Buy the rumor, sell the news

Europe has remarkably stabilized politically. Macron as Napoleon-like president of the République Frainçaise–a few months ago many didn’t even dare dreaming of this. Balkan route… what was that again–a travel tip from the German chancellor?

In brief: politically Europe has proven significantly more stable than most–especially on Wall Street–thought.

Whether now, however, is the right time to start aligning the portfolio more with Europe in light of the political developments is questionable. There won’t be another Macron in Europe nor in Germany. There may be a new Foreign Minister from the FDP, and the current Defense Minister would certainly like to move to the chancellery. However, this wouldn’t be groundbreaking for the stock market. It’s rather already priced in as stock brokers like to say.

Hamburg and the next crisis topics

Everyone is still talking about the riots and the lack of response from law enforcement at the G20 Summit in Hamburg.

The discussion about this topic appears grotesque when one listened to the German radio the day prior and recalls how the spokesperson of the Hamburg Police Department had to justify the supposedly too harsh reaction from law enforcement on the previous day. So quickly does the perspective in the press change.

This is no different at the stock exchange. Donald Trump has named his target multiple times. The German trade surplus is an unacceptable problem. The Economist, which I regard highly, came to Trump’s aid in the G20 Summit edition with the lead story “The German Problem.“ This analysis, however, doesn’t fall into the area that I like about English journalism. „German bashing“ is–even in the opinion of the English–one of the biggest hobbies of the English press. Nevertheless the whole thing isn’t an intellectual highlight. Brexit–and the fear thereof–is sending its regards.

Approximately 20 years ago the Economist called Germany Europe’s lame man. However, the fact that this analysis was correct at the time doesn’t mean that this is automatically the case today, too. But The Donald and The Economists pointing the finger together at the same spot on the back of the German Siegfried makes it clear that other nations have issues. It’s well known that this has manifested in respective changes of government, which, to quite an extent, were based on populist theses of this kind.

Germany–what‘s different?

When comparing Germany to other countries one aspect oftentimes is neglected. Germany hasn’t only lost two world wars in the last century. The social structures of the country, too, were dismantled to an extent that would give English aristocrats, French entrepreneur families, or American WASPs not only sleepless nights but also severe existential fears.
How is it apparent? Just ask a German what (s)he inherits. A house, money or, if (s)he’s lucky, a prospering business. Normal, you may think. In Switzerland, for example, an inheritance is similar. Only with stocks it’s different. The Swiss has inherited his Nestlé stocks from Grandpa rather than buying them himself. And Grandma notes that that’s a good thing. Although Siemens is the same age as Nestlé, as opposed to Nestlé, a Siemens stockholder was disposessed three times since its inception. That has happened to the majority of Germans. When whole generations have to expend significant shares of their net lifetime earnings to rebuild their houses and farms as well as roads and schools, then the financial situation is obviously different from countries in which these things were passed on from generation to generation without major war damages. For example, look at the per-capita wealth of the Italians which is extremely high in comparison to Germany.

Against this backdrop, the criticism from the Economist that the German savings quota is systematically too high needs to be put into perspective. “Head start through fear“ is the title of the briefing on the German economy. It fits–but is not easy to change because the historical experience sometimes continues to have an effect on people much longer than we oftentimes think and because prevalent moods within the population have oftentimes caused effects that politics either was in denial of or simply underestimated.

In Europe, the economy is currently doing well without a doubt, and experience has shown that arguments frequently arise when there are assets on the table. As long as there’s little to distribute, all stay still for the most part. Precisely at this point we may wonder how Europe will manage the pending distribution issues that have been put on the agenda in connection with Brexit.

George Soros is anticipating that the respective negotiations will take at least five years and can very well imagine that there will be a reconciliation before the divorce is executed. In other words: the negotiations are complicated and, consequently, for all parties it can’t be completely clear what the best solution looks like. A situation that shows what Europe has accomplished after World War II. The European nations are trying time and again to improve their situation. Sometimes more at the expense of others, in more favorable cases for a joint benefit. The Brexit negotiation offers not only risks but also opportunities.

We will notice the risks when international investors turn away from individual countries or from Europe as a whole and this will result in falling prices at the stock, bond, and/or foreign exchange markets. The opportunities are not always immediately identified on the markets, but they are extremely important for the long term.

Europe’s chance Brexit

England as important trade and financial center puts much focus on market-friendly structures. On the continent, a number of politicians tend to prefer government-regulated solutions. Government regulation frenzy and resulting infringements on proprietary rights exist not only in Budapest or Warsaw. Vienna, Rome, Paris, or Berlin aren’t free from them either. For example, read up on what the German Minister of Justice is currently doing with copyright laws–scary.

What has always been interesting about Europe is the proximity to an alternative. There is no region in this world that in such short intervals has offered such a social diversity. And this diversity has always contributed to curbing government regulations without onesidedly advocating market interests. The negotiators from London have explained that they would like to continue to participate in the regulations that Europe has given itself in the area of healthcare. We may wonder in which other areas this is viewed the same way.

If England manages to negotiate an interesting provision with Brussels, this could open up options for other countries as well. Italy, for example, is truly not happy with the current situation. A withdrawal à la Brexit is currently not an option for Italy. However, an alternative negotiated by England that would facilitate a face-saving withdrawal from the euro without annulling the Treaty of Rome would certainly be an interesting option for some politicians in Italy.

Who knows which alternatives may be put forward and then gain majority appeal in the European democracies. But one thing is clear. They negotiate rather than shoot. And that is an accomplishment of Europe that many in the world may not envy it for, but for a long-term prosperity it’s pretty much the best thing that there is.

Daimler versus Tesla, Aldi and Lidl versus Walmart and Amazon

With stocks, many talk about Silicon Valley, Aldi, or Tesla. For the auto nation Germany that is certainly an important area of topic. But Germany also has strengths that are easily overlooked. Do you still remember the entry of Walmart in Germany in the late 90ies of the last century? Walmart paid the entrepreneur Mann over five billion for the take-over of his Wertkauf chain stores at the time. Another billion to Metro a few years later to get rid of the disaster. The U.S. retail giant lost its entire quarterly profit in order to gain land.

It took 15 years, now the troublemakers from Germany have taken action in the U.S. with the beat of a drum. What Warren Buffet experienced with Tesco is now a threat for Walmart. And let’s not fool ourselves–the actual rival for the discount giants Aldi and Lidl is, ultimately, Amazon. Supposedly low tech with products on paletts but highly efficient logistics, IT, and super efficient purchasing creates benefits for consumers that have certainly and significantly contributed to the fact that wages in Germany have developed so moderately. It doesn’t have to stay this way, but it does show where the worldwide division of labor is headed. The dream of the unions that the world population will agree on the worldwide highest wages stays an illusion, and countries won’t experience otherwise with their cost structures. Europe has developed big strengths in precisely this process owing to its diversity.

Look at Adidas–a paradigm for this trend of rolling out a successful concept globally. Because stocks of neither Aldi nor Lidl can be purchased at the stock market, it’s worth taking a look at the area of European technology suppliers. The Internet of Things requires vacuum technology, advanced services, and the technological developoment fundamentally changes the way in which information is received and consumed. We call this new field of investment “internet video,“ which offers many opportunities also and especially in Europe. You just have to find the companies or buy funds that invest in these areas. Then, most likely, you’ll still enjoy European stocks in the years to come – regardless what politics is currently doing.