If someone forwarded this to you, you can read about who I am here. I was a strategist and equity partner at the biggest hedge fund in the world. Now I make my thoughts available to you and implement them with my own capital. This Substack grows via word-of-mouth, so please forward it to friends. If you like this writing, you will enjoy my books Master, Minion, and Raising a Thief. This is not investment advice. Investing is risky and sometimes quite painful.
Quotes that caught my eye this week.
“People said that an age of speed required rapidity in art, precisely as they might have said that the next war could not last longer than a fortnight, or that the coming of railways would kill the little places beloved of the coaches, which the motor car was nonetheless to restore to favor.”
Proust, In Search of Lost Time, Volume IV, 1921
“Countries wishing to join the euro were obliged to hold their public debt down to no more than 60 percent of Gross Domestic Product and were expected to run budget deficits of no more than 3 percent of the same. Any country that failed these tests would be subject to sanctions, including substantial fines, imposed by the Union.”
Postwar, Tony Judt, 2005
Next month I head to Europe, a place where even highway rest stops serve decent food. Asked what Germans could be proud of, former Chancellor Angela Merkel answered, “I think of well-sealed windows, no other country can make such well-sealed and good windows.” Agreed.
Europe works well enough that people risk their lives to get inside its umbrella. That’s as true for Ukrainians as it is for Africans. But that doesn’t necessarily make it a good investment. The opportunity, at moments, is likely in the system’s cracks, like the fact that Italy has to pay more than Germany to borrow money. In theory, almost a quarter century into the euro’s existence, that opportunity should not exist. I share my asset allocation and performance for Subscribers further below.
As a system, Europe is structured somewhere between China’s tight controls and the US’s survival of the fittest model. The result is that Europeans are poorer than Americans, richer than Chinese, and happier than both, as the data below shows. The five happiest countries are European. The US is number 19 on the list, despite having higher GDP per capita than Finland, Denmark, or Germany.
While this week’s news focussed on the European Central Bank’s (ECB) decision to raise interest rates, what caught my attention was that the European Union worked out an agreement to give gig workers—Uber drivers, Deliveroo cyclists—some benefits a regular European worker gets. Brussels treats Silicon Valley differently than Washington does, much to the chagrin of CEOs like Uber’s Dara Khosrowshahi, who signed a letter in protest. After suffering the extremes of economic volatility in the first half of the 20th century, the European project is about containing the restless chaos of Capitalism.
Thus the Italian Autogrill highway rest stop cuisine and also why avoiding investing in Europe has generally been a good bet. Over time, compared to investing in the S&P 500, a basket of European stocks has been terrible, as you can see below. The red line is the S&P 500 and the white line is European stocks, which are unchanged in price from 16 years ago! Europe has not produced any of the Silicon Valley superstars, which is part of what buoys the US, and economic growth is generally weaker.
This year is different, however. The best stock index to buy this year was Japan. But the second best was…Europe, a country with high inflation and weak growth, both of which are generally terrible for stocks. Part of the answer to this riddle relates to the bond market. Typically investors won’t buy a bond (Germany yield = 2.5%) that yields far less than inflation (7%). You are lending the money at a guaranteed loss. Lack of demand should drive their yields up and, as a result, stock prices down. And weak growth is generally bad for earnings. Yet, despite high inflation, investors are generally holding onto European bonds, as you can see below.
True, the same behavior is evident elsewhere. But I suspect part of this is due to the confidence Europeans have in their own institutions as the table below from Pew Center polling reveals. Overall, Europeans feel their institutions, including the ECB, are working for them, a stark contrast to the US and many other countries.
Eastern Europeans were willing
Keep reading with a 7-day free trial
Subscribe to Things I Didn't Learn in School to keep reading this post and get 7 days of free access to the full post archives.