By Jeff D. Opdyke, Investment Director, The Sovereign Individual
“People are looking at the hood of their car while they’re driving.
Some are even looking at their feet. No one seems to be
looking at the road.” Daniel Z., Swiss asset manager.
Traveling at more than 100 miles per hour on the autobahn between Munich and Zurich, you quickly develop a keen awareness of the roads that take you through Germany, Austria and Switzerland.
You notice how smooth they are, not a pothole, bump or ripple to be felt.
You notice the decorum as slower motorists reflexively make way for faster cars approaching at speeds topping 120mph.
You notice how well traffic flows almost gracefully as cars enter and exit the roadway.
But most of all, you notice the roadway itself.
By necessity, you pay attention to what’s happening well ahead of you. Not what’s just in front of your hood … and certainly not what your feet are up to. To do so would be certain death at this speed.
It is a perfect analogy for the euro-debt crisis at play. Those who are looking at the hood of the car – those focused on the immediate events – are doomed. They don’t see what’s coming.
Those looking down the road … they see the turn up ahead. They’re the ones who’ll profit because the wreck that’s coming isn’t the demise of the euro.
It will be those who are betting on the euro’s demise. Though it looks troubled now, the euro is destined to survive … and ultimately emerge stronger than ever.
What the Swiss Are Saying About the Euro
I can’t take credit for the autobahn analogy. I’ve borrowed from a Swiss money manager I know in Zurich.
He and I were having a lunch last week of butternut squash soup and Wiener schnitzel, and talking about Europe, the debt crisis, the euro and European stocks and bonds.
I had arrived in his hometown with a preconceived notion: that, despite all the naysayers, the euro has no option but to pull through this crisis as a stronger currency undergirding a more-unified Europe.
That’s clearly not an opinion very popular in the media. Countries supposedly are preparing to revive defunct currencies. Greeks are rioting to exit the euro. Germans are talking of leaving the euro themselves. I was listening to a former British minister on the BBC late one night in Zurich and he announced the euro essentially had no future.
My lunch companion grabbed the chance to voice his frustration to an American who might actually listen.
“This end-of-the-world mentality,” he told me, “drives me nuts.” That’s when he launched into his roadway analogy to explain the short-sighted ways of those who only latch onto the headlines. Even American politicians don’t get it, he said. “We listened to Obama on TV say that Europe needs to deal with its debt quickly, and that America stands ready to help. And you send Geithner over here to talk. We look at that and shake our heads in disgust.”
The irony is laughable. The country with history’s largest accumulation of debt is urging the Europeans to act quickly on the necessary repairs, or else sink the world economy.
Every conversation I had during my week in Europe came back to the same message … those announcing news of the euro’s pending death are simply wrong.
You won’t hear this in many places in America, but the reality is that Europe is in better condition fiscally than we are. When the euro problem is solved, the people who are today fixated on the euro’s demise – the problem right in front of the hood – will shift their focus back to America and all the messes that still exist.
Why Survival is the Only Option
It’s easy – and popular – to predict the euro’s death. It’s the simple answer to a very hard question about how to integrate peoples and cultures that have been beating each other senseless for centuries. But it’s even easier to predict the euro’s survival … though much less popular.
If you spend any amount of time thinking about the ramifications of the euro going away you know that there’s one reason the currency’s survival is preordained: Germany.
The German economic miracle over the last decade is the direct result of the euro. The euro did away with the cost of currency conversions when importing and exporting products around the E.U. It also equalized pricing from one country to the next, and added huge efficiencies to the manufacturing and sales processes.
In essence, the euro allowed the German exports to excel.
Indeed, German exports in the early-90s rose by about 3% a year. Between 1999 and 2003, when the euro existed largely as an accounting currency only, German export growth rose by more than 6% annually. And between 2003 and 2007, when physical euro coins and notes were in circulation, German exports grew by 9% a year.
For 2011, Germany expects exports will top €1 trillion for the first time, representing more than one-third of GDP … and about 40% of that goes to other Euro-zone countries.
Anyone who thinks German business and industry – which relies heavily on selling goods to the rest of the E.U. – will allow such an important trading advantage to slip away is delusional. It’s never going to happen. The single-currency’s existence has added hundreds of billions of euros to the German economy in the last few years alone.
Survival is the only option.
Because consider the fate otherwise … Europe returns to individual currencies and instantly BMWs and Mercedes Benz’s become too expensive across much of the rest of Europe. German exports would immediately slow and the German economy would crash. Massive layoffs would ensue and Germany’s political and financial might would shrivel.
The re-emergence of Germany’s former currency, the Deutsche Mark, would attract capital from all over Europe as Greeks, Italians, Irish, Spaniards, French and others dive out of their weak currencies and into a stronger currency. That would risk inflation in Germany – exactly the fear today of Germans who, as a culture, cling to images of Weimar hyperinflation.
So Germany would end up in a situation where the economy is crashing even as inflation rises.
German business and industry absolutely does not want that. And it will ensure that it doesn’t get it.
Buy Euros Now
The road from here will not be smooth. The euro still has some painful months ahead as Germany and the rest of Europe hash out a plan that Germans can live with. The currency, now at $1.30 to €1, could reach parity before exploding past its previous record near $1.60.
You want to use this period of euro stress to build long-term exposure to the currency. Trade some dollars for cash in a euro-denominated deposit account.
When the road ahead turns and today’s pessimists realize their assessment of the euro was wrong all along, the euro will soar against the dollar. And those who’ve put their money into the euro will see profits roll in.
Until next time, keep a global view…
Jeff D. Opdyke
Investment Director, The Sovereign Individual