One way to try to determine whatís going on in Europe, particularly ďOld EuropeĒ as our Secretary of Defense so diplomatically put it, is to watch what the Eurocrats are doing. And so the New York Times today dedicates an article to the many stumbling blocks that keep this band of old countries from realizing the dream of a Federal Republic of Europe. With Sweden and England staying our of the Euro Ėthe Swedish vote was just a few months ago and may even have cost the life of the Swedish Finance Minister who was a supporter of joining-- and less and less talk from London on joining up, it might have come as no surprise last week when France and Germany, the two mega-powers of the currency block selfishly decided to break the rules they themselves imposed on the other member countries by continuing to run deficits of more than 3% of GDP.
To make matters worse, delegates meeting in Naples this week to come up with a constitution for the broader political entity failed miserably in making any real progress. The countries disagreed on even whether the EU should have its own Foreign Minister and thus a joint foreign policy. Nearly all of the countries balked at this idea even while the military aspirations of certain Europeans (mainly France) to create a third force were subjected to continued NATO dominance, or, one might say the near status quo.
All this and more you can read in the newspaper. My perspective is a little different. So by way of hoping you continue reading, let me ask rhetorically; why should you be interested?
Iíll hit the second point first: you might be interested in European investing as a hedge against a sinking dollar while getting a double bang for your buck. Pick a good stock trading say in Germany, buy it in Euros today and when it goes up as, say, the dollar continues its fall, and you gain on both ends.
But, of course, the dollar could firm and the Europeans are even hinting today that they may intervene to not let their currencies grow so strong they canít compete with the US in certain key markets, like airplanes. That makes sense but as traders like George Soros have taught us in the past, central banks can intervene and use their good money to try to soak up the fast growing pool of dollars floating around out there (the US trade deficit runs at $1.5 billion a day) but the US in an election year can print more dollars than anybody might want to buy. After all, even countries can get sick of losing money through massive interventions. Itís like paddling upstream with your hands if, say, US Xmas sales arenít that hot and, say, businesses continue to improve their productivity by getting more out of fewer workers by issuing pink slips and moving service jobs to India.
You may want to consider buying euro-denominated stocks or making pure currency plays.
But, what I wanted to point out from my nest high above one of the best open air food markets in Rome located at Campo dei Fiori, is what you see in the stores, on the shelves, in the market stalls and even on the road.
Italians, at least in the city here, tend to buy their goods from small stores not from big-box operators. Itís amazing how little things have changed in this regard. And even though it is possible to see so-called foreign goods such as Heineken beer and Quaker Oats, most Italians are still mainly consume Italian goods. You also get the feeling that a lot of the clothes are made here as well. Certainly, thereís no doubt about the shoes.
In other words, integration is more of a slogan than a fact on the ground. Each Old European country has its own language, customs, uses, etc. that change slowly. Italian stores are full of the same cakes, cookies and other goodies for Xmas with little penetration for new habits. The number of large retail stores like Upim and Standa have not increased in central Rome in the last 30 years.
What has changed is the mix of automobiles. Back in the 70ís you basically only saw Italian cars on the roads. Fiat, had practically a monopoly. In France Renault and Citroen had the same total dominance. Thatís changed a bit with Japanese manufacturers and French and German cars taking much greater market share. In France, I rented a Czech made Skoda from AVIS.
And so what this says to me about this huge community with a combined GDP larger than that of the US is that the advantage goes to the very big multinationals that can eventually consolidate markets. Itís pretty clear that some of the European automakers, like the airlines, will fall to multinational ownership.
The reason the Euro is strong is more one of lack of flexibility than anything else. Even if the French and Germans push their debt limits a bit above the 3 percent mark, thatís still half of what weíre running in the states, not to mention Japanís 7% plus deficit.
Also, and most importantly, the Europeans are not running a current account deficit Ėwhich means that they, in total, sell more goods outside Europe than they import. At Wal-mart back in the US, the story isnít quite the same, as we know. US consumers buy goods made mainly by Asians though German-made cars, for one, donít do too badly.
If you are betting against the dollar, you are mainly saying that Americanís wonít stop buying a whole lot more than they sell abroad. You are also betting that the country will continue to run high deficits. Nobody is guessing that George Bush is going to raise taxes in an election year, are they?
So, of course, no one is feeling sorry for me being in Rome, even if my latest run to the ATM had my bank taking $244 for a 200 Euro withdrawal. Germany has been in a long decline as it absorbed all those East Germans. Maybe the muscle guy in Europe is ready for a recovery. Not that theyíll get rich trying sell their noodles to Italy.
Copyright 2003 Richard Mendel-Black All Rights Reserved
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Being in Europe gives you a strange perspective on markets. After all, by the time the US markets open it is already 3:30 in the PM over here. The English, French, Germans, not to mention to the Chinese and Japanese have all pretty much spoken. Markets are up or they are down. They tend to move in synchronization. I wonder how many American investors even bother to check what the rest of the world has said before they get ready to make their own market moves in the US. Should the fact that the Nikkei was up or down have any impact? How about the FTSE or DAX or CAC for that matter? Are all these foreign investors merely making bets on where they think American investors will go that day?
In Europe the big financial news yesterday was that the two largest economies in the Eurozone, Germany and France were about to cheat on the guidelines that they so painstakingly laid out for themselves and everybody else in the single currency. Needless to say, the Spanish, Dutch and Finns, who were keeping their spending down below the limits, got a little miffed at the move by the big guys. What Germany and France said, basically, was that with stagnating economies they were going to go into a 4th year of deficit spending representing more than 3% of their respective GDPís. The net result should have been a rush out the door for Euroís and a stop in the dollar/Euro slide. No such luck for punters like me paying a 20% premium on everything I buy these days. For the umpteenth time in a row, the Euro gained slightly against the dollar. This on the heels of news that the US economy has sprinted ahead at its highest rate in more than two decades, news that should have sent interest rates upwards in the States and sent a signal that growth inspired inflation would soon be back on its normal levels, whatever those are supposed to be. Of course, the word here in Europe as they buy and sell Treasury futures is that US interest rates are on their way further down.
The US deficit at around 6%, of course, makes these Old Europe powers look like frugal poodles and shepherd dogs
What a perfect world we live in: The two largest economies other than the US, Europe and Japan lie at the feet of the US market like lap dogs waiting for their hormone-driven cousins to continue on their consumer driven buying binge. In financial-hormone zone, Cars get bigger Ėin comparison, you should see the little cute things their driving here in Rome called Smart CarsóMachouses get bigger and built at an even faster pace, durable goods sales are up and the markets move back to heights last seen in early 2001.
It all looks great! Americans print dollars and spend them on items made abroad. The foreigners Ėmainly Asiansóbuild more factories, hire more people and make more things for the shelves of Wal-Marts or the virtual market on Amazon or Ebay. They take the dollars no questions asked and use them to buy more American Treasuries to finance even bigger American debts. It sounds like we have reached economic Nirvana. It is Thanksgiving Day eve and we certainly have much to be thankful for. We may be a little skeptical that it is all going to last but letís hope.
In the dance of the perfect circle the Chinese RMB (not me) and the US$ dance in perfect harmony, like Fred and Ginger frozen on the shining screen, always brightly swirling, never a misstep, the ball will last forever, or so we hope.
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Dollar Vs. the World. What Me Worry?
If anyone came up to you and asked the question: Right now, you and your doppelganger in, say, Fredonia, both have equal net worth, without you or she doing anything different, with less than 2 years your savings will total 40% less, how would you feel? Would you want to change places, maybe? Of course, if that question had been posed about 3 years ago, and Fredonia switched for, say France, the above result would have been pretty much what has happened. This means that our European friends, without working any harder (in fact, they probably had more than twice as many paid vacation and holidays) and without doing anything wiser than participating in the right currency zone, in this case that of the Euro, have achieved these amazing results. Beats smart investing, doesnít it?
Of course, if you live in the States and havenít thought to travel to the Old World, you probably wouldnít have noticed. Of course, being here in Rome, Iím faced with the situation on a regular basis, every time I open my wallet or go on line to check my credit card account, Iím looking squarely at the fact that it costs me about $1.20 for every Euro I spend. No big deal, I suppose, when youíre talking espresso or even a pizza but something a lot more meaningful as you bring up your hotel bills on the in house TV screen. Iíd rather be bored by the BBC than face that music.
The reason stateside you hardly notice the exchange rate changes has something to do with the fact that most of the goods you buy are manufactured in countries that tie their currencies to the dollar, like China, and in the desire of my companies not to lose market share in highly competitive markets. So Toshiba or Sony arenít likely to raise the cost of their gadgets because they are taking in less Yen on every sale. Instead, they too have shifted manufacturing facilities into the ďdollar zoneĒ countries while their central bank, the BOJ, actively tries to push down the Yen by buying up dollars on the open market flooding it with Yen, instead.
In Wal-Mart, prices stay the same and even as the Bush government tries to push up the price of underwear by slapping tariffs on the Chinese and has pushed up steel by protecting that industry from the rest of the world, despite a ruling to the contrary by the World Trade Organization. For Bush votes in the keystone state, youíll just have to pay higher steel prices, at least until after the election or if a trade war breaks out, as the Europeans are threatening.
Japan and China are the major props keeping the dollar from falling even farther. But again, I ask the rhetorical question, why should any American worry about the value of the dollar? Wine? Cheese? Italian shoes? I donít think so. Pride? Interest rates that may be forced to rise?
A cheap dollar, we are told, if ever anyone brings up the subject, is a way to stimulate the economy. It makes American goods cheaper when sold in places like Europe and Australia. So, can we expect major gains in exports in the coming year? Again, I donít think so. Will Boeing beat out Airbus on a major contract? I donít think so. Will Telstra go Motorola over Nokia? I donít think so. Some American tourists may stay away from the Continent; some more Europeans may visit Niagara Falls. And up there at the Falls, maybe, a few more Canadians will stick their noses across the border. Prices do matter to them. They can compare head to head.
But a weak currency is first and foremost a symptom of something larger. A loss in the greater wealth of the country as we squander it on ever-greater quantities of Asian made tchotckes, is like a long-term disease that strikes the immune system. At first, you donít really feel it, you may even look better as you lose a little weight, not, of course, until, there is finally a crisis. The problem is that we are living on the kindness of strangers. As long as the Chinese and Japanese continue to buy treasury bonds denominated in an ever less valuable currency to prop up their own internal economies (what a deal, low interest rates on a bond denominated in a falling currency), we have nothing to worry about. We can continue to run up more and more foreign debt, encourage our own plastic-bound consumer class to give it the old college try by going deeper and deeper into personal debt, and the government can merrily print more money than it takes in through taxes. What a deal!
As the man with the uncanny resemblance to Alfred E.Newman, might be heard to murmur: ďWhat Me Worry?Ē
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Being comfortably installed back in Rome for a little more than a week --after an absence of more than 30 years punctuated by a few tourist stays of no more than a couple of days every few years-- I canít help but marvel at the entrepreneurial vigor of the Romans. The ďoldĒ city was always a cacophony of open air markets, shops, stalls and human sounds of grinding, scraping, sawing emanating from artisans fixing, repairing and even cleverly faking the antique pieces decorating grand apartments, ponderous museum and flea market stall. Of course, many of these skilled craftsmen have died out but taking their places are shopkeepers, cafť owners and restauranteurs, especially restauranteurs. Streets that were dark and mysterious once the workshops closed down are now lighted and full of life.
Impressively, the Roman authorities have gotten a real hold on the inner city traffic problem that once made navigation limb-threatening by practically limiting car movement to people who live in the quarters or who have specific business there. This has opened the way to buzzing scooters, like mosquitoes on athletic supplements, that can zip through everyplace but the special areas that are completely closed off to traffic like Piazza Navona and Piazza Santa Maria in Trastevere. Bikes and foot traffic now move freely through the old, winding cobblestone streets.
Rome, of course, is something utterly unique. There is no place on earth like it, no place with so many layers of history still visible (or invisibly hidden in the structures of medieval buildings sometimes built right on Roman temples), no place where so many centuries of vanity and vainglory have combined to allow for the ornate construction of palaces and churches representing the riches that the headquarters of the first great global enterprise, the Church of Rome, has spread around the city. Every Roman cardinal great or small for the last 600 years, every Pope, has left some mark, be it a church or two or a family palace and some of the mightier ones, flush with cash from their exclusive indulgence franchise and ready to monumentalize their worldly fame, transformed the entire city from a medieval village to the great Baroque wonder that it is today.
So yes, the city is full of tourist rightly attracted to this open-air museum and movable feast that is modern Rome. The steady supply of Euros these tourists bring with them acts like manure to a field of entrepreneurial mushrooms, and so in a myriad of shapes and hues, businesses sprout overnight in every nook and cranny of the city.
But beyond that there is a pattern. After all, the cafťs are for the most part individually owned, not a bunch of Starbucks and Cosiís, nor are the restaurants and snack bars Olive Gardens or TGIFís. Something strange is (not) going here (take your pick); there are small grocery stores, small hardware stores, small household supply shops, small video stores, small whatever. What a wonder to see from the perspective of the big box world of Wal-Marts, Targets, Home Depots, Best Buys, etc.
Yes, there are giants here, most with not so glorious pasts as state-owned, or state-run monopolies: autos, big oil, big banks, telephone, TV. There are government jobs, of course, and a large public sector but still you have to marvel at how many small businesses have carved out enduring niches. I even found a little shop that specialized in casting and carving decorative plaster. It hadnít moved from its spot in the back streets of Trastevere where it probably was founded long before I first got here and judging from the various white objects leaning in against every supporting surface, it hadnít lost any of its market share.
What Iím getting at is a fundamental difference in our societies and perhaps between much of Europe today and that of the US. As Americans we pride ourselves on our self reliance, our individualism, our value of individual effort and personal competitiveness but the question then springs up like some kind of a dagger hidden beneath my cloak: where do we get to express this individuality in a society that is so clearly dominated economically and socially Ėthink big mediaóby huge entities that have so heartily gobbled every market and are thus the only promising career choice for most of us. If most jobs are traditionally created by small businesses (this has been a truism of the US economy) and the playing field for small businesses shrinks from day to day Ėthink manufacturing and think China, think retail and think Wal-Martówe have to wonder and worry where new jobs might come from. Large corporations must think bottom line and globally. They are, after all, at the service of the shareholders, as they like to say. And if it is possible to move a backroom computer operation to India and run it for half the price with little or no loss in efficiency then who is to tell the CEO or board that this isnít the way to go. When Wal-Mart places one of its mega orders for some doodad or other, it thinks price. Itís cheaper to set up a factory in China, along the way transferring technology and make it there. The American consumer wants those price cuts. Supposedly he or she doesnít give a damn where the stuff gets made and how many jobs get lost in the Faustian bargain.
One problem, maybe: Can these consumers, tempted by the lowest borrowing rates in 50 years, and inundated with encouragement from media and government, run out their plastic forever? Okay, homeowners, got to double or triple dip but extending the amount they owe on their houses, presumably paying off their credit card balances and extending their limits to once more enter into the field of American battle, not Iraq but the big box down the road.
Maybe the Fed can keep printing the money forever without affecting much more than the price of the dollar if you happen to be abroad, like me, or the price of gold, if you happen to be long on the yellow stuff, also like me.
Then again, maybe not.