Italian Prime Minister Talking Nonsense

WASHINGTON – Yes, there is something to be said about optimistic political leaders who inspire their people to hang on and do the impossible, even when things do not look so good. Sometimes convincing leadership can perform miracles. Think of Winston Churchill during WWII, or Ronald Reagan in the 1980s.

The South comes back to life

Well, so what do we make of this statement by Italian Prime Minister Matteo Renzi during a recent visit to Naples? This is what Renzi said; “If the South [of Italy] restarts, Italy will restart, this way becoming  Europe’s locomotive”. Think of that: Italy (11% unemployment, practically zero growth for a decade) transformed into Europe’s engine. And all this because of the South, (one of the most depressed regions within the EU), all of a sudden roaring into action. What do you know, in the blink of an eye Italy will be ahead of Germany!


Is this sunny optimism or laughable stuff? Please pick the latter. The South of Italy has been and is a perennial tragedy of malinvestment, corruption, stupidity, apathy and desperation leading young people to emigrate. And please do not forget the almost complete dominance of organized crime, (Mafia, Camorra and N’drangheta), in practically all matters.

How The Economist sees it 

If you want details, here is how The Economist put it a while ago:

“The south [of Italy]grew more slowly than the north before the financial crisis. But the main source of the divergence has been the south’s disastrous performance since then: its economy contracted almost twice as fast as the north’s in 2008-13—by 13% compared with 7%. The Mezzogiorno—eight southern regions including the islands of Sardinia and Sicily—has suffered sustained economic contraction for the past seven years. Unicredit, Italy’s biggest bank, expects it to continue. […]”

“Of the 943,000 Italians who became unemployed between 2007 and 2014, 70% were southerners. Italy’s aggregate workforce contracted by 4% over that time; the south’s, by 10.7%. Employment in the south is lower than in any country in the European Union, at 40%; [bold added] in the north, it is 64%. Female employment in southern Italy is just 33%, compared with 50% nationally; that makes Greece, at 43%, look good. Unemployment last year was 21.7% in the south, compared with 13.6% nationally.  [bold added]. The share of northern and southern families living in absolute poverty grew from 3.3% and 5.8% respectively in 2007, to 5.8% and 12.6% in 2013.”

“Downward pressure on demand is exacerbated by the south’s lower birth rate and emigration northward and abroad. The average southern woman has 1.4 children, down from 2.2 in 1980. In the north, fertility has actually increased, from 1.4 in 1980 to 1.5 now. Net migration from south to north between 2001 and 2013 was more than 700,000 people, 70% of whom were aged between 15 and 34; more than a quarter were graduates. Marco Zigon of Getra, a Neapolitan manufacturer of electric transformers, says finding engineers in Naples, or ones willing to move there, is becoming ever harder. According to Istat, Italy’s statistical body, over the next 50 years the south could lose 4.2m residents, a fifth of its population, to the north or abroad.”

Add African immigrants to the mix

And let us not dwell on the dislocation and additional problems created by the tens of thousands of poor African immigrants who land in the South of Italy every year. They cause huge frictions, while straining modest resources. And, by the way, youth unemployment in the South reaches 60% in some regions.

OK, now we have some context within which to place Renzi’s optimistic comments. Think of it for a moment: “If the South restarts”. This is total and utter nonsense.

Stupid statements 

Given the bleak picture presented above, talking about such a “restart” as if it were achievable, and practically around the corner, is a bit like saying “In a little while, when Afghanistan will be a modern industrial economy”….; or “Next year, after Venezuela’s economy will be back on track””…; or “in 2017, after all of Africa will have electricity and clean water”… For any of these highly desirable scenarios to materialize, every sane observer knows that we are talking generations, even assuming good policies and strong perseverance over decades.

Yes, it would be nice if overnight, magically…“Pufff”…the South of Italy became a modern Region, this way energizing the rest of the country, leading Italy to unimaginable new heights.

This is not going to happen 

But no, this is not going to happen. The South is trapped in its culture of short termism, thievery, corruption, organized crime, and unbelievable levels of maladministration. The notion that one or two initiatives, and a sprinkle of investments will trigger a systemic transformation of this perennial economic swamp is not just naive, it is frankly stupid.

I am not sure why the Italian Prime Minister said this. But I find it remarkable that nobody called him on this. Nobody pointed out how preposterous all this is. No media comments. No requests for clarifications as to how this magic “restart” will materialize itself.

Emerging Markets Crisis Dragging Down The Global Economy

WASHINGTON – Will emerging markets in crisis drag down the global economy? Probably not. But they have added and will continue to add to the negatives. 

Enormous debt 

Consider this. According to the WSJ, “foreign banks have lent $ 3.6 trillion to companies in emerging markets, and foreign investors hold, on average, 25% of local debt in developing economies”.

Now, a lot of these credits were used to finance added production capacity in key commodities producing industries. But we know what happened. China, after its fantastic, multi-year buying spree simply stopped buying. China cannot absorb more.

And therefore commodities collapsed, dragging down all the investors, and those banks that financed them.

Ripple effects 

That said, it is important to note that this negative trend is not confined to the companies operating in the sectors directly hit. It also affected other unrelated sectors that were hoping to ride the wave of economic growth fueled by the extra revenue created by sky-high commodities prices.

For instance, the WSJ points out that “Indonesian telecom PT Trikomsel Oke Tbk. nearly doubled its debt from 2012 to 2015, as it rushed to open hundreds of retail stores across the country. But the firm’s revenue collapsed after growth in South-east Asia’s largest economy fell to six-year lows” . Now the company cannot pay back its bonds, “and already defaulted on $ 460 million of its debt”, according to the same WSJ story.

Well, this means that there are huge ripple effects, not limited to Indonesia. Indeed, Japan’s Softbank Group, an investor in PT Trikomsel, is now taking losses on account of this failed growth strategy.

Widespread damage 

And this is not an isolated case. The outlook is equally grim for Brazil, South Africa and Australia. So, here we go: bad debt, financial losses, bankruptcies, lower revenue, growing unemployment. Is this mix deadly? Probably not. But it is bad both for the countries affected and for the world.

Emerging countries now account for a larger percentage of the global economy. Much was said about how a new, self-confident middle class capable and willing to spend on more cars, and more consumer goods would help boost the global economy. Well, this will have to wait. These countries are in serious trouble. Amid crises and depreciated currencies, the new middle class is a lot poorer, these days.

So, what does this mean for the global economy? It means another wet blanket on growth. The commodities producing countries and their lenders are in trouble because of lack of demand. This means that they will buy less from the West. Lack of demand in China and elsewhere means lower growth in Brazil. A poorer Brazil will buy less from Europe or America.

China drags down all its foreign suppliers 

By itself this would be bad, but not catastrophic. But here is the thing. China financed its gigantic investment spree with astronomic levels of new debt. This debt will never be recovered, simply because the investment-driven bubble burst.

So, what does this mean? Well, China sits on enormous cash reserves, so it can weather the storm. Still, this capital will be used to plug holes rather than fund productive investments. As China slows down, its under performing economy drags down all the Asian countries that have become an integral part of China-centered supply chains. Think South Korea, Taiwan, Thailand, and also Japan. Their exports to China are down.

Is America insulated from all this? 

Where does this leave America? Much has been said about the fact that the US economy is not so dependent on exports. Many US firms trade domestically, say between Connecticut and Colorado. Not many depend on exports. And US banks are not exposed to Chinese debt.

Still, as the whole world slows down, rather fast, can the US be the only island of growth and prosperity? I doubt it.

China’s Economy “Worse Than You Think”

WASHINGTON – A few years ago, Jim Chanos of Kynicos Associates made news because he had the temerity to call a spade a spade by telling the world that China’s construction-driven economic growth was in fact a big bubble.

A bubble economy 

Chanos argument was that China’s construction frenzy was not led by real demand. Soon enough this enormous property boom driven by speculation, and by the political need to show consistent GDP growth, would cause huge problems.

And he argued that the crunch would be felt first among the international companies that supply the raw materials that feed the Chinese construction industry. He argued that the Australians, the Brazilians and other commodities exporters would get hit first.


At the time Chanos looked like a really odd character who really did not understand China. China was doing very well, fueling the almost universal expectation that its super successful “New Economic Growth Model” would allow it to surpass America, thereby affirming that there is indeed something better than capitalism.


Now we see 

Well, fast forward to today, and it is quite a different story. Now Chanos looks like a prophet.

Indeed, with all the bad news about China’s economic slow down, smaller exports, lower industrial production, huge over capacity funded by mountains of debt, the Shanghai Stock Exchange implosion, and –yes– the real estate disaster, it is hard to challenge his negative forecasts.

When Chanos speaks, now people listen to him. So, how bad is the Chinese economy? “It’s worse than you think”, replied Chanos in a CNBC interview. “Whatever you might think, it’s worse”.

Got that? It is bad beyond imagination. Well, this assessment is certainly not very detailed. But you get the idea. Underneath a relatively calm, in fact almost airbrushed, surface, there is a badly mismanaged country.


But how is this possible? We thought that the Chinese meritocracy only promoted the super smart. We were told that China is run by carefully trained technocrats.

Well, may be not. “People are beginning to realize the Chinese government is not omnipotent and omniscient,” Chanos said to CNBC. “In fact, like many of us, sometimes they don’t have a clue.”

There you go: “Clueless China”. 

How Bad Is The Chinese Economy?

WASHINGTON – There is no way to tell which way the Shanghai Stock Market is headed. However, it is clear that the July 27 8.5% loss is not just an ugly day in a period of unusual volatility that will eventually come to an end.

A bad day in Shanghai

The fact is that this collapse, the worst one day decline in many years, took place despite highly publicized and very costly ($ 200 billion) government-led counter measures aimed at stabilizing the markets, after a massive rout in early July.

Counter measures 

The Beijing authorities watched (probably in horror) a precipitous share prices decline, day after day. They got really worried that a true stock market collapse would ruin millions of retail investors, this way creating a political problem for the national leadership.

And so they rapidly concocted a series of massive interventions to support share prices. They suspended trading. They ordered brokerage houses to buy selected stocks. They made public funds available to execute these trades.

And, sure enough, the $ 200 billion medication worked, at least for a while. For a few days the markets calmed down. On account of the government administered shock therapy, share prices stabilized. In fact, there was some recovery from the huge dip that had taken place in early July.

No real confidence

But on Monday there has been another major collapse, despite the massive intervention aimed at restoring investors’ confidence. And this is truly worrisome, because it means that millions of Chinese investors deep down do not believe that the government has either the ability or the staying power to stabilize the markets, this way saving their investments.

That said, despite this set back, the Beijing government cannot stop intervening. It simply cannot take a chance and allow a market led by millions of scared investors who would love to run for the exit to find its natural bottom. This bottom may be much, much lower then the lows experienced in early July.

What’s really going on? 

And this is only half the story. Forget for a moment about manipulated and therefore meaningless share prices. The fact is that most of China’s economy is manipulated. Therefore, it is next to impossible to determine its real health conditions, in the midst of signs that indicate a slow down.

Unfortunately, many Western observers keep forgetting that a large chunk of China’s economy is controlled by the state through State Owned Enterprises (SOEs), always funded by state controlled Banks. These large corporations do not follow market rules as we understand them. You can rest assured that government appointed managers will hide losses, while highlighting bright prospects. You see, the government cannot fail.

What we know

Still, despite this fog, we know a few things, none of them reassuring. We know that, thanks to an ill-advised gigantic stimulus plan aimed at facing the 2008 international financial crisis, in the last few years there has been an unprecedented, in fact grotesque, overbuilding of “everything” in China.

We also know that, in order to support its gigantic construction projects, China added an enormous amount of capacity to every industrial sector supporting it: steel, cement, glass, copper, appliances, furniture, and so on. Taken together, these sectors amount to anywhere between 25 and 30% of GDP.

We know that, on account of this construction frenzy, overall supply of commercial and residential properties now vastly exceeds demand. There are way too many vacant villas, apartments and half empty shopping malls.

As a result of this property glut, construction –the main driver of China’s economic growth– had to slow down, dragging down not just unlucky developers but also a huge part of the economy. We know that factory utilization is down to 70%, a pretty bad number.

Debt-financed investments 

Given all of the above, we can conclude that most of China’s recent growth is based on debt-financed excessive investments in unneeded capacity. The stimulus policy aimed at countering the ill effects of the 2008 international financial crisis led to a colossal level of malinvestment.

Still plenty of cash 

The Chinese Government does not have to pull the plug, right now. It still has plenty of cash reserves (trillions of dollars) to fuel this madness a little longer. But how much longer? How much more good money can they throw at zombie companies, in order to prolong the illusion that they are viable? How much more cash will they use to support shares that investors would love to unload?

It is a political issue 

In the end, this is not an economic policy issue. This is a political issue. In a true free market, the state would not massively intervene in the economy. It would allow private companies to compete, while allowing foreign investors to participate on an equal base. This way, without state interference, markets would eventually re-balance demand and supply.

But it is hard to see how China can get from here to there. Hard to believe that the national leadership will liberalize the economy right now, when things are slowing down. There are just too many risks.

Without the recent massive interventions, the Shanghai Stock Market might have collapsed, this way ruining tens of millions of small investors. Likewise, forcing zombie firms to shut down may be good for the future health of the Chinese economy; but it would cause short term misery for millions of workers, suddenly without a job.

The instinct is to control 

I just cannot believe that a political leadership that can claim legitimacy mostly on the basis of a long (past) record of impressive growth would accept a most serious retrenchment of the Chinese economy. Their instinct is to intervene, extend credit, mask problems, and prop up failing companies.

Of course, this means burning cash for no good economic purpose. But this is the only way to survive politically, at least for a while.


Greek Crisis Aside, Most Of Europe Is In Decline

WASHINGTON – With all the excitement surrounding the Greek debt farce, (yes, it is mostly a farce), most observers are pretending not to notice that at least half of Europe is in a state that can only be called terminal economic stagnation, eventually leading to decline.

All is well

It is pathetic to watch pundits on TV telling us that, unlike Greece, Spain and Italy have courageously embraced reforms and now –what do you know– they are doing a lot better.

Which is to say that if only the Greeks would follow the example of their enlightened Mediterranean neighbors, all of Europe would get back to prosperity.

Progress in Italy ? 

Well, let’s give a closer look at this praiseworthy progress. Here are the IMF macroeconomic projections on Italy. After a ritual acknowledgment of Italy’s efforts to improve its fiscal outlook while reforming somewhat its labor markets, the IMF projects that in 2015 Italy’s GDP will grow by 0.7%, its unemployment rate will be at 12.5%, while its national debt will be equal to 133.3% of GDP. Impressive, no?

By 2020 on account (we assume) of the impact of targeted reforms promoted by the no-nonsense Renzi government growth will be 1%, unemployment will be “down” to 10.7% and the national debt will be “only” 122.9% of GDP. Got that?

Growth that may be approaching 1% is actually impressive according to the analysts, while unemployment above 10% is swell, (not to mention that youth unemployment is about double that, while in the south of Italy it reaches 40%).

The new normal

Well, this is what passes for healthy recovery, these days. And this projection of course excludes recessions, downturns or other crises.

So, here is the picture of Europe painted by the experts. Greece is doing poorly because it is unwilling to recognize its serious predicament. But –hey– Italy is making real progress thanks to its smart leaders, while in Spain unemployment is rapidly going down. Really? The last time I checked unemployment in Spain was well above 23%, while youth unemployment is “down” from 53% to 49%. This tragedy is in fact presented as good economic news. Have we gone totally mad?

Terminal decline

The truth is that, while Italy did not jump into the Greek abyss, it is a country in terminal decline. And so is Spain and Portugal; while stagnating France is flirting with the idea. And up north Finland is not doing well, while the Balkan EU countries do not give any reason for rejoicing. No, there will be no Croatia economic miracle. And do not hope that the Bulgarian economy can grow more than 0.9%

So, here is the real story. Greece is an almost comically extreme case; but a large chunk of Europe is essentially in decline. And why is that? Well, it is the compounded effect of statist policies, unaffordable entitlement programs and falling birth rates, combined with structural disincentives to investments in innovation, enterprise and ultimately growth.


What is worse is that this decline is denied. In fact, the experts tell us that because  of intelligent pro-growth reforms and the beneficial effects of quantitative easing administered by the European Central Bank, Greece aside, thing are mostly back to normal. Really?

When analysts tell you that all is well when Italy, a supposedly modern industrial country, is projected to grow at a 1% rate in 2020, that is 5 years after the implementation of intelligent reforms, while carrying a national debt that will stay well above 100% of GDP in eternity, then we have entered a new era, an era in which idiotic wishful thinking passes for sound judgment.


The ECB Launched Its Own QE – But Growth Expectations Will Not Be Met

WASHINGTON – Here we go. European Central Bank (ECB) President Mario Draghi launched his own version of QE, or “Quantitative Easing”. The goal of a rather large bond buying program (about 60 billion Euro or $ 68 billion a month) is to lower interest rates, spur more lending and energize the semi-comatose Eurozone economies, (Germany and a few others being the exception). 

Good luck!

Well, good luck! Draghi himself in many different occasions urged European Governments to take bold action by reforming bloated welfare states and labor markets, while reducing regulations that suffocate business.

Yes, believe it or not, ultimately one needs new money-making enterprises to grow the economy and add jobs. That is the real deal.

Monetary manipulation alone will not get you very far unless policy changes create a more propitious “business climate”. But Draghi for some reasons felt compelled to act now, even though he knows very well that real economic policy changes will not follow his new monetary manoeuvres.

Monetary easing instead of reforms

Indeed, Europe has not moved and will not move on this needed pro-growth agenda. Given this most unpromising background, it takes an act of faith to believe that even lower interest rates –now already quite low– will trigger a healthy cycle of higher growth within the Eurozone. Does Draghi really believe that his QE will do the trick?

Devalued Euro is good for exporters

Sure enough, this move aimed at increasing liquidity has had the immediate effect to further devalue an already devalued Euro. This is of course good news for all the European companies that export outside the Eurozone. As their goods and services are now cheaper, they are more competitive; and therefore they are likely to get more business.

This is no cure

But the notion that devaluation is a good cure-all for any economic malaise is false. The damage is usually bigger that the gain. Look at Japan. “Abenomics” did more or less the same thing the ECB is beginning now. As a result, the yen took a dive. And, of course, with a lower yen Japanese exporters are doing much better. But everybody else is doing worse, since the cost of imported goods went up.

Right now, Europe benefits from cheap oil. Even when paying with a devalued Euro for oil priced in  dollars, the Europeans still benefit from the global oil prices collapse. And this is good news. But everything else will be more expensive.

Easy borrowing will discourage reforms

Furthermore, the unintended negative effect of even lower interest rates is that eternally profligate European Governments now know that they will be able to go deeper into debt at a lower cost. Ironically, while Draghi urges EU Governments to get busy with a credible reform agenda, his polices cause even lower interest rates, and this will make it easier for Rome, Paris or Madrid to get into even more debt. Which is to say that QE will allow this deplorable trend of more spending and more debt to go on a little longer.

Low yields on 10 year bonds

Look, with already depressed interest rates due to monetary easing prior to the launching of Draghi’s QE, we had the absurdity of French 10 year bonds with a 0.70% yield, while Italian 10 year bonds were at 1.56%. Which is to say that French and Italian bonds must be a super safe investment.

Italy must have solid finances

While the US Federal Reserve is also guilty of the same crime of having created and maintained artificially low interest rates, the US 10 year bond has a higher yield of 1.8%. Until very recently it was above 2%. And this is in America, still the world’s largest economy, with a rate of growth of about 3%. But from this interest rates picture we get that French 10 year bonds are so much safer that investors grab them even with less than 1% interest. And Italy’s finances must also be in better shape than America’s. What do you know, with an economy at a stand still, sky-high unemployment and debt now at 130% of GDP, Italian bonds are super safe, and this is reflected in the 1.56% yield.

Monetary manipulation produces distortions

When Central Banks create these types of market distortions through monetary manipulation, so that there is no longer any honest valuation and “price discovery” in something as basic as government bonds, it is hard to believe that things will get better in the real economy on account of another big helping of manipulation, via QE.

Feel-good medicine

ECB President Draghi is simply adding more “feel good medicine” to a Eurozone public debt market in which bond prices are no longer a reflection of real risk. This is really dangerous.

And now the ECB will make a bad situation even worse. Because of even lower interest rates caused by QE, Eurozone governments will mistakenly believe that their financial wiggle room really improved. Feeling no real pressure to get their economic and fiscal house in order, they will yet again postpone any serious pro-market, pro-business reform effort. No serious reform, no chance to have any appreciable new growth.

No welfare state reform

In the meantime, with so many restless segments of society demanding pensions, entitlements, and other benefits, European politicians elected to safeguard clearly unaffordable welfare states will continue to spend money they do not have, counting on the ECB to buy their bonds, so that they will be able to keep borrowing at ridiculously low interest.

I understand that President Mario Draghi is doing the best he can in extremely unfavorable circumstances. But anybody believing that this ECB-managed QE is the real deal that –all by itself– will trigger a new era of growth within the Eurozone is a fool. The Eurozone needs good economic fundamentals, and QE is not one of them.


The Economy Grows Modestly, While Wall Street Is At An All Time High

WASHINGTON – When it comes to US higher and higher stock prices I am struck by something truly odd, in fact frightening. There is an obvious disconnect between all time Wall Street highs and relatively weak economic data. 

Mediocre economy

The US economy is doing OK, but not especially well. After the weakest recovery in recent history, America is growing at 2% a year, may be a little better. However, unemployment around 6% is still too high. Labor participation is at historic lows. Real incomes have not grown for decades. A new generation of college graduates is coming into the labor market saddled with the heavy burden of gigantic student loans. These huge financial obligations prevent even the lucky ones who find decent jobs to spend, buy homes, etc. All in all, I would not call this a booming economy.

Forget about the BRICS

Add to this not particularly inspiring US picture the obvious fact that the global economy is doing poorly. Remember the BRICS? Not even one of them has met expectations. Brazil was all about its short-lived commodities export boom. Now it is in poor shape. Forget about Russia and sorry-looking South Africa. India, now under new management, may hold some promise. China’s economic miracle story is over. The spectacular 30 year export-led model has run its course. At this time China is desperately trying to meet inflated growth targets by pumping more cash into a so-so economy already suffering of a serious case of “too much bad debt”, coupled with massive overcapacity is some key sectors, like steel.

Europe and Japan are in decline

In all this, Europe and Japan are in seriously bad shape. Simply stated, these are old, in fact exhausted societies with way too much public debt, negative birth rates, too many old people, negligible investments, bloated public sectors, and huge entitlement programs no longer supported by a large active work force paying into the system.

These old countries, mostly run by mediocre political leaders, simply cannot keep up any more. Italy has zero growth, an unemployment rate of 12%, with youth unemployment in the South up to 60%, and a national debt now equal to 130% of GDP. Japan is once again in a recession, while its national debt is 230% of GDP. None of this is fixable.

Now, let’s point out the obvious. These are America’s main trading partners. How can it be that the US economy is doing so-so, the rest of the world, including those who buy our goods ans services, is in mediocre to bad shape and the US stock market is booming? It used to be that stock prices reflected basic fundamentals. Well, not any more.

Stock valuations driven by Central Bankers

These days stock prices have little to do with the real economy. They are determined by the presumed positive impact of supposedly benign monetary policies implemented by Central Bankers. And what kind of magic are they doing? Well, the Central Bankers throw more and more invented money into the system while purchasing assets in order to ignite growth.

The evidence is that this does not increase the volume of productive investments; but it pushes up the valuation of stocks. Indeed, since real interest rates are kept below zero by the monetary authorities, where else will you put your money? Therefore, all the smart people buy more stocks, counting on Fed or ECB policies to push valuations higher and higher, no matter what the fundamentals may be. Japan’s economy is not growing, but its stock market valuations doubled. Have we gone totally mad? The answer is “Yes”.

David Stockman’s analysis 

Here is how David Stockman sees it. Writing in his own he says:

“The global financial system has come unglued. Everywhere the real world evidence points to cooling growth, faltering investment, slowing trade, vast excess industrial capacity, peak private debt, public fiscal exhaustion, currency wars, intensified politico-military conflict and an unprecedented disconnect between debt-saturated real economies and irrationally exuberant financial markets.

Yet overnight two central banks promised what amounts to more monetary heroin [bold added] and, presto, the S&P 500 index jerked up to 2070. That is, the robo-traders inflated the PE multiple for S&P’s basket of US-based global companies to a nose bleed 20X their reported LTM earnings.

And those earnings surely embody a high water mark in a world where Japan is going down for the count, China’s house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Street’s spurious claim that 3% “escape velocity” has finally arrived in the US is soon to be discredited for the 5th year running. So it goes without saying that if “price discovery” actually existed in the Wall Street casino, the capitalization rate on these blatantly engineered earnings (i.e. inflated EPS owing to massive buybacks) would be decidedly less exuberant.

In truth, nothing has changed about the precarious state of the world since yesterday. Except….. except the Great Bloviator at the ECB  [President Mario Draghi] made another fatuous and undeliverable promise—- this time that he would do whatever he “must to raise inflation and inflation expectations as fast as possible”; and, at nearly the same hour, the desperate comrades in Beijing administered another sharp poke in the eye to China’s savers by lowering the deposit rate to by 25 bps to 2.75%.

Let’s see. Can it possibly be true that European growth is faltering because it does not have enough inflation? Or that China’s fantastic borrowing and building boom is cooling rapidly because the People Bank of China (PBOC) has been too stingy?

The answer is not on your life, of course.  So why would stocks soar based on two overnight announcements that can not possibly alleviate Europe’s slide into recession or the collapse of China’s out-of-control investment and construction bubble?”

This boom is unsustainable

Well, there is no valid economic reason for these incredibly high stock valuations, except for the crazy belief held by most investors that Central Bankers have magic wealth creation powers.

As long as the monetary authorities of the US, Europe, Japan and now China can keep their magician tricks going, (buying assets while keeping interest rates at zero), everybody in America will continue to believe that the stratospheric Wall Street valuations are justified.

I do not know when, but there will be a point when the Central Bankers  will run out of tricks, and therefore this whole Wall Street boom will unravel, because it is based on nothing real.


Italy Is Slowly Sinking – Years Of Recession Or Zero Growth – Unemployment At 12.6%

WASHINGTON – Mario Draghi, the President of the European Central Bank (ECB) deserves praise for his ability to save the Euro, despite major liquidity crises and recessions affecting many weak Eurozone members, (Greece, Italy, Spain and Portugal). Largely thanks to Draghi’s excellent stewardship, the Euro is a solid currency; and nobody is concerned about any forthcoming catastrophic event.

Monetary policy cannot create growth

That said, the overall picture of slow growth or zero growth economies within the Eurozone and the broader European Union demonstrates that even a well conceived monetary policy cannot produce growth. It can support growth, it can facilitate it; but it cannot create it.

France is in real trouble

The battered (if not devastated) economies of Southern Europe are not going to collapse. But there is very little indication of a rebound.

France, (the number two economy within the Eurozone, after Germany), is in trouble. Essentially no growth, high unemployment, while major political opposition makes it difficult to cut public spending. Extremely unpopular President Francois Hollande, (his favorable ratings are now at 17%), a Socialist, has once again reshuffled his cabinet in order to recreate some hope. But the country’s mood is pessimistic.

Italy even worse

In Italy, (third largest economy within the Eurozone), it is a lot worse. Freshly minted Prime Minister Matteo Renzi, who became the country’s chief executive with zero experience at the national level, (he used to be the Mayor of Florence, a second tier city), came in with bold ideas for economic renewal. But, so far, no results.

Italy languishes in the swamps of zero growth, or worse. Flat or declining GDP in 2012, 2013 and now 2014. At the same time, the official unemployment rate is still at 12.6%, while youth unemployment is at 40%, (60% in the poorer south of the country).

(By comparison, do consider that in the US most economists and policy-makers argue that America’s 6% unemployment rate is unacceptably high).

The Italian leftist newspaper La Repubblica, (instinctively a supporter of this government), writes that the Italian economy is in “extreme darkness”. 

Dark outlook

And just to cheer everybody up, here is how Giorgio Squinzi, head of the Confindustria, the most important voice of Italy’s corporate leaders, assesses Italy’s situation and prospects. At a recent public event in Rimini he said that :

“The economic situation is dramatic. We need a project for this country. Once and for all we have to think about what we want to be, what we want to become…We have to relaunch our corporations, because without [profit-making] corporations, there is no way forward, at the economic or social level….For 20 years Italy has been living above its means. Wealth has been wasted. This way we are lowering our standard of living. Our GDP keeps going down. And even in 2014, unless we have a miracle, we shall have more negative data, just as in 2012 and 2013….

Please note that Squinzi says that Italy needs “a project”. Implicitly this means that he does not have much confidence in the only “project” now on the table: the reform agenda announced by Prime Minister Matteo Renzi.

And do consider that Renzi came into office as a really bold innovator: a no-nonsense young leader, unafraid to chart a new course. In short, Italy’s best hope.

Well, what should Italy do to get out of this path leading to a slow but steady decline? Here is my list.

–Drastically reduce the burden of a bloated public administration

–End endemic corruption

–Fight and defeat organized crime

–Reform labor markets in order to create flexibility

–Reform the pensions system

–Reduce the oppressive tax burden that discourages investments

–Invest in modern infrastructure

–Dramatically increase targeted R&D investments 

–Create a competitive higher education system

–Stop illegal immigration

The list is so long and so large that I doubt that much can be done by this or any other Prime Minister.

Old Continent

Mario Draghi is an excellent ECB President. But, sadly, without the support of a drastic cultural shift, even good monetary policies are not enough to transform his native Italy, (and the other weak economies at Europe’s periphery).

As for the rest of the European Union, except for a more globally competitive North, the EU as a whole does not inspire any enthusiasm.

The Old Continent is indeed just that: “Old”. Old ideas, old values, old leadership, old societies yield structurally inefficient economies.


Hollande’s Poor Efforts At Attracting Foreign Investors To France

By Paolo von Schirach

February 18, 2014

WASHINGTON “France is not afraid to open itself up to the world. We realize that the mobility of investment is part of making a country successful”. This is what French president Francois Hollande recently said to an audience of high-caliber international corporations assembled in Paris to listen to his sales pitch. Well, if this quote indeed captures the substance of Hollande’s message, the picture is depressing, if not outright scary. You do not lure foreign investors by saying: “We are not afraid of you, really”.

Low taxes

Sure there is more. Hollande talked about tax advantages for investors and new measures aimed at making it is easier to set up shop in France. Well, thank God for that. But, guess what: any government worth anything, from Georgia to Vietnam, is already doing all this. Foreign investors expect a “one stop shop” investment promotion agency that will make it easy for them to get established. They expect quick registration of their business. They expect a competitive taxation regime. They expect labor legislation and norms that will make it easy to hire workers and dismiss them, if necessary.

This is a great country

What would make investors pay attention is a pitch that would focus on what a great place to do business France really is. “We have a highly educated, English-speaking, sophisticated work force. We have some of the best research  universities in the world. They nurture the best scientists, engineers and business managers. We have excellent vocational training facilities that will provide the best workers. We have state of the art telecommunications and infrastructure. Make France your hub, the center of your value chain and supply chain, and you will prosper because we offer you proximity to your markets and to your key suppliers. And, best of all, we can guarantee the best quality of life. Here you have safety, affordable housing and first class education for your children, and of course, superior culture, beautiful nature and entertainment.”

You are better than anybody else

Now, assuming all this were true, this would be a real sales pitch. You get investors to pay attention only by stressing how great you are, and not by telling them that, in truth, you are not afraid of them and that “France is going to become simple”. No, Mr. President. First you make France simple and extremely attractive; and then you advertise it as a great place to do business.

Only those who have needed high-value commodities do not need to promote themselves

The only countries that do not need to make a special effort to lure foreign investors are those that can produce scarce and valuable commodities desperately needed by international markets. They can rest assured that investors will come to them, no matter what. But if what you offer is a mostly a good location, it has to be really great. Or, at the very least, it has to be a lot better than what your neighbors or other potential competitors around the world can provide.

First you create a true investor-friendly environment, and then you advertise it

Getting rid of legal, immigration and administrative obstacles that discourage investors is a good start. But it is only a very modest start. The truth is that France is a sick country that grows only a little, while it contemplates the erosion of its past competitiveness. If president Hollande really believes that by saying “We are not afraid of you” investors will come in droves, he needs better advisers.


Matteo Renzi To Lead Italy Out Of The Swamp Of Terminal Decline?

By Paolo von Schirach

February 13, 2014

WASHINGTON – And so Italy is getting a new Prime Minister. Matteo Renzi, head of the Partito Democratico, will replace the incumbent, Enrico Letta, also of the same party, because now, as party leader, he believes that it is up to him to lead the nation as well.

Party Leader and now Prime Minister

In principle this sounds reasonable. Matteo Renzi went through an open and transparent primary process within the Partito Democratico just a few months ago (December 2013) from which he emerged as the clear winner, outdistancing other contenders by a large margin. Indeed, he got an impressive 67.6% of the votes cast.

Given Italian political practice, it is entirely reasonable that the triumphant leader of the biggest party within a ruling coalition would also aspire to become the Prime Minister. With some grumbling, Enrico Letta recognized this reality by resigning. And so, the boss of his party gets the top job, (even though he was not elected by the nation, but only by his fellow party members). Fair enough.

Modest chances of success

That said, the notion that an energetic, good-looking new party leader –Matteo Renzi– now Prime Minister, will engineer the radical transformation Italy badly needs is not just a dream, it is a laughable proposition. And this is not about Renzi’s leadership and vision. He may have it. This is about Italy.

Sadly, the country is semi-comatose. It takes a heroic level of optimism to believe that a clear-headed young leader –assuming Renzi is all this– will get the country out of the swamp, rekindle innovation, investments and enterprise and re-generate hope and enthusiasm.

Terminal decline

Italy has been losing ground for about 10 years. The global recession simply made things worse. The national debt is now at 133% of GDP. Its unemployment rate is at 12%. Youth unemployment is at 40%. Most alarmingly, the best and the brightest leave, or have already left the country, seeking better opportunities elsewhere.

Beyond fashion, wine, olive oil and Ferrari luxury vehicles, Italy has no leadership position in anything. No major players in high-tech and electronics, only a second or third tier player in aerospace. Worst of all, Italian companies do not invest much in R&D, nor are there any significant public sector funds allocated to this critical area. And, please, do not forget organized crime: Mafia, Camorra and ‘Ndrangheta being just the best known branches. Finally, in case this is not enough, Italy is one of the most corrupt countries in the western world, with dismal positions in the universally respected Doing Business rankings compiled each year by the World Bank.

Fertility crisis

Beyond that, consider the fertility rate collapse, (1.4 children per woman). This well consolidated trend indicates that Italy will soon be a geriatric ward. Lots of old people who get pensions and medical care, with very few active people supporting them.

You want more? Tens of thousands of desperate illegal immigrants land in Italy every year, coming mostly from the poor Maghreb and sub-Saharan Africa. And, with due respect, these are not the equivalent of the bright, highly educated PhD. holders coming to America from India and China who then create successful start-ups in Silicon Valley.

How can anyone do well trying to run Italy?

Newly minted Prime Minister Matteo Renzi may have vision, and he may turn out to be a passionate national leader. I wish him well. But at least on the basis of what we know, there is no reason for enthusiasm. Please note that, keeping up with a well established, if pernicious, Italian political tradition, Renzi is another full-time political operative.

In plain language: he never run anything in the real world. He never had a real private sector job. He rose fast from local politician to national leader. But this is all within a political party. This is not about his ability to run anything in the hard world of industry, competition and globalization. His current job is Mayor of Florence, a second or third tier Italian city of 370,000 people who stopped producing anything interesting about 500 years ago. Yes, it has been a long time since the days of Michelangelo.

Party functionary

So, who is Matteo Renzi? A party functionary who got to the top leadership because he is a good politician, at least within the context of his own party. Does this mean that he understands modern capitalism, supply chains, the role of IT, competitiveness and globalization? And what about the urgent need to drastically reform gigantic entitlements, invest in education and strategies to attract precious foreign investments?

Does he get all this? Do the people around him get all this? I hope he does. I hope they do. But I doubt it.

Mission Impossible

Look, governing a large post-industrial democracy is very difficult, even when things are going well. Trying to get Italy out of its historic decline will take more than speeches and bold slogans. It will take a credible, sustainable action plan that has the long-term and sincere buy-in of most key constituencies: capital, labor, the now dispirited young, public servants, retirees.

I wish Matteo Renzi best of luck. I mean it sincerely. But this is “Mission Impossible”.