Blackstone Vice Chairman Byron Wien likes to talk to a guy he refers to as "the smartest man in Europe."
Here's how Wien describes him:
In my mind he earned that title by seeing major shifts in the investment landscape long before his peers on both sides of the Atlantic. Among these were the rise and fall of the Japanese stock market in the 1980s, the end of the command economies in Russia and China, the opportunities afforded by the emerging economies, the importance of gold as an asset class and the dangers represented by the overvaluation of American technology stocks in the late 1990s.
Along the way he has accumulated some of the material rewards of success, including elegant residences, museum-quality artworks spanning many centuries and sleek means of transportation on the ground and in the air, but what moves him is identifying a major change before others recognize it.
I have often attributed at least a part of his acumen to the mercantile tradition in his family that goes back several hundred years. His ancestors operated canteens selling food, supplies and weather protection to travelers along the Silk Road. Dinner table conversation from the time he was a young boy centered around investment opportunities. In his ninth decade he still derives excitement from a fresh idea, and it is inspiring to watch.
In July 2012, Wien's friend was sounding pretty pessimistic on the continent's prospects.
Now, Europe's "smartest man" is bullish, and it's largely thanks to one key development he says many have missed: changing attitudes toward austerity policies in the eurozone.
Wien relays some of their conversation:
“Everyone thinks Europe is hopeless and I can understand why. The European Union is a flawed concept and it may not survive in the long run. There needs to be much more convergence, both economic (which is possible) and political (which is impossible), but a major change in attitude has taken place this year. Until recently the policy makers believed that increasing taxes and reducing spending was the way for the weaker countries to solve their deficit problems, but that was clearly the wrong idea. From a political point of view the austerity approach was impossible because the people in these places wouldn’t accept what their governments were trying to impose on them. Punishing the people for past economic mistakes also made no practical sense. Europe was in a recession and the austerity policies were only going to make conditions worse. Unemployment was becoming a serious social problem and job creation had to be a priority. As we moved into this year the policy makers, even Angela Merkel, began to understand that austerity was the wrong course and that restoring growth had to be an objective.
“Europe is in a kind of equilibrium now which is likely to be sustained by the expansive monetary policy of the European Central Bank. This should continue at least until the German elections in September, resulting in a definitive pullback from austerity. Merkel can only win if she moves away from her hard-line policy stance. Conditions are continuing to improve in Italy even though Mario Monti is no longer in charge. The unions still have too much power in France. François Hollande is beginning to realize that he must restore business confidence by introducing policies that take a positive view of growth. Germany will have to be tolerant of larger budget deficits in Spain, France and Italy...
“In the meantime most investors have reduced their European exposure. Who would want to invest in a place where a recession was underway and likely to get worse? Money managers had been so preoccupied with that idea that they failed to recognize the pullback from austerity which could lead to the restoration of growth. During the last few years European companies, like their American counterparts, have become vastly more efficient. Unemployment in Europe is 12% and part of the reason it is so high is that companies are getting the work done with fewer employees, so profits should improve considerably on any increase in revenues. Stocks are priced assuming conditions will get worse and I see them getting better – not everywhere and not in every sector, but if you are a careful stock picker you can make money.
“The most important factor is that almost no investor likes Europe now and that enhances the opportunity. Two years ago everyone was worried that the European Union was going to break apart. That was never going to happen over the near term because everyone had too much to lose, especially Germany, which has been the biggest beneficiary. Now most people realize Europe is going to muddle through at least for a while, but few people are buying European stocks to take advantage of this conclusion.
Recently, we've seen a bit of an upturn in euro area PMI indices, which track the health of the manufacturing sector. However, most readings are still below 50, which suggests that the euro area is still contracting, albeit at a slower pace than before.
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