Monthly Archives: November 2011

Macro Focus: Europe’s Rock, and its Hard Place

Tues, NOV 29th, 2011

Given the incessant focus thrust upon Europe, and with an inflection point seemingly imminent,  I thought it worthwhile to take a moment to explore the blocs two options: break-up or backstop.

This fall, economists at UBS Investment Research made an attempt to quantify the costs of a euro break-up. If a feeble and unstable country like Greece were to leave the monetary union, it would almost certainly have to default on its sovereign debt, and indolently watch its domestic banking system fold as depositors rush to withdraw euros before they are replaced with new and noticeably less-valuable drachmas. Unrest at a level not yet seen would certainly ensue. UBS projected that a “weak” country like Greece or Ireland leaving the euro would take a whack to their GDP of up to 50 percent in year one, with an additional 15 percent per annum over the next few years. That is an unimaginable and crushing shock, which would likely take a generation to recover from.

The other side of the break-up coin looks like this: a financial stalwart like Germany decides to leave the euro in order to preserve both its regional economic prowess and political compass. Sounds like a no-brainer fix for a country that is resolutely opposed to bailouts and the moral hazards they carry.

It’s not.

True, Germany would not default on its sovereign debt — quite the contrary, its new currency would undoubtedly be more valuable vis-à-vis the old euro — but the problem is its banks would suddenly be awash in assets denominated in the old, relatively-devalued euro. Bank balance sheets would become a mess, and Germany would have to inject a colossal amount of money into cleaning up its financial sector [see: bailout]. Too, the country’s exports would likely be profoundly dented as the new high-value Deutsche Mark renders German goods less price competitive on the global stage. This is deeply important because Germany’s economic engine is heavily influenced by its export market; an export market that is the second largest in the world, per WTO statistics. According to UBS estimates, all told the aggregate cost of breakaway to a country like Germany would probably reach 20-25 percent of their GDP, and persist at about half that for a couple years thereafter.

Taking it a step further, the team at UBS suggests that it would be much cheaper [by a long shot] for Germany to simply bail out the PIGs [ex-Italy]. According to their math this route would cost approximately 1,000 euros for every German man, woman and child. If, however, Germany were to exit the euro zone the cost would be 8,000 euros per German in year one, and 4,500 euros in the subsequent few years.

Myself, along with other members of the Albion research team have performed a similar mathematical exercise to which we derived very similar conclusions. Both are proprietary estimates in effort to explain and demonstrate the same thesis – the cost of disbanding the currency is greater than the cost of the bailouts. As abovementioned, bailouts are strongly ostracized in Germany, and for reasons we can all understand, but they do appear to be the cheaper path. Of course, critics could point out that the analysis doesn’t include Italy, the current 800-pound gorilla in the room.

Enter Bernard Connolly.

The renowned analyst and ex-EU monetary economist estimates that it would cost Germany 7 percent of its GDP for several years to bail out all troubled euro zone countries. Indeed, the Connolly analysis includes Italy; he even threw in France for good measure. Armed with this understanding, bailouts again look to be a less-painful and messy option at this point. This is why our position has been – and will continue to be until data to the contrary surfaces – that it would be foolish for Germany to allow the euro to fracture. Put plainly, it just isn’t in their best economic interest.

The clear path, though admittedly difficult, is euro zone locomotion toward selected levels of fiscal integration in concert with an enhanced monetary backstop – be it from the ECB, EFSF, IMF, ESM, the Fed, or a joint arrangement of this alphabet soup – as the best course of action. This is likely the highest probability outcome.

Unfortunately, as is so often the case with many of life’s challenges, the most reasonable solution is not often clear to those in the trenches until great losses have befallen. Here’s to hoping policymakers appreciate this before these great losses occur.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200

Wealth Advice: IRA Charitable Donation

Wed, NOV 23rd, 2011

With the end of the year fast approaching I found this advice timely and useful. It was written by Debbie Knotts, one of our many astute Financial Advisors here at Albion. It’s a quick and insightful piece highlighting a topic with a commendable message.

Jason Ware Market Strategist, Analyst (801) 487-3700; (877) 487-6200


In our role as financial advisors we work with many of our clients each year to assist them in determining the best way to meet their charitable goals. The provision allowing IRA owners over the age of 70 ½ to make charitable donations from their individual retirement accounts is set to expire the end of this year. The Charitable IRA Rollover Provision included in the 2010 Tax Relief Act extended the ability of IRA owners  to make charitable donations from their individual retirements accounts for 2010 and 2011.

This provision allows taxpayers age 70 ½ or older to make a total of $100,000 in gifts to one or more qualified charities using IRA assets. The donor gets no tax deduction and does not have to report the gift as income. The contribution can satisfy the IRA account holder’s required minimum distribution for 2011 as well. The gift must pass directly from the IRA custodian to the charity. We recommend that clients include their tax advisor in the decision of whether or not this is the most tax-efficient way to donate to a charity during their life.

Debbie Knotts, CFP Albion Financial Group

Notable & Quotable

Tues, NOV 22nd, 2011

“Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”  — George Soros

Jason Ware, MBA Market Strategist, Analyst (801) 487-3700; (877) 487-6200

Notable & Quotable

Tues, NOV 14th, 2011

Warren Buffett bought large positions in chipmaker Intel Corp [INTC] and International Business Machines [IBM], according to Berkshire Hathaway’s latest quarterly filing.

Jason Ware, MBA Market Strategist, Analyst (801) 487-3700; (877) 487-6200

The Submariner – Deep Data Dive: Jobs Report

Mon, NOV 4th, 2011

As investment managers it is our job to thoroughly examine every economic and financial market data point we ascribe as significant – be it the obscure or the obvious. Indeed, there is no shortage of real-time data flow, and today is no exception. Setting aside the European situation for a moment, this morning the U.S. economic landscape released one of its more market-moving statistics, the government’s Employment Situation report.

Overall the report was in-line with sluggish economic growth. The economy added 80k jobs, with 104k coming from the private sector [-24k in government payrolls]. Average hours worked remained flat [34.3], but this isn’t a surprise given that it’s at the high end of its historical range. It demonstrates that companies are still concentrating on squeezing more out of their current workforce, and less to ramp hiring.

On the other hand, the manufacturing work week rose, and 5k jobs were added to factory payrolls. This is positive because factory output has been a key engine for economic growth since the recovery began in mid-2009. In addition, some of the recent concerns over the U.S. macroeconomic landscape have been centered on a cooling manufacturing sector. Thus, the increase in hours worked, payrolls, and taken in concert with recent ISM, PMI and durable goods reports [which showed increases in new orders and unfilled orders] supports this labor data and its positive trajectory.

Perhaps the most encouraging pieces of the report: 2-month upward revisions [Aug & Sep] by 102k suggesting that underlying economic growth for those two months was a bit stronger than originally thought [as evidenced by advanced Q3 GDP]; under-employment dropped from 16.5% to 16.2%; long-term unemployment fell [good direction given the structural labor issues]; wages rose slightly; and the headline unemployment rate dropped to 9% [from 9.1%] surprising most economists and analysts.

For myself, I’m not surprised the rate dropped by a basis point. What I am surprised about is how it dropped. The labor force expanded in October — the number of people working full-time plus those actively seeking employment — yet the rate still fell. This is likely due to the backward positive revisions. Regardless of the statistical reasoning, it’s an encouraging sign. So often during the course of this recovery the rate drop was due to a shrinking of the labor participation rate, that is, discouraged people who stopped looking for work in the past four weeks and were no longer counted in the labor force by the government. This occurrence does not represent a “clean” drop in the unemployment rate; the former does.

Finally, given the recent independent household surveys [showing higher job readings] coupled with the reason for the upward revisions, we are optimistic that this month’s October payroll may be revised up in November.

Although it’s nice continuing down the path of net job gains, it’s important to understand that the pace needs to accelerate if we are to see a meaningful drop in the unemployment rate.

To wit, in simply keeping up with new labor force participants the economy must create about 125k jobs a month. In order to bring down the unemployment rate, say, by 0.5% in time for next year’s election it will take roughly 155,000 net adds a month.

Jason Ware, MBA Market Strategist, Analyst (801) 487-3700; (877) 487-6200