Eurozone debt to GDP and Eurozone debt service ratios

Here is a chart depicting the the debt to GDP ratios for non-financial corporations, governments and households in the Eurozone from 2000 till 2019. The chart shows how Eurozone households have been deleveraging since 2010. European governments and corporations have started deleveraging more recent in 2015.

Eurozone debt to GDP ratios for non-financial corporations, governments and households
Eurozone debt to GDP ratios

Here is another chart showing Eurozone debt service ratios for households and non-financial corporations from 2000 till 2019. These are a GDP-weighted average of France, Germany, Italy and Spain. Helped by low rates these ratios are now as low as in 2000. No sign of excess as in 2008.

Eurozone debt service ratios for households and non-financial corporations
Eurozone GDP-weighted debt service ratios for France, Germany, Italy and Spain

Via Guide to the Markets – Europe

Dutch Government debt payments to GDP from 1950 till 2020 / Rentelasten Nederlandse Staatsschuld van 1950 tot 2020

A chart of the debt payments as a percentage of GDP of the government of the Netherlands from 1950 till 2020.

Een grafiek van de rentelasten als een percentage van het bruto binnenlands product (BBP) die de Nederlandse overheid betaald op de staatsschuld van 1950 tot 2020. Via Twitter

grafiek Rentelasten Nederlandse Staatsschuld 1950 - 2020 als een percentage van het bruto binnenlands product (BBP) bron CPB. Chart Netherlands Dutch Government debt payments to GDP (Gross Domestic Product)

Yield on bonds of European companies with credit rating ‘A’ is almost at 0%

Very interesting chart via Twitter. The current yield on bonds of some European companies who have a credit rating of A is almost at zero percent (0%). Could it go negative?

 Yield on bonds of European companies with credit rating A

Amsterdam housing prices in euro per m2 from 2002 till 2018

This animation (gif) show the property value in euro per m2 of houses in Amsterdam from 2002 till 2018 based on the sale price. The color ranges in the legend are adjusted to the annual inflation rate in The Netherlands.

Housing prices in Amsterdam have doubled in most parts of the city. Notice how the prices in Amsterdam reached a low in 2013 after the financial crisis. I’ve posted before about how Dutch housing prices dropped a total of 20% from 2008 till 2013. It’s which was It’s easy to spot the boom bust and now boom home price in Amsterdam in this visualisation.

Charts via https://maps.amsterdam.nl/woningwaarde/ .gif made by me.

Huizenprijzen Amsterdam gif. Housing prices Amsterdam gif. Home prices Amsterdam. House prices Amsterdam. Property value Amsterdam.
Animation of the annual change in house prices in euro in Amsterdam per square meter (m2) based on the sale price

The Dutch Money Supply Has Been Declining For 2 Years

The money supply is the total amount of monetary assets available in an economy at a specific time. There are different ways to calculate the amount of money in an economy and M3 is the most broad definition. This is important because there is strong empirical evidence of a direct relation between money supply growth and long-term price inflation, at least for rapid increases in the amount of money in the economy.

The interesting thing is that the amount of money in the Dutch economy has been declining for over 2 years now. I guess it has to do with people using their savings to pay down debt on their mortgages and other types of loans.

Not surprisingly inflation in the Netherlands is low. Last June it was only 0.9% according to CBS.

M3 Netherlands Total Amount in Euro's

M3 Netherlands Total Amount in Euro’s

M3 Netherlands Year over Year Change

M3 Netherlands Year over Year Change

Seth Klarman On Index Investing

Recently I started reading Seth Klarman’s book ‘Margin Of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor‘. Although the book came out in 1991 it is still a very interesting read. To me the paragraph about index investing stood out. Indexing is the practice of buying all the components of a market index, such as the Standard & Poor’s 500 Index, in proportion to the weightings of the index and then passively holding them. This comes from the believe that financial markets are efficient and that all information is reflected in stock prices instantaneously. According to this theory it’s almost impossible to outperform the market, something value investors, who believe in inefficient markets, disagree with. I always thought that index investing was a more recent phenomenon popularized by ETFs (exchange-traded funds) since the mid ’90s but apparently it was already popular in the ’80s. 

Since index investing is widely popular right now it is nice to hear a critical note against it. Even Warren Buffet recommended index investing in his latest letter to shareholders. Below is a summary of what Seth had to say about it in his book (pages 40-42). He was not really positive about index investing (he even called the paragraph “Index Funds: The Trend Toward Mindless Investing”) and thought it was a fad that would eventually disappear. The reasons he gives are:

  • An index fund manager never buys or sells shares when they hit an attractive value and index fund managers are not interested in the financial statements of the companies they invest in. Furthermore, they don’t even need to know which business the companies they invest are in.
  • The higher the percentage of investors who index the more inefficient markets become. Fewer and fewer investors would be performing research and fundamental analysis. In extreme circumstances, when everyone would index, stock prices would never change relative to each other because no one would be left to move them.
  • When a stock in the index needs to be replaced, either because of a take-over or a bankruptcy, index funds will buy the new stock that is getting into the index regardless of whether or not it is a good buy. Since 100’s of funds need to buy the same stock on the same day, a liquidity problem could send the price of the stock higher simply for the reason that index funds need to have it in their fund.
  • Liquidity is also a concern with small-cap stocks. More money flowing into small-cap index funds will push the prices of these stocks higher simply because there is less liquidity in these markets. It will also push the price down more in a bear market because of huge sell orders.
  • The index fund manager has no interest in the performance of the index, other than that fees are based on total managed assets valued at market prices. So the index fund manager wouldn’t be very interested in going to share holder meetings and educate himself on the best outcome for the investors he represents.
  • There is a self-reinforcing feedback loop created whereby the success of index investing leads to more people swarming to index funds which leads to more success for the index. When that trend reverses, matching the market won’t be that attractive according to Seth Klarman, the selling will then work the other way around and depress the price of the index.

Seth Klarman also uses a quote from Warren Buffet on index funds to further make his point: “In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try”. Which is none the least interesting because Warren Buffet has been advising his trustee to put 90% of his money in index funds in his Berkshire 2013 letter.

US Investors Have Been Net Buyers Of European Equities For Over A Year Now

Confidence in the European economy is slowly coming back. The eurozone’s economy (countries that have adopted the euro as their currency) grew by 0.3% in the last quarter of 2013 compared to only 0.1% in the quarter before. The Dutch economy grew by as much as 0.7% in the fourth quarter relative to the third quarter. Growth for the whole 28-member EU was 0.4% in the last quarter of 2013. For the whole of 2013 the economy of the eurozone contracted with 0.4% while growth for the whole EU grew with 0.1%.

This growth in the European economy has gradually attracted investors from outside the EU to buy European Equities since last year. US investors have been net buyers of European equities for over a year now as the chart below, courtesy of Gavyn Davies, depicts. The Eurostoxx 50 ETF (FEZ) has showed a very nice return lately and is up 20% from a year ago.

NET US Buying of European Equities (12mma)

NET US Buying of European Equities (12mma)

But as Shaun Port of Nutmeg pointed out, most of this money has actually been going in UK stocks. Historically US investors seem to favor UK stocks above stocks from other countries in the eurozone. Which is pretty interesting because the FTSE 100 has been in the same tight range for over a year now (chart).

US Net Purcheses Of European Equities, Rolling 12-month total

US Net Purchases Of European Equities, Rolling 12-month total

As a bonus: here is the same chart from Shaun Port as a percentage of total market capitalization.

US Net Purcheses Of European Equities, Rolling 12-month total As A Percentage Of Market Capitalization

US Net Purchases Of European Equities, Rolling 12-month total As A Percentage Of Market Capitalization

 

No World’s Reserve Currency Status Lasts Forever

The U.S. dollar is the current world’s reserve currency. Being the world’s reserve currency is very beneficial because persons living in the country which issues the currency can import goods and borrow more cheaply because they do not need to exchange their currencies to do so. An example of this is the oil market where barrels of oil are trading in U.S. dollars.

Every now and then another currency will come along to become the new world’s reserve currency as the bar chart below shows. In my last post I described a few books that have been forecasting the end of the world’s reserve currency status for the U.S. dollar. According to the authors of those books the end of the world’s reserve currency status would be disastrous for the U.S. dollar. While nobody knows when it will happen it is inevitable that the U.S. dollar will someday be replaced by another currency as the world’s reserve currency. My personal opinion is that the next reserve currency will be some form of an international currency like the IMF’s Special Drawing Rights (SDR). But this leaves me with the question: is it really that bad for a currency to lose it’s world’s reserve currency status?

Global Reserve Currencies Since 1450

Global Reserve Currencies Since 1450

I found this chart of the British Pound from 1900 till now which shows that losing the reserve currency status did not change the exchange rate for the British Pound that much. The First and Second World War did arguably more damage. Most of its “demise” happend in the second half of the 20th century when U.S. economic dominance grew bigger and bigger and the U.K. endured a few periods of economic weaknesses. The British pound was still the third most held reserve currency in the world in 2006.

Pound Sterling Exchange Rate U.S. Dollar Since 1900

Pound Sterling Exchange Rate U.S. Dollar Since 1900

Where Is That Stock And Dollar Crash I’ve Been Waiting For All These Years?

Fear sells. For years a big fear-mongering industry has been putting out books and articles about how the economy is going down the drain soon and the U.S. dollar will be worth less than the paper it is printed on. The bears have been saying this for years. Here are a few (hilarious) examples of “Doom & Gloom” books over the years that I found.

Below is picture of an impressive 300-page book by Doug Casey called “Crisis Investing: Opportunities and Profits in the Coming Depression“. In this book Doug Casey makes the case that the market is about to crash any minute now! The dollar will be destroyed soon and the stock market is going to zero. The next great depression is just around the corner. You have to act fast before all your wealth, that you have been carefully building up for years, will vanish in front of your eyes! But wait.. Let’s check something.. When did this book hit the shelves? July 1980?! There certainly hasn’t been a “new great depression” since then.

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey (1980)

Ok maybe Doug was just a little bit early on his call that ‘the world as we know it’ is going to end. What about this book from Jerome F. Smith: “The Coming Currency Collapse“. In this book Jerome describes how the dollar is going to be toast in the near future. Oh wait that one was penned down in September 1981. He’s only 33 years (and counting) off on his call of an imminent dollar crisis. The only thing that collapsed in all those years is the price of this book since you can now get it for $ 0.01.

Coming Currency Collapse by Jerome F. Smith (1981)

Coming Currency Collapse by Jerome F. Smith (1981)

What about Howard J. Ruff’s book “How To Prosper During The Coming Bad Years“? This book came out in 1984. Everyone who followed the advice in this book missed the greatest bull market in stocks ever. The S&P 500 was trading at 160 at the time. Some reviews for the book on the Amazon page even talk about all the “missed opportunities” investors lost because they followed the recommendations in this book.

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

But Howard J. Ruff was maybe just a few years off of his imminent call for a new period of “Doom & Gloom”. In this book I got here by Martin D. Weiss called: “How To Survive The Money Panic” the author talks about the coming destruction of the U.S. economy and the U.S. dollar (of course). This one came out in 1989.

The Money Panic by Martin D. Weiss (1989)

The Money Panic by Martin D. Weiss (1989)

And then there is this one by Ravi Bata called The Great Depression of 1990. 1990? You got to be kidding me.

The Great Depression Of 1990 by Ravi Bata (1988)

The Great Depression Of 1990 by Ravi Bata (1988)

Here are some more recent ones:

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan. This book came out in 2005.

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

This one is more bizarre because shortly after this book was published in 2008 the dollar index set a long term bottom (chart) and is trading higher ever since. The Collapse of the Dollar and How to Profit from It by James Turk.

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

And here is one from November 2013 where the author is forecasting a stock market crash in 2016. The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann.

The Crash of 2016: The Plot to Destroy America - and What We Can Do to Stop It by Thom Hartmann (2013)

The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann (2013)

The last time I checked (5 minutes ago) the S&P 500 was still trading near all time highs. The U.S. Dollar is still the world reserve currency and certainly not reduced to toilet paper. The Euro is still around as are a lot of other economies and currencies the bears have been warning us for, for years.

All the authors of the books above are still touting their doom & gloom stories to this day.

The bottom line is this: Although the bears are sometimes right about their calls for stock market crashes (2000-2002 and 2008-2009) and housing market crashes (2006-2011) the crashes never seem to bring us to a new normal of forever lower stock/housing prices and a destroyed currency (at least for the U.S. market and the U.S. dollar).

This doesn’t mean that it’s never smart to be a bear. It can be very profitable, but you need to have your timing almost exactly right. It is no secret that the market goes up on average every year (7%).

Being a long term bear is thus bad for your financial health.