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Germany, Europe, and America: Central Banks Growing Apart
Ryan Cole, The Investment U Research Team
Two weeks ago, German Chancellor Angela Merkel tried to raise a stink. She laid into the central banks of Britain, the European Union, and the United States.
Without explicitly saying so, Merkel hinted that the current policies of central banks look more like those of the Weimar Republic and less like FDR’s New Deal.
And while she may have succeeded in lifting an eyebrow or two on Fox Business News, for the most part, her outburst was ignored.
That’s a mistake.
Germany rarely speaks out about the policies of central banks – especially ones outside her borders – so to do so now suggests there are strong beliefs behind Merkel’s words. And where there are strong beliefs, policy follows.
In other words, Merkel’s dissent is a leading indicator that Europe’s response to the global crisis is splintering from the Anglo-American one. Indeed, that’s already started to happen.
Europe and America Switch Roles
While both Britain and America are throwing trillions of dollars at the problem – possibly leading to painful inflation in the near future, Merkel’s greatest complaint – the E.U. has spent a much smaller, conservative amount, by comparison.
Oddly enough, Germany and the European Central Bank (ECB) are acting more like free-market responders, getting out of the way of the recession’s creative destruction.
By comparison, America and Britain are behaving like old-world European democratic-socialists – propping up companies and industries considered too important to fail.
Of course, the picture is more complex than that simple brushstroke – with 16 member-countries; the ECB has a near-infinite number of viewpoints all fighting for voice, and action. And America is still allowing plenty of failures, insisting on bankruptcies, and generally behaving more like a demanding investor in their bailouts, not a protective father.
Still, on balance, the ECB has been more passive during the crisis – even if only due to political paralysis.
And let’s not forget, it has long been the belief of some libertarians that America works best when it’s not working – when Congress is so embroiled in political battles, it doesn’t have the chance to get in the way of the natural free market.
Perhaps, with the more embattled and complex E.U., Europe has found an even better way to do nothing.
Investing In Two Futures
The simple fact is these high-minded debates are both arcane and unlikely to be settled in time for an investor to know how to act.
And where there are unsettled answers, wise investors place many small bets.
That’s exactly what we’re recommending here. Will the American response wind up correct? Will the European one win out? Will Germany even be able to carry the day against her more liberal European partners?
Who knows. The only smart play is a bit of every play, with tight trailing stops.
Assuming you already have money invested in America, grab some positions in Europe as well (not to mention Asia and emerging markets – but that’s another article). We recommend starting with the iShares MSCI German Index Fund (NYSE: EWG) or the iShares S&P Europe 350 Index (NYSE: IEV). Both will give you broad exposure to German or European markets.
That way, should Merkel prove right, you’ll get to capture European gains while America and Britain fall behind battling runaway inflation. And should she prove wrong – thanks to tight trailing stops – you won’t have risked very much.
In times as uncertain as these, the important thing is to hedge all your bets. When a head of state provides such a nice, stark differentiation, we’d be foolish not to take advantage of it.
Good investing,
Ryan Cole
P.S. If you’d like to find out more on uncovering some of the best foreign investments around the world, take a look at the Oxford Club’s New Frontier Trader Service.
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