WILL GERMANY TAKE THE EU ECONOMY DOWN WITH IT?

OBSERVATIONS: I Smelled Major German Problems In The Air.

I have just spent two weeks in Europe and I came away with worrying concerns about the EU, and Germany in particular.

The smell of diesel is still the smell tourists will immediately notice when arriving in Europe. Nothing has changed in that regard since I last lived in Europe in the early 90’s. For all the power of the “Green Party”, I noticed few, if any EV charging stations as well as less hybrid and EVs than in the greater Boston area.

On a flight between two major cities I became engaged in a conversation with a high level corporate planner on the way to a meeting with a major German automotive corporation. The meeting was to be about planning steel supply changes to the German auto corporation. The problem was EV sales are not meeting forecasts, meanwhile existing production was being wound down. The ramifications to the supplier meant seriously smaller volumes. Smaller volumes meant penalties and increased costs to the automotive corporations. I suspect the plane had other types of suppliers onboard. The EU transition in Europe is signaling a mounting debacle of losses and layoffs.

For those not familiar with the German Economy, the dependency of the German economy on the automotive industry would be equivalent to the imapct on the State of Michigan’s economy facing massive problems in Detroit when the “Big Three” were at their height of automotive dominance during the 60’s!

Inflation and disgust with the EU (and government in general) is the normal tone of conversation, punctuated with bursts of anger about Immigration and energy policies. On a flight into Vienna I couldn’t help notice the sea of Wind Turbines surrounding the landscape of the city. However, homes with solar panels on the roof were no more prevalent than is currently seen in the US Northeast. For all of the EU’s Green initiatives, the homes I visited were all burning gas. Many in the Austrian Alps (where I visited some relatives) are still burning wood and have zero plans or incentive to change.

Europe appears to have blundered into a problem of monumental proportions that is only going to get worse across most of the EU. As I wrote in last week’s newsletter, green energy is a Good Idea, but has saddled many economies with a bad and cripplingly destructive implementation plan. When I read of Germany’s 1T Euro Green Heating Law, I was left wondering if the EU and Germany can actually survive what clearly lies ahead? We explore that outlook below.

WHAT YOU NEED TO KNOW!

I have been cautioning about a coming dramatic shift in Corporate Equity Buybacks which has been a major pillar of US equity markets. It should be fully expected that current economic conditions and tightening of credit will prompt CFO’s to “pull in their horns” at least temporarily to preserve cash balances. Buybacks will be the first to be placed on “pause”!

As a potential recession unfolds the shift will increase in size. As markets potentially fall on tougher financial conditions and weakening equity markets (aided by falling Buybacks), the problem will then get even worse. A potential self-reinforcing cycle could become a catalyst for a crash as public ETF holders hit the panic SELL button as losses mount.

NOTE: Buybacks are currently in a Blackout Window, which began on 09/15/23 and lasts 4-6 weeks depending on a company’s Q3 earnings release.

RESEARCH

WILL GERMANY TAKE THE EU ECONOMY DOWN WITH IT?:

• • The German Industrial Export giant has serious problems in front of it. Exports and Industrial Production continue to slow.
  • The German Auto Industry is facing slowing sales and a transition to EV technology that is not materailizing in sales as cheaper subsidized Chinese EV products are becoming a major trade threat.
  • Many of the problems are self inflicted as a result of poor policy choices.
  • German issues are structural in nature and can not be fixed quickly.
  • A “sick” Germany will increasingly expose the fundamental flaws in the EU Experiment.
  • German Government expects GDP to decline by 0.4% in 2023 in draft Autumn projections. Reasons for the expected mild GDP contraction in 2023 are: i) high energy prices, ii) high inflation and iii) weakness in international trade.

GLOBAL ECONOMIC REPORTING: What This Week’s Key Global Economic Reports Tell Us?

• • NON-FARM PAYROLLS: At 336K vs a median forecast of 170K, the September NFP was the first 6-sigma beat of expectations in a long time.
    • Having become the butt of all data goal seeking jokes in recent months after revising every single month in 2023 lower, the BLS decided to avoid becoming a complete lackey of the Biden Regime, revised higher not only August but also July. Of course this was now required to support the “Higher-for-Longer” Fed Policy stance to reign in the Biden Regime’s historic budget deficits.
    • The bottom line, when you take out the gimmicks, is all of the job gains in September were either from part-time workers or multiple jobholders forced to get another job in addition to their current one, and thus be counted by the BLS as two distinct jobs (or more).
    • In September, the subset of multiple jobholders who held both a primary and secondary full-time job just hit an all time high.
  • ADP JOBS REPORT: Private businesses in the US hired 89K workers in September 2023, the least since January 2021 when private employers shed jobs, and well below market forecasts of 153K.
  • JOLTS REPORT: The BLS absolutely shocked and stunned markets, strategists and economists when the DOL decided to come up with the largest data fabrication in years, and reported that in August job openings exploded from 8.827MM to a mind-blowing 9.61 million (a 5 Sigma Increase). The increase, a staggering 690K (from the upward revised July print of 8.920MM), was the biggest monthly increase since July 2021.
  • CONSUMER CREDIT: Real-time data on card spending has taken another leg lower and is significantly weaker than prior levels.

DEVELOPMENTS TO WATCH

TIGHTENING FINANCIAL CONDITIONS INDEX

We’ve had a meaningful tightening in financial conditions from the July trough. The FCI has tightened by 100bp and is around 60bp tighter relative to the Jun-Aug average and nearly 40bp since the September FOMC.

INCREASING GLOBAL RECESSION WARNINGS

More organizations are warning of slowing economic and trade conditions which precursors a Global Recession. A Recession that could also drag the US into a Recession.