Russia for its needs. Perhaps France and Germany will learn from this, but it will take years for the problem to be resolved. |
Russia
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As tech companies from around the world end shipments to Russia, Chinese firms are licking their chops
(08 Mar 2022) Last week, Apple (AAPL $159) stopped selling its products in Russia and removed state-controlled RT News from its App Store. Although the company doesn't have a physical footprint in Russia, visitors to the online Apple store would get the message that products are "unavailable for purchase or delivery." No problem, right? Russians can simply turn to the Samsung Galaxy. Not so fast. South Korea's Samsung, which holds a larger market share than Apple in the country, just announced that it, too, would halt all shipments of phones to Russia, in addition to consumer electronics and chips. On the tech front, similar moves have been made by the likes of Microsoft, Electronic Arts, Nintendo, IBM, Intel, and Sony. The united global front against Russia's invasion of Ukraine has been nothing short of remarkable. Sadly, this united front does not extend to that country's neighbor to the south: China. China-based Xiaomi is the second-largest phone seller in Russia, while Hong Kong-based Lenovo holds that distinction in the PC market (behind HP, which is also halting sales). Huawei Technologies, based out of Shenzhen, China, is already Russia's top telecom equipment provider, and the company has been battling Sweden's Ericsson for 5G contracts in the country. The latter announced back on 28 Feb that it would suspend deliveries until Russia ends its war against Ukraine. There is no doubt a stronger economic and even military alliance forming between Communist China and the former communist state of Russia—birds of a feather, but the worldwide condemnation of Russia's military actions will make the new love affair tenuous for Xi Jinping and the ruling CCP. Especially in the year when Xi hopes to cement his role as "ruler for life." And that last factor is really all we need to know about China and Russia to understand the nature of the threat the West faces going forward. Despite their love affair, both Xi and Putin have undoubtedly been shocked by the level of global cohesiveness against Russian aggression. China has so much as telegraphed that this is all about Taiwan, a nation which will one day face the same fate as Ukraine. The greatest weapon the West has against these leaders is their own hubris. "Leader for life" may look great on paper, but maintaining order and controlling the narrative in this new world of smartphones, communication satellites, and Internet access will be a Herculean task—especially as the civilized world continues to wake up to the threat both pose on the world scene. Two years and two disasters later, no sane mind could argue that those threats aren't clear and present. |
Germany
Russia |
Trump couldn't get Germany to raise its defense spending; Putin just did
(28 Feb 2022) Just how mentally stable Vladimir Putin is right now is open for debate, but one component of his unprovoked invasion of neighboring Ukraine is crystal clear: he is taken aback by the cohesion of the Western world against his actions; specifically, Germany. Germany has become irresponsibly reliant on Russia, a condition going back at least as far as Angela Merkel's ascension to power in 2005. This has always seemed strange to us, as she was raised in East Germany under the thumb of the Soviet empire. She is also highly intelligent, earning her doctorate in quantum chemistry and working as a research scientist before the fall of the Berlin Wall. It is hard to imagine anyone more acutely aware of Russia's tactics than Merkel. Nonetheless, as the country phased out coal and nuclear energy, Germany's leadership allowed itself to become more and more reliant on Russian commodities, especially in the energy sector. Chancellor Merkel's party recently suffered its worst defeat since it was founded in the aftermath of World War II in 1945. The country's new leader is Olaf Scholz, head of the center-left Social Democratic Party (SPD). His party, and the Greens who have formed an alliance with the SPD, have never been fond of the already-built Nord Stream 2 pipeline, but Putin was angered (and surprised, we would argue) when Germany actually halted approval of the pipeline for operational status due to the invasion. Now, they are taking steps which have surprised even us: they are planning on a massive boost in defense spending. That is something Germany is not known for doing, to put it mildly. Just ask former President Donald Trump, who vociferously and unsuccessfully argued that our European allies needed to at least hit NATO's 2% of GDP target for defense spending. Now, thanks to Putin's aggression on the continent, Scholz has announced that his government will funnel 100 billion euros ($113B USD) into a modernization fund for Germany's military. Additionally, he announced that the country would allot at least the 2% target on defense spending by 2024. On a related note, Germany even said it would supply weapons to Ukrainian fighters—a dramatic change in posture for the nation, and certainly the SPD, which has a history of warm ties to Moscow. Germany's moves are great news for the cause of freedom. The wild card, however, remains Putin's state of mind. It is rather disturbing to consider just how far this mercurial autocrat will go to prevent his image from being damaged or ego from being bruised. Sadly, we cannot rely on the Chinese government to coerce its ally into pulling back. Winnie the Pooh's evil doppelganger is trying to portray an image of China being above the fray, but it is evident which side he supports. Birds of a feather.... |
Russia
Ukraine Belarus |
The US has warned Europe to be prepared for a potential Russian invasion of Ukraine
(12 Nov 2021) Russia's mercurial de facto dictator, Vladimir Putin, doesn't need an excuse to cause problems and wreak havoc, but he currently has two: a migrant issue and a pipeline issue. And, according to the Biden administration, Ukraine might be the battleground. The US has warned its Western allies in Europe that Russia is building up its forces near the Ukrainian border, and some level of military operations in the country—to include a possible invasion, may be in the cards. On the energy front, tensions have been heated between Western Europe and Russia, which provides nearly half of the natural gas to countries such as Germany. (Poland, it should be noted, receives most of its natural gas from the United States, after shunning Russia's Gazprom.) Putin is demanding that European regulators immediately approve the already-built Nord Stream 2 gas pipeline which runs between Russia and Germany. Despite Europe's severe gas crunch and skyrocketing LNG prices, the pipeline is in limbo due to Germany's new left-leaning government which is currently being formed. The US and Ukraine have vehemently opposed the pipeline. On the migrant front, thousands of Belarus refugees have flocked to that Russian ally's border with Poland in an attempt to get into Western Europe. Poland, a staunch US ally, has held firm on the issue, with full backing from the EU. This has enraged the president of Belarus, Alexander Lukashenko, who is now threatening to cut off LNG supples from another pipeline which travels from Russia to the West. All of this comes at a time when energy prices are at multi-year highs, meaning Russia, which has an energy-based economy, is suddenly feeling even more emboldened than usual. For all of America's challenges, Europe is currently getting hit with crises on all sides of the economic spectrum, from a new wave of the pandemic to the severe energy problems. Granted, many of these challenges are from self-inflicted wounds, but the best course of action they could take right now is to make Putin understand that military action on his western front will not be tolerated. Sadly, the historical record of Europe standing up to bullies is spotty, at best. |
Germany
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In a messy German election which will lead to months of chaos, one thing is certain: Merkel's coalition suffered a defeat
(27 Sep 2021) After sixteen years in power, Angela Merkel had anointed her would-be predecessor: Armin Laschet. The only problem with that pick was the fact that Laschet was a weak, unlikeable candidate. That undeniable truth came to fruition during the weekend elections in Germany, in which Merkel's right-leaning coalition of the Christian Democratic Union and Christian Social Union received just 24% of the vote—the worst results for the alliance since the end of World War II. The leading vote-getter in the elections was the left-leaning Social Democratic Party (SPD), which scored 26% of the vote. That party is now in the driver's seat to form a new coalition with the Green Party, which garnered 15% of the vote, and the liberal Free Democratic Party, which had an 11.5% show of support. The SPD's leader, Olaf Scholz, is now in the best position to become the next chancellor of Germany, but nothing is certain. The next leader must be chosen by the German parliament, which will involve cobbling together at least three political parties in a loose coalition to garner enough votes to elect that leader. Americans tend to see their government as dysfunctional; tracking the German results makes it abundantly clear that chaos in Western elections tends to be the rule rather than the exception. Of course, this is a far more palatable situation than the controlled "election" process in places like China, Russia, North Korea, Iran, and Venezuela. Germany, through Merkel, has been the dominant European voice for over a decade. This election will probably change that, either moving more power over to the French, or—more likely—creating a power vacuum on the continent. As the Western world tries to contain China's grand ambitions, which include taking full control of Taiwan, neither of these two outcomes are desirable. At a time when leadership from the West is most critical, we will suffer through a period of ineffectual coalitions having the power to do little of importance. |
France
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France is furious at the US for shutting them out of submarine deal
(17 Sep 2021) We have never been accused of being Francophiles. The European nation has shown, time after time, that its own interests come before all else, even if that entails dealing with the likes of Iran or rebuking allies for some myopic gain. Therefore, we find the latest tiff between France and three of its allies (the US, the UK, Australia) rather amusing. At the heart of the issue is a new security pact which calls for the US and UK to provide Australia with nuclear-powered submarines; part of an overall strategy to combat China's growing threat in Oceania, the region between the latter two nations. For all intents and purposes, the deal blows out of the water a 2016 agreement in which France would sell Australia 12 diesel-powered subs from French defense contractor Naval Group. A livid French foreign minister proclaimed that, "this unilateral, brutal, unforeseeable decision really looks like what Mr. Trump was doing." He went on to call the pact a "stab in the back." Comically, the foreign minister said that the deal highlights the need for the EU to pursue its own strategic autonomy (free from the US). That statement is farcical in that France, which ordered US troops off of its soil in 1966, has made it quite clear that it no longer wishes to rely on help from the US in countering security threats—except, of course, where money is involved. France has been a major cheerleader of the US shouldering the lion's share of NATO's financing, to its own benefit. Australia, meanwhile, is at ground zero in China's war on the West, and has been a strong vocal critic of the communist government since the pandemic began ravaging the world. Whether or not this deal is, in part, a retaliation for France's recent attacks on the Biden administration is hard to say. Here's what we can say: the new deal will leave Australia in a stronger position to deal with the ever-increasing menace to the nation's north. The termination of the French sub deal will result in a $90 billion blow to that nation's defense industry. |
Recession
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America is roaring out of the pandemic; that is not so much the case in Europe
(31 May 2021) Over the course of the last two quarters, covering the end of 2020 and the beginning of 2021, the US economy grew at an impressive clip of 4.3% and 6.4%, respectively, thanks to a herculean vaccination effort and a subsequent loosening of Covid restrictions. Sadly, this has not been the case across the pond. The latest metric comes from France, which just re-entered a recession. The French economy shrank by 0.1% in the first quarter of 2021, following a 1.5% contraction in Q4 of 2020. But Europe's second-largest economy has some good company: Germany, the eurozone's largest economy, has seen its economy shrink for five straight quarters, with Q1 GDP coming in at -3.10%. To be sure, the pandemic and a chaotic subsequent vaccine rollout have been the catalysts for the recession that Europe can't seem to shake, but there were other factors which prepared the field for these conditions. While US deficit spending has been a sad, running joke for a number of years, Europe's fiscal policy almost makes America's economic house look enviable. After the Great Recession, Brussels, led by the erudite wonks primarily from France and Germany, spent with reckless abandon to help the poorer nations in the southern region shake off record levels of unemployment—like 28% in Greece and 26% in Spain. Austerity measures were then forced upon these borrowers which only served to exacerbate the problem and create resentment among the citizens of these beleaguered southern nations. Going into the pandemic, unemployment levels remained stubbornly high in Portugal, Italy, Greece, and Spain. In essence, the eurozone never shook off the effects of the 2008-2009 crisis when the global pandemic hit. The ECB's only answer seems to be throwing more money at the problem until it goes away. Eventually, Europe's vaccination rate will subdue the nightmarish pandemic and growth will return to the region. But the economic scars caused by the handling of two massive crises will remain, as will the bitter divide between the northern and southern regions of the continent. We continue to underweight the eurozone—with the exception of a few emerging markets in Eastern Europe—as the region grapples with its reopening efforts. The UK is the wild card, as the 2017 Brexit outcome appears more and more prescient with each passing month. Goldman Sachs recently issued a glowing outlook for the British economy, anticipating a "striking" 7.8% GDP growth rate for the year. One way to play the anticipated rebound is with the iShares MSCI United Kingdom ETF (EWU $34), which holds 88 large-cap positions; names such as Unilever PLC and London Stock Exchange Group PLC. For investors looking for more growth potential there is the iShares MSCI United Kingdom Small-Cap ETF (EWUS $50), which holds several hundred small- and mid-cap names. |
Germany
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The weaker candidate won the primary battle in Germany; may now lose the war to the Greens
(23 Apr 2021) Last week we outlined the internal struggles going on behind the scenes among the two leading center-right political parties in Germany, Merkel's Christian Democratic Union and Markus Söder's Christian Social Union of Bavaria. The wildly popular Söder agreed to step aside if the CDU voted to support Merkel's candidate, the unpopular Armin Laschet. Despite the latter's weakness in the polls, that is exactly what her party did, and Söder, true to his word, stepped aside. While we said that the bloc's main competition would come from the center-left Social Democratic Party of Germany (SPD), a new frontrunner has emerged: the far-left Green party's Annalena Baerbock. The 40-year-old former champion trampolinist is promising Germans a "new start" for the country, with a focus on green energy and increased spending on eduction. A poll of German business leaders (a poll we highly question, it should be noted) favors Baerbock over Laschet by a comfortable margin. Clouding the outlook—and probably fracturing the vote in the general elections—are the two candidates from the SPD and the pro-business Free Democrats Party (FDP), Olaf Scholz and Christian Lindner, respectively. The general elections are precisely five months away. With the best candidate for Germany's future (in our opinion) officially out of the race, the outcome is a flip of the coin. Our instincts tell us that Armin Laschet will come out on top, which will lead to a ho-hum period for the German economy. In a tantalizing twist of fate, that would probably tip the economic scales in Europe in favor of the breakaway "troublemaker," Great Britain. While it is brutally painful going through a domestic election, we have a deep sense of schadenfreude watching the "wise and sapient" Europeans squirm through theirs. |
Germany
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Could an internecine battle in Germany help bring about a major regime change?
(12 Apr 2021) For some reason, it seems as though it has been about five years since Angela Merkel announced that she would be stepping down from her role as Chancellor of Germany—a position (stepping down, that is) rather forced upon her by the party she led between 2000 and 2018, the Christian Democratic Union (CDU). In what seems to be dragging on longer than Brexit, the battle for her successor just took a dramatic turn. While there are roughly a dozen political parties in the country, the ruling alliance between the center-right CDU and the center-right Christian Social Union in Bavaria (CSU) has been a stabilizing factor in the country since nearly the end of World War II. Generally, the leader of the larger CDU, Merkel's party, gets the nod to represent the alliance in the national election. And, indeed, Merkel has backed her party's leader, Armin Laschet, to succeed her. However, the more charismatic Markus Söder, head of the CSU, believes that he is the right person for the job, and his party just sent a shocking snub to Merkel's pick. Söder points out how far the CDU has fallen in the polls since the former journalist took the reins of the party from Merkel three years ago. He is correct on both counts: that the party has fallen from grace since 2018, and that he could energize the electorate more than Laschet. Of course, this battle has the center-left Social Democratic Party of Germany (SPD) licking its chops. It sees its own nominee, Olaf Scholz, gaining from the disarray. To further complicate the matter, Scholz is not only Merkel's deputy vice chancellor, he actually lost the race to be the leader of his own party. We won't even get into the far-left Green Party, or the far-right Alternative for Germany (AfD), or even the Pirate Party, which opposes the EU's data retention policies. It should be fun to watch (from across the ocean) as battles play out over the next five months—the country has set its official federal election date as 26 September 2021. The ugliness could spiral out of control, with a real possibility that Scholz could pull out a victory. Considering the gargantuan problems facing Germany right now, perhaps the real question should be why would anyone want to be chancellor? |
EU
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While the pandemic rages in Europe, parliament focuses on what to call a veggie burger
(21 Oct 2020) One of our favorite pastimes is making fun of the European government. Let's face it, the only reason a "European Union" even exists is because of that continent's envy of the United States. The level of arrogance permeating the halls of the EU parliament in Brussels is stratospheric, which makes them such an easy target for ridicule. The latest? While the pandemic rages across the continent, EU lawmakers are focused on a critical issue: Whether or not to ban the likes of Beyond Meat (BYND $176) from calling their plant-based patties "burgers." Lawmakers will debate and vote on an amendment this month which would force these companies to label their burgers "discs" and their sausages "tubes." i.e. Beyond Burgers would become "veggie discs," and Beyond Breakfast Sausage would become "plant-based tubes." Parliamentarians will vote on another amendment, pushed by the European dairy union, which would ban the use of the word "creamy" when describing a non-dairy item. And we make fun of our government. Is it any wonder Brits voted to pull out of this dysfunctional entity? |
Poland
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Much to the Chagrin of Putin, Poland's Duda wins reelection
(13 Jul 2020) The tough, outspoken, pro-democracy, law-and-order leader of Poland, Andrzej Duda, won a stunning election over the weekend to secure another five years in charge of the Eastern European country. Duda's victory will assure Poland, a staunch US ally, will remain a thorn in the side of not only Russia, but also EU leaders in Brussels who have been unable to coral the feisty leader. Duda, who won over ten million votes in a country of 38 million citizens, is a staunch advocate of pro-growth policies designed to transform Poland into a major business hub in the region. FTSE Russell, a leading global provider of asset benchmarks, recently upgraded Poland from emerging market to developed market status. We believe the country will continue to rise in economic stature and ultimately achieve its aim of becoming a global economic powerhouse. Poland's strategic location, which has been the cause of incredible pain and suffering among the Polish people over the past century (invasions by Germany and Russia), will be one of its biggest assets going forward. One of the easiest ways to invest in the Polish economy is through the iShares MSCI Poland ETF (EPOL $12-$17-$24), which appears undervalued. |
M&A
Activity China |
The EU moves to limit China's takeover of European companies
(17 Jun 2020) We were outraged when the US government allowed a Chinese conglomerate to buy Smithfield Foods, the largest US producer of pork, back in 2013. This deal came as images of dead pigs floating in the toxic waters of China's Yangtze River were still fresh in our mind. We don't believe that deal would have been allowed today, but it is now a fait accompli. Fortunately, Europe finally seems to be waking up to China's business practices and appears poised to do something substantive to curb that country's influence in the region. Several countries, France and Germany included, are putting together legislation which would forbid the acquisition of European firms by Chinese interests which are found to have received government subsidies. In other words, if China is bankrolling a company, that company would not be allowed to buy a European firm. If the legislation ever sees the light of day, and these rules were enforced, that should eliminate nearly all M&A activity by Chinese companies; after all, name one that is not subsidized by the state. We have zero faith in the Europeans to actually apply these rules, but at least they are now showing some rare signs of lucidity with respect to China's motives. |
EU
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The EU's bailout plan will create enormous friction among members
(28 May 2020) We have been convinced for years that fissures in the bedrock that is the European Union will continue to widen, causing mass economic dysfunction on the continent. The greatest example of this—to date—was Brexit. Now, thanks to the Chinese-borne pandemic, Brussels is about to undertake a $2 trillion COVID response plan that is guaranteed to deepen the rift between the nation-states in the union. Ironically, the plan is designed to interweave the separate economies together in an unprecedented manner. The proposal calls for $824 billion worth of immediate aid and a budget of $1.21 trillion spent over the next seven years to reverse the damage caused by the virus. Using the vehicle of commonly issued debt, the plan will transfer massive amounts of wealth to the poorer EU nations in the south, namely Greece, Italy, and Spain. Northern countries from Austria to Sweden are crying foul, arguing that their own fiscal responsibility is being punished to support their less responsible neighbors to the south. Pressure will be intense for all 27 members to approve the plan, and expect Germany and France to browbeat the other nations into submission ("You need the money, and we have it—agree to our terms or else"). Proving the bloc's America-envy (they set up the EU to emulate this country's system), the German finance minister compared the plan to Alexander Hamilton's 1790 move to assume states' debt from the American Revolution in exchange for an abdication of some powers. The comparison is, in fact, uncanny in certain ways. In both examples, the northern and southern states (13 in the US at the time, 27 currently in the EU) had/have very different ideas on matters of great importance. This will be fun to watch play out from the other side of the globe. |
France
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Strikes continue to paralyze much of France as labor battles Macron over pension reform. (15 Dec 2019) It began nearly two weeks ago, on 05 December, and it now threatens to bleed over into the heart of the Christmas travel period. Government transit workers and teachers across France have walked away from their posts and joined the picket lines to protest the French president's proposed pension reforms, which include raising the full-pension retirement age from 62 to 64. Despite the fact that France has one of the most lucrative retirement plans in all of Europe (and that is saying a lot considering some of the progressive Nordic countries), there are scant signs that labor is willing to back down, forcing millions of French workers to bike or scooter their way through snarled and blockaded streets to get to their jobs. Air traffic controllers have also walked off the job, which could mean a nightmare scenario for those planning air travel over the holiday season. Protesters have also blocked oil refineries in an attempt to keep motorists from fueling up.Here are some of the proposed changes to the country's pension plan: there will be one plan instead of the confusing 42 plans currently in place; the legal retirement age of 64 will go into effect in 2027 but not affect those born before 1975; those with "hardship" jobs, which include police, firefighters, night workers and nurses, will still be able to receive full retirement at age 62. France currently spends 14% of its GDP on the pension retirement system—more than virtually any other EU nation—and that percentage is growing at an unsustainable rate. The government has signaled a willingness to negotiate on the proposed changes, but the unions have shown little interest in halting the nationwide strikes, arguing that a "red line" has been crossed. In the end, we expect little in the way of actual reform, kicking a larger can down the road for another generation to handle.
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UK
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In biggest win since Margaret Thatcher's 1987 victory, Boris Johnson now has the votes to complete Brexit process. (13 Dec 2019) For months, we have been predicting a Tory victory in the UK large enough to give Prime Minister Boris Johnson the votes needed to carry out the will of the people and blow out of the EU. That is precisely what happened, but even we were surprised by the level of voter anger focused on the Labour Party, which had all but promised another national referendum on Brexit (hoping for a different outcome). In the end, the British people said "enough!" This vote all but assures England will leave the EU on 31 Jan 2020. The national vote was such a thumping for Labour that leader Jeremy Corbyn, who had hoped to be elected prime minister, said he will step down as party leader. Markets loved the news, with the FTSE 100 jumping 1% in early trading, and the pound sterling spiking 2% against the US dollar. After 31 Jan, the UK will have the freedom to ignore much of the byzantine EU regulatory process, negotiate its own trade deals with other countries, and set its own immigration rules. President Donald Trump congratulated the prime minister on his stunning victory, and hinted that a big trade deal between the two allies would come to fruition early in the new year. For the EU leaders in Brussels, this is a nightmare scenario.
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Germany
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Merkel comes one step closer to the end of the line as German chancellor. (03 Dec 2019) It is remarkable that German Chancellor Angela Merkel has been able to hang onto power this long. Vacillating positions are one thing, and nothing new for a politician, but remaining in power as your country's economy teeters on recession, now that's a feat. Just ask Bush 41, who was riding high after Desert Storm only to lose the 1992 election as the US economy hit a speed bump. Merkel is a member of the Christian Democratic Union of Germany, or CDU. She has remained in power thanks to a grand coalition between the CDU, the Christian Social Union (CSU), and the Social Democratic Party of Germany, or SDP. Over the weekend she was dealt a serious blow as the SPD soundly defeated her vice chancellor, Olaf Scholz, as its leader. Instead, party voters installed two anti-alliance lawmakers, Norbert Walter-Borjans and Saskia Esken, in the leadership role. While Merkel has announced she won't run again, it is hard to imagine she can accomplish much between now and the end of 2021 when her current term is up. Germany is in a tenuous position, not only economically but also geopolitically as the EU grapples with the Brexit issue. Germany has long been the titular head of the EU, which means more turmoil for that body in 2020. We reiterate our underweight position on developed Europe as a whole, but expect the UK to see nice growth on the heels of that country's 12 Dec election—providing the results are what we expect them to be.
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Brexit
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If the UK Parliament cannot pass the new Brexit agreement, they will supplant the US Congress as the world's most ineffective legislative body. (17 Oct 2019) Maybe a bit of hyperbole, but not much. After three years and millions of hours of bloviating by politicians, Prime Minister Boris Johnson and European Commission President Jean-Claude Juncker performed a miracle: they came to an actual agreement on the terms of Brexit. The deal may not have been perfect (what negotiated deal is?), but it dealt effectively with the gargantuan sticking point: there will be no "hard" border between the Republic of Ireland and Northern Ireland. For that reason alone, parliament should sit down this Saturday, swallow their pride, put their country first, and vote "AYE". Will it actually pass when parliament sits for their first Saturday session since the 1982 Falklands War? It looks like a toss of the coin, and that is being hopeful. For anyone holding out hope that the minority Labour Party will see members crossing the line to vote yes, remember that this party would do anything to regain power, and a failed Brexit—they believe—will give them their best shot at that. As for Johnson's own Tories and his rag-tag coalition, if he gets their votes, the deal will pass. Certainly, they will have heartburn with issues like an operational border between Northern Ireland and the rest of the UK, but without that wording, the hard Irish border would have remained in play. There will be time to figure out ways to smooth over the rough edges later—the majority coalition needs to get this deal done now. If they don't, the UK will continue to descend down a dark path, and the irresolution will only further damage their economic situation. As we alluded to, Labour has the goal of chaos to worm their way back to power, so expect no support from their MPs on Saturday. If the majority coaltion cannot get the votes, a lot of the "no" voters will be tossed out in the next general election in a wave of anger. We put the odds for a Saturday victory at 45%.
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Germany
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Germany's economy is in the tank, and sorry, it is not because of the US/China trade war. (07 Aug 2019) First the cold, hard, facts: German industrial production just suffered its worst annual decline in a decade, down 5.2% from the previous, unimpressive year. Every single maturity of German government bonds being issued now comes with a negative yield. German automakers are slashing their estimates, and unemployment is on the rise. Now the narrative being foisted by the media: it is all America's fault. If we hadn't started this "unwinnable" trade war, the world's third-largest economy would be humming along. Please. Doesn't it make more sense that China and Germany would be cozying up, vis-à-vis trade, to battle the big bully Trump? No, this is about Merkel's weak leadership, a country going down an insane Keynesian path, and a futile attempt to stimulate an economy using below-zero rates. With France and Germany as the titular heads of the European Union, is it any wonder Brits voted to vamoose? Back in February, we reported that Germany barely skirted a recession thanks to a 0.2% GDP in the third quarter of 2018. Now, however, the Bundesbank is predicting the nation's economy contracted again in the second quarter, fueling fears of a recession. To us, that seems like a foregone conclusion. Germany is an incredible country, filled with hard-working individuals and a rich past—minus the pure evil that enveloped the land in the early-to-mid 20th century. The beast that is the EU, however, has tainted their thinking and warped their ability to maintain sound fiscal policy. The country that was once paranoid about inflation (following the nightmare of the 1930s) is now issuing 30-year bonds with a negative yield! And that is sheer madness.
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UK
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You heard it here first: with Prime Minister Boris Johnson, Britain will finally blow out of the EU. (23 Jul 2019) The machinations of government grind so slowly that we often misread the strong undercurrents of a political movement. The press dutifully report the movement as simply a bunch of crackpots blowing off some steam...at least until the subterranean activity manifests in a shocking (at least to those who believed the reporting) manner. That is precisely what is happening in the United Kingdom right now. Erudite journalists writing for pompous publications like The Economist laugh off the likes of a Boris Johnson, the outspoken Brexiteer and former mayor of London, right up to the point at which the target of their ridicule becomes the leader of the country. And that is exactly what will happen this week, as the man who assured Britons that Brexit will happen this year, with or without a deal in place, becomes Prime Minister Boris Johnson. The hatred for this man is palpable, and loud. But that doesn't matter now. He will assume the throne, execute the will of the people, and lead Britain out of the bumbling, inept EU. And England will not only survive, it will thrive. And that will make Boris Johnson all the more hated by the arrogant cabal which has impugned him incessantly for the past three years. The iShares MSCI United Kingdom ETF, symbol EWU, is down 23% over the past five years. If we are correct in our predictions, now might be a good time to pick up some shares to fill any international gaps in a portfolio. It certainly looks better than an investment in a basket of French or German companies right now.
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Greece
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Center-right New Democracy party takes over in Greece after Tsipras fails to deliver. (11 Jul 2019) Talk about a tough job. Imagine trying to steer Greece out of its massive fiscal hole immediately after the defeated, left-leaning Syriza party, led by Alexis Tsipras, threw a bunch of economic goodies at the citizenry in a vain attempt to retain power. That task, and dealing with a European Union to which the country owes roughly $250 billion after a decade of bailouts, is what awaits the newly-elected prime minister, Kyriakos Mitsotakis. Mitsotakis won a plurality of the vote in this month's election by running on a pro-business, lower-tax, reduced-bureaucracy platform which promised 4% annual economic growth. The country desperately needs that level of growth, considering its debt-to-GDP ratio is around 175%. The new prime minister's New Democracy party also now controls the 300-seat Parliament in Athens. We will discuss the Greek elections and the investment outlook for Greece in the next Penn Wealth Report.
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UK
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In a major win for Brexiteers, MPs reject plan to halt a "no-deal" exit from the EU. (14 Jun 2019) It appears that many in England simply refuse to accept the vote of the people. Three years—almost to the day—after Brits voted to leave the EU, a massive attempt to undo that referendum remains underway. The poor sport crowd suffered another loss this week as MPs in the House of Commons voted 309-298 against a motion which would have prevented a no-deal Brexit. Specifically, were the motion successful it would have blocked the next prime minister from leaving the EU this October without a deal. It was arguably aimed directly at Boris Johnson, the probable next PM, and an ardent advocate of leaving the bloc with or without a deal in place. Opponents argued that voting for the motion would have all but guaranteed a Labour Party win in the next election, putting the far-left Jeremy Corbyn in power. After some disconcerting months in which the odds of another referendum coming before the voters rose substantially, the new odds favor England leaving the EU by this fall—with or without a deal in place. Opponents have used fear-mongering to create the illusion of an economic earthquake if England leaves without a deal in place, similar to the specter they envisioned if the referendum passed in the first place. England will be just fine, economically and otherwise, following the breakup. In fact, breaking free from the chains of Brussels should foster economic growth in the country, especially after a bilateral trade deal with the US is put in place.
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UK
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JP Morgan predicts Boris Johnson will be prime minister by fall. (21 May 2019) In what would be a stunning turn of events, US banking giant JP Morgan (JPM) is predicting that former foreign minister and London mayor Boris Johnson will take over as the UK's next prime minister, and that it will happen by September. Johnson is a staunch supporter of Brexit, the plan to leave the EU which was supported by a majority of voters nearly three years ago. Despite the long, three-year runway the country had to make it happen, both Prime Minister Theresa May and the UK Parliament have managed to fritter that time away without executing the plan. Johnson got so frustrated by the lack of a cogent plan that he quit his post as foreign minister last year. As the drama is unfolding in England, the EU is preparing for its own European Parliament elections, with another stunner in the works in that contest. Nigel Farage's Brexit Party is suddenly the frontrunner to gain the most votes within the UK. That would send shock waves across Europe and into the Brussels headquarters of the pompous EU leaders who have attempted to foil Brexit at every turn. Finally, as for Theresa May, she is trying yet again to revive her own Brexit deal; a deal which has already been rejected three times by Parliament. In a bizarre twist, she is promising the legislature the chance to vote for another Brexit referendum if they go along (this time) with her agreement. Not likely. We still believe there will be no repeat referendum in the UK for Brexit. The voters have spoken, and to toss the first referendum aside would invite mass chaos in the country. We also predict a Prime Minister Johnson, followed by his call for a general election and, ultimately, a real exit from Brussels, with or without an Irish Backstop in place.
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Brexit
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Voters in the UK should be outraged as Brexit becomes a farce. (11 Apr 2019) Three years. That is the length of the runway between Brits voting to leave the European Union and the actual takeoff. Three years, and they couldn't get it done. As with the indolent kid pleading for more time from the teacher to get his homework done, we all know what happens when the teacher grants the stay: the kid breathes a sigh of relief and still doesn't get it done by the extended deadline. So, the EU is giving the UK an extension to 31 October for an exit plan. How magnanimous, and how fitting the date. Unlike the kind teacher in our story, the EU knows it has simply provided more rope for England to hang itself (i.e. end up remaining in the Union). This is truly an outrage, and Brits should rise up and demand their majority voice at the ballot box be heard. What, exactly, is Parliament going to magically work out between now and Halloween? The majority party cannot come together to save their members' respective lives, and they have demonstrated an inability to work with an ineffectual prime minster. Meanwhile, the smarmy elitists in Brussels sit back and laugh at the dolts. Brexit would have happened by now had the Republic of Ireland voted the same way as England in the referendum, but they didn't. They remain a thorn in the side of England, siding with their "friends" in the EU, stoked by a deep-seated hatred for the way England has treated them over the centuries. Now, after this latest farce, the most probable outcome is no exit from the EU by England; they will remain stuck in the nightmare that is the Customs Union. We know how the opportunist Labour Party will react, but the real question is how the Brexiteers will respond to this travesty. That could get interesting.
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Germany
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Germany's economy continues to get pounded due to global slowdown, trade issues with China. (04 Apr 2019) German industrial orders plunged 8.4% year/year—their biggest drop in a decade—on the heels of a general global slowdown, and continued trade tensions with China. Europe's largest economy reported that demand for new factory orders from customers outside the eurozone fell a disconcerting 7.9% in February; this news caused the euro to fall about 15 basis points against the dollar (to $1.12), and the 10-year German bund to fall back into negative yield territory. We continue to underweight developed Europe within our international allocation, as we don't see any quick fixes to their problems—regardless of any purported trade deal with China.
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UK Jobs
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The UK jobs market remains strong, despite growing business angst over Brexit uncertainty. (19 Feb 2019) In this week's upcoming issue of The Penn Wealth Report, we take a look at the five possible outcomes to the UK's exit from the European Union. Spoiler alert: it is going to be a rough-and-tumble spring and summer for the country. Despite the growing concern over the potential of a "hard" Brexit, the British jobs market is rocking. Unemployment is at its lowest level since 1975 (4%), and workers' pay grew at its highest rate in nearly a decade (3.5% annualized). Those figures fly in the face of a recent mainstream British news poll claiming that "one in three UK businesses are considering moving out of the country if there is a hard Brexit." While that poll had to be biased to the point of absurdity, it does make this week's labor numbers all the more impressive. The European Union continues to foment fear among the British people as payback for the country choosing to leave the Union. One fact cannot escape the attention of the politicians in Brussels: the UK has the second-largest economy in Europe—behind Germany's and atop France's. In the fourth spot is Italy, which is Europe's second biggest headache. Despite all of the ticking time bombs, the Union refuses to renegotiate its Brexit terms with London. This will be fun to watch—from afar.
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Germany
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Germany, with its hapless leader and within its chaotic Union, barely dodges a technical recession. (15 Feb 2019) Developed Europe is in a world of hurt, and it is hard to see what magical catalyst is going to shake them out of their economic funk. While forging full-steam-ahead with onerous new regulations on businesses (their latest is the just-passed Article 13 "meme ban"), their biggest Asian importer is hurting. Germany is a great example: China has been that country's largest importer for the past two years, taking over the mantle from the US. But China's rate of growth is clearly declining. Within Europe, Germany has always been able to count on deep-pocketed buyers in the UK. Now, however, with the ugly and contentious Brexit overhang, that trade relationship has soured measurably. How bad is it for Germany right now? After an economic contraction of 0.2% for the third quarter, the Q4 figures just came out: Germany's economy grew 0.0%. Two consecutive quarters of contraction defines a technical recession. With a three-year look-back, the situation isn't much better. There has been only one brief period in which real GDP growth in the country climbed above 1%. Yet another reason why Merkel is serving out her final term as chancellor. One of Europe's major trade challenges has revolved around the auto tariff battle with the US. While this situation hurts US automakers, it is being felt much more acutely by the German automakers. As much as the leaders in Berlin and Brussels despise dealing with Trump, it behooves them to swallow their pride and strike a deal sooner rather than later.
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Brexit
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Global Strategy: Europe
May needs to bring a skilled negotiator with a spine of steel to renewed Brexit talks. (30 Jan 2019) Within the next couple of day, British PM Theresa May and new Brexit Secretary Stephen Barclay will head to Brussels in an attempt to renegotiate the deal for the UK's exit from the EU bloc. It is not an enviable task for the most skilled negotiator, let alone this less-than-dynamic duo. At the heart of the matter is the Irish backstop, an unacceptable provision that would almost guarantee Northern Ireland will stay in the EU's orbit despite being an "exiting" member along with England. This return visit was forced on May after the House of Commons (rightfully) handed her a historic defeat on the original plan—due primarily to this provision. Here's the problem: the EU feels as though it has nothing to lose. Add that stacked deck to their notoriously arrogant attitude and May's lack of negotiating skills, and we are presented with a trifecta of bad omens leading into the talks. It is hard to see how this turns out positively for Great Britain. In the next issue of The Penn Wealth Report, we take a deeper dive into the Irish backstop nightmare, which can trace its roots back to the Irish War of Independence, fought precisely a century ago. |
France
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The powder keg issue of the Yellow Vest protests in France: gas tax hikes. (03 Dec 2018) Clashes between police and the so-called Yellow Vest protestors in France turned violent over the weekend, with little sign that either side is willing to back down. While the bigger issue is one of government overreach versus individual freedoms, this most recent movement stems from one specific action: the Macron government's decision to raise gas taxes (by the equivalent of about $0.30 per gallon) as part of a wider environmental push to reduce the use of fossil fuels. Average, ordinary French citizens see this carbon tax as a sign of just how out of touch the elitists in government really are, and they see Macron as one of the elites. It is a classic battle between the masses in flyover country, and the ruling class. And it is not limited to France—spillover protests are taking place in Belgium and other nations in Europe. Odds are great that the carbon tax will remain in place, further reducing Macron's already anemic approval numbers. As a small segment of the protestors deface and otherwise harm monuments and other symbols of national pride, public opinion will turn slightly against them—which the French press will happily help to foment. However, the simmering will continue. If the unemployment rate remains stubbornly high—it has been sitting near 9.5%—strikes and general protests will continue, and French/European GDP will continue to be flat. Another reason we are underweighting developed Europe in our international mix.
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Germany
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Twilight (finally) descends on Merkel's political career. (29 Oct 2018) Talk about someone overstaying their welcome. Angela Merkel has been chancellor of Germany for eighteen long years, and this past weekend's regional elections show just how weary German voters have become of her leadership style and policies. A few weeks ago, Merkel's alliance parties were hit in Bavaria with their worst election losses since 1950. This past weekend, regional elections moved to the wealthy state of Hesse—home to the German financial industry—and the outcome was similar. Merkel's ruling Christian Democratic Union (CDU) and alliance Social Democrats party (SPD) garnered less that 47% of the vote in aggregate. It was such a deep loss for Merkel that she abruptly announced she would step down as chairman of the party this December. While she also announced she would not seek a fifth term in 2021, her party may seek another option: removing her as chancellor before the next national election.
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Brexit
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In typical elitist fashion, London's mayor calls for new Brexit vote. (17 Sep 2018) Full disclosure: London's mayor, Sadiq Khan, is a full-throated leftist, angry at the UK's Brexit outcome from the day the surprise results were announced. We had to get that out of the way since the mainstream media won't mention it. Against that backdrop (lest anyone think he is simply a nonpartisan Londoner), the mayor, who tried to ban President Donald Trump from entering London, has called for a second Brexit referendum. In his "anguished" speech, the mayor decried the prime minister's handling of the negotiations and said that a new referendum was the only way to clear the air. i.e. he didn't get the results he wanted, and is now throwing a temper tantrum. The second referendum has been dubbed the "people's vote" by supporters like the hapless Khan, whose politics are in the same vein as New York's socialist mayor DeBlasio. If this new vote is the "people's vote," who, exactly, voted in the first referendum.
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Sweden
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Stunning surge by right-wing party in Sweden shakes up establishment. (10 Sep 2018) Virtually every country in Europe has lashed out, in one way or another, against the EU's forced immigration policy—telling member-states how many immigrants they must accept. Over the weekend, Sweden added their name to the list as voter anger manifested itself at the polls, pushing the typically left-leaning nation further to the right. Up until now, the major ruling force has been an alliance between the leftist Social Democrat Party and the further-left Green Party. The leader of the Social Democrats, Stefan Löfven, also happens to be the current prime minister of Sweden. During the campaign season, the right wing Sweden Democrats ran an efficient campaign based primarily on two planks: immigration and crime. This resonated with voters, and the party was rewarded by gaining nearly 20% of the national vote. Now, two allegiances must vie for power: one from the left (led by the Social Democrats), and one from the right (known as the Alliance). Both groups scored about 40% of the votes in the election. Calls for Prime Minister Löfven to step down are intensifying in the wake of the election, and the formation of a brand new government are all but certain.
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Italy
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Italy to veto EU budget over failure of bloc to follow-through on immigration reform. (27 Aug 2018) Recall that Italy is now being governed by leaders swept into power by Italian citizens angry with the lack of a cogent immigration policy on the continent. Fast forward to today: Italian leaders have vowed to veto the EU budget currently on the table because other European nations (Germany is the big antagonist) have refused to follow-through on an immigration deal hammered out in June. The issue came to a head with the the case of 177 immigrants sitting in a boat off the coast of Italy. Italian Interior Minister Matteo Salvini, a member of the Northern League (Lega Nord) party, wanted commitments by other European nations to take responsibility for the majority of immigrants before he would let the vessel dock. The Diciotti was finally allowed to dock in a Sicilian port after ten days at sea. The Lega Nord party wants more power for individual regions within Italy (think "states rights" in the US) and less for the central government, and certainly less for the European Union. In a sham, Salvini now faces a probe by his political enemies (who favor the EU) for "kidnapping and illegally detaining" the immigrants. This issue is red-hot in Italy, and the arrogant response coming from Brussels is only fueling the fire of discontent among the populace.
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Brexit
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Global Strategy: Europe
In typical, arrogant fashion, the EU publicly rebuffs Theresa May's Brexit offer. (26 Jul 2018) The hard date for Brexit is quickly approaching: 29 Mar 2019. The soft date for negotiations to be completed between the UK and the EU is nearly here: October of this year. While we have criticized Prime Minister May in the past, arguing that she is back-peddling on Brexit plans, we have seen her take a tougher stance in recent weeks. A few days ago, she took the lead in negotiations with the EU and directly presented her plan for the split. Not only was that plan rejected, it was done so in a way which seemed designed to humiliate May. The big sticking point right now is the collection of VAT (value-added taxes) and duty fees on goods entering the UK. May has said that her country would be willing to collect those fees for the EU. EU negotiator Michel Barnier flatly rejected those terms. Complicating the matter is the fact that Irish voters chose to remain in the EU, so there must be—with no deal in place—a "hard" border between Northern Ireland, which remains part of Britain, and the rest of the country. The EU offered an alternative (remain in the EU's customs union) which, in essence, negates the Brexit vote. If May took that offer, she would be ousted by her Conservative Party. Which, by the way, is precisely what her Labour Party opponents, all of whom are aligned with the EU, would love to see happen. It is now looking more and more like a hard Brexit is imminent, which will complicate trade and a host of other issues between the two sides. It would foster, however, increased trade between the US and Great Britain. Strap in for an exciting nine months. |
Brexit
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Theresa May: a weak leader looking for a way to circumvent the Brexit vote. (09 Jul 2018) First Brexit Secretary David Davis resigned over the deal. Then went his number two at the department, Steve Baker. Then came Foreign Secretary Boris Johnson's letter of resignation (actually, Prime Minister Theresa May announced his departure before he had even finished the letter). What had all of these pro-Brexit government officials so angered that they felt they must resign? The Gordian knot, the deal with the devil May agreed to in an effort to appease the anti-Brexit forces at the EU. Theresa May never wanted to split from the EU and, in our humble opinion, she disdains the British voters who foisted it upon her. So, she and the erudite buffoons in Brussels look to share a "common rulebook" (they must still approve the deal) which keeps much of the alliance between the UK and EU intact. She calls it a "soft Brexit;" we call it a capitulation and a slap in the face of the voters. What did Boris Johnson say about May's selling of the plan to the citizenry? It is akin to "polishing a turd." As for EU president and all around worm Donald Tusk, here's what he tweeted after the resignations: "Politicians come and go but the problems they have created for people remain. I can only regret that the idea of #Brexit has not left with Davis and Johnson. But...who knows." He thinks he can roll the UK, and with May in power he may be right. The British people should demand a no-confidence vote immediately.
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ECB
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While US economic growth pushes rates higher, the EU stands pat below zero. (14 Jun 2018) While European Central Bank chief Mario Draghi did announce an end to the ECB's massive bond purchase program (which has flooded the market with over 2 trillion euros, or approximately $2.3 trillion) by the end of 2018, he kept the deposit facility rate (think fed funds rate) at a historically low -0.400%. Yes, European banks must pay for the honor of keeping funds parked at the ECB. Additionally, Draghi lowered expectations for Europe's 2018 economic growth from 2.4% to 2.1%. These are not good signs for the continent. It appears as though the United States and the European Union are on two economically divergent paths. The euroheads can puff their chest and talk with all the bluster they want with respect to tit-for-tat tariffs, but their words are hollow. With the delicate state of their economy, they cannot afford a fight with the US right now. And the US knows it. After Draghi's rate announcement, the euro began its greatest daily decline against the dollar since last October.
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eurozone
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Eurozone analogy: imagine if California were Brussels, and the remaining states were European nations. (09 Jun 2018) Quick refresher for this analogy: the EU consists of 28 European nations, and the eurozone consists of the 19 nations which adopted the euro as their currency. I have been stressing that not only is the eurozone in trouble, it is an unsustainable and disastrous social experiment guaranteed to fail. Considering the new Italian government's soon-to-be clash with the euro powers in Brussels, it made me think: What if California's governing bodies, from Governor Moonbeam to the bicameral legislature to the court system, were given the authority to dictate fiscal and monetary policy to the remaining states, from Arizona to Florida? California is now demanding Starbucks place cancer warning labels on their cups of joe, so the Starbucks at the Galleria in Dallas must do the same. California is a sanctuary state, so Kansas must be a sanctuary state. Crazy, right? Not if you are an Italian or a Spaniard or a Greek.
Italy wants to initiate new programs within the country to spur the economy, protect its borders, and help their poorest citizens, and they are about to go before the "great minds" in Brussels to argue their case. For this analogy, let's consider Angela Merkel Europe's Governor Moonbeam, as she is the effective hammer of the eurozone. Jean-Claude Juncker (think John Kerry) is the actual head of the European Commission. Italy's petition will be torpedoed quicker than an ICE agent would be run out of San Francisco. I'd like to say that there is some colorful exaggeration in this analogy, but the friction between the arrogant Northern European nation-states and the more impoverished southern countries truly is this bad. The fascinating development to watch will be how the Italian electorate—which voted for change—responds to the smack down from nanny Merkel. |
Italy
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The odd couple forms an Italian government. (02 Jun 2018) Talk about an explosive mix. Italy's League party wants to spur the economy by initiating across-the-board tax cuts and controlling the border. The country's Five Star Movement wants "income equality for the poor" by getting more from the country's wealthy. Both parties consist of anti-establishment eurosceptics, but will that generate enough adhesive to hold them together? We are about to find out. Five Star and League struck a deal on the formation of a new government, with current Italian President Sergio Mattarella finally giving the green light (he used his constitutional power to refuse the previously-proposed government, as it included an anti-eurozone economist as the would-be economics minister). Compromise candidate Giuseppe Conte will be the new prime minister, while Five Star's Luigi Di Maio will be the new welfare and economic development minister, and the League's Matteo Salvini will become interior minister. Salvini has previously pledged to deport hundreds of thousands of the illegal immigrants who have flooded into the country in recent years. This government will be fun to watch...from across the pond.
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Spain
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Center-right Spanish prime minister out, socialist prime minister in. (01 Jun 2018) For the first time in the country's history, a Spanish leader has been ousted by a no-confidence vote. Prime Minister Mariano Rajoy, who undertook a number of unpopular (but needed) "austerity" measures in the country, was voted out of office in a 180 to 169 tally in parliament, with one abstention. Socialist Party leader Pedro Sanchez will take over, but he will lead a minority government. His party promised to call for new elections before the 2020 deadline, and why would anybody doubt a socialist party's willingness to face the voting public?
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France
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"Enlightened" French clear out Paris refugee camp filled mainly with African immigrants
(30 May 2018) Oh, the "enlightened" French...what they could teach us rubes here in the United States if only we would listen. Which is what makes this story so bizarre. French police cleared out a refugee camp along the Canal de Saint-Denis in northern Paris on Wednesday, housed with mostly African immigrants (we use that term because of the political incorrectness of using the word migrant) in search of a better life. We assume the immigrants had become an eyesore to the denizens of the region who like to jog and bike along the path in front of the river, but we will no doubt be told it was for the safety of the group. After the immigrants were carted off to local gymnasiums, bulldozers ripped down the tents of the camp. Maybe authorities and their friends in the press can find a way to blame Marine Le Pen and her National Front for the forced relocation. That better fits the false narrative created by the press. |
Italy
euro |
The Italian crisis: one more nail in the coffin of a dying euro currency
(30 May 2018) It was a harebrained idea from the start, hatched by arrogant European elites from the ruling class. Pseudo-scholars who looked across the pond at America with envy and disdain. Enormous fissures existed within the European alliance, with the gaps being widest between the northern and southern countries of the continent. Nonetheless, nineteen countries gave up their sovereign currencies nineteen years ago and adopted the ill-fated euro. While Brexit was devastating for the European Union it was less so for the eurozone (the monetary alliance of nations who adopted the euro), in that the UK kept its ancient currency. That is not the case with Italy. The Italian crisis, which was the catalyst for Tuesday's 31-point drop in the S&P 500, is quickly coming to a head, and the elites in Brussels are shaking in their boots. So-called eurosceptics, those opposed to a centralized European government entity, were the clear winners in Italy's national elections this past March, but they are now being denied the ability to form a government. The probable result will be new elections in July or August of this year, with an enraged citizenry likely to give them even more power. Global markets don't like the uncertainty, but Italians are more concerned about their dwindling liberties than they are about the market reaction. And who can blame them? |
Germany
Gazprom Russia RDS.A |
Trump Administration steps up pressure on Europe over Russian pipeline
(17 May 2018) With friends like this, who needs enemies? It is almost as if Germany's Frau Frump is more comfortable with Vlad Putin than she is with the US president. Actually, we take that back, we are certain she is more comfortable with our Russian enemy. In the last issue of The Penn Wealth Report (Clients/Members click here to read), we reported on the proposed Nord Stream 2 pipeline, which belies the EU's supposed strategy of weening itself off of Russian gas. Putin and Merkel (Frau Frump) appear to be the only two parties married to the deal. Now, the US has stepped up the pressure, warning that sanctions could be headed the EU's way if the deal goes through. These sanctions could affect companies in Germany, France, Austria, and the Netherlands. Our true friends in Eastern Europe (who are embracing democracy as their "developed" neighbors to the west increasingly shun it) are adamantly opposed to the Nord Stream 2. It is of interest to note that the Netherland's Royal Dutch Shell, PLC (RDS.A) has offered to provide financing to Russia's Gazprom to complete the project. We predict the pipeline never gets built. |
Germany
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Hey Germany, don't blame the US for your slowing economy
(15 May 2018) Angela Merkel is a lot like former FBI Director James Comey in that neither can stand being in the room with US President Donald Trump. When you see French President Emmanuel Macron with Trump, it is evident that there is mutual respect and a growing friendship between the two. Ditto Canadian Prime Minister Justin Trudeau. It is of interest to note that both of these leaders are from their respective country's left-leaning parties. When you see Angela Merkel at a podium next to the president, you sense discomfort and even a hint of arrogant contempt on the part of the four-term German leader. If reports are to be believed, the majority of German people feel the same way as their frumpy commandant. Under that backdrop, we must admit to getting a chuckle out of the latest German economic reading. In the fourth-quarter of 2017, Germany's GDP came in at 0.6% growth. In Q1 of 2018, that number was halved, to 0.3%. Not only is that dismal, it is also behind Europe as a whole and most of the other nations on the continent. While the UK did come in a bit behind Germany from a GDP standpoint, that region just added 200,000 new jobs during the quarter and watched its unemployment rate drop to a 43-year low. Germans can blame Donald Trump all they want for their woes, but shouldn't they focus their energy on growing the German economy instead? |
Italy
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Bad news for the EU swamp: Italy's populist Five Star Movement closer to forming a working government
(11 May 2018) Despite the tremendous success of the populist Five Star Movement (MS5) in the Italian national elections this past March, the Eurocrats who control the European Union were holding out hope that this group of rabbles would not be able to cobble together enough support to actually form a working government. Uh oh. Former Prime Minister Silvio Berlusconi, leader of the Forza Italia party, just announced that he was open to the formation of a government by MS5, and that he would support the center-right policies within any such alliance. Italy is the most indebted of the EU nations (not to be bailed out by Brussels), and the friction between the country's new government—when it is finally formed—and the hawks in Germany will be red-hot. From across the pond, what fun this will be to watch. Perhaps even more fun than the Brexit brouhaha. |
European
Union France Germany |
Rift between EU leaders France and Germany deepens; oddly, we support the French position
(10 May 2018) These are odd times, indeed. We have a "globalist" president of France, who is friends with the "nationalistic" president of the United States, telling the four-term leader of Germany, who came from Communist East Germany, that she needs to chill out and become a team player. What a disappointment Merkel has been since she was first elected in 2005—way too long ago; and what a pleasant surprise Emmanuel Macron has been since he moved into Élysée Palace last year. The latest EU rift came as Macron dressed down Merkel in a speech after accepting the "Charlemagne Prize" for his work on European unification. Merkel was in the audience. Macron's beef is fiscal: he believes Germany is putting its own global trade interests ahead of those of the European Union's. The money line that had to make Merkel wince: "Germany can't have a perpetual fetish about budget and trade surpluses, because they come at the expense of others." Ouch. We love it. |
UK
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Brexit battle's second front: Scotland and Wales
(17 Apr 2018) By most accounts, the glorious victory that was Brexit has become a muddled mess. This has been due, primarily, to weak-kneed leadership in the UK, but there is another factor at work. It is important to remember that the United Kingdom is actually a compilation of different countries; namely England, Scotland, and Wales. Ireland is a unique situation, with Northern Ireland having gained some degree of autonomy through the process of devolution. We know that England voted to secede from the EU, but what about the other countries in the UK? Welsh voters did, indeed, back Brexit, but a majority of Scottish voters wanted to stay in the EU. Now, both countries are vying for increased powers once the separation is final, and they are no-doubt being egged on by the little worms which infest EU headquarters in Brussels. Now, the Supreme Court of the United Kingdom is set to rule whether some powers scheduled to return to London should, instead, be transferred to the respective governments in Edinburgh and Cardiff. Yet another roadblock designed to thwart the actual outcome of 2016's landmark vote. |
Italy
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It isn't quite "Brexit, part two," but Italian voters show they have had enough in anti-EU election results
(05 Mar 2018) You know it has to be good news when the mainstream media laments the results. In this weekend's national elections in Italy, the establishment parties were rejected, but none more than the ruling leftist Democratic Party (PD), which limped away with a humiliating 20% of the vote. The big winner was the populist, anti-establishment, eurosceptic Five Star Movement (MS5), which shocked the world by garnering 32% of the national vote, while the right-wing Lega Nord party gained an unexpected 18% of the vote. Combine these two percentages with the votes cast for Silvio Berlusconi's center-right Forza Italia party, and EU leaders in France and Germany have reason to be shaking in their boots. The ruling coalition that will ultimately form in Italy will be no friend to the dictates coming out of Brussels. |
Germany
Russia Gazprom |
US slams Germany over allowance of new Russian natural gas pipeline
(13 Dec 2017) Several facts are certain with respect to Russia and Europe. Vladimir Putin’s Achilles heel is the ability to sell Russian energy at the highest possible price—his military buildup plans live or die on energy revenue. Russia wants to either control Ukraine or destroy its economy. Putin will use energy as leverage to break European support for anti-Russian forces in the Baltic region. It is under this backdrop that a storm is brewing over a new natural gas pipeline known as Nord Stream 2. In The Penn Wealth Report, Vol. 6, Issue 01, we take a look at what the 760-mile-long pipeline would mean for Europe's dependence on Russian energy and the nascent US effort to export LNG to the continent. (Clients/Members click on link to visit story) |
Germany
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As talks break down, Merkel's role in Germany is greatly diminished
(21 Nov 2017) What a grand disappointment Angela Merkel has been as chancellor of Germany. Despite governing against the will of the German people on so many issues, she pulled out a slim win in national elections two months ago, despite having already held the post for twelve years. Now, that reign is in serious jeopardy, as coalition talks have broken down between her Christian Democrat party and the country's other disparate parties—primarily the Social Democrats and the Free Democrats. Barring another election (which may be called), she is reduced to running a caretaker government, void of any bold initiatives for the European Union. That sounds good to us. |
UK
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What BREXIT worries? UK posts smallest September budget deficit in a decade
(20 Oct 2017) For all of the mainstream reporting of the cataclysmic event that is BREXIT, the British economy doesn't seem to be feeling any ill effects. The country just posted its smallest trade deficit for a September—$7.8 billion—in more than a decade. Solid growth in income and increased revenues from sales taxes ("all that consumin' goin' on," as the old curmudgeon Senator Ernest Hollings would have said) accounted for the reduced gap. |
Greece
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Greek prime minister, in meeting with President Trump, hails "high point" for Greek/US relations
(17 Oct 2017) After an extremely cordial meeting with President Trump at the White House, Greek Prime Minister Alexis Tsipris told reporters that Greek/US relations have reached a "high point," praising the president for his support. His words are well-founded. The US has taken a tougher stance with Turkey, Greece's ancient adversary, over that country's lackluster support in fighting terrorism. Greece is also a key NATO ally, and the two presidents discussed different methods to shore up both military and economic cooperation between the two countries. Mr. Trump also trumpeted increased US corporate investment in Greece, and the potential increase of US exports of LNG to the country. Although it was not the purpose of the meeting, the cordial relationship between the two leaders is a poke-in-the-eye to Putin, who would love to exert more control in the region. |
Austria
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Candidate who ran on immigration reform slated to become Austria's next leader
(16 Oct 2017) Concerns over unfettered immigration continue to shape Europe's political landscape. Austria's 31-year-old foreign minister, Sebastian Kurz, declared victory for his center-right Austrian People's Party following the weekend's national elections in the Central European country. This is only the second time since WWII that the party has defeated the left-wing Social Democrats. Austrians have become increasingly frustrated with the escalating level of violence in areas of the country with a large middle-eastern immigrant population. As part of the European Union, Austria has been forced to deal with the immigrant "quota" foisted on them by EU officials in Brussels. The biggest loser in the election (besides the EU)? Austria's green party, whose support dropped from 12.4% to 3.9%—missing the 4% cutoff to play a role in the country's parliament. |
Spain
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Voters in Catalonia overwhelmingly choose to break from Spain; government calls vote unconstitutional
(02 Oct 2017) In a referendum which the Spanish government said it would not recognize, voters in the Catalonia region overwhelmingly chose to secede from the country. There is a catch, however. Along with ruling the vote unconstitutional, the government urged opponents of the movement to stay home—which they did. Nonetheless, 2 million of the region's 7.5 million citizens (40% of the voting population) did show up to vote, with 90% choosing independence. Violent clashes with police left over 800 injured. The Catalan president said he would set a secession plan in motion, which will probably be met with the Spanish government's revocation of the region's autonomy. This is about to get ugly. |
Germany
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Merkel may have won 4th term, but governing just got a lot tougher
(25 Sep 2017) There’s something to be said for term limits. Actually, that is a gross understatement. It is more accurate to say that, for freedom to flourish, a nation-state must have term limits throughout the ranks of its elected officials. Angela Merkel became chancellor of Germany back in 2005. After 12 years in power, she just won her fourth term as leader. For 12 years she has moved further and further left, incensing her original base (mainly from the former East Germany, most of whom understand intimately what freedom means) and cutting deals with political opponents. Now, after allowing a mass wave of unskilled and unemployed Middle-Eastern immigrants into the country, voters sent her a strong message. Yes, she was reelected, but she must now try and form a working government by working with disparate parties, such as the far-left Greens. Her greatest challenge, however, is the fact that the right-wing Alternative for Germany (AfD) party picked up a whopping 94 seats—their first seats ever—in parliament. This should be interesting to watch from afar. |
Greece
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(12 Jul 2017) After eight long years, Greece is taken off the EU's "offenders' list."
It is hard to believe that it has been eight years since talk of "Greek austerity measures" hit the newswires. Now, after years of political turmoil regarding the issue, the country has made sufficient budgetary progress to warrant its exit from the EU's "excessive deficit procedures" list. In short, this means an end to austerity. Greece has, in fact, made some pretty remarkable strides over the past few years, considering the odd dynamic between fiscal hawks and the Communist leftists in the country. There have been real spending cuts, tax increases, and, now, an actual budget surplus. Over $340 billion of bailout money has been pumped into the Greek economy since 2010, but recent fiscal advances means the country will soon be able to tap global bond markets once again. |
Germany
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(22 Jun 2017) Germany spied on White House, US Air Force, others. Remember how "outraged" German Chancellor Angela Merkel was when she found out that Obama's NSA was listening in on her phone conversations? Well, according to government documents reviewed by German newspaper Spiegel, Germany's spy agency, BND, has been tapping into the White House, NASA, the USAF, and numerous other US agencies and entities for years. With egg on her face, Merkel claimed that she did not know this had been going on.
(Photo: Germany's hapless chancellor claims she didn't know the spying was taking place) |
UK
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(09 Jun 2017) Follow up to story below: Never mind. The elections were an unmitigated disaster for May's party. They lost prestige, the majority, and bargaining power.
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UK
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(18 Apr 2017) With Labour weak, Theresa May calls for snap elections. The British pound fell as Prime Minister Theresa May said she would make a morning announcement from 10 Downing Street. The currency quickly bounced back after she called for a snap national election on 8 June. This is a brilliant move, as the opposition Labour Party is in complete disarray, and the prospects for her Conservative Party increasing its majority in the House of Commons appear strong. Sterling strengthened by 11 basis points after the announcement. The election is a gamble, but one with mitigated risk. If May and the Conservatives win, it will give them a stronger hand in dealing with Europe during Brexit negotiations, as it will have swept away much of the debris cluttering the room—those who still refuse to accept the outcome of last June's vote. Classic move.
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EU
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(31 Mar 2017) Juvenile EU president says he will break up the US. Back in the early '90s, when the EU was in its nascent stage of existence, we knew the master plan was borne from a festering inferiority complex among nations like France as they looked across the pond with envy. They wanted to emulate the United States. We also believed the effort was destined to fail, due primarily to the seismic cultural divide between the Northern- and Southern-European nations (which is exactly what is playing out now). On Thursday, the goofy little president of the European Commission, Jean-Claude Juncker, proved our envy argument. In response to President Trump's support of Brexit, Juncker said, with no smile of "tongue-in-cheek" on his face, that he would push for Ohio and Texas to split from the rest of America if Trump doesn't change his tune quickly! Fantastic! This proves several points: 1. the EU is completely discombobulated over the UK leaving; 2. the ruling class is deeply envious of the US; and 3. the arrogance of the Union's leaders has made them delusional. Now is the time to strike a sweetheart trade deal with England to foment more EU wackiness. Too bad Trump's pick for US Trade Representative, Robert Lighthizer, is still being held hostage in the senate.
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(30 Mar 2017) JPMorgan looks to Dublin as Brexit becomes a reality. Talk about a convoluted mess. Scotland will remain part of the United Kingdom, leaving the EU along with England. Ditto Northern Ireland. The Republic of Ireland, not part of the UK, will remain in the EU. All of this has serious implications for commerce as the two-year Brexit move plays out. It is also the reason that Jamie Dimon's JPMorgan (JPM $57-$88-$94) is searching for office space in Dublin to hold up to 1,000 employees. Although the plans are still private, Dimon told his UK staff last year that the $316 billion bank could feasibly move up to 4,000 workers from England post-Brexit. Keep in mind, however, that he made those comments before the June, 2016 vote. Nonetheless, the purchase of this office building in Dublin's Capital Dock will probably happen.
Europe. Point of no return: Barrow delivers Brexit letter. There's no turning back now. On Wednesday, the UK's ambassador to the EU, Tim Barrow, personally handed that country's letter of intent to leave the European Union to EU Council President Donald Tusk. This "triggering of Article 50" sets in motion a two-year timeframe for the United Kingdom to sever all official ties to the EU. This will be fascinating to watch: British conservatives will demand a severing of all ties that bind, while UK member-state Scotland is already threatening to leave and re-join the EU unless the ties remain strong. For her part, British Prime Minister Theresa May must grant permission for Scotland to hold a second referendum to leave the UK—the first one failed 55/45, with 55% voting to remain.
(13 Mar 2017) British Parliament gives final approval to Brexit. On Monday the House of Lords in the UK passed a bill giving Prime Minister Theresa May the go-ahead to trigger Article 50, initiating the no-looking-back, two-year process of leaving the European Union. Meanwhile, in Scotland, the leftist First Minister, Nicola Sturgeon, is demanding a second vote to leave the UK and remain in the EU. Two problems with that. First, the Scottish people already had such a vote, and they voted to stay with the UK. Second, another referendum would have to be approved by Theresa May.
(08 Mar 2017) Jon Huntsman tapped to be US ambassador to Russia. Many had hoped that former Utah Governor and GOP presidential hopeful Jon Huntsman would be called on by President Trump for the role of Secretary of State. That didn't happen, but Huntsman did accept the president's offer to make him the next ambassador to Russia. What a job. Between the comical claims of Russia "hacking" the US election, that country's invasion of Crimea, and Vlad Putin's mercurial disposition, it will take a cool head to be effective in Moscow. We can't think of a man or woman with a better temperament for the position.
(21 Feb 2017) Leading French candidate refuses to don head scarf on Lebanese trip. French presidential candidate and the worst nightmare of the European establishment, Marine Le Pen, made waves among the Islamic world on a recent trip to Lebanon. Before a planned meeting with the country's senior Sunni Muslim cleric, officials gave her a head scarf to wear, despite the fact that this hadn't been demanded in previous meetings with Sunni leaders. Le Pen refused, telling the officials, "It doesn't matter. Pass on my considerations to the Grand Mufti but I will not veil myself." This was, more than likely, a complete setup to get a photo op in the hopes of demoralizing her base in France. As usual, she outsmarted her opponents.
(15 Feb 2017) Brexit? What Brexit? UK employment highest level on record. The employment rate in the United Kingdom rose to 74.6% in the final quarter of 2016, which is the rosiest number since data collection began back in 1971. Figures from the Office for National Statistics also show a 2.6% jump in earnings from Q4 of 2015. Remember the economic fear-mongering that was shoved down our throat by the press regarding the disastrous results of the UK leaving the EU?
Francois Fillon Surprises, Wins French Conservative Primary
It appears as though it will be a race between someone on the right, and someone further on the right this coming April as the French people choose a new leader. The mere thought of that sentence would have sent shock waves through the halls of academia and government in the EU just a few short months ago, but the anger and frustration that allowed the UK to leave the Union, and Donald Trump to become president of the United States, will most certainly carry forward into 2017.
Francois Fillon, who has compared himself to Ronald Reagan and Margaret Thatcher, was given up for dead a few months ago. Last week he won his party’s primary in a landslide, beating such names as former Prime Minister Nicolas Sarkozy. This sets up an almost certain national election between Fillon and the National Front’s candidate, Marine Le Pen, an ardent opponent of mass immigration and France’s role in the EU.
The first round of the presidential election will be held on 23 April 2017. Should no candidate receive a majority of the votes (which is a near certainty), a runoff between the top two vote-getters will be held on 7 May 2017. All of the so-called experts are assuring the masses that Le Pen has no chance of winning, but these are the very same journalists and erudites who told us that Donald Trump had no chance to win the US presidential race.
To be clear, the idea of either Le Pen or Fillon at the helm in France scares the hell out of EU leaders in Brussels. As if the thought of the French election weren’t scary enough, Germany will have its own national election in the fall of 2017. German Chancellor Angela Merkel, facing a populist backlash for her open-door policy on refugees, is quickly trying to backtrack on her previous actions, like unilaterally allowing millions of Middle Eastern immigrants into the country. We will go out on a limb and make a bet that the EU will be shaken to its core after the results of the two elections. And that is a good thing.
British Parliament must approve Brexit, judges decree
In a clear slap in the face to the rights of the British people, who voted by a majority to leave the European Union, a cabal of London judges has ruled that the Parliament must indeed “OK” the deal before Article 50 is implemented (Implementation of this Article requires the country in question to be fully extricated from the Union within two years).
Ultimately, what does this mean for the plans to leave the muddled mess that is the EU? Not much. It does, however, gum up the works, forcing the British government to expend energy and resources on legal battles; energy and resources which would be better served focused on economic growth.
The fact is, most British politicians, including newly-installed prime minister Theresa May, were actually opposed to the Brexit deal. Most respected the will of the people, however, and vowed to make the transition as smooth as possible. May said she plans to implement Article 50 by the end of the first quarter of 2017, initiating the two-year countdown clock.
Dire consequences of a British separation were predicted by the British press leading up to the vote, not unlike the current tenor of the US press on what would happen if Donald Trump were elected president. In the rear view mirror, all of the acute warnings by the British press are beginning to look like nothing more than bombastic bluster.
To the chagrin of many in that country, the British economy grew more than expected in the third quarter, lifted by growth in retail and the services sector. On the heels of the solid economic data, the Bank of England decided to keep key interest rates unchanged, i.e. they are not going down Germany’s path of negative interest rates in a vain attempt to spur economic growth.
The Supreme Court of the United Kingdom has been placed on standby to expedite a hearing on Brexit by early next month. Odds are, despite the prime minister’s appeals, they will uphold the ruling of the judges, and the vote will move to Parliament. Labour’s Jeremy Corbyn probably realizes that his leftists in Parliament cannot stop Brexit. However, they will use this gift from the judges as a bargaining chip to achieve their secondary and tertiary desires—more immigration and closers ties to the EU, post Brexit.
Reprinted from this coming Sunday's Penn Wealth Report
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In a clear slap in the face to the rights of the British people, who voted by a majority to leave the European Union, a cabal of London judges has ruled that the Parliament must indeed “OK” the deal before Article 50 is implemented (Implementation of this Article requires the country in question to be fully extricated from the Union within two years).
Ultimately, what does this mean for the plans to leave the muddled mess that is the EU? Not much. It does, however, gum up the works, forcing the British government to expend energy and resources on legal battles; energy and resources which would be better served focused on economic growth.
The fact is, most British politicians, including newly-installed prime minister Theresa May, were actually opposed to the Brexit deal. Most respected the will of the people, however, and vowed to make the transition as smooth as possible. May said she plans to implement Article 50 by the end of the first quarter of 2017, initiating the two-year countdown clock.
Dire consequences of a British separation were predicted by the British press leading up to the vote, not unlike the current tenor of the US press on what would happen if Donald Trump were elected president. In the rear view mirror, all of the acute warnings by the British press are beginning to look like nothing more than bombastic bluster.
To the chagrin of many in that country, the British economy grew more than expected in the third quarter, lifted by growth in retail and the services sector. On the heels of the solid economic data, the Bank of England decided to keep key interest rates unchanged, i.e. they are not going down Germany’s path of negative interest rates in a vain attempt to spur economic growth.
The Supreme Court of the United Kingdom has been placed on standby to expedite a hearing on Brexit by early next month. Odds are, despite the prime minister’s appeals, they will uphold the ruling of the judges, and the vote will move to Parliament. Labour’s Jeremy Corbyn probably realizes that his leftists in Parliament cannot stop Brexit. However, they will use this gift from the judges as a bargaining chip to achieve their secondary and tertiary desires—more immigration and closers ties to the EU, post Brexit.
Reprinted from this coming Sunday's Penn Wealth Report
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Europe's Populist Uprising—The Alternative for Germany (AfD) party's success is making Merkel, and other EU leaders, squirm
(08 Sep 16) Between early last year and this past weekend, German citizens have watched while the country’s leaders, primarily Angela Merkel, have allowed over 1 million immigrants from war-torn Mideast nations to legally enter their borders. Germans are fed up with the spiking crime rate and the lack of a cohesive immigration policy, and they are voicing their opinion at the ballot box. In Vol 4 Issue 37 of the Penn Wealth Report, we discuss what is at the heart of European populism, the probable outcomes, and whether or not it is good for the continent. Coming Next Sunday.
(08 Sep 16) Between early last year and this past weekend, German citizens have watched while the country’s leaders, primarily Angela Merkel, have allowed over 1 million immigrants from war-torn Mideast nations to legally enter their borders. Germans are fed up with the spiking crime rate and the lack of a cohesive immigration policy, and they are voicing their opinion at the ballot box. In Vol 4 Issue 37 of the Penn Wealth Report, we discuss what is at the heart of European populism, the probable outcomes, and whether or not it is good for the continent. Coming Next Sunday.
Think the US 10-year Treasury rate stinks? How about paying to own a government bond?
(06 Jul 16) While the markets are on pins and needles over when the Fed will make their second rate hike in a decade, something phenomenal is going on at the Bundesbank—Germany’s equivalent of the Federal Reserve. For the first time in its history, the 10-year German bund (think 10-year Treasury bond) is yielding a negative interest rate. In other words, investors seeking safety are now willing to pay the German government for the right to park money in the 10-year government note.
By comparison, the US 10-year Treasury’s 1.5% yield, or even the UK’s 1.1% rate, seems downright hefty. But let’s not kid ourselves; inflation is still gobbling up our money at a faster clip. As for Europe, the negative bund rates are a result of a couple of issues spanning the continent.
The shock of the UK leaving the EU was a major disruptor to the European economy, and a factor in the rate change. Sadly, the bumbling, fumbling group of highbrows in Brussels which ostensibly runs the continent’s economy still doesn’t appreciate the angst and anger among the “leave the EU” crowd. The UK pulling out of the EU was akin to Texas or California pulling out of the US—at least economically (California’s GDP just passed France’s, making it the 6th-largest economy in the world). We don’t buy the uncertainty argument; other than being forced to renegotiate a bunch of trade agreements, everyone who had been trading with the UK will continue to do so. Since the UK never adopted the euro, the direct impact on either currency will be minimal, following this brief temper tantrum by FOREX traders.
Another reason for the move was to weaken the local currency. In theory, investors will look for low-risk returns elsewhere as rates fall; as they pull money out of a currency, it becomes weaker, making a country’s goods more attractive around the world. Battering a currency to promote the export of goods is a dangerous game to play, however, and often signals a weak central bank willing to use desperate measures to strengthen an economy. Not exactly a confidence builder in the eyes of the global marketplace.
Misery loves company.
While the negative bund rate is extraordinary for a couple of reasons (the length of maturity and the developed German economy), it now joins a club “boasting” $10 trillion in assets—global sovereign debt funds with negative rates. Japan is the most famous and oft-cited member of the group, but the northern European countries of Denmark, Sweden, and Switzerland also penalize responsible savers. The European Central Bank, in fact, implemented a negative-rate policy in 2014 in an attempt to spur economic activity. There is an old maxim that says “if all you have is a hammer, then everything looks like a nail.” The central banks are firing the only weapons they have, but they don’t realize the ammo dump is empty.
Back to the Brexit issue. Brussels appears ready to play hardball with the UK in negotiating future deals with the former member-state, but is that a wise move? In reality, the EU needs Britain at least as much as the latter needs the EU. After the initial puffery abates, that reality will set in.
The governor of the Bank of England, Mark Carney, unveiled a four-point plan to monetarily deal with the Brexit. As Carney put it, “these efforts mean we can all look ahead, not over our shoulders.” Germany’s Merkel may not have that luxury, as the temperature continues to rise on her aft end. (Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 27.)
What European country do we own in the Penn New Frontier Fund? Hint: it is almost assuredly not one you have considered. Members, take a look at the Strategy holdings.
(OK, got it. Take me back to the Penn Wealth Hub!)
(06 Jul 16) While the markets are on pins and needles over when the Fed will make their second rate hike in a decade, something phenomenal is going on at the Bundesbank—Germany’s equivalent of the Federal Reserve. For the first time in its history, the 10-year German bund (think 10-year Treasury bond) is yielding a negative interest rate. In other words, investors seeking safety are now willing to pay the German government for the right to park money in the 10-year government note.
By comparison, the US 10-year Treasury’s 1.5% yield, or even the UK’s 1.1% rate, seems downright hefty. But let’s not kid ourselves; inflation is still gobbling up our money at a faster clip. As for Europe, the negative bund rates are a result of a couple of issues spanning the continent.
The shock of the UK leaving the EU was a major disruptor to the European economy, and a factor in the rate change. Sadly, the bumbling, fumbling group of highbrows in Brussels which ostensibly runs the continent’s economy still doesn’t appreciate the angst and anger among the “leave the EU” crowd. The UK pulling out of the EU was akin to Texas or California pulling out of the US—at least economically (California’s GDP just passed France’s, making it the 6th-largest economy in the world). We don’t buy the uncertainty argument; other than being forced to renegotiate a bunch of trade agreements, everyone who had been trading with the UK will continue to do so. Since the UK never adopted the euro, the direct impact on either currency will be minimal, following this brief temper tantrum by FOREX traders.
Another reason for the move was to weaken the local currency. In theory, investors will look for low-risk returns elsewhere as rates fall; as they pull money out of a currency, it becomes weaker, making a country’s goods more attractive around the world. Battering a currency to promote the export of goods is a dangerous game to play, however, and often signals a weak central bank willing to use desperate measures to strengthen an economy. Not exactly a confidence builder in the eyes of the global marketplace.
Misery loves company.
While the negative bund rate is extraordinary for a couple of reasons (the length of maturity and the developed German economy), it now joins a club “boasting” $10 trillion in assets—global sovereign debt funds with negative rates. Japan is the most famous and oft-cited member of the group, but the northern European countries of Denmark, Sweden, and Switzerland also penalize responsible savers. The European Central Bank, in fact, implemented a negative-rate policy in 2014 in an attempt to spur economic activity. There is an old maxim that says “if all you have is a hammer, then everything looks like a nail.” The central banks are firing the only weapons they have, but they don’t realize the ammo dump is empty.
Back to the Brexit issue. Brussels appears ready to play hardball with the UK in negotiating future deals with the former member-state, but is that a wise move? In reality, the EU needs Britain at least as much as the latter needs the EU. After the initial puffery abates, that reality will set in.
The governor of the Bank of England, Mark Carney, unveiled a four-point plan to monetarily deal with the Brexit. As Carney put it, “these efforts mean we can all look ahead, not over our shoulders.” Germany’s Merkel may not have that luxury, as the temperature continues to rise on her aft end. (Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 27.)
What European country do we own in the Penn New Frontier Fund? Hint: it is almost assuredly not one you have considered. Members, take a look at the Strategy holdings.
(OK, got it. Take me back to the Penn Wealth Hub!)
Marine le Pen’s National Front Party wins big in first round of French elections
(08 Dec 15) When you begin a study of French politics, it is helpful to first look at the political parties in the United States. On the left you have the Democrats. Their semi-equivalent group in France would be the Socialist Party, which is considered to be center-left. French President Francois Hollande represents this group. The French version of the Republican Party in the US would be, simply enough, the Republicans. Former French President Nicolas Sarkozy is a member of this party. This is where the structure begins to get a bit more twisted.
While these two parties have dominated election wins over the past thirty years or so, each is quite fractured, cobbling together a disparate band of other parties to form a governing coalition. On the fringes of the political spectrum in France you would find many far-left groups such as the Communist Party and the Radical Party of the Left. On the other side of the spectrum you would see nationalist parties like the National Front, or FN.
When a national tragedy strikes, especially when the threat emanates from outside of a country, nationalist parties tend to garner a groundswell of support. This is precisely what happened last weekend in France, when the National Front was handed an enormous victory at the polls.
So fresh on voters’ minds was the massacre of 130 innocent civilians by jihadist militants on the streets of Paris, and the promise of FN’s leader, the charismatic Marine le Pen (pictured above), to ebb the flood of Middle Eastern immigrants coming into the country. While a second round of voting will occur on 13 December, the FN’s victory was sweeping.
Of the 13 regions in France, this third-largest political party won in six. The trouncing was so bad in three regions that the Socialists are pulling out of the second round to help the moderate right Republicans win. Following the election night bloodbath, le Pen proclaimed that voters had rejected the “old political class,” and are ready for change. She may be right.
While the next presidential election isn’t until spring of 2017, if the FN wins the second round of regional voting, President Hollande may face a nightmarish situation until then. Hollande’s Socialists came in third in overall voting last weekend, garnering just 23% of the vote. Despite the FN’s disdain for both ruling parties, if the Republicans can forge a coalition with the group (the two parties each garnered about 25% of the vote) it would deal a serious blow to the EU’s plans to absorb millions of refugees over the next several years.
In addition to the anti-immigration stance, the FN also supports ditching the euro for a return to the franc, and gutting free trade agreements in favor of protectionism. Interestingly, England will have a vote next year as to whether or not they should continue to remain in the European Union. It should be an interesting year ahead across the pond.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 50.)
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Last Week it was Air France, This Week it is Lufthansa
(11 Nov 15) Last week we showed pictures of shirtless Air France executives bolting over a fence to escape the onslaught of protesters ripping at their clothes. This week we turn to Deutsche Lufthansa AG. The German carrier was forced to cancel nearly one-third of its 3,000 flights scheduled for Wednesday due to a cabin crew strike, leaving over 100,000 passengers stranded. In all, about 4,000 flights have been canceled since the sporadic walkouts started on 6 Nov.
So what’s the big schnitzel? The trouble began when the struggling German carrier announced its plans to transform its Eurowings division into a low-cost carrier to compete with the likes of Ryanair Holdings, PLC. Management argues (rightfully) that these changes must be made to keep up with the ever-changing and uber-competitive environment. European socialists don’t care much for change, however—just look at Greece for evidence of that.
Perhaps what has been most impressive is management’s refusal to capitulate to the offenders. A leader of the flight attendants’ union said that due to the airline’s “stubbornness,” he is in no hurry to return to the talks.
Who are investors siding with? Clearly management. The stock price actually jumped on Wednesday as the flights were being canceled. These investors understand the importance of the airliner doing what is necessary to remain profitable in an industry with razor-thin margins.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 44.)
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Those Enlightened French
(09 Oct 15) Let’s face it, the French believe that Americans are some amalgamation of Neanderthal and cowboy and hillbilly. They, on the other hand, are the enlightened ones. Their stoic, ahem, behavior was on full display this past week as striking Air France workers stormed a meeting of airline managers and began ripping the shirts from their backs. Several half-naked supervisors fled over a fence to escape the violence.
The Paris-based airline has been bleeding money, and the relentless strikes have only exacerbated their dire financial straits. The meeting at the epicenter of the most recent attack occurred at the airline’s headquarters near the Charles de Gaulle airport. Managers were discussing a restructuring plan to eliminate 2,900 “redundancies” between now and 2017.
For their part, French unions decried the violence. Ironic, as these unions have been fomenting hatred for years. De honte.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 38.)
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Both Sides Lost, but Tsipras Really Got Hammered in Bad Greece/EU Deal
(13 Jul 15) After 22 hours of hard, often contentious negotiations, the European Union hammered out a deal on the Greek crisis. Greek Prime Minister Alexis Tsipras, whose bravado has become well-known to Eurozone leaders since he was elected earlier this year, walked away the clear loser, but the rest of Europe, sans Russia, isn’t far behind.
Consider this: The deal agreed to after the Sunday marathon was a far more bitter pill for Greece to swallow than the one the prime minister walked away from last month. He had convinced himself just how cunning he was, and the leftists who swept him to power buttressed that viewpoint among the Syriza party leadership. Instead of that deal, he walks away with a rescue plan that gives Greece’s creditors, i.e. the taxpayers of Europe, almost complete control over the country’s finances.
While he must now sell the plan to the Greek parliament, it will almost assuredly be approved, considering the large number of his political opponents who were urging a deal all along. This seems to prove what one pundit said last week: holding on to power is the number one priority for Tsipras.
By mid-week, the parliament must agree to pension overhauls for the Greek people, a sales tax hike that the mere mention of caused riots in the street a few months ago, and a purging of Greek banks that will see the number of institutions fall from 15 (before the recession began) to probably two. Assuming the deal passes, roughly $96 million in cash will be freed up and sent to Athens so that they might re-open their financial institutions.
So why did Tsipras agree to more Draconian terms than he walked away from last month? Some believe that Merkel simply called his bluff and he realizes that they (the rest of the EU) were willing to cut Greece loose. That would be thinking analytically, however, and we have seen that emotions, not clear-headed analysis, wins the day. I would point back to Tsipras’ dressing down last week by members of the EU; specifically, one Brit MP who told him he should have the courage to stand up and lead Greece back to the drachma. Perhaps Tsipras wanted to show the MP that he would not be bullied by the likes of him. Or, perhaps Tsipras wants to get the $96 million first, and then tell the Eurozone to take a hike. Either way, it was not a reformed leader that took the deal. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 28.)
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Is there a Difference between the European Union and the Eurozone?
(07 Jul 15) There is one positive aspect of the Greek debt debacle: Americans are learning more about the structure of modern Europe than they ever anticipated.
Take the two by-names for the continent that, until recently, seemed to be interchangeable in the minds of all but the most ardent Europhile—the “Eurozone” and the “European Union.” Our first clue that these were actually two completely different beasts came when we learned that Greece might actually leave the former, but certainly not the latter! A little research (yes, we should have probably already known this—typical arrogant Americans) revealed the 9-country difference.
The idea of a European Union dates at least back to, ironically, the eponym of this organization—William Penn, who argued in 1693 for a union that would prevent further war on the continent. Precisely 300 years later, Penn got his wish when the 1993 Maastricht Treaty brought the EU to fruition. The purpose of this geopolitical group of 28 neighboring nation-states was to forge a singular economic and political partnership between members, while each retained its own national identity.
The Eurozone is a subset of the EU and consists of the 19 nation-states which adopted a single currency, the euro. Seven of the remaining nine (Denmark and the UK are exempted) are expected to adopt the euro and, thus, become members of the Eurozone when they meet the economic criteria. It is amusingly ironic that Greece, a nation that should no longer qualify for Eurozone membership, is threatening to leave and re-adopt the drachma. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 27.)
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What, exactly, does the Rest of Europe Owe Greece?
(06 Jul 15) Well, those petulant Greek voters really showed the rest of Europe who is boss. After receiving roughly $350 billion from the pockets of taxpayers who reside in other nations, Greek voters overwhelmingly flipped the figurative bird to their creditors.
With Sunday’s “NO” vote, the Greeks are playing a dangerous game of chicken, betting that they have the rest of Europe over a barrel. But it really wasn’t a tactical move on the part of voters, it was an emotional one. Pride cometh before a fall, and chances have increased that Angela Merkel will tell them to take a hike—despite France’s socialist President Francois Hollande’s desire for a deal.
If you want to know whether the "no” vote was a good or bad move, consider how the world’s leftist dictators, politicians, and pundits lined up. From Vlad Putin to Paul Krugman to Bernie Sanders to the ghost of Che Guevara, the anti-capitalists all expressed their will that the Greeks do exactly what they ended up doing. The logical questions are: What did the rest of Europe do to Greece to make them mad, and what does the rest of Europe owe to the Greek people?
Along with the $350 billion in cash they gave the beleaguered country, the EU & ECB asked that the government begin acting more fiscally responsible. The Greeks responded to that request by putting a Marxist in charge during the last election cycle. Arguably, that led to the deep worsening of the crisis. As for what Europe owes Greece, the answer is absolutely nothing. Greece does not contribute in any substantial way to the EU’s GDP; it has refused to adopt even the liberal employment policies of its neighbors; even the request that the retirement age be hoisted to 67 was met with anger and rage.
Here’s the simple fact: A plurality of the Greek people are more aligned, politically and ideologically, with Putin’s Russia. Most of the Greeks who voted “no” on the referendum would love to see the country go back on the drachma and increase ties to Russia. Their misguided wish may soon come to fruition.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 27.)
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Putin Left Wondering What Happened to the Weak West—US Sending Heavy Artillery to Region, EU Extends Sanctions
(23 Jun 15) Whether Vlad Putin has Asperger Syndrome or is a simple megalomaniac, one thing is certain—he has been convinced that his ability to run circles around the weak-willed West is limitless. He will need all of his delusional thought patterns firing to deal with the past week.
First came Western Europe. With the strict embargo that has been in place against Russia since the invasion of Crimea about to expire, the continental powers wasted no time in extending the sanctions until the end of January, 2016. On the following day, the United States landed a right cross to follow up Europe’s jab when SecDef Ash Carter announced that six Eastern European nations threatened by Russia will be receiving a brigade’s worth of heavy equipment...
(Read the rest of the story, including what three former Soviet Bloc nations requested Western boots on the ground to keep Putin in check, in this Sunday’s Journal of Wealth & Success, Vol. 3, Issue 25.)
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France Really is a Socialist Haven: Government Buys More Shares of Air France to Increase its Role at Airline
(Mo, 11 May 15) Those rascally French. Just when it looks like there might be some hope, they go and totally redeem their leftist credentials. Last Friday, the government announced that it would begin raising its stake (yes, the government’s stake) in Air France-KLM to 18% to increase its activist role in the company. Alternative reality time. How about ending the charade (ironically, a word they created) and just take ownership of the entire company. The US government runs a train company, and we all know what a well-oiled machine that is.
At the heart of the issue is the government’s ability to hold veto power at the air carrier’s shareholder meetings—they don’t have it, but they want it. Just last month, the French economic minister orchestrated a €1.2 billion purchase of Renault SA shares so it could defeat a resolution the board of the automaker was about to pass, but one the government didn’t like. The defeated resolution would have ended the practice of giving longtime shareholders, like the government, double voting rights (no joke).
In the case of Air France, the government’s aim is ostensibly the same: upholding the double-vote rule. But the desire for corporate control runs deeper than the ability to vote twice with one share. Renault’s CEO, Carlos Ghosn, put up a vigorous fight against the government intrusion in a private company, only to lose.
It does not appear that Air France-KLM is readying such an attack. That is interesting, as the KLM portion of the airline is Dutch (they merged with Air France in 2004), and that wing has enjoyed a large degree of autonomy, to include a separate company headquarters in Holland. The new share purchases by the government of France (with French taxpayers’ money) risks upsetting relations between the two nations, though the Dutch response has been muted thus far.
The double-voting rights issue is a scheme devised by the French government to thwart foreign investors from controlling too much of a French company. That is power reserved, obviously, for the government.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 20.)
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The European Union’s new Antitrust Chief is not Afraid to Make Big Enemies
(22 Apr 15) She has been called Denmark’s most powerful politician, and she didn’t waste any time living up to the moniker. University of Copenhagen-trained Margrethe Vestager took over in the role of EU Commissioner for Competition this past November, at age 46, and she has already gone after Google (a case which sat dormant under her predecessor) and now Gazprom—Putin’s Russian gas giant which supplies Europe with a lion’s share of its energy.
This week, the EU accused Gazprom of using its size and market share to gouge Central and Eastern European countries who rely on natural gas from the company. If the charges hold up, Gazprom, i.e. Russia, could face multibillions in fines. Considering it was just last fall when Putin issued a thinly-veiled threat to withhold gas during the coming winter, this is a bold move. It is also a move which will spur the demented Russian leader to take some predictable course of action.
At the heart of the charges are eight EU member-states—Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia. Vestager has shown that the price disparity between Gazprom fuel purchased in these countries is as much as 40% higher than in other EU countries. The fact that she is willing to go to bat for these periphery members of the union says a lot about how she will run her department during her five-year reign.
Russia’s immediate response came from Foreign Minister Sergei Lavrov, who called the charges “absolutely unacceptable.” His vacuous argument was that both sides—Russia and the EU—had “agreed not to take any actions that would worsen business conditions (between the two trading partners).”
Such silliness might have worked with the US State Department, but it won’t get Russia very far with Vestager. Interestingly, the investigation has been going on for over two years but stalled when Russia invaded the Ukrainian island of Crimea, and Putin made his threats. Back then, there was another, weaker sheriff in town; one that was more easily intimidated. The situation has since changed dramatically.
In addition to the disparity in gas prices, Vestager’s department also claims that Gazprom used its monopolistic position to strong-arm unrelated commitments out of the likes of Poland and Bulgaria, such as support for its now-abandoned South Stream pipeline project. That pipeline would have allowed Russia to circumvent delivering the gas through Ukraine on its way to Europe. It would have consisted of an underwater link to Bulgaria through the Black Sea. While the Russians blamed the EU for cancelling the pipeline plans, Gazprom was simply not up to the Herculean task of making it work. While it may be frustrating to see Putin beat his chest and cause trouble in the region, it is ultimately the Russian people (who support him overwhelmingly) who will pay the price for his rule.
As for the EU, it is refreshing to see an actual leader put in a position of power. Perhaps a few linguine-spined politicians in the US and Europe will take notes on how to take charge effectively. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 17.)
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Greeks Receive Four Month Bailout Payback Extension
(24 Feb 15) Here’s the problem: The €240 billion emergency bailout Greece received from the other nations of the European Union has gone dry, and they want more money. But they don’t want to begin paying back the money they owe on the original amount, a big chunk of which is (was) due this month. Also, the Greek people put a political party in power which promised to face north and collectively flip the Athenian bird in France and Germany’s direction.
After weeks of contentious debate, a four-month extension on the payback of the bailout money was approved, contingent upon Greece providing a list of reforms they will undertake to act more responsibly….
(Read the entire story in the Journal of Wealth & Success, Vol. 3, Issue 9. Not a member? Click Here.)
Europe: Russia
Russian GDP will Shrink 3% this Year, According to Economy Minister
(31 Jan 15) Russian Economy Minister Alexei Ulyukayev made a dour projection about the state of his nation’s economic situation for 2015—it will shrink an estimated 3%. The government had previously projected a GDP of -0.8%, but with falling oil prices and rising inflation, not to mention an S&P downgrade of the country’s credit rating to “junk” status, a much bigger contraction is developing.
Russia must have been listening to Goldman Sachs’s dead-wrong predictions about the price of oil rising from $100 to $200, based on Putin’s defense spending spree, but with oil going in the exact opposite direction—cut in half—the situation is dire for the Russian people.
Until now, Putin has been able to frame his enemies, especially America, as the central focus of the problem, but with inflation expected to hit 12% this year, the people’s bitterness will spread like a bowl of spilled borscht. Despite his control of the press, it will be hard to keep the economic sinkhole of Crimea, the island he invaded and took from Ukraine, a secret for long. It is estimated that the cost of maintaining the island will amount to at least $4 billion per year, which is not in the budget. The price of oil, not economic sanctions, may ultimately be Putin’s Achilles’ heel.
European Central Bank to Flood Market with €60 Billion Each Month until September 2016
(22 Jan 15) In the midst of some future generation, America may actually be able to bring its $18 trillion debt down to a more “manageable” level, but that will be after politicians are term-limited out of office, and a balanced budget amendment gets added to the US Constitution. The only element the US has going for it, from a fiscal responsibility standpoint, is the certainty that Europe is more government-centric than we are.
Evidence Mario Draghi’s announcement Thursday that the European Central Bank will begin flooding €60 billion euros per month into the bowels of Europe for at least the next year and a half. That equates to $69 billion dollars per month, or nearly $1.2 TRILLION of new debt for the continent. Have no fear, Europeans, Draghi is keeping open the option of extending the deadline if necessary. What is “necessary” to a politician with someone else’s checkbook? Is enough ever really enough? All in a misguided effort to devalue the euro and stave off deflation.
The European Union Fiddles as Ukraine Burns
(04 Mar 14) Maybe French President Hollande is too preoccupied with his girlfriend. Spain and Italy have their own internal concerns, and don't want to be bothered. But Angela Merkel of Germany, now that is another story.
Merkel grew up in Communist East Germany, and she knows what someone like Vlad Putin is capable of. She also knows that, deep in their hearts, many Russian leaders yearn for the "good old days" of the Soviet Union. All the more reason, considering she is the titular head of the European Union, for the continent to act, soon and decisively, to protect one of its own--the Eastern European country of Ukraine.
As mentioned in previous reports, the president of Ukraine was merely a puppet put in place by Vlad Putin. Since 1992, Ukraine has been an independent nation, but the regions within its borders, especially the energy rich eastern part of the country, are too valuable for Putin to give up. He did not calculate the speed at which the citizens of Ukraine would force his puppet from office, nor did he welcome the negative press generated as he was showing the world what a glittering jewel Russia was via the Olympic Games held in Sochi. It forced his hand, and he acted.
The most humorous news report to come out of the press (if one could find any levity in this situation) revolved around Putin going to the Russian parliament to ask for "permission" to use force in the region. Perhaps recalling the poor uncle of Kim Jong-un in North Korea, who met a grisly fate in the mouths of a pack of starved dogs (literally), parliament members gave Putin his go-ahead.
Enter Merkel. The German Chancellor is said to be fuming about Russian troops invading, for all intents and purposes, the Ukrainian region of Crimea. She has called this act of aggression a clear violation of international law, which it absolutely is. This would be akin to U.S. troops occupying towns in Mexico and taking over Mexican airports in the name of border security. While America has pledged $1 billion in loan guarantees to the interim government, now is the time for Merkel to rally the EU to action.
Putin's military moves are a power grab, plain and simple, and Europe must now take a decisive stand in the name of freedom and in the face of aggression. Unfortunately, lofty words and lengthy speeches may be all the people of Ukraine receive from their immediate neighbors to the west. Perhaps England can appoint Neville Chamberlain's grandson as a special envoy to the region.
Ukrainians Take to Streets to Demand Ouster of Puppet Ruler
(17 Dec 13 UPDATE) Vlad Putin met with Ukrainian President Yanukovich on Tuesday, assuring the embattled leader that Russia would cut the price of gas supplies to Ukraine by about one-third, and purchase $15 billion worth of the country's bonds to infuse cash into the struggling economy.
Every action Putin takes on the world scene must be viewed through the prism of his KGB background. He is certainly the puppet-master of Yanukovich, but the method he used to deal with the situation was designed to deflate the opposition. In essence, he told the president to jettison some cabinet members. This will serve a dual purpose to Putin--it will allow the president to place loyalists in the cabinet, while attempting to placate the demonstrators by making changes.
As usual, Europe and the U.S. are missing in action. Europe certainly could have made it clear to Ukraine that they were willing to provide economic support, despite the president's last minute refusal to sign the trade accord with the EU. America could have, and should have, worked behind the scenes to let the protesters know that they had U.S. backing. Good will win out in the end, and Yanukovich will probably face a dour end to his reign. In the meantime, however, Putin has gained yet another victory thanks to Western incompetence.
(04 Dec 13) While protests in America seem to center around a socialist agenda, protesters in the Ukraine are demanding moreeconomic freedom. Hundreds of thousands of citizens took to the streets of Kiev, demanding the ouster of President Viktor Yanukovych. The beef is over the decision to toss aside an accord between the Ukraine and the European Union that would increase ties, and trading, between the two powers.
Vlad Putin's dirty little hands are all over the scrapping of this deal. Since the Orange Revolution of nine years ago, a revolt that swept pro-Western leader Viktor Yuschcenko into power, the states of the former Soviet Union have been the prize target for the former KGB leader. Trying to walk the fine line between alienating the public and ticking off the thug Putin, President Yanukovych had been promising closer ties with the Western world to counter Ukraine's ties with Moscow. When the rubber met the road, however, he refused to sign the EU deal.
Moscow was infuriated when they got wind of the deal with the EU. Gazprom, one of the largest gas companies in the world (and one controlled by Moscow) immediately claimed that Ukraine owed it about $1 billion in past-due payments, and demanded payment in full. Shortly after this is when President Yanukovych reneged on the trade deal with the European Union.e Shortly after that, Gazprom said they were fine with the current payment plan. Chicago should send its elected officials to Moscow each year for continuing education credits on how to shake down the competition.
The president of Ukraine was bullied into submission by Putin, but the citizens in the streets are having none of it. Putin is, no doubt, longing for the good ole' days of the USSR when it was a lot easier to perform crowd control.
Hollande's Millionaire Tax Illustrates French Contempt for the Free Market
(30 Dec 13) When a left-leaning country elects a socialist president, one can predict the results. French President Francois Hollande ran on a plank of "leveling the playing field" by making wealthy French citizens pay, and he appears to be succeeding in his quest.
A year ago, the French constitutional council dealt a blow to Hollande's plans to place an oppressive 75% tax on individual earnings in excess of €1 million ($1.37 million) per year by declaring it unconstitutional. While this stick-it-to-the-man approach may have many cheering (even many in America), anyone with a modicum of economic understanding would realize how the unintended consequences of this draconian plan would harm a nation's productivity.
For example, many French business leaders and other high net worth individuals have already taken up residence in parts of London, commuting to France as needed, to escape the onerous tax. French Actor Gerard Depardieu made headlines by renouncing his French citizenship and moving, ultimately, to Belgium. France's wealthiest individual, Bernard Arnault, has also applied for Belgian citizenship and will take his luxury company, with brands like Louis Vuitton and Hennessy, out of France. For their part, leaders like Brittain's David Cameron have been courting those seeking self-imposed exile. A cottage industry of sorts has sprung up to help French entrepreneurs create London-based businesses.
While the constitutional council ruled the tax plan on individuals unconstitutional, this past Sunday they gave the go-ahead for Hollande to implement the tax on companies and organizations paying over €1 million to those individuals. Consider this example: an American actor earns $20 million to make a film, or a ballplayer is paid $10 million per year by a major league team. Before the individual sees a penny of it, 75 cents of every dollar over $1 million would be confiscated by the central government. Karl Marx might approve, but anyone who enjoys the comforts brought to them by a free market economy should shudder.
As for France, we expect no more. It is encouraging, however, that so many achievers and producers born in the country are scrambling for the door. The praise for the socialist Hollande may just become muted by the giant sucking sound of all those euros heading for greener pastures.
German Union Strikes Amazon
(16 Dec 13 UPDATE) How to win friends and influence people: German union trying to disrupt America's Christmas as well. Head of the German services union Ver.di, Mechthild Middeke, called on her union "brethren" in America to help them in their plot. A number of U.S. unions have agreed: the Teamsters and the SEIU (Service Employees International Union) said they will show solidarity with workers in Germany by protesting outside of Amazon's Seattle headquarters. Amazon employs about 9,000 workers in Germany, which is about one-tenth of its total workforce. The 16th of December was the company's busiest single day last year, so the unions certainly devised this plot with maximum pain in mind. A spokeswoman for Amazon said that the firm is able to fall back on its massive logistics network in Europe when a strike occurs in one area, and expects any pain felt by customers to be minimal.
(25 Nov 13) Something odd has been going on between the United States and Germany, one of our closest allies. First, it was the snooping incident in which the NSA was purportedly listening in on Angela Merkel's cell phone conversations. Then it was a U.S. claim that Germany was perverting the EU's trading protocol to give itself an unfair advantage and pad its trade surplus. Now, the large German trade union Ver.di ("United Services Union") has called for a strike against U.S. internet powerhouse Amazon.
Knowing it will hurt the most during the busy holiday shopping season, the union has called for 1,000 workers to strike two of Amazon's German locations. The union's beef is ostensibly over wages and benefits, and they have issued a thinly-veiled threat to Amazon. "It lies completely in Amazon's hands whether more strikes will take place in the upcoming Christmas season," Ver.di spokeswoman Mechthild Middeke told reporters. Roughly 500 workers are expected to go on strike today at each of the two facilities.
Germany is an important market for Amazon, as nearly $9 billion of the company's $61 billion in annual revenue is generated there. By most accounts, the firm pays workers well in the country; near the upper end of the pay scale compared to German companies in similar industries, in fact. Although Amazon initiated what could be called "Christmas bonuses" for their German workforce, the union wants them to comply with forced, socialist-style European wage agreements, which include components like the "13th-month salary," which is a refined way of saying workers will get paid an extra month each year without working for it.
The great irony in this story is that Amazon, like Starbucks, is being pilloried in socialist regions of the world despite their progressive corporate leanings. This should be a lesson for domestic companies operating abroad. Expect to be targeted simply because you are an American firm.
Unemployment Rate in Europe Remains at Record High
(05 Nov 13) Europe had grand visions of emulating, then overtaking, America's economic might when it formed the European Union 20 years ago. Unfortunately, the insurmountable challenges many of us saw, namely getting the vastly disparate northern and southern regions of the continent to agree on anything substantive, seem to have been overlooked in the giddiness and chest-pounding of the moment.
The European Commission (their equivalent of the executive branch) has just released a very somber autumn economic forecast. The report prepares Europeans for an unemployment rate of 12.2% or so until 2015, when the rate is forecast to fall to 11.8%. Despite the phoniness of the U.S. unemployment rate of 7.2% (it is actually higher), this is comparably very bad news for the EU. The fact that the unemployment rate will be much higher in some regions and much lower in others sends a chilling signal of just how frail the unity is within the continent.
On the domestic product front, the news is not much better. The EU report projects final 2013 GDP of around -0.4%, before recovering to a rate of around 1.1% in 2014--a downward revision. As inflation seems to be contained, this negative report will give the European Central Bank the ammo it needs to reduce interest rates even further, pumping more euros into the economy and driving up government debt. Angela Merkel, with her Samsung phone at her side, is spending a lot of time expressing anger over the traitor Snowden's claim that the NSA has been monitoring her calls. As head of the leading economic state within the EU, the German Chancellor may need to turn her attention back toward financial matters.
(08 Dec 15) When you begin a study of French politics, it is helpful to first look at the political parties in the United States. On the left you have the Democrats. Their semi-equivalent group in France would be the Socialist Party, which is considered to be center-left. French President Francois Hollande represents this group. The French version of the Republican Party in the US would be, simply enough, the Republicans. Former French President Nicolas Sarkozy is a member of this party. This is where the structure begins to get a bit more twisted.
While these two parties have dominated election wins over the past thirty years or so, each is quite fractured, cobbling together a disparate band of other parties to form a governing coalition. On the fringes of the political spectrum in France you would find many far-left groups such as the Communist Party and the Radical Party of the Left. On the other side of the spectrum you would see nationalist parties like the National Front, or FN.
When a national tragedy strikes, especially when the threat emanates from outside of a country, nationalist parties tend to garner a groundswell of support. This is precisely what happened last weekend in France, when the National Front was handed an enormous victory at the polls.
So fresh on voters’ minds was the massacre of 130 innocent civilians by jihadist militants on the streets of Paris, and the promise of FN’s leader, the charismatic Marine le Pen (pictured above), to ebb the flood of Middle Eastern immigrants coming into the country. While a second round of voting will occur on 13 December, the FN’s victory was sweeping.
Of the 13 regions in France, this third-largest political party won in six. The trouncing was so bad in three regions that the Socialists are pulling out of the second round to help the moderate right Republicans win. Following the election night bloodbath, le Pen proclaimed that voters had rejected the “old political class,” and are ready for change. She may be right.
While the next presidential election isn’t until spring of 2017, if the FN wins the second round of regional voting, President Hollande may face a nightmarish situation until then. Hollande’s Socialists came in third in overall voting last weekend, garnering just 23% of the vote. Despite the FN’s disdain for both ruling parties, if the Republicans can forge a coalition with the group (the two parties each garnered about 25% of the vote) it would deal a serious blow to the EU’s plans to absorb millions of refugees over the next several years.
In addition to the anti-immigration stance, the FN also supports ditching the euro for a return to the franc, and gutting free trade agreements in favor of protectionism. Interestingly, England will have a vote next year as to whether or not they should continue to remain in the European Union. It should be an interesting year ahead across the pond.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 50.)
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Last Week it was Air France, This Week it is Lufthansa
(11 Nov 15) Last week we showed pictures of shirtless Air France executives bolting over a fence to escape the onslaught of protesters ripping at their clothes. This week we turn to Deutsche Lufthansa AG. The German carrier was forced to cancel nearly one-third of its 3,000 flights scheduled for Wednesday due to a cabin crew strike, leaving over 100,000 passengers stranded. In all, about 4,000 flights have been canceled since the sporadic walkouts started on 6 Nov.
So what’s the big schnitzel? The trouble began when the struggling German carrier announced its plans to transform its Eurowings division into a low-cost carrier to compete with the likes of Ryanair Holdings, PLC. Management argues (rightfully) that these changes must be made to keep up with the ever-changing and uber-competitive environment. European socialists don’t care much for change, however—just look at Greece for evidence of that.
Perhaps what has been most impressive is management’s refusal to capitulate to the offenders. A leader of the flight attendants’ union said that due to the airline’s “stubbornness,” he is in no hurry to return to the talks.
Who are investors siding with? Clearly management. The stock price actually jumped on Wednesday as the flights were being canceled. These investors understand the importance of the airliner doing what is necessary to remain profitable in an industry with razor-thin margins.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 44.)
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Those Enlightened French
(09 Oct 15) Let’s face it, the French believe that Americans are some amalgamation of Neanderthal and cowboy and hillbilly. They, on the other hand, are the enlightened ones. Their stoic, ahem, behavior was on full display this past week as striking Air France workers stormed a meeting of airline managers and began ripping the shirts from their backs. Several half-naked supervisors fled over a fence to escape the violence.
The Paris-based airline has been bleeding money, and the relentless strikes have only exacerbated their dire financial straits. The meeting at the epicenter of the most recent attack occurred at the airline’s headquarters near the Charles de Gaulle airport. Managers were discussing a restructuring plan to eliminate 2,900 “redundancies” between now and 2017.
For their part, French unions decried the violence. Ironic, as these unions have been fomenting hatred for years. De honte.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 38.)
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Both Sides Lost, but Tsipras Really Got Hammered in Bad Greece/EU Deal
(13 Jul 15) After 22 hours of hard, often contentious negotiations, the European Union hammered out a deal on the Greek crisis. Greek Prime Minister Alexis Tsipras, whose bravado has become well-known to Eurozone leaders since he was elected earlier this year, walked away the clear loser, but the rest of Europe, sans Russia, isn’t far behind.
Consider this: The deal agreed to after the Sunday marathon was a far more bitter pill for Greece to swallow than the one the prime minister walked away from last month. He had convinced himself just how cunning he was, and the leftists who swept him to power buttressed that viewpoint among the Syriza party leadership. Instead of that deal, he walks away with a rescue plan that gives Greece’s creditors, i.e. the taxpayers of Europe, almost complete control over the country’s finances.
While he must now sell the plan to the Greek parliament, it will almost assuredly be approved, considering the large number of his political opponents who were urging a deal all along. This seems to prove what one pundit said last week: holding on to power is the number one priority for Tsipras.
By mid-week, the parliament must agree to pension overhauls for the Greek people, a sales tax hike that the mere mention of caused riots in the street a few months ago, and a purging of Greek banks that will see the number of institutions fall from 15 (before the recession began) to probably two. Assuming the deal passes, roughly $96 million in cash will be freed up and sent to Athens so that they might re-open their financial institutions.
So why did Tsipras agree to more Draconian terms than he walked away from last month? Some believe that Merkel simply called his bluff and he realizes that they (the rest of the EU) were willing to cut Greece loose. That would be thinking analytically, however, and we have seen that emotions, not clear-headed analysis, wins the day. I would point back to Tsipras’ dressing down last week by members of the EU; specifically, one Brit MP who told him he should have the courage to stand up and lead Greece back to the drachma. Perhaps Tsipras wanted to show the MP that he would not be bullied by the likes of him. Or, perhaps Tsipras wants to get the $96 million first, and then tell the Eurozone to take a hike. Either way, it was not a reformed leader that took the deal. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 28.)
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Is there a Difference between the European Union and the Eurozone?
(07 Jul 15) There is one positive aspect of the Greek debt debacle: Americans are learning more about the structure of modern Europe than they ever anticipated.
Take the two by-names for the continent that, until recently, seemed to be interchangeable in the minds of all but the most ardent Europhile—the “Eurozone” and the “European Union.” Our first clue that these were actually two completely different beasts came when we learned that Greece might actually leave the former, but certainly not the latter! A little research (yes, we should have probably already known this—typical arrogant Americans) revealed the 9-country difference.
The idea of a European Union dates at least back to, ironically, the eponym of this organization—William Penn, who argued in 1693 for a union that would prevent further war on the continent. Precisely 300 years later, Penn got his wish when the 1993 Maastricht Treaty brought the EU to fruition. The purpose of this geopolitical group of 28 neighboring nation-states was to forge a singular economic and political partnership between members, while each retained its own national identity.
The Eurozone is a subset of the EU and consists of the 19 nation-states which adopted a single currency, the euro. Seven of the remaining nine (Denmark and the UK are exempted) are expected to adopt the euro and, thus, become members of the Eurozone when they meet the economic criteria. It is amusingly ironic that Greece, a nation that should no longer qualify for Eurozone membership, is threatening to leave and re-adopt the drachma. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 27.)
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What, exactly, does the Rest of Europe Owe Greece?
(06 Jul 15) Well, those petulant Greek voters really showed the rest of Europe who is boss. After receiving roughly $350 billion from the pockets of taxpayers who reside in other nations, Greek voters overwhelmingly flipped the figurative bird to their creditors.
With Sunday’s “NO” vote, the Greeks are playing a dangerous game of chicken, betting that they have the rest of Europe over a barrel. But it really wasn’t a tactical move on the part of voters, it was an emotional one. Pride cometh before a fall, and chances have increased that Angela Merkel will tell them to take a hike—despite France’s socialist President Francois Hollande’s desire for a deal.
If you want to know whether the "no” vote was a good or bad move, consider how the world’s leftist dictators, politicians, and pundits lined up. From Vlad Putin to Paul Krugman to Bernie Sanders to the ghost of Che Guevara, the anti-capitalists all expressed their will that the Greeks do exactly what they ended up doing. The logical questions are: What did the rest of Europe do to Greece to make them mad, and what does the rest of Europe owe to the Greek people?
Along with the $350 billion in cash they gave the beleaguered country, the EU & ECB asked that the government begin acting more fiscally responsible. The Greeks responded to that request by putting a Marxist in charge during the last election cycle. Arguably, that led to the deep worsening of the crisis. As for what Europe owes Greece, the answer is absolutely nothing. Greece does not contribute in any substantial way to the EU’s GDP; it has refused to adopt even the liberal employment policies of its neighbors; even the request that the retirement age be hoisted to 67 was met with anger and rage.
Here’s the simple fact: A plurality of the Greek people are more aligned, politically and ideologically, with Putin’s Russia. Most of the Greeks who voted “no” on the referendum would love to see the country go back on the drachma and increase ties to Russia. Their misguided wish may soon come to fruition.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 27.)
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Putin Left Wondering What Happened to the Weak West—US Sending Heavy Artillery to Region, EU Extends Sanctions
(23 Jun 15) Whether Vlad Putin has Asperger Syndrome or is a simple megalomaniac, one thing is certain—he has been convinced that his ability to run circles around the weak-willed West is limitless. He will need all of his delusional thought patterns firing to deal with the past week.
First came Western Europe. With the strict embargo that has been in place against Russia since the invasion of Crimea about to expire, the continental powers wasted no time in extending the sanctions until the end of January, 2016. On the following day, the United States landed a right cross to follow up Europe’s jab when SecDef Ash Carter announced that six Eastern European nations threatened by Russia will be receiving a brigade’s worth of heavy equipment...
(Read the rest of the story, including what three former Soviet Bloc nations requested Western boots on the ground to keep Putin in check, in this Sunday’s Journal of Wealth & Success, Vol. 3, Issue 25.)
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France Really is a Socialist Haven: Government Buys More Shares of Air France to Increase its Role at Airline
(Mo, 11 May 15) Those rascally French. Just when it looks like there might be some hope, they go and totally redeem their leftist credentials. Last Friday, the government announced that it would begin raising its stake (yes, the government’s stake) in Air France-KLM to 18% to increase its activist role in the company. Alternative reality time. How about ending the charade (ironically, a word they created) and just take ownership of the entire company. The US government runs a train company, and we all know what a well-oiled machine that is.
At the heart of the issue is the government’s ability to hold veto power at the air carrier’s shareholder meetings—they don’t have it, but they want it. Just last month, the French economic minister orchestrated a €1.2 billion purchase of Renault SA shares so it could defeat a resolution the board of the automaker was about to pass, but one the government didn’t like. The defeated resolution would have ended the practice of giving longtime shareholders, like the government, double voting rights (no joke).
In the case of Air France, the government’s aim is ostensibly the same: upholding the double-vote rule. But the desire for corporate control runs deeper than the ability to vote twice with one share. Renault’s CEO, Carlos Ghosn, put up a vigorous fight against the government intrusion in a private company, only to lose.
It does not appear that Air France-KLM is readying such an attack. That is interesting, as the KLM portion of the airline is Dutch (they merged with Air France in 2004), and that wing has enjoyed a large degree of autonomy, to include a separate company headquarters in Holland. The new share purchases by the government of France (with French taxpayers’ money) risks upsetting relations between the two nations, though the Dutch response has been muted thus far.
The double-voting rights issue is a scheme devised by the French government to thwart foreign investors from controlling too much of a French company. That is power reserved, obviously, for the government.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 20.)
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The European Union’s new Antitrust Chief is not Afraid to Make Big Enemies
(22 Apr 15) She has been called Denmark’s most powerful politician, and she didn’t waste any time living up to the moniker. University of Copenhagen-trained Margrethe Vestager took over in the role of EU Commissioner for Competition this past November, at age 46, and she has already gone after Google (a case which sat dormant under her predecessor) and now Gazprom—Putin’s Russian gas giant which supplies Europe with a lion’s share of its energy.
This week, the EU accused Gazprom of using its size and market share to gouge Central and Eastern European countries who rely on natural gas from the company. If the charges hold up, Gazprom, i.e. Russia, could face multibillions in fines. Considering it was just last fall when Putin issued a thinly-veiled threat to withhold gas during the coming winter, this is a bold move. It is also a move which will spur the demented Russian leader to take some predictable course of action.
At the heart of the charges are eight EU member-states—Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia. Vestager has shown that the price disparity between Gazprom fuel purchased in these countries is as much as 40% higher than in other EU countries. The fact that she is willing to go to bat for these periphery members of the union says a lot about how she will run her department during her five-year reign.
Russia’s immediate response came from Foreign Minister Sergei Lavrov, who called the charges “absolutely unacceptable.” His vacuous argument was that both sides—Russia and the EU—had “agreed not to take any actions that would worsen business conditions (between the two trading partners).”
Such silliness might have worked with the US State Department, but it won’t get Russia very far with Vestager. Interestingly, the investigation has been going on for over two years but stalled when Russia invaded the Ukrainian island of Crimea, and Putin made his threats. Back then, there was another, weaker sheriff in town; one that was more easily intimidated. The situation has since changed dramatically.
In addition to the disparity in gas prices, Vestager’s department also claims that Gazprom used its monopolistic position to strong-arm unrelated commitments out of the likes of Poland and Bulgaria, such as support for its now-abandoned South Stream pipeline project. That pipeline would have allowed Russia to circumvent delivering the gas through Ukraine on its way to Europe. It would have consisted of an underwater link to Bulgaria through the Black Sea. While the Russians blamed the EU for cancelling the pipeline plans, Gazprom was simply not up to the Herculean task of making it work. While it may be frustrating to see Putin beat his chest and cause trouble in the region, it is ultimately the Russian people (who support him overwhelmingly) who will pay the price for his rule.
As for the EU, it is refreshing to see an actual leader put in a position of power. Perhaps a few linguine-spined politicians in the US and Europe will take notes on how to take charge effectively. (Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 17.)
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Greeks Receive Four Month Bailout Payback Extension
(24 Feb 15) Here’s the problem: The €240 billion emergency bailout Greece received from the other nations of the European Union has gone dry, and they want more money. But they don’t want to begin paying back the money they owe on the original amount, a big chunk of which is (was) due this month. Also, the Greek people put a political party in power which promised to face north and collectively flip the Athenian bird in France and Germany’s direction.
After weeks of contentious debate, a four-month extension on the payback of the bailout money was approved, contingent upon Greece providing a list of reforms they will undertake to act more responsibly….
(Read the entire story in the Journal of Wealth & Success, Vol. 3, Issue 9. Not a member? Click Here.)
Europe: Russia
Russian GDP will Shrink 3% this Year, According to Economy Minister
(31 Jan 15) Russian Economy Minister Alexei Ulyukayev made a dour projection about the state of his nation’s economic situation for 2015—it will shrink an estimated 3%. The government had previously projected a GDP of -0.8%, but with falling oil prices and rising inflation, not to mention an S&P downgrade of the country’s credit rating to “junk” status, a much bigger contraction is developing.
Russia must have been listening to Goldman Sachs’s dead-wrong predictions about the price of oil rising from $100 to $200, based on Putin’s defense spending spree, but with oil going in the exact opposite direction—cut in half—the situation is dire for the Russian people.
Until now, Putin has been able to frame his enemies, especially America, as the central focus of the problem, but with inflation expected to hit 12% this year, the people’s bitterness will spread like a bowl of spilled borscht. Despite his control of the press, it will be hard to keep the economic sinkhole of Crimea, the island he invaded and took from Ukraine, a secret for long. It is estimated that the cost of maintaining the island will amount to at least $4 billion per year, which is not in the budget. The price of oil, not economic sanctions, may ultimately be Putin’s Achilles’ heel.
European Central Bank to Flood Market with €60 Billion Each Month until September 2016
(22 Jan 15) In the midst of some future generation, America may actually be able to bring its $18 trillion debt down to a more “manageable” level, but that will be after politicians are term-limited out of office, and a balanced budget amendment gets added to the US Constitution. The only element the US has going for it, from a fiscal responsibility standpoint, is the certainty that Europe is more government-centric than we are.
Evidence Mario Draghi’s announcement Thursday that the European Central Bank will begin flooding €60 billion euros per month into the bowels of Europe for at least the next year and a half. That equates to $69 billion dollars per month, or nearly $1.2 TRILLION of new debt for the continent. Have no fear, Europeans, Draghi is keeping open the option of extending the deadline if necessary. What is “necessary” to a politician with someone else’s checkbook? Is enough ever really enough? All in a misguided effort to devalue the euro and stave off deflation.
The European Union Fiddles as Ukraine Burns
(04 Mar 14) Maybe French President Hollande is too preoccupied with his girlfriend. Spain and Italy have their own internal concerns, and don't want to be bothered. But Angela Merkel of Germany, now that is another story.
Merkel grew up in Communist East Germany, and she knows what someone like Vlad Putin is capable of. She also knows that, deep in their hearts, many Russian leaders yearn for the "good old days" of the Soviet Union. All the more reason, considering she is the titular head of the European Union, for the continent to act, soon and decisively, to protect one of its own--the Eastern European country of Ukraine.
As mentioned in previous reports, the president of Ukraine was merely a puppet put in place by Vlad Putin. Since 1992, Ukraine has been an independent nation, but the regions within its borders, especially the energy rich eastern part of the country, are too valuable for Putin to give up. He did not calculate the speed at which the citizens of Ukraine would force his puppet from office, nor did he welcome the negative press generated as he was showing the world what a glittering jewel Russia was via the Olympic Games held in Sochi. It forced his hand, and he acted.
The most humorous news report to come out of the press (if one could find any levity in this situation) revolved around Putin going to the Russian parliament to ask for "permission" to use force in the region. Perhaps recalling the poor uncle of Kim Jong-un in North Korea, who met a grisly fate in the mouths of a pack of starved dogs (literally), parliament members gave Putin his go-ahead.
Enter Merkel. The German Chancellor is said to be fuming about Russian troops invading, for all intents and purposes, the Ukrainian region of Crimea. She has called this act of aggression a clear violation of international law, which it absolutely is. This would be akin to U.S. troops occupying towns in Mexico and taking over Mexican airports in the name of border security. While America has pledged $1 billion in loan guarantees to the interim government, now is the time for Merkel to rally the EU to action.
Putin's military moves are a power grab, plain and simple, and Europe must now take a decisive stand in the name of freedom and in the face of aggression. Unfortunately, lofty words and lengthy speeches may be all the people of Ukraine receive from their immediate neighbors to the west. Perhaps England can appoint Neville Chamberlain's grandson as a special envoy to the region.
Ukrainians Take to Streets to Demand Ouster of Puppet Ruler
(17 Dec 13 UPDATE) Vlad Putin met with Ukrainian President Yanukovich on Tuesday, assuring the embattled leader that Russia would cut the price of gas supplies to Ukraine by about one-third, and purchase $15 billion worth of the country's bonds to infuse cash into the struggling economy.
Every action Putin takes on the world scene must be viewed through the prism of his KGB background. He is certainly the puppet-master of Yanukovich, but the method he used to deal with the situation was designed to deflate the opposition. In essence, he told the president to jettison some cabinet members. This will serve a dual purpose to Putin--it will allow the president to place loyalists in the cabinet, while attempting to placate the demonstrators by making changes.
As usual, Europe and the U.S. are missing in action. Europe certainly could have made it clear to Ukraine that they were willing to provide economic support, despite the president's last minute refusal to sign the trade accord with the EU. America could have, and should have, worked behind the scenes to let the protesters know that they had U.S. backing. Good will win out in the end, and Yanukovich will probably face a dour end to his reign. In the meantime, however, Putin has gained yet another victory thanks to Western incompetence.
(04 Dec 13) While protests in America seem to center around a socialist agenda, protesters in the Ukraine are demanding moreeconomic freedom. Hundreds of thousands of citizens took to the streets of Kiev, demanding the ouster of President Viktor Yanukovych. The beef is over the decision to toss aside an accord between the Ukraine and the European Union that would increase ties, and trading, between the two powers.
Vlad Putin's dirty little hands are all over the scrapping of this deal. Since the Orange Revolution of nine years ago, a revolt that swept pro-Western leader Viktor Yuschcenko into power, the states of the former Soviet Union have been the prize target for the former KGB leader. Trying to walk the fine line between alienating the public and ticking off the thug Putin, President Yanukovych had been promising closer ties with the Western world to counter Ukraine's ties with Moscow. When the rubber met the road, however, he refused to sign the EU deal.
Moscow was infuriated when they got wind of the deal with the EU. Gazprom, one of the largest gas companies in the world (and one controlled by Moscow) immediately claimed that Ukraine owed it about $1 billion in past-due payments, and demanded payment in full. Shortly after this is when President Yanukovych reneged on the trade deal with the European Union.e Shortly after that, Gazprom said they were fine with the current payment plan. Chicago should send its elected officials to Moscow each year for continuing education credits on how to shake down the competition.
The president of Ukraine was bullied into submission by Putin, but the citizens in the streets are having none of it. Putin is, no doubt, longing for the good ole' days of the USSR when it was a lot easier to perform crowd control.
Hollande's Millionaire Tax Illustrates French Contempt for the Free Market
(30 Dec 13) When a left-leaning country elects a socialist president, one can predict the results. French President Francois Hollande ran on a plank of "leveling the playing field" by making wealthy French citizens pay, and he appears to be succeeding in his quest.
A year ago, the French constitutional council dealt a blow to Hollande's plans to place an oppressive 75% tax on individual earnings in excess of €1 million ($1.37 million) per year by declaring it unconstitutional. While this stick-it-to-the-man approach may have many cheering (even many in America), anyone with a modicum of economic understanding would realize how the unintended consequences of this draconian plan would harm a nation's productivity.
For example, many French business leaders and other high net worth individuals have already taken up residence in parts of London, commuting to France as needed, to escape the onerous tax. French Actor Gerard Depardieu made headlines by renouncing his French citizenship and moving, ultimately, to Belgium. France's wealthiest individual, Bernard Arnault, has also applied for Belgian citizenship and will take his luxury company, with brands like Louis Vuitton and Hennessy, out of France. For their part, leaders like Brittain's David Cameron have been courting those seeking self-imposed exile. A cottage industry of sorts has sprung up to help French entrepreneurs create London-based businesses.
While the constitutional council ruled the tax plan on individuals unconstitutional, this past Sunday they gave the go-ahead for Hollande to implement the tax on companies and organizations paying over €1 million to those individuals. Consider this example: an American actor earns $20 million to make a film, or a ballplayer is paid $10 million per year by a major league team. Before the individual sees a penny of it, 75 cents of every dollar over $1 million would be confiscated by the central government. Karl Marx might approve, but anyone who enjoys the comforts brought to them by a free market economy should shudder.
As for France, we expect no more. It is encouraging, however, that so many achievers and producers born in the country are scrambling for the door. The praise for the socialist Hollande may just become muted by the giant sucking sound of all those euros heading for greener pastures.
German Union Strikes Amazon
(16 Dec 13 UPDATE) How to win friends and influence people: German union trying to disrupt America's Christmas as well. Head of the German services union Ver.di, Mechthild Middeke, called on her union "brethren" in America to help them in their plot. A number of U.S. unions have agreed: the Teamsters and the SEIU (Service Employees International Union) said they will show solidarity with workers in Germany by protesting outside of Amazon's Seattle headquarters. Amazon employs about 9,000 workers in Germany, which is about one-tenth of its total workforce. The 16th of December was the company's busiest single day last year, so the unions certainly devised this plot with maximum pain in mind. A spokeswoman for Amazon said that the firm is able to fall back on its massive logistics network in Europe when a strike occurs in one area, and expects any pain felt by customers to be minimal.
(25 Nov 13) Something odd has been going on between the United States and Germany, one of our closest allies. First, it was the snooping incident in which the NSA was purportedly listening in on Angela Merkel's cell phone conversations. Then it was a U.S. claim that Germany was perverting the EU's trading protocol to give itself an unfair advantage and pad its trade surplus. Now, the large German trade union Ver.di ("United Services Union") has called for a strike against U.S. internet powerhouse Amazon.
Knowing it will hurt the most during the busy holiday shopping season, the union has called for 1,000 workers to strike two of Amazon's German locations. The union's beef is ostensibly over wages and benefits, and they have issued a thinly-veiled threat to Amazon. "It lies completely in Amazon's hands whether more strikes will take place in the upcoming Christmas season," Ver.di spokeswoman Mechthild Middeke told reporters. Roughly 500 workers are expected to go on strike today at each of the two facilities.
Germany is an important market for Amazon, as nearly $9 billion of the company's $61 billion in annual revenue is generated there. By most accounts, the firm pays workers well in the country; near the upper end of the pay scale compared to German companies in similar industries, in fact. Although Amazon initiated what could be called "Christmas bonuses" for their German workforce, the union wants them to comply with forced, socialist-style European wage agreements, which include components like the "13th-month salary," which is a refined way of saying workers will get paid an extra month each year without working for it.
The great irony in this story is that Amazon, like Starbucks, is being pilloried in socialist regions of the world despite their progressive corporate leanings. This should be a lesson for domestic companies operating abroad. Expect to be targeted simply because you are an American firm.
Unemployment Rate in Europe Remains at Record High
(05 Nov 13) Europe had grand visions of emulating, then overtaking, America's economic might when it formed the European Union 20 years ago. Unfortunately, the insurmountable challenges many of us saw, namely getting the vastly disparate northern and southern regions of the continent to agree on anything substantive, seem to have been overlooked in the giddiness and chest-pounding of the moment.
The European Commission (their equivalent of the executive branch) has just released a very somber autumn economic forecast. The report prepares Europeans for an unemployment rate of 12.2% or so until 2015, when the rate is forecast to fall to 11.8%. Despite the phoniness of the U.S. unemployment rate of 7.2% (it is actually higher), this is comparably very bad news for the EU. The fact that the unemployment rate will be much higher in some regions and much lower in others sends a chilling signal of just how frail the unity is within the continent.
On the domestic product front, the news is not much better. The EU report projects final 2013 GDP of around -0.4%, before recovering to a rate of around 1.1% in 2014--a downward revision. As inflation seems to be contained, this negative report will give the European Central Bank the ammo it needs to reduce interest rates even further, pumping more euros into the economy and driving up government debt. Angela Merkel, with her Samsung phone at her side, is spending a lot of time expressing anger over the traitor Snowden's claim that the NSA has been monitoring her calls. As head of the leading economic state within the EU, the German Chancellor may need to turn her attention back toward financial matters.
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