Two months ago we went to Italy to celebrate our 25th wedding anniversary. The Mrs. and I love to travel to Europe and have been doing so since 1996. At various times Europe has seemed relatively reasonable or expensive, based on primarily on currencies and relative strength of economies. This trip it wasn’t just reasonable, but dirt cheap.
At the risk of stating the obvious, from a US perspective, Europe has been hit with a dual edged sword. First off, the Euro has dropped over the last few years. How much? Well, the five year chart shows a pretty solid decline.
This only tells part of the story, as, during 2008, the Euro traded at $1.60. Which means that, at this year’s lows, there was a decline of over 30% relative to the USD.
The second side of the blade is deflation. While the US has had a recovery, tepid but indeed a recovery, over the last few years, Europe hasn’t been as successful. Interest rates in the US have been raised over the last two years. Rates in Germany, the bellwether of the EU, have spent a lot of time in negative territory.
The combination of these two factors, deflation and a depreciating currency have created a situation where I can go to Italy and get designer dress shirts for $20 that would cost well over $100 in the US. I bought quite a few.
Everything is Cyclical
We all know the issues involved in the EU these days. The UK is on its way out. Immigration is a nightmare. Southern economies seem to be permanently in the toilet and the list goes on.
But, as the old saying goes, it’s darkest before the dawn. Perhaps all the bad news is priced into the Euro? France is being very vocal about reform for the European Union. This is greatly needed. Meanwhile, I would suggest that the Syrian refugee crisis has hit its peak and the rise of nationalism is going to lead to a reversal of this trend.
Simultaneously, things in the US are priced for…well, if not perfection, they are priced higher. Rates on a relative basis are up, the dollar has had a sustained bull run and the economy, despite not really feeling like it, has had a very long string of success.
If you throw in the looming disaster that is the Trump Administration, one has to think the best of times here are in the rearview mirror.
Perhaps it is time for Europe to outperform the US? If not outperform, at least have a positive shift in momentum while things could turn tougher here? This seems likely to me as, having been involved in markets for a long time, I can only say that all trends revert to the mean over time.