October 16, 2018

“We know that we have too few young people and nevertheless we live at the expense of the future by running up debts. That means that we rob future generations of their room for investment and development – and that is immoral.” – German Chancellor Angela Merkel, at her first talk in the Global Economic Forum in Davos, Switzerland in January 2006

Last week’s market bloodbath may have some investors wondering whether or not it is wise to stay invested in U.S. stocks, but consider the alternatives. Global stocks are faring worse. Last week, I brought you the story of the dismal performance of Euro-stocks, year-to-date. Longer-term, look at the flat-line of the 50 top European stocks in the decade since early 2008. The Euro Stoxx 50 index is still below water.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It wasn’t always this way. Europe began the 21st Century with a bang. Notice how the Euro Stoxx 50 Index outperformed the S&P 500 during the first big bear market of the 21st century, from 2000 to 2002. Europe also slightly outperformed the S&P 500 during the following recovery, from 2003 to 2007.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But then, Europe’s house of cards fell in, far more catastrophically than anything that happened in the U.S., as I showed you in last week’s Growth Mail. European banks were far more invested in the worst tranches of the U.S. mortgage market, as shown in Adam Tooze’s new book, “Crashed: How a Decade of Financial Crisis Changed the World.” In one of the author’s many statistical tables, he showed how Europe overloaded themselves with debt in the first years of the 21st century, far more than the U.S.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The fact that Germany acted responsibly could not rescue the rest of the European Union, since the debts of the several irresponsible nations, acting on their own sovereign behalf, became the obligation of the whole Union to repay. That was (and is) the fatal financial flaw of the EU. It’s as if Nebraska could run up debts that New York was obligated to pay. It makes for a rocky union if 28 renters in a dormitory have a checkbook and all 28 have to balance that checkbook at the end of the month from their various salaries.

That’s one reason why Europe went into a long (six-quarter) recession in 2011-13, and the U.S. didn’t.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This trend is also reflected in the performance of the euro currency, which was born 20 years ago this coming January, at an IPO price of $1.18. It quickly went down under $0.90 in 2001 but it recovered and reached a peak of nearly $1.50 in 2008, but it has been on a downhill slide ever since the 2008 crisis.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

America Kept Rescuing Europe – Until Trump Was Elected

A century ago, American troops poured into Europe in mass numbers and turned the tide of a trench-warfare stalemate into a situation in which Germany felt obligated to sue for surrender, leading to an Armistice whose centennial is soon approaching – November 11, 1918. Americans lost over 100,000 lives – more to disease than battle deaths – to win a war that was not of our making and did not threaten our shores, just to help Europe solve some age-old rivalries that cost Europe nearly 20 million lives.

Barely a generation later, America sent even more troops over to Europe and into the Pacific to fight a two-theater war to defeat Germany and Japan, even though they posed no credible threat to America’s shores. Europeans suffered far more, of course, but it was American troops that made the difference in the survival of Europe, under the wartime leadership of Dwight D. Eisenhower and Gen. George Patton, then the postwar Marshall Plan and the launch of the North Atlantic Treaty Organization (NATO) in 1949.

The U.S. still shoulders over 70% of the cost of NATO defense. As a percent of GDP, the U.S. spends 3.5% on defense while Europe’s NATO nations spend 1.5% on defense, relying heavily on U.S. arms.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is changing, as President Trump has repeatedly called on Germany (which spends 1.2% on defense) and others to spend more on arming themselves and quit relying on their sugar daddy across the pond.

America supports Europe’s generous welfare state by taking care of the bulk of their defense. Another way in which America funds Europe’s welfare state is in tariff inequalities. Europe funds a generous cradle-to-grave welfare state and six-week vacations in “greater August” in part by high tariffs charged on U.S. exports to Europe. One example is that vehicles shipped from Europe to the U.S. face a low 2.5% tariff, while cars built in America face a 10% tariff when entering Europe (plus added fees for “gas guzzlers.”) Europe recently said it was willing to lower these tariffs after Trump raised tariffs on steel.

A third way in which America has bailed out Europe is in the banking sector. As I showed last week, European banks loaded up on bad U.S. mortgage debt more than U.S. banks did. The Fed’s QE liquidity helped European banks more than ours. Now that the Fed is reeling in liquidity through QT (quantitative tightening), it is highlighting some bad debts in Italian banks, among many other overextended debtors.

The combination of Europe having to face the music of paying for its own defense, its own welfare state, its debts, and massive unassimilated waves of immigrants – all without U.S. bailouts – will be a daunting challenge. They can holler all they want about Donald Trump, but this is a problem of their own creation.

Looking at the world around us without illusions, the U.S. is still the best place for our investment dollars.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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