A huge slowdown in Germany is on the way, yet few see it. Steen Jakobsen, chief economist at Saxo bank writes via email ...
Back from major trip to Brazil, Uruguay, US and Spain.Surprise Index Notes
The one thing which to me is being ignored by the market is the coming slow-down in Germany. The market can of course go up in times of weaker growth, but my big “thing” is that no one believes Germany economically is slowing despite very negative macro changes in the last twelve months:
- The China rebalancing will cost Germany export volume.
- Germany has the most expensive energy policy in Europe – a drive away from atomic power dependency to a less obvious dependency on Russian gas.
- The Ukraine crisis impacts Germany. According to the Federation of German Wholesale, Foreign Trade and Services (BGA) about 6.200 German companies are doing business in Russia.
- The coming Chinese devaluation of the Yuan will significantly lift Chinese import prices.
I had to write a monthly OP-ED for Swiss Financial newspaper and as I sat down to verify my long held opinion that Germany would slow-down in Q4 I was surprised to find Germany already seeing relative dramatic slow-down signs:
Germany and China Interlinked
click on any chart for sharper image
Citigroup Surprise Index – Europe
[Mish note: An explanation of the Surprise Index follows the email from Steen]
German 10 Y Bund & Citigroup’s Surprise Index
German Manufacturing Exports YOY & GDP Chain GDP YOY
I have constantly argued for this slow-down being logic based on Germany’s Asia dependency on export volume growth but with poor policy responses from Germany on energy and a neglected understanding of the Russian exposure the market is in for very negative surprise on growth as we leave 2014. More than 6.200 German companies are involved in Russia – The Economist claims more than 300.000 jobs depends on Russia export. Russia is Germany’s 11th biggest export market & its 7th biggest import market. Germany now imports more than 70% of its energy and which more than 25% comes from Russia. Merkel has created a risky energy policy which makes her impotent in international dealings.
Europe and Germany must soon own up to the fact that we are energy deficient. We run major short position in energy. That should be the main topic for the next EU Council Minister meetings, but instead they are going to celebrate the crisis is finally over…. The King is dead – long live the King.
I have been long core European bonds since Q4 last year – that position combined with short EUR and AUDUSD remains the only three trades I have on, and also the only three trades I have done in the last three months. Our rule of stock market lagging real economy by three month would indicate that DAX is getting very close to “full price”. I have presently no positions in stocks, but I am looking for way to short either naked or against Nikkei over next week. We need a catalyst to upset the status quo.
Citigroup's surprise index measures weighted historical standard deviations of positive and negative surprises (actual economic releases vs. median Bloomberg survey expectations).
The surprise index for Europe has been trending lower since mid-January. It went negative in mid-March and has been there ever since.
Wine Country Conference Notes
Steen spoke at Wine Country Conference II. Germany and China were part of his presentation. Videos will be out within a week or so.
Mike "Mish" Shedlock