Macro: The Bull case for Europe and the Euro
If you read any news source today, there is one common theme: “The EUR and the European union are doomed”.
Every economist, politician, bank boss, asset manager, talk show host (and their grandmothers) now know exactly what Target2 accounts are and why Europe is on a one way track into doom and bust. Additionally they ussually mention that they always said so. Some of them offer additional advice for instance how helpful it would be if countries would go back to theri own currencies, or adapt the gold standard etc. etc.
I do not claim to have any superior knowledge about how this will work out, but i want to point out some of the issues why I personally think that one should not take those “market pundits” too serious:
Example Late 80ties – October crash
Especially now I am feeling that I am getting old, but in a positive way regarding capital markets. I started investing as a student in the stock market with my own money in September 1987, so that makes it almost 25 years now. Those were interesting times as well. I remember reading English news articels in School in the late 80ties, where everyone was convinced that the Japanese will take over the world and the US will never ever make it back to past glory. As a small side show, there was always the threat that some lunatic will push the red button and blow up the entire world with nuclear weapons. There was no internet but you could read in any newspaper from the most clever guys on earth why this is inevtiable and we are all doomed.
Then, out of nowhere, the Wall fell and the “peace dividend” created one of the most amazing booms in the history of the world. I had the privilege to visit Eastern Germany in 1988 and I still remember how this looked before. I would say that we are living ain a much better world now than back then, despite all the gloomy headlines.
Example Asian crisis 1998
Just one example more: In the late 90ties, the Asian economies were down and out. In the wake of the “peace dividend” in Europe, Asia had a very good developement in the early 90ties, but then, mostly due to large FX debt loads, the finanical sector in most Asian countries crumbled with the “real economies” as well. I still remember lynch mobs in Kuala Lumpur and other really bad things happening there. Everyone wanted out of Asia because they were all failed states and failed economies.
Fast forward 13 years and Asia is the poster child of growth and budget discipline. Howver many people seem to forget that this did not came over night and required some significant changes. But again, in the late 90ties and early 2000s, no one saw that coming as well. I rememebr one project in 2005 wheere I was involved in a (on shore….) pre IPO participation at a Chinese company where most people involved simply refused to participate. Now of course everyone (and again also their grandmothers) always saw it coming and knows exactly where it is going for the next 20 or 100 years.
The lessons of those episodes at least to me are clear:
1. No one really knows what is going to happen in the future, developments are never linear over a long period of time and disruptions (positive or negative) can happen more often than one imagines.
2. The “loudest” commentators are mostly people who make a living out of it (Roubini, Martin Wolf, Krugman etc.) or are talking their books (Bill Gross, El Erian, Kyle Bass etc.)
3. Crisis are always a catalyst for change. Structural changes take time and will not be recognized for a long long time
So coming back to the Bull case for EUR and Europe, how could this look like ?
I try to narrow it down to a few “structural” points:
1. People want Europe and the EUR
As the Greek elections have shown, even in Greece, people actually want to stay in the EUR and the European union. I think it is also a generational thing like the German reunification. Many young people who have enjoyed the advantages of a borderless Europe will not support the opposite. And due to demographics, the share of those people automatically increases each year. Just watch who the PDS (the “democratic” successor of the former GDR communist part is just “dying out”.
2. Changes are happening, but they take time
financial market pundits are always looking for quick fixes, the magical wand being waved and solving every problem quickly (and giving a nice quick return on one’s trading positions).
When the crisis started, the EU had nothing to counter it. Now we have the ESM, the EFSF, we have USD swaps with the FED, they have a pragmatic ECB. Of course the pundits scream “this is not big enough” or “this is not fast enough”. Basle II, one of the main drivers behind increasing Government debt is reworked.
In many countries, the Government has changed and those Governments are implementing reforms. Again, it is not a quick fix but many steps in the right direction. Maybe something like the FDIC on a European level is missing, but if I interpret this correctly, something like that might be on the way.
In my opinion, the market has given absolutely no credit for any of this.
3. There is still huge growth potential in Europe
If Europe and the Eurozone gets it right, there is still a huge “natural” growth potential in Europe, especially in Eastern Europe. As difficult as it sounds, but what is currently mentioned as the biggest advantage of China, poor people wanting to move into the cities and climbing up the ladder, applies to countries like Bulgaria, Romania, Ukraine etc. as well.
4. Companies are becoming more European and more competitive
What I can see in many of the smaller companies I am following is the fact that many of them now (by pressure of their declining home markets) are forced to expand internationally, especially in the neighbouring EUR countries. And many do so quite successfully. This means more competition on the one hand but more competition means more efficiency in the long run. So less competitive companies will suffer, whereas clever competitive companies will discover that a large more or less homogenous market offers advantages.
And those companies will fight (and lobby) for the EUR and the European Union.
5. You never know what is going to happen
Finally, a lot of other things could happen on the positive side. Maybe a break through on the clean energy side ? Space and time travel ? China buying EUR bonds instead of USD bonds ? I don’t know and the market does not know.
6. There is no place to hide
A lot of people are trying to give “clever” advice where one can “safely” invest if the EUR and the Eurozone falls. In my opinion, the economy globally is much to interlinked that there were any safe havens. Short term yes, the USD can go up, the GBP can go up. But maybe not. Long term the global powers have to work together to get out of this mess. Whenever you hear the word “decoupling” you should run to the hills.
I am sure many readers could come up with 100 reasons why Europe and the EUR will fail out of current media reports and all might be valid. Hopefully I could make the point that the consensus is usually dead wrong and that in many comparable crisis people would not recognize any positive REAL developments even if you hit them on the forehead with them many times.
I don’t suggest that we will see a massive rally in the EUR stock market soon, but in the medium term the opportunities will present themselves to the long term oriented investor if she/he is looking in the right places against the consensus view.
Based on past experience, such a full cycle from crisis and doom back to normal or even boom can last 5-10 years. Depeneding on when we start to count (2008 or 2011) we might be somewhere before or relatively close to the bottom.
People are much to focused on short term Central Bank actions. Long term, the “real economy” will prevail. And again, the future is not a fixed lineary extrapolation of the past.