Posted By: Matthias Paul Kuhlmey
My colleagues consider my distinct (possibly questionable) assessment of good vs. bad hotels as “diva-ish” (some may even think I am an idiot). Possibly a full and extensive topic for another blog, I can assure you, that with nearly 20 years of combined personal and business travel experience, one begins to have a good sense of the “dark side” of accommodations hidden behind the shiny stars. This writing should have carried the title “Reality vs. Perception,” but in our attempt to not immediately reveal our planned course of writing, as well as to deliver on our traditional music reference, it turned out to be Hotel California, possibly the best-known song by the Eagles.
In 1950, Robert Schuman (not the composer, but the French Foreign Minister) became the promoter of a united Europe by announcing plans of the formation of the European Coal and Steel Community, which became the Foundation for the European Union (and later the EMU). On the surface, Schuman had the objective to establish a common value system, but part of his hidden agenda was to create an environment for European countries to never again be at war with their neighbors. German Chancellor, Konrad Adenauer, recognized as the first statesmen to have reconciled the relationship between France and Germany after WWII, subsequently bought into Schuman’s plan. Voilà.
With much “civic love” and reconciliation having taken place over the years, Germany’s Banking system now carries about $2.62 trillion in exposure to debt of other Governments across the world (Q4 2012), including $996 billion to the Euro area. When segregating those numbers to the PIIGS (Portugal-Italy-Ireland-Greece-Spain), German Bank exposure totals a little less than $400 billion (BIS) of an estimated Euro 8.3 trillion ($11 trillion) banking system (assets) or nearly 11% of German GDP (ca. $3.6 trillion at 2012 figures). Not a small chunk. These numbers do not even account for all the “other stuff,” including regular lending activities among banks, derivatives, etc. I guess Adenauer didn’t see this one coming.
Another lesson in perceived realities: On the “home front,” everyone appears to have gone “gaga” over the latest employment report and related unemployment rate of 7.5%(!). Admittedly, it is not too shabby compared to previous years, but underneath the surface the story is different. “In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and 3 million more than there were when the recession began at the end of 2007.” The job market is only improving on the “net line.” When considering more and more people leaving the labor force, along with an increasing number of “underemployed” workers, the real unemployment rate (U6) still stands at nearly 14%(!). More tragic is the development in youth unemployment across the globe, now being called “Generation Jobless”: “OECD figures suggest that 26m 15- to 24-year-olds in developed countries are not in employment, education or training; the number of young people without a job has risen by 30% since 2007 … Depending on how you measure them, the number of young people without a job is nearly as large as the population of America.” In Spain and Italy, respectively, youth unemployment ranges between 40 and 55%(!). The situation is unsustainable, but for now it’s a breeding ground for radical measures and political opinions.
The lyrics to “Hotel California” describe a “luxury resort where ‘you can check out anytime you like, but you can never leave.’ On the surface, it tells the tale of a weary traveler who becomes trapped in a nightmarish luxury hotel that at first appears inviting and tempting” … but then things change (as always). The Germans may have created this very constellation for themselves. In other words, it’s quite an expensive undertaking to “leave” now – either you pay up and help your ailing neighbors, or you let them fail, likely implying that Mrs. Merkel and friends would have to “bail out” or possibly nationalize the German banking system. Regarding the young and unemployed across the globe (and especially in Southern Europe), they are “stuck” in a similar dichotomy; improving headlines assessed on an incomplete basis with an underfunded education system, and their respective economies in dire straits.
What does this all mean in terms of investing?:
1. Beware of the vibrant “headline” news; we are most likely being told “stories of convenience.”
2. Should a “story of convenience” prove to be inaccurate, beware of volatility in markets.
3. As economic conditions continue to be “sub-par,” accommodative policies will exist (QE).
4. With further increases in the monetary base globally, asset price inflation will continue.
5. It will be fundamental to distinguish “inflated assets” from those that rise on good valuations.
6. As long as Central Banks keep easing, equity markets will have a “floor” … and so should bonds!
7. Central Banks will “take turns”: After the U.S., it is now Japan’s turn. Europe (likely) will be next.
8. No country can afford a strong currency (competitive devaluation). Identify future stores of value.
9. Don’t turn greedy and “chase” markets. Manage volatility. Understand risk-adjusted returns.
As HighTower is all about our 360 concept (i.e., “a look around the industry”), please find, in addition, an excellent opinion piece on Europe by our friends at Lord Abbett, specifically by Milton Ezrati, their Senior Economist and Market Strategist.
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