Mar

5

50% OffWhen I moved from Italy to the US last year I asked for advice about the opportunity to buy a house during my three-year tour in this beautiful country. Most of the responses were against buying and I am glad that I followed this advice. At the time, the exchange rate between Euro and US dollar was 1.28 vs the current 1.52 (almost a 19% difference). There was a house for sale in the neighborhood for 450K$. After one year, the house is still for sale, but this time at 380K$. Moreover, you have to subtract the 19% due to the more favorable exchange rate. For the equivalent of a small two-bedroom apartment in the suburbs of Rome, you can now buy a four-bedroom house here and still have 350K$ cash. This situation is not related only to the housing market, but the economy in general. The difference in price between goods and assets in the US and Europe during the past year has become impressive. Whenever I happen to fly to Europe I have some relative or friend asking me to buy and bring a new computer, telephone, videogame, golf club, article of clothing, etc. The same is true for the price of cars. But of course importing a car from the US is not so easy! The same applies to the stock market. For Europeans and for others the US has a big sale sign on the country! Sooner or later these imbalances will be resolved and markets will start working in this direction as investors will find opportunities in this new situation.

Jim Sogi adds:

Same in Hawaii, the Europeans are snapping up land like crazy. What a good deal, they say. I remember the Japanese doing the same 20 years ago. What a good deal, they said. Many of them bailed out in flames from their excesses.

Stefan Jovanovich remarks:

This is not the first time. One of the least appreciated of President Grant's many virtues was his insistence that the U.S. capital markets become completely open to foreign investment. That was his primary reason for reestablishing the gold standard for the dollar after the Civil War. During the same period J.P. Morgan & Son established its reputation as our country's preeminent investment bank by urging its European customers to exchange their francs and pounds for dollars after the Panic of 1873. When those investments proved to be stunning successes, Morgan's word became literally as good as gold as far as the bankers in Paris and London were concerned. What is truly sad is that, this time, it is the wise visitors like Paolo, not Americans themselves, who see the historic opportunity.

Bruno Ombreux adds:

Because of dollar depreciation, visitors have the purchasing power. Even if American see the buying opportunity, they don't have the purchasing power. Also it seems they are in debt, which makes it difficult to add more debt to take advantage of purchasing opportunities.

I see the purchasing opportunities also. I think I'll buy assets in the States in a couple years. It is cheap. And in the long-term, the USA will be better off than Europe.The US has a better demographic pyramid. It has a lower population density. It has the best universities in the world. Taxes are confiscatory but less than in most European countries.

It is cheaper than Europe and has a better and brighter future. This is a buy.And you are right, this is a historic opportunity. I am trying to micro-manage to time the purchase by waiting a couple years, but maybe I am too greedy.

Stefan Jovanovich replies:

American non-financial corporations certainly have the ability. They have become self-funding, even for capital expansions. They have less dependence on debt markets and banks than they have had in a generation. But their managements seem to be taking their inspiration from Sewell Avery instead of Sam Walton in terms of their confidence about the country's future prospects.

Bruno Ombreux explains:

The US and Europe have different perceptions of history. In the US, the traumatic experience was the Great Depression. In Europe, it was the Weimar hyperinflation which led to the rise of Hitler which led to the horror of WW2. The purpose of the EU is to avoid another WW2. That was the founding principle of its predecessor the EEC. The purpose of the ECB is to avoid another Weimar. European are ready to take it on the chin and suffer a lot to avoid any repeat of Weimar or WW2. In the 1990s the French experienced two recessions for the sake of Europe. First they absorbed part of the cost of German reunification through imported deflation. Then they cut spending to meet the Maastricht treaty obligations, while due to low growth they should have run an expansionary fiscal policy. They'll do it again. The German will do it too. Everybody will do it. The rest is posturing in the context of negotiations between goverments, as well as trying to influence the ECB. The ECB is not like the Fed. The ECB has only one mandate. It is price stability. It is very precise: CPI right below 2%. The Fed has two mandates, price stability and economic growth. I never understood why, because there is a macroenomic theorem that you need to have as many policy tools as economic targets. If you you want to control inflation for instance, you need only one tool, that is either monetary or fiscal policy. If you you want to control inflation and growth, you need two tools, that is monetary and fiscal policy. That is the case if the Fed and the government are coordinating actions as they seem to be doing. But then it means the Fed is not independent. You can't control inflation and growth and the currency. Something has to give. The job of the ECB is much easier.

Paolo Pezzutti extends:

The risk in investing in US assets is not related to the value of the assets in US dollars. For example, buying the depressed and daily hit by bad news financials in the long term is something that will work out to be profitable. The financial system is the engine of the US economy. It simply cannot fail and eventually will recover from its excesses. The question mark lies with the exchange rate between euro and US dollar, which could really impact overall performance as it has done in the past years. However, we are at a point of excessive difference in the purchasing power. For example, if you check on Amazon for book prices or on other sites for electronics, such as iPods or Nintendo, you will notice that they sell an item for 100 Euro on one of the Atlantic and for 100$ in the US, which is quite impressive.

Kim Zussman replies:

What happened to no-arbitrage theory? A 40 year old student converts his Euros to dollars, buys iPods in the US, and sells them for Euros back home. Same with real estate. Sells his Amsterdam flat, converts to dollars, and buys a beach house in Venice, California. True, ganja is only legal in CA by prescription — but a 50 Euro visit to Dr Pheelgut fixes that.


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