This note was originally published at 8am on May 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“There is, so I believe, in the essence of everything, something that we cannot call learning. There is, my friend, only a knowledge - that is everywhere.”
-Herman Hesse
Last week I was on vacation and had some time to turn off the crackberry (or iCrackberry in my case) and do some reading. Most of my reading was centered on my day job as Director of Research at Hedgeye, but I also had a chance to read some fiction, including Hermann Hesse’s classic, “Siddhartha.”
For those of you that haven’t read Hesse’s novel, it is the classic example of a man’s search for meaning and identity. In the story, the protagonist, Siddhartha, lives in the time of the Buddha and is in search of enlightenment. On this path, he forsakes his family as a teen and leaves a comfortable lifestyle to the sparse life of an ascetic that is characterized by abstaining from worldly pleasures.
Siddhartha then has an awakening of sorts and leaves the ascetics to become a trader (in this day and age he would clearly have been trading CDS), and also takes on a lover. Siddhartha then again turns his back on the materialistic world to once again return to the ascetics. Eventually Siddhartha realizes that that his “understanding” is enhanced by the collection of his experiences.
From my purview, this short novel is the classic existential angst and search for identity story. In people, this often occurs years immediately following college, but also manifests itself in the “midlife crisis.” Nation states also struggle in the search for identity. In the United States this struggle has recently been on the social side of the equation as both Republicans and Democrats have taken up the gay marriage debate with fervor, but in Europe the search for identity continues along the economic path.
This morning's GDP numbers were released for the majority of the Eurozone. In the Chart of the Day, we’ve highlighted the y-o-y GDP growth rates for the EU-27. While the architects of the euro may have envisioned a scenario where economic progress is shared across the region, the reality has proven to be much different. Clearly, Germany has been, and continues to be, the key beneficiary of the common currency. This will only continue with the euro trading below the 1.30 line versus the U.S. dollar.
In aggregate, the EU27 grew 0.0% from Q4 2011 and 0.1% from Q1 2012. This was largely driven by Germany, which grew at 0.5% sequentially and 1.2% y-o-y. Germany has benefitted from strength in its industrial sector, in particular solid results from the automakers. As a result, exports have been a meaningful tailwind for Germany.
On the disappointing end of the GDP report were France, Italy and Spain. France’s growth effectively evaporated on a sequential basis to 0.0%, and Italy was -0.9% sequentially while Spain was down -0.3% sequentially. Clearly, Europe is seeing the impact of austerity in short-term GDP growth numbers. The open ended question remains how tolerable austerity remains, especially as Germany’s economy continues to dramatically outperform its neighbors.
To answer that question, we probably have to look no further than Francois Hollande’s first action as leader of France. Specifically, immediately after being sworn in today Hollande is flying to Germany to discuss a growth pact with Angela Merkel. While Merkel has been adamant that no new sovereign debt will be issued to support growth, she too is feeling the pressure to implement policies that are, at least in perception, more pro-growth by her political opposition in Germany. The economic identity crisis in Europe continues.
The European sovereign debt markets are clearly signaling their confusion around the lack of economic identity. While they had seemingly been reacting better to certain austerity policies, many periphery yields are now trading back near all-time highs. The key market we watch, of course, is the Spanish 10-year yield which is now solidly above the rhetorically critical 6% line at 6.25% this morning.
With France’s political identity resolved, at least temporarily, Greece is now in focus on the political front. My colleague Matt Hedrick highlighted this on Friday when he noted:
“This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).”
Clearly, the search for political identity in Greece is going to be protracted.
Changing gears for a minute, I wanted to highlight a recent note from Howard Penney and Rory Green on our restaurants team titled, “The (Coffee) Prince”. As they wrote:
“For Howard Schultz, it is all about winning. Even when he doesn’t want to communicate it, he does. The word “Machiavellian” has come to represent, for many people, any human behavior that is cynical and self-interested. While Schultz seems to have a strong social conscience – and this is meant as a compliment – we can’t help but believe that the single-serve strategy being employed by Starbucks seems to rhyme with The Prince, Machiavelli’s most famous book. An appearance by Mr. Schultz on CNBC yesterday illustrates this perfectly.”
Their general point, and email sales@hedgeye.com if you want to trial their research and read the entire note, is that the identity, or search for identity, of corporate leaders can very much impact financial results.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
