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“We Europeans should remember well that Europe is a continent where nearly everyone has at one time been a refugee. Our common history is marked by millions of Europeans fleeing from religious or political persecution, from war, dictatorship, or oppression.”

-Jean-Claude Juncker

Juncker, President of the European Commission, made this remark in his 2015 State of the Union address titled “Time for Honesty, Unity and Solidarity”, which he delivered at the European Parliament on September 9th, 2015. In recent days Juncker’s Commission has put forward a proposal to resettle 120,000 asylum seekers, which will be evaluated by the EU ministers beginning today.

Clearly Juncker and his Eurocrat colleagues are at a huge crossroads on the region’s next policy move to deal with the mass influx of refugees (and migrants) seeking shelter in Europe.  Data suggests that since the beginning of the year, nearly 500,000 people have made their way to Europe, the majority fleeing war and terror in Syria, Libya and Eritrea, and landing in the highest concentrations in the member states of Greece, Hungary, and Italy. (For perspective Turkey, Jordan and Lebanon are hosting over 4 million Syrian refugees).

One aspect that’s striking about this refugee crisis is its parallels to the concurrent Eurozone debt crisis.  Note the media’s darling word choice, ‘crisis’.  By definition, crisis has a connation of a “short term or sudden event”, yet it has been anything but— Greece’s first crisis started way back in 2010! 

But getting beyond the language choice, I suspect that Europe’s refugee crisis will be far from short term or sudden in nature.  In fact, I think the resettling of refugees stands to have a very long tail, one that could have very disparate outcomes, and financially may pose far greater risk than the Eurozone debt crisis.

Again and again we’ve witnessed the Eurozone and EU’s major challenge as a “union” incapable of effective coordination and implementation of policy given the uneven nature (political, economic, and cultural) of member states. The Czech government has already notified Brussels that it believes compulsory quotas are illegal.  And so even in a best case scenario in which Eurocrats agree to sign on a dotted line on how many refugees they’ll be willing to take on, then what happens with the refugees?

If we take Germany as an example, the longer term prospects may not look so favorable.  There, Chancellor Angela Merkel has been very vocal on her country’s willingness to take on refugees, even boosting the number of asylum seekers to 800,000 (or about 0.9% of the population) this year and 500,0000 a year for a foreseeable future.

Yet if we rewind the clock back to 2010, this is the same Merkel who very adamantly stated that multiculturalism (where Germans live side-by-side with immigrants) is a failed project.  Specifically, she was referencing the inability of Turks to integrate with Germans, and vice-versa.  The Turks were originally recruited as guest workers (Gastarbeiter) in the 1960s and 1970s to help rebuild the country following the war. History shows that many of those Turks didn’t return home and had children in Germany, contributing to Germany’s Muslim population that represents ~ 5.4% of the country today (2009 est.). [For perspective, Muslims make up ~ 0.9% of the U.S. population (2010 est.)].

So multiculturalism is dead?  Well then what’s the plan to integrate these Syrians into Germany, so that they are a benefit and not a tax to the society, to the economy?  If there’s no integration, is there really any hope that these immigrants can support Germany’s generous welfare system – or at least replace Germany’s aging and declining population?

Let’s hope this time is different, that European heads of state take the time to address the longer term solutions for asylum seekers; simply signing on the dotted line will doom the region to repeat past integration failures.  

Back to the Global Macro Grind

Notably tomorrow, ECB President Mario Draghi will stand before the European Economic Affairs Committee in its quarterly monetary meeting to discuss the state of the Eurozone.

While we don’t have a crystal ball, we think it’s well worth pointing out that this presents Mr. Draghi yet another large stage to make a “splash” should he so choose.

We continue to point out that European equities have been bombed out (the German DAX is down over -20% since April = crash), in-line with our 3Q15 Macro Theme of #EuropeSlowing.  At the meeting, we wouldn’t be surprised to see Draghi 1) talk down the euro (in the near past, European equity markets have acted favorably to a weak EUR/USD – Germany in particular with 46.5% of the economy levered to exports – and 2) suggest more QE may be in the pipe (an increase in monthly purchases above the original target of €60B/month).

Catching a Break? - down DAX cartoon 09.21.2015

While the Bundesbank’s recent monthly report highlights a few shoots of positive economic indicators in Germany, we continue to be on the other side, signaling declines in rate of changes terms of our high frequency gauges, with our proprietary GIP (growth, inflation, policy) model signaling that Germany will enter the ugly Quad 3 in 4Q15, equating to growth slowing as reported inflation accelerates (or stagflation).

Can Draghi be the market’s elixir to tone down the European equity market volatility? 

While we’re not throwing the chips in on German equities, on Friday (9/18) we signaled to buy German bonds via the etf BUNL. If Germany has to do what Japan did, QE forever, we like buying bunds on any/all pullbacks!

Our immediate-term Global Macro Risk Ranges are now:

DAX 9611-10107


UST 10yr Yield 2.11-2.21%
EUR/USD 1.10-1.14
YEN 118.78-121.76
Oil (WTI) 43.28-47.93 

Catching a Break? - z cod hed GERMANY