On How is Europe Mending and Opportunities Therein, and Why Meditation?

From: aditya rana
Date: Sat, May 11, 2013 at 2:00 PM
Subject: On How is Europe Mending and Opportunities Therein, and Why Meditation?


Europe is beginning to finally show signs of having turned the corner – with dramatic improvements in some key macro variables like current account balances and declining sovereign yields. However, questions remain whether continued austerity is a sustainable strategy and whether there exists a possible way out. Recent notes by two astute observers of the European situation, Daniel Gros and Gavyn Davies, provide a glimpse into a potentially unfolding scenario which could ultimately provide the basis for a sustainable recovery in Europe. To summarise:

Daniel Gros (Director of the Brussels-based Center for European Policy Studies):


-The austerity debate misses a key point – the distinction between debt owed to foreigners and debt owed to locals. High interest rates on domestic debt implies a transfer of wealth from tax payers to bond holders, while foreign debt involves a transfer of resources abroad – usually requiring currency depreciation and reduced government expenditure.

-The Euro crisis exemplifies this key distinction as eurozone countries cannot devalue to increase exports and thereby service the debt. The euro crisis is not really about sovereign debt, but about foreign debt.

-Only countries which were running large current account deficits prior to the crisis were adversely impacted by it. For example, Belgium had a debt/GDP ratio of about 100% prior to the crisis and an unstable political environment (by not having a government for a year), but was able to have a low debt yields throughout the crisis as it was largely running current account surpluses.

-Japan provides another example of the crucial difference between domestic and foreign debt by having the highest debt/GDP ratio in the OECD while being able to service its debt at a cost below 1%. This is because it ran large current account surpluses for decades , giving it the domestic savings to fund the domestic public debt.

-The implication of this for Europe is clear – what matters is not really the fiscal deficit but the current account balance. Rapidly improving current account balances have led to a dramatic fall in debt yields, despite political uncertainty in Italy and widespread fiscal deficits across countries.

-The current debate about austerity is misleading on two accounts: first, while austerity can be self-defeating by initially causing a rise in debt/GDP ratio, it also leads to a sharp fall in domestic demand in response to a cut in government expenditure, causing a rapid fall in imports and significant improvement in the current account balance and therefore lower debt yields.

-Italy provides a helpful example – the large increase in taxes in 2012 caused a sharp fall in demand, leading to falling government revenues, an increasing debt/GDP ratio and only marginal improvements in the fiscal deficit. However, it also led to a strong improvement in the current account balance and therefore lower debt yields, despite the political uncertainty caused by the recent election.

-Secondly, the controversy about the Reinhart/Rogoff study is relevant only to countries which have debt in their own currencies (i.e. the U.S., U.K. and Japan) which need to assess the negative impact of debt exceeding a particular “threshold”. For the eurozone countries, they simply had no choice but to reduce their current account deficits as foreign capital was no longer available on which their economies were so dependent. However, as their current account balances turn to a surplus (see chart below), the pressure from financial markets will continue to ease, allowing them to regain their fiscal sovereignty.

Gavyn Davies (Chairman of Fulcrum Asset Management, previously head of the global economics department at Goldman Sachs from 1987-2001):


-While the dramatic improvement in the current account balances in the crisis hit countries provides some basis to the view that the fiscal tightening and structural reforms imposed on these countries has been successful – there has not been much improvement in the relative unit labour costs between Germany and the crisis countries (with the exceptions of Spain and Ireland – see graph below).

-So the improvement in the current account balances in the crisis countries has not been due to declining wages versus Germany or structural reforms but the rapid decline in demand due to the austerity programmes. The impact can be seen most clearly by the relative performance of unemployment between the core and the crisis countries.

-The crisis countries are faced with the hard choice between continued high unemployment ( and the risk of rising discontentment amongst the population) and trade deficits which are difficult to finance. With Germany showing no signs of relenting, the current process could take up to 5 years before the competitiveness gap with Germany is closed.

-Is this a feasible strategy? Yes, if the global economy starts growing rapidly again, private flows into the crisis countries are restored (already happening in the debt markets with the equity and housing markets possibly next) which support a recovery in domestic demand and the banking sector.

-Interesting observations and while the path to eventual recovery in Europe is likely to continue to be volatile, it does present an extremely attractive buying opportunity for a broad variety of risk assets. The sovereign debt markets have already experienced dramatic price gains with 10 year Greek debt rising by 331% over the past year! (see chart below)

What about the equity markets? From a valuation perspective, Europe and EM markets offer relatively more attractive opportunities than the U.S. based on 10 year trailing P/E ratios ( as illustrated in the chart below from Morgan Stanley) signalling a need to rebalance from the U.S. towards Europe and the EM.

-While, stocks markets in the peripheral countries have already started anticipating the improving macro fundamentals (by rising 25% to 50% over the last year as the chart below illustrates for the country ETFs of Greece-GREK, Italy – EWI and Spain – EWP).

-They are still down significantly from pre-crisis levels (falling by 50% to 60% as illustrated in the chart below for Spain and Italy):

Private sector stocks present an even more attractive (albeit riskier so please do your homework!) buying opportunity with some stocks still languishing 90% (National Bank of Greece-NBG) to 70% (Hellenic Telecom and Banco Santander) below pre-crisis levels. Additionally (and significantly) , private sector banks in the crisis countries are beginning to attract private equity capital, with NBG recently announcing a rights issue for 12% of capital, thereby staying above the 10% threshold to avoid being nationalised.

-Lastly, the ongoing easing programs (in varying degrees) by most central banks around the globe (as the chart below from Morgan Stanley illustrates) will continue to provide support for most global equity markets.

Why Meditation?:

I have discussed the merits of meditation in previous newsletters and present below two recent studies which highlight the broad variety of benefits (ranging from increasing energy to reducing inflammation and stress) which mediation can provide. To recap – to meditate effectively it is important to keep note of the following guidelines: 1) keep a straight spine while sitting – on the floor or on a chair, 2) close your eyes and breathe slowly and gently by expanding and contracting the stomach (not the chest), and focus on the breath by visualising it travelling from outside your nostrils to your stomach and outwards again , and, 3) make it a daily practice, even if it is for 5 minutes, and preferably at the same time. An alternative to focussing on the breath is to silently repeat a preferred word/prayer, or look at a candle flame or a preferred object/symbol. Additionally, do not worry about distracting thoughts while meditating – observe them and gently bring your mind back to focus – over time they will lessen in frequency.

New Scientist, 2 May 2013

-Feeling run-down? Try a little chanting, or meditation. Such relaxation techniques can boost the activity of genes involved in several processes beneficial to health, and they only take a few minutes each day to show results.

-Previous studies have reported changes to the brain while people practise these activities, but a new study shows for the first time that gene activity changes too. This could explain the reported beneficial effects of meditation, yoga and prayer.

-"It’s not New Age nonsense," says Herbert Benson of the Massachusetts General Hospital in Boston. He and his colleagues analysed the gene profiles of 26 volunteers – none of whom regularly meditate – before teaching them a relaxation routine lasting 10 to 20 minutes. It included reciting words, breathing exercises and attempts to exclude everyday thought.

-After eight weeks of performing the technique daily, the volunteers gene profile was analysed again. Clusters of important beneficial genes had become more active and harmful ones less so.

-The boosted genes had three main beneficial effects: improving the efficiency of mitochondria, the powerhouse of cells; boosting insulin production, which improves control of blood sugar; and preventing the depletion of telomeres, caps on chromosomes that help to keep DNA stable and so prevent cells wearing out and ageing.

-Clusters of genes that became less active were those governed by a master gene called NF-kappaB, which triggers chronic inflammation leading to diseases including high blood pressure, heart disease, inflammatory bowel disease and some cancers.

-By taking blood immediately after before and after performing the technique on a single day, researchers also showed that the gene changes happened within minutes.

-For comparison, the researchers also took samples from 26 volunteers who had practised relaxation techniques for at least three years. They had beneficial gene profiles even before performing their routines in the lab, suggesting that the techniques had resulted in long term changes to their genes.

-"We found that the more you do it, the more profound the genomic expression changes," says Benson. He and his colleagues are now investigating how gene profiles are altered and whether these techniques could ease symptoms in people with high blood pressure, inflammatory bowel disease and multiple myeloma, a type of bone marrow cancer.


Huff Post, 11 May 2013:

-A new study in the journal Health Psychology shows an association between increased mindfulness and decreased levels of the stress hormone cortisol.

-"This is the first study to show a direct relation between resting cortisol and scores on any type of mindfulness scale," study researcher Tonya Jacobs, a postdoctoral researcher at the University of California, Davis Center for Mind and Brain, said in a statement.

-For the study, 57 people spent three months in a meditation retreat, where they were taught mindful breathing, observation skills, and cultivation of "positive" mental states like compassion.

-At the beginning and end of the retreat, the participants also had their cortisol levels measured with a saliva test, and their mindfulness levels rated on a scale, which Jacobs explained in the statement "measured the participants’ propensity to let go of distressing thoughts and attend to different sensory domains, daily tasks, and the current contents of their minds."

-Researchers noted that the participants’ mindfulness scores on the scale were higher at the end of the retreat than at the beginning. Plus, they found an association between increases in mindfulness and decreases in cortisol levels in the saliva.


So here’s to just a few minutes of daily meditation!




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