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

Category: Contrary Indicators, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “The Smartest Man in Europe”

  1. RW says:

    What the economy is doing is not necessarily what the stock market is doing so the more narrow question for the investor remains what factors where will make European equities more attractive.

    The larger question actually seems more clear at the moment: Although some cracks are appearing here and there, European fiscal and monetary policy remains in the foetid grip of the Austerians so the depression (not recession) continues in the southern half w/ infection inexorably spreading north; e.g., Depressing Draghi.

  2. Livermore Shimervore says:

    This is why people hate wall street: EU corporations are firing people, putting more work and stress on those still employed often for less pay and benefits while management pay themselves higher salaries and bonus checks. If management is fairing better than the workers (aka the consumers of that economy) then speculators reward those same job-cutting managers by boosting demand/price for their vested shares. A win win for management. The speculators then dump the shares when lower economic demand leads to fewer sales for that company. I’m not so sure that this is the type of capitalism that would have been able to create such large middle classes in Europe and America.

  3. ex1 says:

    Contrarian?!? Youre almost two years late with increasing your exposure to eu.

    • I get the sense you may not be all that familiar with the concept of relative performance. You cannot look at how any sector/stock/region, etc did alone, its relative to the opportunity cost you lost had you put that same capital to work elsewhere, preferably in a more productive asset class.

      We were under-weight Europe and overweight US — call it Long Fed/Short Austerity — which for the past few years worked quite delightfully. Now we are looking to flip that emphasis somewhat.

  4. barbacoa666 says:

    It’s kind of funny. There are really very few prognosticators worth listening to. If you take the advice of those predicting disaster or pie in the sky returns, you’ll make money sometimes, but lose money in the long run. If you take the advice of reasoned people with good track records, you’ll make money. Unfortunately, people too often listen to the former and discard the advice of the latter.

    • The Hedgehog & the Fox discussion are part of my “Brain on Stocks” presentation.

      See slide on page #10 called “Expert” Forecasting versus Ambiguous Uncertainty

      • barbacoa666 says:

        Luckily, I am a suspicious, stubborn introvert. Pushy and charismatic people make me want to dig in my heels.

        WRT p.12 (over-optimistic analysts), it has been my experience that industry insiders are generally terrible at determining prospects for a given company.

  5. patslatt says:

    Matthew Parris,political columnist for The Times of London,observed that in politics a prevailing trend has to be flogged to death before radical political change can occur. In the EU,years if not a decade of flogging still remain before political parties can bring about a radical restructuring of bloated welfare states.

    As the Latvian prime minister observed,reform only begins when the money runs out. Tightening of credit has triggered reforms in southern EU states but the reforms have been too timid.

    Southern EU states seem incapable of reforming labour laws that in practice guarantee lifelong employment but paradoxically are the major cause of unemployment.French youth demonstrated with customary violence against modest reforms in those laws,not realising they were the main economic victims and hoping they would ultimately get one of those lifelong jobs.

    Ireland which I’m familiar with has been held up as an austerity poster child. Austerity has mostly been applied to the private sector in a spate of huge tax increases and government capital spending cuts to private sector contracts in construction and computer software projects mainly.As a result, Ireland’s top tax rate of over 50% starts at relatively low salaries and capital gains tax is 33%.Meanwhile,government current spending has increased from the boom years,mainly due to high unemployment.

    Irish public sector employees remain relatively untouched by austerity,although they squeal like stuck pigs about modest cuts in their crazy wages and salaries which still left them about 48% higher on average than the private sector’s according to Central Statistics Office (CSO) data. By comparison,UK public sector salaries are 13% higher while public sector salaries in France and Germany are lower than the private sector’s.Also,unfunded pension liabilities for the Irish public sector threaten the long term finances of the state as legacy pension rights require only modest pension contributions by public servants in the upper half of salaries and entitle them to pension increases in line with the pay increases of the job formerly held. Several prime ministers (taoiseach in Gaelic) ended up with pensions far higher than their salaries in office. Only in Ireland!

    Government sponsored RTE media gloss over the huge burden of public sector pay and government spending,disingenuously pointing to government spending figures as a percent of GDP. In Ireland,GDP is inflated by multinational tax related transactions which overstate GNP or GNI by about 25%. At present,government spending is about 57 to 60% of gross national income,but despite such colossal spending,the welfare state benefits are threadbare. There are considerable expenses for doctors’ fees,third level fees,hugely expensive day care and there is a long waiting list for social housing. Public transport services are poor outside Dublin,which imposes very expensive costs of car ownership on low income people.

  6. stonedwino says:

    Buy when there is blood in the streets? Hmm? My concern is that southern Europe is so FUBAR and detached form the rest of the EU, that it may take decades for any form of “recovery” for the average man on the street in Greece, Italy, Spain, Portugal, Ireland…France too?

  7. CSF says:

    I like the contrarian thinking, though it appears European equities have roughly correlated with the S&P since early 2012, so maybe they’re already looking past the worst. To use an ETF pairing, the big divergence between VGK (Vanguard FTSE Europe) and SPY happened in late 2011. Since last summer VGK has slightly outperformed SPY, though it’s lagged 4% since November and 6% since January. So a European investment is about a combination of things: sentiment, valuation, and a little mean reversion (but not the huge contrarian play that investing in EEM would be).

  8. Livermore Shimervore says:

    Long-term Europe faces nearly all of the same problems facing America as globalization reduces the middle class standard of living. But the Europeans have another layer of issues atop those as well. Namely that they are dumping billions attempting to maintain the weakest links. As an investor this double whammy would push me towards European companies whose growth is largely coming from consumers in Latin America, India and China. The fiscal mess in Euro zone is no doubt punishing the shares of companies who are at or approaching the 50% mark on offshore revenues. Even if the Euro tumbles one should really have a shopping list of which European companies stand the best chance of continuing their growth in emerging markets, namely in energy, durables, tech/services/ hardware and healthcare.

  9. MayorQuimby says:

    I made some nice money on ABB last year. I think the risk/reward was much more favorable when things were going to hell all at once into deeply double digit bond yields. Now? Not so much – there might be some upside but I’d be a net seller here overall. I see the EU, US and BRICs are much more correlated than most. Anyways…nice post.

  10. bonzo says:

    1) The stock market is not the economy.
    2) One of the ways for Europe to resolve the debt problem is by a wave of defaults (sovereign, corporate, household). In other words, a belated stick-it-to-the-bondholders-and-banks that should have happened back in 2009. The European stock market is heavy on banks, who would be crushed in this scenario.
    3) Nothing cheap about the really good franchises (Nestle, Roche, etc).
    4) If the US market dives, for whatever reason, Europe and the rest of the world will probably follow. If all you care about is relative performance, then maybe you’ll do okay.

    I don’t pick individual stocks or sectors nor even regions. It’s always an even 50% VTI, 50% VEU (Vanguard Total US stock market and Total International stock market ETFs, respectively) for me in my stock allocation. 50-50 split is for simplicity, nothing more. Right now, I think the US market is expensive, and so I’ve reduced exposure tremendously and I may get out entirely soon, which means I’m also reducing my international and thus European exposure. Relative performance means nothing to me.

  11. Willy2 says:

    “investors hate Europe, and that has me licking my lips.”

    Europe is indeed a disaster. But what bugs me MUCH more is the unmitigated/astounding optimism of (US & european) investment managers on the topic “United States”. European (depending on what one defines as Europe) GDP is about 80% of US GDP. So, if/when Europe goes down the drain the US WON’T be spared. Think commodity prices. Falling commodity prices lead to shrinking profit margins for mining companies especially in combination with a rising USD.

    @Mr. Ritholtz: Do you REALLY believe that the FED can “rescue” the US stockmarket ? If so, then why did the US stockmarket crash in 2008 ? In the 2nd half of 2008 the FED increased its balance sheet dramatically but the crash happened anyway !!

  12. Diablo says:

    Last years the ‘smartest man in europe’ said greece and spain would default, gold will be much higher, and was long AAPL. doesnt seem like the smartest man to me.

  13. Antifriction says:

    Personally I always prefer “The Oldest Man in the World” (Mel Brooks)

    Humor is a no lose bet…………… and always makes me feel better…

    May the Schwartz be with you… in any trade

  14. Moss says:

    A number of the European Markets are at or near all time highs although as a whole it lags the US. Then u have the Euro Countries and the non Euro countries within Europe. Since the currencies now play such a huge part in any market (see Japan) I think by playing austerity off you are talking about the Euro countries. It would seem like in the round robin of currency deval the Euro is up. I have owned both Unilever and Nestle for a while.