Category: Europe

If you want some insurance against future Europe-US travel restrictions, want your children to have the flexibility to study/work/live in the EU, or just want to be like Eric Schmidt (support Biden and the Democrats’ plan to re-make U.S. society and the U.S. economy, but have the Gulfstream fueled and that second passport handy just in case!), the Portuguese Golden Visa program is an inexpensive path to an EU passport (less than $100,000 in fees and travel expenses). One requirement of the program is investing in real estate, which the Portuguese love and which I personally hate, or stocks, which the Portuguese hate and I love. The stock purchase approach requires more capital (1 million euro, versus as little as 280,000 for real estate that needs renovation), but is virtually guaranteed to be liquid.

(see Portuguese stocks or Lisbon real estate for the next five years? for some backgrond)

Friends of friends manage money or work in investment banking over in Europe. The general consensus was that Portuguese stocks aren’t mispriced and therefore there is no reason to expect them to do worse (or better) than German or U.S. stocks. That said, the stock market isn’t very developed in Portugal and it is perhaps easier for a management team to loot from shareholders.

Here are some notes from a guy who grew up in Portugal, but has spent his career as an investment banker in London and Spain….

Don’t buy real estate unless you want to use it. He bought in the center because he is fanatical about capital preservation. It took a long time to unload an apartment in Lisbon after the last crash.

Why has PSI-20 done so badly? Had same problems in 2001 and 2008 as everyone else. Bank blew up in 2014. Should be correctly priced now. They’ve survived hell and high water.

The PSI-20 has more exposure to Poland than Brazil or Angola, e.g., through JMT.

You’re in great shape with the large liquid components of the PSI-20.

• JMT (10, great management, high growth) [the number is a rating from 1 to 10]
• EDPR (world’s leading wind farm developer, incredibly management)
• EDP (owns 65% of EDPR, cheapest right way right now to own EDPR)
• GALP (4, local distribution company for oil, invested some into oil fields in Brazil, Angola, Mozambique, not especially well-managed)
• BCP (6, only remaining bank, not especially well-managed, dirt cheap, too big to fail for system, largest shareholder is Chinese)
• RENE (5, just the grid, regulated business, natural monopoly for electricity and gas, yield play)
• SON (1, conglomerate, screw the minorities every single time, subsidiary is NOS and own that)
• NVG (integrated paper manufacturer, Europe’s leader, very good management, very well run)
• COR (10, one of the best companies I’ve ever come across, 50% of good wine[ry?])
• ALTR (8, indirect way of owning, one of Europe’s most efficient [… something?])
• CTT (6, post office)
• SEM (85% of value is navigator, forget about them)
• EGL (avoid)
• PHR (avoid)
• IBS (very nice company, KFC and Pizza Hut, they can grow)
• Novabase NBA (great company, small IT provider, all software for Vodaphone, half of market cap is cash)
• RAM (specialized steel and have a forest, properly managed and managed for you).

What if the Portuguese bank holding one’s securities fails? It is just like in the U.S. and the bank is only a custodian.

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What did I decide to buy?

Company	Symbol	Weight PSI-20	Percent portfolio
J. Martins	JMT	13	25
EDP	EDP	12	20
Corticeira	COR	4	17
Navigator	NVG	6	10
Altri	ALTR	4	10
Ibersol	IBS	1	10
Novabase	NBA	0.5	5
Ramada	RAM	0.3	3

The above is based on personal prejudice against banks (ruled out BCP), enthusiasm for Poland (overweight JMT), enthusiasm for electricity (overweight EDP; think of all the European douchebags needing to charge their Teslas!), belief that people are too lazy to cook and that table-service restaurants are unsustainable in a world of COVID-19 plus high labor costs (IBS).

Due to prejudice (observing the USPS!), I didn’t buy the post office, which is sad because they have great-looking trucks:

(2017 photo from the Azores)

Readers: Let me know if you need an introduction to attorneys and bankers over there.

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After 16 years of rule by Angela Merkel and the Christian Democrats, the government in Germany is changing. I talked to some European bankers and a former hedge fund manager to find out what, if anything, investors should do about this.

The general consensus was that very little would change in Germany. As in the U.S., grand plans from a party can be derailed by an individual member of parliament who thinks that the grand plan will have a negative impact on his/her/zir/their own little corner of the country. For better or worse, this tends to make the German system stable.

Nobody said that Merkel would be missed. One banker pointed out that Merkel was likely voted out by the low-skill welfare-dependent migrants that she was instrumental in bringing to Germany (welfare in Germany is much less generous than in the U.S., but still leads to a better material lifestyle than trying to work for a living in a lot of countries). “They’re betting that the Social Democrats will increase the handouts,” he said. “The conservatives bring them in saying that they’ll work and they turn around and vote for liberals so that they don’t have to work.” (After five years in Germany, about 51 percent of migrants don’t work, which is considered an improvement and a success story by pro-migration Germans.)

Another banker said that Merkel was responsible for the UK leaving the EU. “The British could have just ignored the EU’s demands to accept migrants, as the Eastern European countries did, but they’re too bound up in being law-abiding,” he said. “The Eastern European countries just refuse and dare the EU to throw them out, but there isn’t really a mechanism for kicking a country out of the EU.”

The former hedge fund manager said that Merkel was an unprincipled follower of public opinion. While she initially told Germans that most would be infected with SARS-CoV-2 and therefore most resistance would be futile (e.g., masks and shutdowns would just slightly delay the inevitable), when people demanded lockdowns she locked them down.

How’s Europe doing? “Euro zone inflation hits highest level in 13 years as energy prices soar” (CNBC, October 1, 2021):

Headline inflation came in at 3.4% last month, according to preliminary data from Europe’s statistics office Eurostat. This was the highest level since September 2008 when inflation stood at 3.6%. It comes after German consumer prices rose by 4.1% in September — the highest level in almost 30 years.

The rise has been driven higher by surging energy prices, deepening concern among policymakers. The front-month gas price at the Dutch TTF hub, a European benchmark, has risen almost 400% since the start of the year.

What’s more, this record run in energy prices is not expected to end any time soon, with energy analysts warning market nervousness is likely to persist throughout winter.

France has become the latest country to step up measures to mitigate the costs for consumers. Prime Minister Jean Castex said Thursday the government would be blocking further natural gas price increases as well as rises in electricity tariffs. However, before these measures kick in, gas prices will rise by 12.6% for French consumers as of Friday.

I.e., France is copying Richard Nixon’s wage and price controls and hoping for a different result. (See also “Nixon Taught Us How Not to Fight Inflation” (WSJ): His price controls led to an exponential increase in demand, which caused a shock when they ended.)

I asked the hedge fund manager if the European inflation numbers were cooked like the U.S. numbers (e.g., food and energy costs are excluded from some measures, the cost of buying a house is excluded from all measures (the government comes up with a fictitious world in which people can rent their houses from themselves for a government-determined price)). “Completely fake of course,” he responded. “However, there is one reality of their own making. To ‘save the world’ (read: tax more) they recently yanked up taxes on natural gas and the such. Together with rising oil prices, this has created quite a bit of inflation as you can imagine.”

If the Europeans are inflating away the value of their currency just we are inflating away the value of ours, what is an investor to do? Move money to China, as BlackRock has recently started to do? That’s a bridge too far for a lot of non-Chinese investors. How about “Mining Stocks Offer a Cheap Play on Growth. Dig In.” (Barrons, September 17, 2021), in which we learn that iron and copper miners have P/E ratios of 5-7 (compare to over 30 for the S&P 500):

We have no idea where the euro and dollar will be after the politicians on both sides of the Atlantic are done with their manipulations of the respective economies. I’ve always hated gold as an investment because it isn’t productive. And, in fact, once you factor in dividends paid (“total return”), gold has underperformed U.S. stocks going back to the beginning of our galloping inflation (1971):

(black is the total return; silver is bumping along on the bottom; the S&P (without considering dividends), the Dow Jones, and gold are clustered in the middle)

Could mining iron and copper be considered a hybrid of gold’s inflation hedge and the return to be expected from investing in a productive activity? People will still need steel even if there is a lot of inflation in one or more currencies. On the third hand, aside from the low P/E ratio, why are raw materials miners better investments than upstream manufacturers? And if the P/E is 5 or 7, is that because a company is heavily indebted and can go bust (rather than simply slim down) in the event that demand is reduced?

Related:

• “Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign.” (nytimes, October 1). My summary of this plus the rest of the nytimes: Since even the smartest and most expert experts have no idea how the economy works, it makes sense to have the government move in and manage a much larger portion of it.
• Gina Rinehart, one of the world’s richest women (though not nearly as rich as some American divorce plaintiffs), who turned a nearly-bankrupt mining company into a huge success (and she’s a fan of Donald Trump’s economic policies)

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As readers may have noticed, I’m a contrarian when it comes to COVID-19 (along with the 60,000 physicians and PhDs who’ve signed the Great Barrington Declaration). To me, the untested “experiment” is locking a country down and closing schools in hopes of winning a war against a respiratory virus. It is not an “experiment” to stay open, as Sweden did (and as the W.H.O. recommended through 2019), and continue to educate children, continue to go to work, continue to hit the gym, continue to socialize with friends and family, etc. I don’t think the U.S., for example, will be better off as a result of shutting down, closing schools, buying and wearing cloth masks that have been shown to be worthless, etc. I do think the Swedes will prosper in the long run due to superior mental health, a focus on something other than COVID-19, their kids having an extra year of in-person school compared to kids in U.S. cities, etc. I want to invest in Sweden with a 10-20-year horizon.

(Based on our devotion to the Vietnam and Afghanistan wars, we could still be fighting the COVID-19 war 10-20 years from now! Even if we aren’t, the misallocation of $trillions from the past 1.5 years, e.g., paying people to stay home for 1.5 years ($800 billion just from federal tax dollars), giving $3,600/year extra per child to successful child support plaintiffs, funding highway repairs in the least efficient states (the new “infrastructure” bill, which builds infrastructure everywhere other than in the states that actually need it due to growing population?), etc., will be a comparative drag on the U.S. economy.)

What’s the best way to invest in Sweden? My usual preference is for common stocks, but apparently a lot of these can’t be purchased in the U.S. There is an ETF that tracks the Swedish market: EWD from iShares. The dividend yield is medium (just under 3%), which I hope means that capital appreciation is expected. Somehow, 77 percent of the yield is classified as “qualified” (I’d thought that this was for U.S. stocks) and therefore subject to a lower federal tax rate (if the Democrats are successful with their latest federal tax increase, the result will be a dividend tax rate of about 50 percent for Californians (fed+state) and this will be on top of higher corporate taxes (i.e., something like 75% of a company’s profits that would have belonged to shareholders will instead go to pay taxes); things are a little less grim for residents of Florida).

The big negative of this iShares fund is a 0.51 percent management fee. They’re just trying to track the index, so it is unclear what you’re paying them for (how hard is it to buy and hold 53 stocks?). The fee for the Vanguard S&P 500 ETF is 0.03 percent, which is also the fee for the corresponding iShares S&P 500 ETF.

The big negative of Sweden as an investment, if you’ve been reading this blog, is that I don’t believe the prevailing American dogma that low-skill migrants make a country richer (if they did, Canada and European nations would be vying for and paying for the opportunity to fly low-skill migrants from our southern border to their respective countries). At 25 percent, Sweden has, I think, the highest percentage of immigrants or children of two immigrant parents, of any country in Europe. If these folks prefer not to work, that could be a drag on the Swedish economy (via welfare costs) for the next 100 years. See “‘New Swedes’ left out as economy powers through pandemic” (Reuters, March 17, 2021):

Sweden has powered through the COVID-19 crisis with an economy set to regain its pre-pandemic size by late-2021, but a surge in unemployment among its foreign-born citizens risks exacerbating social divisions for years to come.

Ajlan came to Sweden as a 17-year-old from Baghdad in 1993. Despite graduating with a degree in Middle Eastern Studies from Lund University – one of the country’s best schools – he only found work as a taxi driver.

A rigid labour market and a lack of low-skilled jobs means Sweden has been poor at integrating waves of immigrants, or “new Swedes”, since the 1970s – a social and economic divide that has been widened further.

Unemployment among foreign-born workers stood at 18% in the fourth quarter of last year, up 3.5 percentage points from a year earlier, according to Statistics Office data. For people born in Sweden, it was 4.1%, up just 1 percentage point.

Immigration has been running at high levels for the past two decades in Sweden, with a record 163,000 asylum seekers arriving in the country of 10 million in 2015.

The government has launched a raft of measures – some of which predate the pandemic – aimed at getting people into work, including subsidized employment, tax breaks for employers, on-the-job training schemes and its “knowledge-lift” programme that offers study opportunities for the unemployed.

In other words, the Swedes don’t have any better idea of what to do with low-skill migrants than we do. They’re on the same “provide free housing, free health care, free food, and then ask people nicely if they would like to work” plan (maybe the Swedes don’t offer an Obamaphone, but mobile phone service in Europe is much cheaper than in what we call our competitive market).

On the third hand, the U.S. and all of Europe are going to be packed with low-skill migrants for the foreseeable future. The only way to short the idea of a migrant-packed welfare state is to invest in Asian countries that are closed to low-skill immigration and that, in any case, don’t offer the multiple generations of free housing, health care, and food that the U.S. offers and that some European countries offer (albeit at a less generous level; see Hartz IV in Germany, of which 55 percent of the recipients are migrants or children of migrants: “According to the Federal Employment Agency … this was due to the migrants lacking either employable skills or knowledge of the language”).

Vaguely related… the Volvo-driving migrants arrive in Stockholm on the ferry from Finland (2016):

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