Behind the Money

Investors Too Worried About Europe: German Bank Economist

Ironically, the chief U.S. economist at a company in the crosshairs of the European crisisbelieves investors are too concerned about a ripple effect on these shores and believes the American economy could be growing at the fastest pace in almost five years.

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“Everyone is too focused on Europe and the possibility (albeit very small in my view) of a Lehman-type of event and so analysts don’t want to mark up their numbers,” said Joseph Lavorgna, a managing director at Germany’s biggest bank.

“If we simply get very modest inventory building this quarter, somewhere in the vicinity of $20 to $25 billion, after what appears to have been about $20 billion in liquidation last quarter, we would get current quarter output of 4.2 percent,” he added

While LaVorgna has not raised his forecast yet, a growth number above 4 percent would mark the fastest pace since the first quarter of 2006 for the U.S. economy.

It would also place the economist, whose current forecast is an already bullish 3 percent, at the very top of predictions by the major firms. He cited this week’s better-than-expected October retail sales figures as evidence the demand is there for companies to start building up inventories.

There is a wide range of forecasts for this quarter (one economist predicts just a 0.6 percent move), reflecting the uncertainty economists feel about a resolution to the European crisis.

Attention turned from Greece to Italy this month as the country brought in a technocrat as leader to implement an austerity plan and regain the confidence of the region. However, Italian bond yields—and now Spanish yields—have continued to rise.

Deutsche Bank’s U.S. shares are down 37 percent over the last six months as investors fear the country’s largest lender may have to raise capital and take even bigger losses on sovereign debt holdings. This week, third quarter GDP for the Eurozone came in at a meager 1.4 percent, raising fears of a recession for the region.

But Lavorgna points out that total U.S. exports to the continent are only 1.6 percent of our total GDP and so investors should relax about the effect on multinationals, which drive the direction of U.S. stock market.

“We have been hesitant to raise our already above consensus growth forecast from 3 percent in light of sovereign debt developments and the possibility of a systemic shock to the global financial markets,” said LaVorgna. “However, we will look to revise it if the U.S. economic data continue to surprise to the update.”

To be sure, many take issue with LaVorgna’s thesis that a depletion in inventories last quarter will lead to a build up this quarter, and most importantly, be met with robust final purchases by consumers and companies.

“Who’s going to buy the newly built inventory?” said Alan Newman, editor of the CrossCurrents newsletter, which was early to warn clients of the Lehman credit crisis back in 2007. “The 14 million unemployed or the 45 million in the food stamp program? I think not.”

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