When I invest one of the things that I do is get feedback from the locals. If I am investing in Latin America I get a local contact that gives me the lay of the land in South America. I happen to be lucky because I have family that lives in South America, North America, Europe, and the former Eastern Bloc countries.


I use feedback from the locals (not investing locals) because I want to understand what is going on. I want to know the psychology of the situation. I live in Switzerland and it is a protected country as I don’t have to worry about being robbed, mugged or murdered. Though not every country is like Switzerland and hence my psychology will be tainted by Swiss security. The other place where we live is Quebec Canada.

I wrote all that because I feel people are getting the lay of Europe WRONG! I happen to like Mish’s blog quite a bit, but I find his attitude very similar to many people who I feel are wrong.

  • German banks are arguably as bad off if not worse than US banks.
  • Property bubbles in parts of the Eurozone are worse than in the US, Spain being the primary example.
  • The property bubble in the UK is as bad if not worse than the US.
  • Anti-dollar sentiment is extreme.
  • The Euro has benefited from a huge diversification out of dollars especially from oil producing states. At some point diversification will end.
  • There is still a prevailing attitude that the US will enter recession and somehow the Eurozone and UK will avoid that recession. I do not support that view.
  • There is a prevailing attitude that Bernanke will keep slashing rates to zero while the ECB will hold the line. I suspect the ECB will start cutting rates and at some point the Fed will pause to consider.

The banking structure in Europe is not the banking structure in America. The banks in Germany are not as bad off as the banks in the United States. Yes IKB is in bad shape, but that’s about it. The reason has to do with the other business that the German banks have. German banks underwrite German mortgages and there is no crazy property bubble in Germany.

Where German banks went afoul is in their purchase of American mortgage backed securities. Though for the large part of German banks those securities are a minimum. For example, the local sparkassen are doing fine as are the local hypo banks.

Property bubbles in the Eurozone are not worse than the US. The referenced example of Spain is an interesting case study. Yes the prices in Spain are inflated, but it is not a bubble in the American sense. Let me explain how this situation is different. The Brits sensing a strong pound went crazy and bought properties on the continent. This drove up property prices to such a point that locals could not afford the properties. I know because my wife and I wanted to buy some property on the Cote D’Azur. Luckily the Brits were restricted in Switzerland (non-locals have many restrictions) and thus could not drive prices through the roof.

Though it smells like a bubble, yes? The difference is that it is a British bubble, and not a Spanish or French bubble. The local banks in Spain and France only underwrite mortgages for the locals. And the Brits that bought the properties are not locals. They are tourists and thus must find financing from their banks in BRITAIN! Thus the screwed banks are the British banks and the Brits who cannot afford the properties. The locals are just waiting for prices to drop so that they can buy. Again I know a local from Provenance who says, “oh I will buy once those tourists have to unload their properties. It always happens.”

Many think that the Anti-Dollar sentiment is extreme. It is not a sentiment, but a basketing issue. Until the Euro the USD was the common currency. Now corporations are using a basket of currencies to manage their bottom lines. This means the USD has become another currency. Hence there will continue to be a drop and it has nothing to do with being anti-USD.

With respect to recession, on this issue I have to eat crow. I was also supporting the notion that if the US goes into recession so will the world. The more I think about it the less likely it will happen.

I did an informal poll among Europeans, a few South American’s and some Russians. Almost all of them said the following:

  1. The economy is going to slow down and things are going to become hard.
  2. I am not slowing down my spending. I never overspent, and will not underspend. I will live within my means.

It was very interesting to hear this. People accept that the economy will slow down . Yet they are not slowing down their spending. It is status quo, thus I do believe there will be a de-coupling between America and the rest of the world. BTW I do believe that the USD will drop to 1.76 against the Euro.