| April 15, 2008 |  | | Vol. 3, No. 15 |  |  | Bigger and Better Than China Fellow Investor, Twenty years ago, I couldn't walk into a book store without tripping over yet another book about how Japan was going to dominate the world's economic future. The same thing is true today about China. Yet you'd have to search long and hard to find a book written on the world's third-largest economy, Germany. But Germany punches far above its perceived economic weight. Taking an economic snapshot today, at market exchange rates, Germany's economy is still bigger than China's; 82 million Germans generate more exports that 1.3 billion Chinese. And had you invested in the German stock market five years ago, you'd be three times better off than having invested the same money in the S&P 500. And here's a shocker: you'd have made more money investing in slow-growth Germany during the past five years than investing in the emerging global superpower China. With the collapse of the Chinese stock market bubble, the German tortoise has taken over the Chinese hare.  | Bigger and Better Than China: Germany's Image Problem
But don't expect to see solicitations for "Hans Schmidt's 'New Germany' Investor" in your e-mail inbox any time soon. Germany is just too hard of a sell. If it is better to be hated than ignored, Germany's popular image is even worse than bad boy Russia's. And sadly, that truth applies to all things German. Germany's remarkable cultural heritage has been all but erased from today's collective memory. Goethe's literature, Richard Wagner's operas and Nietzsche's philosophy are all treated as either too obscure or too politically incorrect to be widely taught in America's college classrooms. The German economy is rarely even mentioned in the U.S. or U.K. financial press. And even when it is, it's been portrayed as slow-moving, lethargic, and hopelessly behind the curve. Germans' own gloomy Weltschmerz -- a general unease about their role in the world -- turns even good news into bad. Today, roughly 80% of Germans feel the economic recovery of the past two years has passed them by. (Continued below) | Double Your Money in 12 Months with the Stock That's Actually PROFITING
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With the U.S. economy slowing, self-congratulatory comparisons between the dynamism of the United States and the stodginess of Germany suddenly look less flattering than they did in the past. Much of the improvement in U.S. productivity growth, compared with that of Germany, was in financial services and retailing. After the implosion of the whizz-bang financial engineering models on Wall Street, much of the value added in financial services now seems questionable. And as journalist Philippe LeGrain has pointed out, on a per capita basis, Germany's economic growth rate actually has matched that of the United States. How is that possible? A big chunk of U.S. GDP growth comes from an increase in population, while Germany's own population is stagnant or declining. And while U.S. unemployment is much lower, Germany's headline unemployment rate (now near record lows) actually may overstate the number of unemployed compared with the way the same number is calculated in the United States, the United Kingdom and Sweden. (Continued below) | Do you have what it takes to make
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| And with Germany never having experienced a housing boom (and subsequent bust), and little financial toxic waste polluting the books of German banks, the German economy seems virtually immune from any direct fallout from the U.S. mortgage crisis. A U.S. slowdown may hit sales of German BMWs and Audis, but exports to other regions -- especially the "BRIC" economies: Brazil, Russia, India and China -- are holding up well. Nor is there a sign of a German credit crisis. Lending to business is rising at record rates across the eurozone, with German companies driving much of the growth. Bigger and Better Than China: Yes, But For How Long? None of this is to say that China won't overtake Germany during the next year or so -- though the Chinese economy would have to hit more than $40 trillion today (about three times the size of the United States) before it matched Germany on a per capita GDP basis.
Despite its recent success, Germany has its challenges. Angela Merkel has fallen far short of far-reaching reforms of the tax system and labor market made during her 2005 election campaign. And Germany's stock market gains are flattered by the effects of the euro appreciation against the dollar. Adam Posen, in a recent book, "Reform and Growth in a Rich Country: Germany", argues that Germany's recent uptick has been cyclical rather than structural. Lower wages have been the key to its strong export-driven growth. And those gains remain fragile. Recent wage demands from German rail workers confirm that Germans like their six-week holidays, high wages and spa treatments.
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| Germany's Achilles' heel is as much cultural as economic. Edmund Phelps, winner of the 2006 Nobel Prize for economics, argues -- correctly, I think -- that the structural explanation for Europe's slower growth rates mask deeper problems with dynamism. German business culture is risk averse, and there is less initiative and personal responsibility. And because it's just not as cool to be an entrepreneur in Germany, chances are the next Google won't come from Munich. Workers in Europe's big economies have little regard for the innovation and autonomy that the Stanford dropouts who started Google, Yahoo, and eBay did.
Yet for all of their purported shortcomings, Germans have developed one of the most prosperous societies on the planet -- as they have for centuries anywhere else they have settled in the world. You can't help but wonder what Germans could achieve if just they cleared the cobwebs from their minds.
Sincerely,
Nicholas A. Vardy
Editor, The Global Guru P.S. While most U.S. investors are glued to their screens hoping for a recovery in U.S. markets, Global Stock Investor looks at investment opportunities across the globe, wherever they may be. The result? All but one of my current Global Stock Investor picks is in positive territory -- with October's pick up a whopping 66.08%. To find out the names of these, and my upcoming pick for the new May issue due out next week, sign up for your 90-day trial subscription to Global Stock Investor today. Forward this email to a friend! |
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