On European Investing
Here’s why I’m not really that pumped up to invest money into European funds or ADRs based out of Europe, as well as some other concerns I have about the markets internationally…
1. There are unprecedented foolish negative yields in Europe literally. Can you even believe this?! To hold a short term bill from the Sovereign State of e.g. France, Belgium, the Netherlands, Germany, and Switzerland, you will have to literally pay their Central Bank for the investment into their bond aka their short term bill. I can’t even believe this! I always thought a government would pay interest to its investors.
2. Greece’s nonsense isn’t over! Looming down the road and around the bend is more problems for Greece and their debt ordeal. Expect more civil and political unrest, perhaps there will be political destabilization as well.
3. Low PE Multiples in Europe are not really that enticing. Secondly, socialist European shares have always been selling at a discount. Europe is weak, is weakening, and is headed into a recession if not already there, depending on which country you are analyzing. The only strength in Europe is Germany, Belgium, the Netherlands, and France, as well as Switzerland.
4. The declining (rapidly declining) Euro currency is a harbinger for Europe’s negative outlook. The Russian Ruble is also declining rapidly.
5. Japan, China, Europe, and Russia are all decelerating and are weak.
6. There was more than “The Lost Decade” in Japan from 1989 to the present, remember the Nikkei 225 at roughly 38,000 in 1989?! Japan’s stock market still hasn’t recovered from their massive real estate and economic bubble!!! It’s more than “the lost decade,” it’s now been a duration of longer than a lost quarter century! “The Lost Quarter Century.”
7. Despite oil heading south rather strongly since roughly June of 2014, which is like a huge tax cut (or tax rebate) to billions of people on Earth with automobiles (and for them all with regards to everything and anything that’s shipped, such as food, medicine, and goods & services), the economies of the world are weakening! This reminds me of 2006 through 2009 when oil collapsed, and then eventually, the whole market, real estate, and the economy collapsed as well. Lower gas and oil prices aren’t necessarily great for the economy. At the same time, all other things equal, it should be a stimulus for the consumer, and the consumer is the biggest share of GDP. Despite the benefits of lower oil prices, Japan, Russia, Europe, and China are all weak and weakening, which is troublesome. I believe higher oil prices are looming in our future, and is seems as though oil actually reached rock bottom on January 29, 2015; Higher oil prices are not going to really benefit anyone, except oil companies and Russia (and other sovereign states which control their energy sector, such as Venezuela, and other OPEC nations).
8. I worry that a stronger (and strengthening) U.S. Dollar will lead to wider trade deficits, since we’ll import more, and export less, due to our currency strength. I worry that various authoritative fools will act as though this is bad, even though it’s great, and is actually an increase to our standard of living! Additionally, large cap multinational corporations may use a strong dollar as an excuse for selling and/or earning less abroad; It’s believable, as foreigners weak currencies will not be worth as much, so when EPS are converted back to U.S. Dollar EPS will seem weaker. The large cap multinationals will then be effectively bringing in less as the U.S. Dollar gains ground versus the Euro and other currency cross rates.
9. King Dollar is back! The reason the U.S. Dollar is strengthening is because we’re not headed into a recession, while the rest of the world is weak or is headed into recession. Also, our interest rates are already higher, and are forecast to move even higher still, at the short end, and throughout the rest of the yield curve. Higher rates will bring about a stronger currency at the margin. This especially will be readily apparent when comparing our Treasury yields to Central bank yields in Europe which are literally negative.
10. If people are concerned with how the stock market will digest higher rates in the USA when it begins to hike rates, imagine how things will go in Europe coming off a base of literally nearly unprecedented negative yields. Negative rates are ridiculous to me.
11. Don’t be solely concerned with how the stock markets will digest higher rates, the bond markets will also have a hiccup potentially coming off low rates. Thirty Year Treasury Zeroes are down -12.80%, so are 30 year Treasuries, down about -8.70% from their peaks. Imagine how this will go for Europe with negative yields currently. It won’t be pretty.
12. Don’t forget that Russia is having a great time terrorizing the world with its sabre rattling and military fiasco. When will its madness and belligerence stop?!
I just wanted to voice some concern over the worldwide economy and investing in Europe. I’d recommend keeping money in the USA (with the exception of emerging market bond funds… Just say no to foreign stocks, and just say no to developed world bond funds). I believe long term bonds are going to produce negative returns.
Swim at your own risk!
Happy trading!
Andrew G. Bernhardt
Bernhardt Capital Management LLC 