I am not going to suggest that Europe does not lie at the top of the list when it comes to macro risk these days. A euro 'accident' would have severe consequences for financial markets and the real economy across the globe. A great number of analyses in the press have covered pretty much every angle there is on this issue.
It is also the consensus view that the US is 'ahead' of Europe in many respects, and righly so; for example, the US has a more flexible/proactive central bank and has been more decisive in recapitalizing its banks.
However, it is often the case that taking a longer-term perspective can yield counterintuitive (or contrarian) insights.
This 'principle' came to mind after watching a brief interview of economic historian (and widely regarded as a 'bear') Russell Napier on FT.com.
Napier argues that, from a long-term valuation angle, Europe is the most promising region when it comes to prospective returns from equities for the next 10 years, esp. with many markets now back at valuations last seen in the early 1980s.
While not as useful a guide for the short-term, metrics such as the 10-year cyclically-adjusted PE ratio (or, 'Shiller PE' ratio) suggest the risk/reward for the long-term investor appears pretty attractive.
According to Napier, European equities currently seem to already reflect/discount a 'great deal of pain'. Notwithstanding the scenario of a euro breakup, Napier's argument is that the ECB (or, should the euro disintegrate, the resulting national central banks) will try to reflate/turn on the printing presses, in an effort to arrest deflationary economic pressures, thus acting as a trigger for higher equity valuations.
Under this rationale, it would make sense to look for good companies in the most distressed markets and make a bet for the next 10 years. Greece has its own 'gems', a number of companies with good management, considerably extrovert and currently trading at valuations that discount near-bankruptcy (e.g. MOH GA, MYTIL GA, EEEK GA), as investors are fleeing any sort of asset related to Greece (for example, this is indicative)
This is not meant to suggest 'go and buy tomorrow', as the euro exit scenario is very much real and it is nearly impossible to time market bottoms anyway. It is intended to stress the importance of being able (and willing) to adopt a longer-term, contrarian mindset when one feels we may be getting closer to an inflection point.
Napier goes on to talk about the US. His argument is that, fundamentally, the biggest and most systemically-important risk out there revolves around the ability of the US government to finance itself going forward.
The foreigners that hold around 45% of US sovereign debt have been quite 'patient' thus far with all the money-printing by the Fed. However, 'the king has no clothes on' and the most likely catalyst for this to get the market's attention wil be when the Chinese renminbi depreciates, hits the bottom of its trading bound and leads on to the selling of Treasuries by the PBOC.
Nassim Taleb (see here) also thinks the biggest concern involves US fundamentals going forward, rather than the European situation.
“We have zero interest rates,” Taleb said. “If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill but is conscious of it. In the United States we are ill, but we don’t know it. We don’t talk about it.”
Interesting stuff...
It is also the consensus view that the US is 'ahead' of Europe in many respects, and righly so; for example, the US has a more flexible/proactive central bank and has been more decisive in recapitalizing its banks.
However, it is often the case that taking a longer-term perspective can yield counterintuitive (or contrarian) insights.
This 'principle' came to mind after watching a brief interview of economic historian (and widely regarded as a 'bear') Russell Napier on FT.com.
Napier argues that, from a long-term valuation angle, Europe is the most promising region when it comes to prospective returns from equities for the next 10 years, esp. with many markets now back at valuations last seen in the early 1980s.
While not as useful a guide for the short-term, metrics such as the 10-year cyclically-adjusted PE ratio (or, 'Shiller PE' ratio) suggest the risk/reward for the long-term investor appears pretty attractive.
According to Napier, European equities currently seem to already reflect/discount a 'great deal of pain'. Notwithstanding the scenario of a euro breakup, Napier's argument is that the ECB (or, should the euro disintegrate, the resulting national central banks) will try to reflate/turn on the printing presses, in an effort to arrest deflationary economic pressures, thus acting as a trigger for higher equity valuations.
Under this rationale, it would make sense to look for good companies in the most distressed markets and make a bet for the next 10 years. Greece has its own 'gems', a number of companies with good management, considerably extrovert and currently trading at valuations that discount near-bankruptcy (e.g. MOH GA, MYTIL GA, EEEK GA), as investors are fleeing any sort of asset related to Greece (for example, this is indicative)
This is not meant to suggest 'go and buy tomorrow', as the euro exit scenario is very much real and it is nearly impossible to time market bottoms anyway. It is intended to stress the importance of being able (and willing) to adopt a longer-term, contrarian mindset when one feels we may be getting closer to an inflection point.
Napier goes on to talk about the US. His argument is that, fundamentally, the biggest and most systemically-important risk out there revolves around the ability of the US government to finance itself going forward.
The foreigners that hold around 45% of US sovereign debt have been quite 'patient' thus far with all the money-printing by the Fed. However, 'the king has no clothes on' and the most likely catalyst for this to get the market's attention wil be when the Chinese renminbi depreciates, hits the bottom of its trading bound and leads on to the selling of Treasuries by the PBOC.
Nassim Taleb (see here) also thinks the biggest concern involves US fundamentals going forward, rather than the European situation.
“We have zero interest rates,” Taleb said. “If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill but is conscious of it. In the United States we are ill, but we don’t know it. We don’t talk about it.”
Interesting stuff...
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