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Over the past few weeks, we’ve seen a lot of graphs about the woes of European economies and markets.
Let’s take a look.
I’m always amazed by these charts that show how the largest companies in the US stock market are as big or bigger than those in major European economies.
In the UK, about 1,900 stocks are listed on the London Stock Exchange. France and Germany have about 800 and 500 stocks listed on their main exchanges respectively. Nvidia has fewer than 30,000 employees.
I’m not sure if a chart like this gives you any actionable information, but it does get you thinking.
The Economist magazine has published a graph showing the decline in European GDP and stock market capitalization this century.
Europe accounts for 25% of world GDP but just over 15% of world stock market capitalization, while the United States accounts for roughly the same 25% of world GDP but over 60% of world market capitalization.
The United States (as well as China) dominates Europe in terms of the civilian market as well.
In the early 2010s, the situation was pretty even, but it’s not the same anymore.
The Financial Times has a graph showing the productivity divergence since just before the Great Financial Crisis.
After the 2008 financial crisis, it was as if someone flipped a switch and US workers and companies became more efficient than their eurozone counterparts.
The Wall Street Journal ran an article this week that makes it seem as if expensive American tourists are the sole economic engine of the eurozone.
These data show that tourism countries have seen higher growth since the pandemic.
This may be a bit of a stretch, but there is no denying that the eurozone has lagged behind this century when it comes to economic and financial market growth.
Here’s how European stocks compare to the US stock market since 2009:
To be fair, these figures are from the perspective of a US-based investor. A strong dollar is a headwind for international stocks. For residents of European countries, returns will likely be better.
I’m not smart enough to explain all the reasons for this discrepancy or to suggest far-reaching solutions.1
As a realist, I believe that American dominance will continue. We have the biggest and best technology companies in the world. We worship our stock market and economic growth. And Americans tend to stick to their jobs rather than take a month-long vacation.
America has many unique advantages over other countries in the world.
But contrarian like me thinks that perhaps everyone is too pessimistic about Europe right now.
There’s a legendary story about how John Templeton began his investing career during World War II: The 26-year-old investor borrowed $10,000 in 1939 when the war began and invested in over 100 companies trading for less than $1 a share. A few of those shares ended up worthless, but the rest made huge profits.
Does this story make sense? Well, maybe it does.
I know a lot of smart people in Europe, and it’s hard to watch growth in the region continue to collapse while the US gobbles up global stock markets. I think anything could happen. Being contrarian for the sake of being contrarian is not an investment strategy.
There are two basic options:
Option 1. Europe is dead gold: the rules and regulations there are too onerous for profit-making businesses to thrive.
Option 2. Everyone is so pessimistic about the outlook for Europe that it doesn’t take much good news to turn things around.
At the very least, it’s a question worth considering.
In this week’s Animal Spirits video, Michael and I discuss Europe’s economic woes and more.
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References:
Long-term recency bias
Well, here are the books I’ve been reading lately:
Books:
1That would require a longer post.
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