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Europe On A Quest

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 09 2010

This story was originally published on Monday, June 07, 2010 in the form of an email to paying subscribers at FNArena.

By Rudi Filapek-Vandyck, jet lagged Editor FNArena

There's a rather uncomfortable similarity between BP's oil well disaster in the Gulf of Mexico and the political switch to increased austerity measures in debt-ridden European countries. On both accounts experts are trying their best to solve a major problem that was always going to require their attention, at some point, but the cold fact remains that none of yesteryear's predecessors ever cared to come up with a decent 'What If' scenario. So today's problem solving exercise is 100% born out of necessity, with zero per cent foresight, and with the additional complication that nobody knows what solution suits best.

As shown in the Gulf of Mexico, such forced trial and error approaches only have limited odds for immediate success, they come without guarantees and any side-effects will have long lasting, negative consequences. It is probable that BP's environmental, financial and public relations disaster will reshape the industry's regulations and best practices for decades to come. It is equally probable that Europe's sovereign debt problems are just the tip of the iceberg of what is yet to come for years into the future.

At last Europeans have stepped down from their insulated ivory tower.

This is the good news and a remarkable shift since I last visited the continent a little less than two years ago. Back in 2008 I could have hardly timed my visit any better: on the very day I stepped off the plane Fortis Bank went under, causing major surprise and shock among European investors and political leaders. Up until that point the general view across the continent had been that the world's problems were all caused by Americans and their uncontrollable thirst for profits and more profits.

A lot has happened since then. In today's Europe elections are taking place with all political parties proposing spending cuts, even those with little chance of making it into government. There's also a noticeable shift to the right by the electorate, making any opposition to the new austerity measures by unions and lobbyists from the political left less likely to succeed.

These internal conflicts should not be underestimated. Today's Europe is a direct derivative of the grassroots labour movements of the 19th and early 20th centuries. A solid and extensive social safety net is to every born and bred European citizen what the burka is to most Muslim immigrants on the continent. No matter the amount of abuse, or the leakage of government resources, Europeans simply cannot fathom a world without a decent social safety net around them. To them this is what separates Europe fundamentally from the US and most other places.

The fact that abuse of the social system is widespread or that it has become contra-productive, if not financially unsustainable is never considered an argument in favour of breaking down the system (let alone getting rid of it). This truly is one characteristic that only genuine European raised minds can fully appreciate. From an Anglo-Saxon perspective, it can easily be argued that Europe is too focused on protecting labourers from "evil" business owners, with laws and tax regulations too restrictive and even anti-entrepreneurial. Europe is too much of yesterday and too little of tomorrow, but all this is not going to deter the old continent to stay its course -widely regarded as its identity- no matter what.

No surprise thus, intellectual Europe has now embarked on the search for a new and better form of capitalism, one that manages to combine the social face of the European culture with the need to innovate, to grow and to keep the home grown identity affordable. It truly is one mighty fine ideal, and one can only hope success lies at the end of Europe's quest.

But then again, any leadership coming from Europe would be rather surprising within the context of the past decades. Europe may be today's largest economic zone, on paper, but the region has spectacularly failed in displaying any sense of leadership towards the rest of the world.

Let's not mention the war in former Yugoslavia. From Wii to Xbox, from iPod to iPad, from 3D Hollywood blockbusters to American Idol, most technological advances that helped shape today's society have come from outside the old continent. There was a brief moment, in the nineties, when Europe appeared to lead the rest of the world in mobile telecommunication, but that only lasted so long.

Maybe the biggest shame is the fact that Europe has felt captive and uncomfortable about its dependence on natural gas, and thus on Russia, for so long. Yet the current revolution taking place in the global gas sector also started in the US first, before spreading to other regions like Australia and eventually landing on the European continent.

Could it be that high taxes and inflexible labour markets, overzealous regulations and restrictions, combined with a plethora of different languages and cultures on top of expensively euro-priced products and services are simply too much for European entrepreneurs to overcome in comparison with their peers elsewhere? It is not a question you will find on too many European minds.

The Big Irony is, of course, that despite all of the rampant anti-Americanism (which is also part of the wider European identity) and the overall desire to work with a better model than what the Anglo-countries have managed to come up with, Europe's problems today are exactly the same ones usually suffered by the US: too much debt, with banks virtually bankrupt and property bubbles deflating. Europe's main problem is, however, that it doesn't own the global reserve currency, but it does have so many more disadvantages and barriers on top of its structural problems and challenges.

Forget about the (costly) half-baked institutions that are the European Community and the European Monetary Union. Imagine for a second the following fact: most countries are battling unemployment figures at grossly double the 5%-something in Australia, yet today between 30-40% of European businesses -depending on the country- are complaining they have difficulties in finding suitably, willing candidates to join their workforce.

The latter probably sums it all up quite nicely. Europeans have finally come to realise that shorter work days in combination with continuously increasing salaries, earlier retirement, more holidays, cheap medical services and medicines, indecisive politicians, a heavily abused social safety system and little, if any, economic growth simply don't add up.

Someone, somewhere will have to pay for it all and indefinite postponement no longer seems like a viable option.

This is why most financial experts I spoke to during my trip are not positive about both the economic prospects and the immediate outlook for European share markets. When governments have to apply both brakes and accelerator at the same time, the brakes usually win. One can only assume this particularly applies to countries where a relatively large part of the workforce draws a salary directly from the government.

In response to all of the above, politicians and intellectuals across the continent have started to argue in favour of a new measurement for overall progress. Instead of the usual Gross Domestic Product (GDP) some of them are advocating a switch to gauging a Gross Net Happiness-level, combining economic growth with elements such as education and healthcare. It's a commendable attempt to escape the tyranny of the cold economic growth figures, but it won't change one iota of the underlying story; even on GNH measurements, Europe's immediate prospects are looking rather grim.

The good news is, however, that Europe has finally realised it is dealing with an oil well that is spewing black poison into the ocean with devastating longer term consequences upon every new day of delay.

This is at present reshaping the overall mindset.

Assuming the old adage that what doesn't kill, ultimately makes one stronger, the old continent might just re-emerge in a much better shape at the end of this tunnel. But it'll require time.

This story was originally written and published in the form of an email to paying subscribers on Monday, June 7, 2010.

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