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Euro devaluation


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Assuming further devaluation of the Euro vs U.S. dollar, European exporters should stand to benefit from this tailwind. Given what the Swiss National Bank did, don't see Swiss exporters winning here. One European company which could benefit might be Sanofi (France).  What companies would you nominate?

P.S. I do not own SNY.

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For how long would the US be willing to be the sucker who gets punched for all this volatility before it joins in to devalue the USD or just pressures other countries to stop one way or another?

 

It is Germany which should adjust internally to rescue the Euro zone so why should the US absorb it when Germany is not willing to adjust?

 

 

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Volkswagen is a pretty good company that looks poised to gain market share in the US. They have a plant in Chattanooga but I think the majority of the VWs sold in the US are built in Mexico. Mexican built cars would benefit from the lower peso and the protection of NAFTA. VW also has a range of models tailored to US tastes, which differ markedly from the rest of the world.

 

Disclaimer: I've been thinking about buying a VW Golf and not so much (or not at all) about investing in the company.

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I've had a thesis for a while that because Europe is moving faster than we are they're going to eat our lunch.  It's the first to clean up debt/devalue etc that moves forward.

 

Granted Europe isn't perfect and there are a lot of problems, but they're moving much quicker on these things compared to the US. 

 

I own some European companies that might benefit: Installux, Precia, Conduril

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Guest Schwab711

This currency devaluation seems completely demand-driven, so not necessarily to the benefit of exporters but because of them. The US is growing at 5% and can probably end up between 3-7% real GDP with near 0% inflation (moving to defaltion). Our new obligations are financed at 0-3.5%! Isn't this the dream scenario everyone said to have faith in when we were taking on all the debt in 2008-2010? The US consumer debt levels are at the lowest levels in 45+ years. We are a consumer economy so strong USD is moving our trade defict into a surplus. The US is at least 2 years ahead of the rest of the world in the recovery and that comes with a drastically reduced risk level. I think the US is running away from the rest of the world, fast.

 

http://www.federalreserve.gov/releases/housedebt/

 

Country debt levels:

http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100027691/chinas-terrifying-debt-ratios-poised-to-breeze-past-us-levels/

http://research.stlouisfed.org/fred2/series/GFDEGDQ188S

http://www.wsj.com/articles/u-s-trade-gap-narrows-to-39-0-billion-in-november-1420637664

http://www.nytimes.com/2015/01/08/business/united-states-trade-deficit-falls-to-11-month-low.html?_r=0

 

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I've had a thesis for a while that because Europe is moving faster than we are they're going to eat our lunch.  It's the first to clean up debt/devalue etc that moves forward.

 

Granted Europe isn't perfect and there are a lot of problems, but they're moving much quicker on these things compared to the US. 

 

I own some European companies that might benefit: Installux, Precia, Conduril

 

That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing.  They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.

 

The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite.  This European EQ or whatever is not going to help them.

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I've had a thesis for a while that because Europe is moving faster than we are they're going to eat our lunch.  It's the first to clean up debt/devalue etc that moves forward.

 

Granted Europe isn't perfect and there are a lot of problems, but they're moving much quicker on these things compared to the US. 

 

I own some European companies that might benefit: Installux, Precia, Conduril

 

That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing.  They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.

 

The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite.  This European EQ or whatever is not going to help them.

 

I agree 100% with meiroy: the European financial system is twice as levered as the US counterpart, and debts are still going up fast. Until we don’t see a reversal in this trend, I simply don’t understand how things could get better… But we don’t have the money to recapitalize our banks, therefore a trend reversal isn’t likely anytime soon… Of course, if a huge amount of money gets printed, that could help somehow… But it would also entail a further devaluation of the Euro… How should the rest of the world respond? Another EU crisis might be waiting just around the next corner!

 

Gio

 

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That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing.  They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.

 

The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite.  This European EQ or whatever is not going to help them.

 

I tend to agree, but this is the super standard consensus view that is repeated ad nauseam in every newspaper, on television and on every website. So even if this is correct it might very well be priced in already given the strong USD, CHF, weak EUR, low European stock prices, etc. and we shouldn't feel to smug about our macro insights. Basically we are just following the herd. At least Nate is original :) . And he might just be ruffling our feathers a bit.

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In my humble view, a lot of things have been done right in Europe, in particular in countries like Ireland, Spain and Greece which have gone through very painful and bitter process of adjusting their economies. They have cut social security spending, cut red tape, dismissed a lot of public workers. These countries are much more competitive than they used to be five years ago. Unfortunately, these steps have not been accompanied by an investment programme (Marshal plan/ERP like) which is a major reason why demand is so weak. It was Germany's major mistake to not understand that necessary cuts should have accompanied by reasonable investments. Still, a lot of things are moving to the right direction.

 

Also, the European banks have made a lot of progress in terms of writing down bad debt and raising capital. It is correct that the action action was less decisive and much slower than in the US, but in my view we are roughly there in terms of capital raising as was also evidenced by the last eCB stress test which was fairly credible. In consequence, European banks are among the most interesting recovery play in my opinion.

 

As a negative, political risk has increased as we are seeing from Syriza in Greece.

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I tend to agree, but this is the super standard consensus view that is repeated ad nauseam in every newspaper, on television and on every website. So even if this is correct it might very well be priced in already given the strong USD, CHF, weak EUR, low European stock prices, etc. and we shouldn't feel to smug about our macro insights. Basically we are just following the herd. At least Nate is original :) . And he might just be ruffling our feathers a bit.

 

Well, if you want to be original at all costs, just think the Euro will be valued 0.8 USD in 2 years, and there will be no Euro in 5 years! ;)

 

Cheers,

 

Gio

 

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In my humble view, a lot of things have been done right in Europe, in particular in countries like Ireland, Spain and Greece which have gone through very painful and bitter process of adjusting their economies. They have cut social security spending, cut red tape, dismissed a lot of public workers. These countries are much more competitive than they used to be five years ago. Unfortunately, these steps have not been accompanied by an investment programme (Marshal plan/ERP like) which is a major reason why demand is so weak. It was Germany's major mistake to not understand that necessary cuts should have accompanied by reasonable investments. Still, a lot of things are moving to the right direction.

 

Also, the European banks have made a lot of progress in terms of writing down bad debt and raising capital. It is correct that the action action was less decisive and much slower than in the US, but in my view we are roughly there in terms of capital raising as was also evidenced by the last eCB stress test which was fairly credible. In consequence, European banks are among the most interesting recovery play in my opinion.

 

As a negative, political risk has increased as we are seeing from Syriza in Greece.

 

In the latest numbers I saw there was no sign of deleveraging in the EU. On the contrary, overall debts vs GDP numbers kept increasing. And imo it all boils down to this: how will the EU cope with a debt which is 460% its GDP? Will it invert its trend towards the US level, 334% of GDP? Or will it proceed towards the Japan level, 655% of GDP? Until I don’t see enough evidence we are making good progress in this regard, I think any recovery will be based on very shaky fundamentals.

 

Gio

 

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That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing.  They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.

 

The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite.  This European EQ or whatever is not going to help them.

 

I tend to agree, but this is the super standard consensus view that is repeated ad nauseam in every newspaper, on television and on every website. So even if this is correct it might very well be priced in already given the strong USD, CHF, weak EUR, low European stock prices, etc. and we shouldn't feel to smug about our macro insights. Basically we are just following the herd. At least Nate is original :) . And he might just be ruffling our feathers a bit.

 

Let me flesh this out a bit further.  I'm thinking much longer term.  The US when you consider all of our promised obligations like social security and medicare is deep in debt.  I know most economists 'forget' about those because they're off balance sheet.  That's fine, but putting them off balance sheet doesn't mean they'll never need to be paid or settled.

 

Europe is deeply in debt as well.  We're both in a similar spot.  But right now Europe has realized they have a problem and are doing something towards it.  The US hasn't done anything to solve our long term insolvency issue.  I'm not thinking 12-18mo like most financial media is thinking, I'm thinking the next 20-30 years.

 

For a brief period in the US we were talking about getting the debt in line.  But the truth (mentioned above as well) is no one cares about the debt, they just care about the deficit.  How much extra debt we're incurring per year.

 

Maybe since we're a larger and prominent country we're a special snowflake and will never have to deal with this.  I don't know.  We haven't had to so far, and maybe we never will.  It's similar to the Japan situation, they still haven't dealt with it, so we might have another good 20-30 year run without this problem plaguing us.

 

The best analogy I can think of is this.  Both Europe and America are at a party and drunk, but Europe has realized they're drunk and has begun the process of calling for taxi's.  The US claims it's not drunk at all and keeps drinking.  One day the party will end and we're going to need to go home, will any taxi's be left?  Maybe we'll luck out.

 

For my own sake I hope that the US is the luckiest country, I live here, it seems like a nice place.  I'd rather have a nice and prosperous life without any external problems whatsoever.  I'm not sure I can count on that though...

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The best analogy I can think of is this.  Both Europe and America are at a party and drunk, but Europe has realized they're drunk and has begun the process of calling for taxi's.  The US claims it's not drunk at all and keeps drinking.  One day the party will end and we're going to need to go home, will any taxi's be left?  Maybe we'll luck out.

 

As I have said, the deleveraging in the US has already begun, in the EU it has not! It has not even stopped the piling up of new debt… Therefore, maybe the EU is only pretending to have realized to be drunk and is only pretending to have called for a taxi! After all in Europe we are very good at talking, less so at doing… Until I see a clear reversal in the full debt/GDP trend, I’ll remain a skeptic…

 

Gio

 

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Interesting viewpoint, I've always been with the maybe-consensus view that Europe is pretty intensely screwed. (To your analogy, it's guy in the back room at the party violently arguing with his wife about whether he is ok to drive home who will end up hitting her as well as the friend who was trying to calm him down).

 

I think not only is the common currency a cyclical curse if nothing else, but many of the individual countries have social obligations as significant/greater than the US as well as labor and economic cultures that make dealing with them properly highly unlikely.

 

 

That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing.  They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.

 

The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite.  This European EQ or whatever is not going to help them.

 

I tend to agree, but this is the super standard consensus view that is repeated ad nauseam in every newspaper, on television and on every website. So even if this is correct it might very well be priced in already given the strong USD, CHF, weak EUR, low European stock prices, etc. and we shouldn't feel to smug about our macro insights. Basically we are just following the herd. At least Nate is original :) . And he might just be ruffling our feathers a bit.

 

Let me flesh this out a bit further.  I'm thinking much longer term.  The US when you consider all of our promised obligations like social security and medicare is deep in debt.  I know most economists 'forget' about those because they're off balance sheet.  That's fine, but putting them off balance sheet doesn't mean they'll never need to be paid or settled.

 

Europe is deeply in debt as well.  We're both in a similar spot.  But right now Europe has realized they have a problem and are doing something towards it.  The US hasn't done anything to solve our long term insolvency issue.  I'm not thinking 12-18mo like most financial media is thinking, I'm thinking the next 20-30 years.

 

For a brief period in the US we were talking about getting the debt in line.  But the truth (mentioned above as well) is no one cares about the debt, they just care about the deficit.  How much extra debt we're incurring per year.

 

Maybe since we're a larger and prominent country we're a special snowflake and will never have to deal with this.  I don't know.  We haven't had to so far, and maybe we never will.  It's similar to the Japan situation, they still haven't dealt with it, so we might have another good 20-30 year run without this problem plaguing us.

 

The best analogy I can think of is this.  Both Europe and America are at a party and drunk, but Europe has realized they're drunk and has begun the process of calling for taxi's.  The US claims it's not drunk at all and keeps drinking.  One day the party will end and we're going to need to go home, will any taxi's be left?  Maybe we'll luck out.

 

For my own sake I hope that the US is the luckiest country, I live here, it seems like a nice place.  I'd rather have a nice and prosperous life without any external problems whatsoever.  I'm not sure I can count on that though...

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The euro/dollar is currently trading at or around the lowest level in a decade and, for example, Greek stocks have been absolutely slaughtered last year. Yet everybody is only talking about debt levels, Grexits, bailouts and stagflation.

 

We value investors should adhere to the classic principle: "price is what you pay, value is what you get" but somehow if we talk macro all we do is analyse debt levels, GDP, inflation etc. In other words, all we do is looking at qualitative issues (the value part of the equation). But with the euro trading so low and with EU equities trading at depressed multiples maybe we should buy European stuff even if Europe is screwed. Consider it a liquidation play :) . Anything is good value at some price. Maybe we've reached that stage already.

 

Just an observation - no specific insights either way.

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But with the euro trading so low and with EU equities trading at depressed multiples maybe we should buy European stuff even if Europe is screwed. Consider it a liquidation play :) . Anything is good value at some price. Maybe we've reached that stage already.

 

Yes! Maybe you are right… But I am in the camp of Mr. Munger when he says: “All I want to know is where I am going to die, so that I will never go there!”

The EU situation is too difficult for me to judge and to get comfortable with… If I could never know exactly where I am going “to die”… At least I want to stir clear of all those places that might threaten my wellbeing!

 

This being said, if I’d find a great entrepreneur in a predictable business at a good price in Italy, Spain, or Greece, I would gladly invest alongside him/her… Because imo those 11 bold words are the prescription for a long life in business! ;)

 

Cheers,

 

Gio

 

 

 

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To me its more straightforward to bet on Asian devaluation then European devaluation. The problem with Europe is that the countries are pulling in different directions. Germany is competitive and other European countries are not. I think the Germans will strongly resist devaluation of the Euro so its not going to go very far. But the Asians situation is the exact opposite. They will probably be competitive devaluations in China and Japan.

 

For instance, Angela Merkel is already saying in today's FT that "One must prevent...ECB from easing the pressure for improvements in competitiveness".

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Too much top down thinking for my liking. Given most of my top down thoughts about how things would turn out in the 5 years after the crisis didn't materialise at all, I just focus on making sure I'm best prepared for any eventuality, rather than wasting time thinking which scenario is most likely.

 

I mean who considered $50 oil a few years ago? I know that while I thought about it as I'm always extremely conservative, I never actually thought it would happen and didn't make any investment decisions based on my personal thoughts on oil (thankfully)

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In my humble view, a lot of things have been done right in Europe, in particular in countries like Ireland, Spain and Greece which have gone through very painful and bitter process of adjusting their economies. They have cut social security spending, cut red tape, dismissed a lot of public workers. These countries are much more competitive than they used to be five years ago. Unfortunately, these steps have not been accompanied by an investment programme (Marshal plan/ERP like) which is a major reason why demand is so weak. It was Germany's major mistake to not understand that necessary cuts should have accompanied by reasonable investments. Still, a lot of things are moving to the right direction.

 

Also, the European banks have made a lot of progress in terms of writing down bad debt and raising capital. It is correct that the action action was less decisive and much slower than in the US, but in my view we are roughly there in terms of capital raising as was also evidenced by the last eCB stress test which was fairly credible. In consequence, European banks are among the most interesting recovery play in my opinion.

 

As a negative, political risk has increased as we are seeing from Syriza in Greece.

 

In the latest numbers I saw there was no sign of deleveraging in the EU. On the contrary, overall debts vs GDP numbers kept increasing. And imo it all boils down to this: how will the EU cope with a debt which is 460% its GDP? Will it invert its trend towards the US level, 334% of GDP? Or will it proceed towards the Japan level, 655% of GDP? Until I don’t see enough evidence we are making good progress in this regard, I think any recovery will be based on very shaky fundamentals.

 

Gio

People keep saying europe as if it is one entity. Northern Europe is in pretty good shape. Especially germany. They are in a better shape then the US as a whole with lower debt levels. Southern Europe is what is keeping the average down. You can't really compare the average greek to the average german. And it seems this new QE program where each country has to take 80% of the risk is not going to do much, it is basicly more debt to solve a debt problem. I read that various african countries have a better business climate then Italy! That is something that needs to change if Europe has to get out of this slump. But that will only change after countries have been zombies for years and shit hits the fan.

 

Im curious what will happen to Italy as they are basicly in a debt trap at this point. And if germany is not going to cough up money to keep them afloat, who is? Especially if there is  no way they could pay back that debt. It is very interesting to watch for sure, I dont think this situation has ever occured before.

 

 

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I read this in a recent Seeking Alpha article on the deflation trap southern European countries like italy find themselves in

 

"For Italy it is slow torture. Contractionary policies have already pushed the debt ratio from 116pc to 133pc of GDP in three years. Each one percentage point fall in Italian inflation forces the country to increase the primary surplus by 1.4pc of GDP to meet EMU rules, according to the Bruegel think-tank in Brussels. Yet to act on this imperative is to thrust the economy further into a self-reinforcing downward slide."

 

First we had Japan begin the process of devaluation, we now have a muted attempt in Europe (how far will Germany let Mario go?), can China and the rest of Asia be far behind? As someone who actually lives in Italy it would be interesting to get Gio's thoughts on the situation in Italy.  Does the whole world have 20 years of "Japan" to look forward to??

 

cheers

Zorro

 

 

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In my humble view, a lot of things have been done right in Europe, in particular in countries like Ireland, Spain and Greece which have gone through very painful and bitter process of adjusting their economies. They have cut social security spending, cut red tape, dismissed a lot of public workers. These countries are much more competitive than they used to be five years ago. Unfortunately, these steps have not been accompanied by an investment programme (Marshal plan/ERP like) which is a major reason why demand is so weak. It was Germany's major mistake to not understand that necessary cuts should have accompanied by reasonable investments. Still, a lot of things are moving to the right direction.

 

Also, the European banks have made a lot of progress in terms of writing down bad debt and raising capital. It is correct that the action action was less decisive and much slower than in the US, but in my view we are roughly there in terms of capital raising as was also evidenced by the last eCB stress test which was fairly credible. In consequence, European banks are among the most interesting recovery play in my opinion.

 

As a negative, political risk has increased as we are seeing from Syriza in Greece.

 

In the latest numbers I saw there was no sign of deleveraging in the EU. On the contrary, overall debts vs GDP numbers kept increasing. And imo it all boils down to this: how will the EU cope with a debt which is 460% its GDP? Will it invert its trend towards the US level, 334% of GDP? Or will it proceed towards the Japan level, 655% of GDP? Until I don’t see enough evidence we are making good progress in this regard, I think any recovery will be based on very shaky fundamentals.

 

Gio

People keep saying europe as if it is one entity. Northern Europe is in pretty good shape. Especially germany. They are in a better shape then the US as a whole with lower debt levels. Southern Europe is what is keeping the average down. You can't really compare the average greek to the average german. And it seems this new QE program where each country has to take 80% of the risk is not going to do much, it is basicly more debt to solve a debt problem. I read that various african countries have a better business climate then Italy! That is something that needs to change if Europe has to get out of this slump. But that will only change after countries have been zombies for years and shit hits the fan.

 

Im curious what will happen to Italy as they are basicly in a debt trap at this point. And if germany is not going to cough up money to keep them afloat, who is? Especially if there is  no way they could pay back that debt. It is very interesting to watch for sure, I dont think this situation has ever occured before.

 

 

who do you think italy owes the money to?

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http://img.photobucket.com/albums/v233/dongfangmeiren/DebtHoldingsByNonResidents.png~original

 

Mostly to its own people. It is a bit of a scam though, pension funds have to invest a certain amount of money in the government bonds, so basicly the people are getting fleeced like this. Pension money is inserted in pensionfunds, and funds are obliged to borrow it to the government for rates that seem too low.

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