Well, it had to happen sooner or later, so clearer heads prevailed. I'm not talking about the end to the NFL referee strike, but about the budget news from Spain and Greece.
Spain is making big pledges in order to qualify for a massive bailout of its economy. Ministers there approved plans to cut spending and institute economic reform via 43 new laws to be written in the next few weeks. The bold plan, which nobody believes is achievable, should go a long way toward getting money for Spain's citizens since their banks have already scored 130 billion Euros.
Greece is going to bite the bullet, or at least try (wink) by slashing spending $14.8 billion next year while collecting two billion Euros over the next two years through tax reform and better collections. Yes, that means those camouflaged swimming pools and other gimmicks will no longer work.
Both Spain and Greece are seething with anger, finger pointing at their mean-spirited northern neighbors who lack sympathy. I read an article where the author said German's should come to feel how living with austerity feels. She pointed out that Spain had to live under the dictator Franco and never recovered. I guess she never heard of Hitler and World War II.
It is amazing how much anger there is toward workers, savers, and income-producers all over the world. I'm thrilled conservative governments in Spain and Greece are making tough decisions that would be big steps that ultimately could put them in position to be Germany in one or two decades. There are other barriers like a slack work ethic and limited intellectual firepower (Greece) needed to compete in the global economy.
But, where there's a will there's a way.
While these nations were making tough decisions, Euro Zone confidence slipped to a three year low—this thing is a race against the clock. Of course, once you're in too deep, turning it around is no longer an option. I wrote earlier in the week how Portugal's government decided to go with prosperity-killing taxes on everything that moves and everything that doesn't. They are going to tax gas emissions and assets. Yesterday, Jose Manuel Barros, the Portuguese President of the EU Commission said, in a speech at Princeton, that Europe should move toward one united entity. Of course, that sounds great to a taker—a larger pool of prosperity to suck dry.
It's all there for us to view with amazement and awe. What a mess. That could be our mess. In fact, at some point, with $16.0 trillion in debt and GDP growth under 2.0%, even the greatest economy in the world stumbles.
Gross Domestic Product
The Real Story
Our economy is barely skimming the surface; a fact that seems lost on everyone including the market. I've pointed out for the last few years how the correlation of the stock market to the domestic economy no longer has to be in lockstep. The difference is the global economy. This was the theme from the final revision to second quarter GDP, which came in at 1.3% growth, revised from an earlier assumption of 1.7%. Corporate profits, which ultimately drive the stock market, were better in the second quarter domestically but soared in the rest of the world.
This makes for a sweet honey pot for the administration to attack at some point during a second term (I'm not sure how they'll take credit for building the oceans or roads in other countries, but there will be the "fair share" attack and "offshore" demonization). Moreover, attacking the good fortunes of corporations diverts from the lesser fortunes of the American economy. I'm also concerned with decreasing profits among financial companies just one week after another announcement of massive job cuts at Bank of America.
The GDP number didn't make a ripple in the mainstream media partly because it doesn't help the incumbent but also because Honey Boo Boo's sixteen year old sister was having a baby with two thumbs on one hand. The stock market has been amazing in its ability to wait out the dull domestic economy but has only been afforded that luxury because the rest of the world sans Western Europe has been rocking. It's great for American businesses that have operations there but speaks to the need for greater urgency to get back on track domestically.
Just Doing it too Slow
This also explains why Nike is off this morning and taking other major American brands with large or growing presence in China along for the ride.
In China Nike's footwear sales were up 13%, and overall sales were up 8% (they are not big on buying the equipment yet) which is a lot less than 30% to 50% some expected.
Central and Eastern Europe +2%, Western Europe -5% which was expected, so the reason Nike will be among the losers today is China even though their domestic sales were up 23%. Yum Brands and McDonald's are lower as well.