Germany: The "Must-Invest" Economy

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If you're a U.S. investor, you can't be happy about the prospects for your portfolio. After all, you're mostly trapped in an economy with a gigantic and dangerous financial-services sector, a central bank that can't stop itself from printing money and a government that overspends wildly.

But there is an answer: You should consider allocating some of that "at-risk" capital to a country that has none of those problems – Germany.

Germany has a banking system, of course, but that banking system is not the overgrown financial-services monster that we have here in the United States (or, for that matter, in Great Britain). It's impossible to get a subprime mortgage in Germany: Even now – and even after mortgage levels have crept up in recent years – the average down payment for the purchase of a new home in this key Eurozone nation is 50%. As a result, the homeownership rate in Germany is only 43%, the lowest rate in the European Union.

That's actually healthy; far less of Germany's capital is tied up in unproductive housing and the savings rate is correspondingly higher. (Let's face it, most Americans don't accumulate 50% of the cost of a house in savings over their lifetimes – unless forced to do so in a company pension scheme).

What's more, this more-modest home-ownership rate lessens the impact of speculative bubbles, since the wealth of most folks isn't tied up in rapidly escalating house prices. So while the German banking system had its own real estate problems in the late 1990s, the only parts of it that got in trouble in 2008 were those banks that had rashly ventured overseas and got caught up in the U.S. disaster.

Up until 1999, Germany had the most admirable central bank in the world – the Bundesbank. This was a much better set up than the U.S. Federal Reserve. It was owned by the states instead of by the national government, so political interference was much more difficult. It was a single institution, instead of a collection of regional banks, so it was much easier to manage. And it had the single objective of avoiding inflation (Germany having bad memories of the Weimar hyperinflation of the 1920s) so did not get sidetracked into attempting Keynesian management of employment. As a result, Germany's currency – the Deutsche Mark – was a beacon of stability during the inflation-ridden 1970s.


In 1999, control of Germany's monetary policy passed to the European Central Bank (ECB). The ECB is not as solid as the Bundesbank, but it still beats the Fed. The ECB expanded the money supply much less than did the Fed from 2002-07, and it has issued much less monetary stimulus since the crash. Consequently, there is far less danger of inflation in Germany and the Eurozone in general than there is in the United States. Yes, there's the possibility that German taxpayers might have to bail out Greece, but the same possibility exists in the United States with respect to California, which is much larger.

However, the most important advantage for Germany over the United States – in fact, over all the other major industrial economies – is its superior fiscal policy. When the talk of "stimulus" first appeared in late 2008, Peer Steinbruck – a Social Democrat who was then serving as Germany's finance minister – rudely described it as "crass Keynesianism." As a result, Germany did very little stimulus, and so still has a budget deficit of less than 5% of gross domestic product (GDP), in spite of the recession.

Last September, the German electorate decided that even Steinbruck was too socialist, and so elected a coalition between Angela Merkel's Christian Democrats and the Free Democrats, a free-market party that is even more opposed to public spending than Merkel. The effect of this has been to push Germany even more firmly into the fiscal-retrenchment camp – the German parliament lopped an extra 5.8 billion euros ($8 billion) off public spending before finalizing the 2010 budget – no pork barrel waste there!

The result has been a very brisk economic recovery, with no inflation and no significant risk of "crowding out" the private sector. Manufacturing orders were up a strong 4.3% in January, far more than had been expected, and are now 19.6% ahead of where they were a year ago. Unemployment is 8.2%, well below the U.S. level, while Germany's current-account surplus is a massive 5.2% of GDP.

With competitive manufacturing, a business-friendly government and plenty of domestic capital, Germany is about as healthy an economy as there is in the world today and is thoroughly underrated by U.S. and British analysts. Its stock market is trading at a fairly demanding 19.7 times earnings, according to The Financial Times database. But that's lower than the U.S. market multiple of 20.0 times earnings. And Germany has better near-term prospects.

You should think about owning some of Germany's promise, even if it's only through the iShares MSCI Germany Index Fund ETF (NYSE: EWG).

[Editor's Note: Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps - half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).

During the stock-market rebound that started in mid-March, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.

Experts are taking notice. And so should you.

Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and specially designated "Alpha-Bulldog" stocks into winning portfolios.

To find out more about The Permanent Wealth Investor, please just click here.]

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  1. GERMANEE | March 10, 2010

    Thanks for your Oil- and Germany-Report. Only few investment consultants realize and follow the fast-pace changes in now dominating new investment instruments and countries. As a french born, german grown and now american riped investment observer (MBA), I appreciate you.

  2. Alexander Treutler | March 10, 2010

    An article to be printed, framed and read and re-read to hopeium addicts.

  3. Mike Holly | March 10, 2010

    Germany also spends less than 1/2 as much as the US on health care, which is bankrupting the US. Germany forces competition by allowing medical supply to exceed demand. For example, they have 3.5 doctors per 1000 people compared to only 2.3 in the US.

  4. William Patalon III | March 10, 2010

    Dear Mike:
    A shrewd, timely and well-articulated point — particularly given the ongoing healthcare debate taking place inside the Beltway right now.
    We appreciate such contributions……please do so again!
    William Patalon III
    Executive Editor
    Money Morning

  5. Judi | March 12, 2010

    Just one: the American banking system is not owned by a "national government." It is privatly owned by individual investors (the FED), and has NOTHING to do with the Federal government.

  6. ernst | March 15, 2010

    A good analysis, that understates German external debt though. Last info available reads 180% of GDP for German external debt, vs 90% for US
    How can be considered healthy an economy that owes the world twice its yearly gross?

    Another fact is that huge German banks are far more leveraged than US competitors.
    Their exposure to Spain, and UK is like an iceberg straight ahead a short-of-fuel boat

  7. Nepo | March 26, 2010

    Good article, its contains substance instead of beliefs. One thing i would like to add is Germany's almost fanatical investments in alternative energy and resources. Since the late 1980's Germany has been taking the most efforts in getting its economy away from Oil and co. Given the Oil spike we experienced in 2008 i think any economy that does the most on reducing oil Dependency will come out as a winner on the long run.

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