The Smartest Man in Europe

I have been reading this (for lack of a better word) series from Byron Wien for many years. I remain unsure if The Smartest Man in Europe actually exists or if it is a clever ruse that allows Wien to say things at arm’s length that perhaps he would not be able to if he had to sign at the bottom (and initial here, here . . . and here).

Even if The Smartest Man in Europe is a mere literary device, it works well. I find the insights to be atypical, though I sometimes disagree with swaths of it. Regardless of whether or not this is a fictional person, it works well as a piece of commentary.

The piece is quite long, and you should definitely head over to Barron’s to read it in its entirety. However, I am becoming increasingly interested in the contrarian idea of a European recovery.

investors hate Europe, and that has me licking my lips. We have exposure through a few ETFs and Global allocation models — and as of June 1, we now have a 15.44% exposure to Europe — and that might tick higher eventually.

Here is Byron Wien:

“Everyone thinks Europe is hopeless and I can understand why. The European Union is a flawed concept and it may not survive in the long run. There needs to be much more convergence, both economic (which is possible) and political (which is impossible), but a major change in attitude has taken place this year. Until recently the policy makers believed that increasing taxes and reducing spending was the way for the weaker countries to solve their deficit problems, but that was clearly the wrong idea. From a political point of view the austerity approach was impossible because the people in these places wouldn’t accept what their governments were trying to impose on them. Punishing the people for past economic mistakes also made no practical sense. Europe was in a recession and the austerity policies were only going to make conditions worse. Unemployment was becoming a serious social problem and job creation had to be a priority. As we moved into this year the policy makers, even Angela Merkel, began to understand that austerity was the wrong course and that restoring growth had to be an objective.

“Europe is in a kind of equilibrium now which is likely to be sustained by the expansive monetary policy of the European Central Bank. This should continue at least until the German elections in September, resulting in a definitive pullback from austerity. Merkel can only win if she moves away from her hard-line policy stance. Conditions are continuing to improve in Italy even though Mario Monti is no longer in charge. The unions still have too much power in France. François Hollande is beginning to realize that he must restore business confidence by introducing policies that take a positive view of growth. Germany will have to be tolerant of larger budget deficits in Spain, France and Italy.

“In the meantime most investors have reduced their European exposure. Who would want to invest in a place where a recession was underway and likely to get worse? Money managers had been so preoccupied with that idea that they failed to recognize the pullback from austerity which could lead to the restoration of growth. During the last few years European companies, like their American counterparts, have become vastly more efficient. Unemployment in Europe is 12% and part of the reason it is so high is that companies are getting the work done with fewer employees, so profits should improve considerably on any increase in revenues. Stocks are priced assuming conditions will get worse and I see them getting better – not everywhere and not in every sector, but if you are a careful stock picker you can make money.

“The most important factor is that almost no investor likes Europe now and that enhances the opportunity. Two years ago everyone was worried that the European Union was going to break apart. That was never going to happen over the near term because everyone had too much to lose, especially Germany, which has been the biggest beneficiary. Now most people realize Europe is going to muddle through at least for a while, but few people are buying European stocks to take advantage of this conclusion.”

Good stuff, regardless of whether its from the Smartest Man in Europe, or just a clever old codger here in the United States . . .


The Smartest Man in Europe
Byron Wien
Blackrock via Barron’s, June 7 2013

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