Jump to navigation

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
Follow Futures          
       
more >>

We Asked Traders

We asked traders for their opinion on the launch of bitcoin futures

Sponsored Content

Trading

Equities.com launches unlimited trading via Tradier Brokerage, Transforming into a news & fintech portal

Featured Topics

more Commodities>>

Commodities

Energy demand steps back in play
Advertisement
more Volatility>>

Volatility

Volatility & opportunity in the energy sector
more Financials>>

Financials

Daily Price Action: E-mini S&P 500
more Options>>

Options

Trading Vertical Option Spreads

Advertisement

America economic efforts since ’07 prove superior to Europe slump

America breaking higher, while Europe returns to recession

By Simon Kennedy and Rich Miller

May 12, 2013 • Reprints

America’s aggressive strategy for tackling its financial and economic ills is working better than Europe’s go-slow approach -- and investors are taking notice.

Even amid the weakest recovery in modern history, the U.S. economy is outperforming the euro area and soon may break higher. More than a year after U.S. gross domestic product returned to its pre-crisis level, Europe still has to make up lost ground and is back in recession. While America’s unemployment, at 7.5 percent, is 2.5 percentage points higher than at the start of the recession, it’s below the 12.1 percent rate of the euro zone -- and the gap is the most since 2000. Manufacturing is shrinking in the 17-nation bloc; U.S production is expanding.

“The U.S. is in a transition from the intensive-care unit to out of the hospital,” said Mohamed El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California. “Europe is out of the ICU, but in a ward close by.”

The source of America’s relative economic success may lie in the decisions of policy makers. While the U.S. quickly addressed bank solvency, Europe battled over how to deal with its sovereign-debt turmoil and still is struggling to craft a comprehensive banking plan. The Federal Reserve eased monetary policy faster than the European Central Bank, and governments in Europe put their faith in austerity over the U.S. preference for fiscal stimulus.

S&P’s Gain

Investors are beginning to tune in. The 15 percent gain in the Standard & Poor’s 500 Index since the start of the year is more than twice the advance of the Euro Stoxx 50 Index. A Morgan Stanley gauge of 50 companies that generate almost all their sales from within the U.S. is up 18 percent this year, compared with an 12 percent rise in a measure of 49 companies that get 60 percent of their sales from abroad.

The dollar also stands to benefit. Deutsche Bank AG, Citigroup Inc. and Barclays Plc are among banks predicting the currency will gain this year against the euro as U.S. growth accelerates.

Since financial turmoil first began in 2007 and then accelerated with the collapse of Lehman Brothers Holdings Inc. in 2008, the U.S. has set up a $700 billion bank-bailout fund, enacted a fiscal-stimulus program of about $800 billion and embarked on a loosening of monetary policy that has injected more than $2 trillion into the economy so far.

Crisis Source

Even though the U.S. was “the source of the crisis, we moved quickly to clean things up,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. “And we haven’t had the aftershocks that unfolded inside the euro zone as people began to question the very foundations of that structure.”

In the EU, while nations have provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since October 2008, they put off calls for sweeping recapitalizations, even as the debt crisis festered beyond Greece. The latest bailout of Cyprus even included a tax on uninsured bank deposits as countries again tried to ring-fence turmoil rather than find a continent-wide solution.

Policy makers still are clashing over a banking union aimed at breaking the cycle of contagion between governments and lenders so troubled institutions don’t paralyze economies. Disputes include how far to go in building a central authority to handle failing banks and whether national deposit-guarantee programs should be linked up.

Expose Weakness

Europe also ran into criticism for failing to replicate the success of U.S. bank stress tests by being too soft and failing to expose weaknesses. In 2010, for example, the now-defunct Committee of European Banking Supervisors said seven EU banks needed only 3.5 billion euros more capital, a 10th of the lowest analyst estimate.

Now the ECB is left propping up the system through unlimited long-term loans to financial institutions, justifying this approach by noting that banks account for 80 percent of European financing compared with 20 percent in the U.S.

“The natural adjustment has been impeded by counter- cyclical policies to prevent deleveraging,” said Stephen Jen, managing partner at hedge fund SLJ Macro Partners LLP in London.

To Mike Howell, founding managing director of London-based CrossBorder Capital Ltd., Europe’s banking system is similar to Japan’s in the 1990s, which plagued the Asian nation’s economy for two decades. As much as 15 percent of European bank loans may be bad, the same share as in Japan, he estimates. Attracting new deposits will be hard, because institutions are paying interest rates below comparable government-debt yields and their credit ratings have fallen, he said.

‘Bad Business’

“Banking is a bad business in Europe,” Howell said. “They have to recapitalize the banks, and then you might get lending. The U.S. outlook looks pretty good because the banking system is coming back to normality.”

The divergence is reflected in how easily nonfinancial companies can tap credit. While U.S. banks eased conditions in every quarter but one since the end of 2009, European lenders have tightened for 23 consecutive quarters since 2007, according to UBS AG. Europe’s small and new businesses particularly have been hit.

The different approaches are influencing economic performance as the U.S. and Europe decouple, breaking what Lucrezia Reichlin of Now-Casting Economics Ltd. in London says is a traditionally high level of synchronization. Kevin Loane, an economist at Fathom Consulting in London, says America’s economic output will be 8 percent above its pre-recession peak by the end of next year, while the euro area will still be 2.4 percent below.

Root Causes

“Policy makers in the U.S. addressed the root causes of the crisis more quickly,” Loane said. “That is why the U.S. is doing better.”

The world’s five biggest businesses are American for the first time in nine years, and automakers General Motors Co., Ford Motor Co. and Chrysler Group LLC all gained U.S. market share in the first quarter for the first time in 20 years.

“We wouldn’t be hiring if we didn’t think it was going to last,” Joe Hinrichs, Ford’s president of the Americas, said in a May 2 telephone interview after the company announced plans to add workers at its F-150 truck plant in Claycomo, Missouri.

Global policy makers have recognized the gap. International Monetary Fund Managing Director Christine Lagarde divides advanced economies between those “on the mend,” like the U.S., and those “that still have some distance to travel, such as the euro area.”

Next page: 'Breaking Out'

Page 1 of 2
>>next >

About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Related Articles
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
GBP/USD drops as weak CPI reduces BoE May rate rise odds
Daily Price Action: E-mini S&P 500
Previous
Stock market highs create more optimism, but for how long?
Next
Employment, inventories data send mixed signals on economy
Related Terms
US Federal Reserve 8527Bloomberg 5254European Central Bank 3208European Union 2864Standard & Poor 2008International Monetary Fund 1712S&P 1534California 1387manufacturing 1315Morgan Stanley 934Barack Obama 909U.S. Treasury 854JPMorgan Chase & Co. 818gross domestic product 748Mario Draghi 685Citigroup Inc. 603Massachusetts 585Barclays Plc 573Bank of Canada 490European Commission 483europe 463UBS AG 455Deutsche Bank AG 426Societe Generale SA 224Missouri 212Ford Motor Co. 173Mark Carney 167Pacific Investment Management Co. 164General Motors Co. 163Lehman Brothers Holdings Inc. 158Christine Lagarde 135Chrysler Group LLC 83bank loans 59Mohamed El-Erian 56Jacob J. Lew 56IHS Inc. 26bank stress tests 21Joe Hinrichs 14Jefferies International Ltd. 13Nariman Behravesh 9Stephen Jen 8SLJ Macro Partners LLP 7Marchel Alexandrovich 5fiscal 4Committee of European Banking Supervisors 4Aneta Markowska 4america 3economic recovery 3monetary 3David Hensley 2CrossBorder Capital Ltd. 1Fathom Consulting 1Now-Casting Economics Ltd. 1continent-wide solution 1uninsured bank deposits 1bank-bailout fund 1addressed bank solvency 1Mike Howell 1Kevin Loane 1

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
images