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Blog by Matthias Paul Kuhlmey


Matthias Paul Kuhlmey is a Managing Director & Partner at HighTower Advisors, where he serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions.

Tag Archives: Europe



Tall Skinny 2.0

Wednesday, June 19, 2013

Posted by: Matthias Paul Kuhlmey

Allow this blog to be somewhat anecdotal and a bit speculative in nature. This in mind, an alternate title could have been: “Will New York be the new London?!” Some time ago, we reported on several real estate topics, notably about Tall Skinny (Parts I and II), and the more distant Knightsbridge, the “center filet piece” of real estate in London. Recall my trip report from last year, in October: … “It is fascinating to understand that property prices in Central London have reached a new record high (July 2012 data), at 13.5% above the previous peak in March 2008, and that prices, overall, have risen by 49%(!) since the post-Credit-Crisis low of March 2009.” You think this was the end of it?  Nope! Prices for central London real estate are up another 7.2% over the last 12 months, and 3.2% in 2013.

As a long-term business traveler to the U.K., it has been amazing to see the city’s transformation from “jolly ol’ England-style” to a glamorous global metropolis. The wealth created, or better portrayed, in London is simply breathtaking; this stated, over the years, many Londoners have been priced out of more convenient “close-to-center” locations, with the effect (domino) that even more remote parts of metropolitan London have become very expensive, if not unaffordable. Let’s now bring this idea back to the Big Apple.

European austerity measures, caps on banker salaries in London, the rich getting richer, all paired with New York being a (relative compared to other metropolitan areas) good and affordable deal (to some), has led to money coming in! Notably, wealthy foreigners have been buyers of high-priced real estate in New York. A recent article in the German magazine, Spiegel, vividly explains the latest craze in Manhattan’s high-floor, high-priced real estate luxury apartment market. Off the charts, baby!

Real estate developer, Harry Macklowe, is back on track (after almost having faced bankruptcy in 2008), progressing with the construction of the tallest residential condominium building in the Western Hemisphere, on 432 Park Avenue (the site of the old and infamous Drake Hotel). Btw, in case you were wondering: The penthouse of the new “Tall Skinny” (2.0) has already been sold at a $95 Million price tag (you are out of luck). On the other side, (literally over the East River) in Queens, the number of foreclosures is skyrocketing. Let’s stick with the “other side”: “If the borough of Manhattan [presenting only one of the five NYC boroughs!] were a country, the income gap between the richest twenty percent and the poorest twenty percent would be on par with countries like Sierra Leone, Namibia, and Lesotho.”

Notable questions/conclusions: 1) Foreigners continue to “recycle” the flood of Dollars provided to them during the “booming years” into U.S.-dollar-denominated markets (e.g., real estate in the U.S.); 2) The economic recovery (still tbd) continues to be “uneven” at best, and has mainly provided benefit to the wealthy. In contrast, “some 46.2 million Americans now live in families where someone is working but earning less than the poverty line: $11,702 a year for an individual or $23,021 for a family of four”; 3) We need to question the quality of economic forecasting: it is a given fact that several components of reported Leading Economic Indicators are directly influenced by the Fed, e.g., housing data(!), equity prices, and consumer confidence readings (please see our entry, American Dream, for additional background); 4) Do the ultra-wealthy know something we don’t, balancing the onset of inflationary pressures with the potential of preserving wealth through prime real estate investments?

Additional historic background: The evolutionary spread of original (old) London to a “fresh” location is not a new concept. In 1609, English sea explorer, Henry Hudson (but sailing under Dutch flag), re-discovered the New York region (Giovanni da Verrazzano was first in 1524). Consequently, Dutch ownership of the island then called “New Amsterdam” changed in 1664, when King Charles II of England granted the region to his brother, the Duke of York. New London, however, was established, after all, as a somewhat charming seaport city in Connecticut, about 100 miles south of Boston. Now as it was then – all a massive real estate transaction that (so far) has held value over the long-term.

Cadence

Thursday, June 13, 2013

Posted by: Matthias Paul Kuhlmey

This piece is dedicated to our firm’s respected and very-impressive COO, Mr. Mike LaMena. In shaping an up-and-coming financial services firm, it is essential to “follow the right sequencing,” not only to address the needs of our partners and clients, but also to balance the appropriate infrastructure projects against market occurrences. Mike likes to think in terms of cadences, which is an interesting concept we should explore with respect to capital markets as well (also to stay true to our obligation in providing musical education).

“In Western musical theory, a cadence (Latin cadentia, “a falling”) is “a melodic or harmonic configuration that creates a sense of repose or resolution,” specifically a finality or pause. Given recent volatility in financial markets (stocks and bonds alike!), investors are eager to understand if the bull market in global stocks, since 2009, is simply pausing or potentially ending. “A cadence is considered as more or less ‘weak’ or ‘strong’ depending on its sense of finality”, and it is this potential “finality” we need to explore, region by region, to understand our availible investment choices.

Asia/Japan:  Recent price action in Japan, in both bond and equity markets, has become “living proof” of how inherently volatile our global financial system has become beneath the surface. Overly accommodative central bank policies, over the past years, have given the basis for a false sense of investor security. Whereas Japanese equities have been in corrective-mode lately, with significant volatility experienced, the focus should be on a far more problematic bond market: JGBs, for more than a decade have been priced for deflation, not inflation, the new policy objective by Mr. Abe’s Government, aka “Abenomics”!

A now-to-be-expected transition from deflation to inflation should further impact Japanese asset markets, including the Yen. Global investors need to understand the potential for high volatility, and potential contagion, as other markets continue to be supported by the very same central bank objectives, most notably in Europe. Japanese equities and the Yen should trade range-bound until the Japanese Upper House election in July. It is probably too early to consider the Japanese “equity story” to be over, as the impact of a far more favorable Yen should present itself in corporate earnings to come. Investors should continue to hedge their Yen exposure when investing in Japanese equities.

Europe:  Most European financial markets, with few exceptions, have experienced significant asset price deflation since 2008/2009. Recent economic data and leading Indicators, however, are supportive of a presumed bottoming process. The ECB, on the other hand, appears to be coming around to the idea that the economic system needs to be further supported in “Anglo-Saxon style”; whereas quantitative easing may not be the primary option, further accommodative adjustments can be made with respect to repo operations and the cost of marginal lending. Such measures will continue to support an ailing, but consolidating, European banking system – the key element to a sustained economic recovery.

On a relative basis, many European high-quality company stocks are more attractively valued, when compared to names in the U.S. or other parts in the world. Market participants that can endure volatility and have a longer term investment horizon should also consider an allocation to peripheral countries of the EU (Eastern nations). Those economies, and their favorable cost structure, especially with respect to cost of labor, continue to compete favorably with Asian nations. Volatility will continue to be elevated, and it may be opportune to hedge exposure to the Euro.

U.S.:  As already stated in our recent blog American Dream, domestic investors/consumers “never missed a beat”:  from the craze of the dot-com mania, to inflated housing, and to now ever-rising stock markets. Behind the scenes there has been an always committed and accommodating Federal Reserve Bank. Noting that the U.S. Consumer has contributed about 70% to GDP over the last decade, it is likely that Mr. Bernanke and his Fed (not dissimilar to what happened under Greenspan’s leadership) will be cautious to “take the foot off the gas pedal,” willingly allowing for the risk of over-stimulating the system.

With the grand “Bernanke Plan” in mind, the concept of asset price inflation will stay valid, with potentially higher equity prices to come (including a good portion of volatility), until the very last fool will have realized (and it may be someone at the Fed) that accommodative monetary policies, alone, cannot heal a system under deflationary pressure. Over-excesses of a multi-year credit cycle still have to “pass through the system.” This process will lead to subpar growth for years to come, but not necessarily to unattractive investment opportunities, at least on a relative basis. The U.S., compared to other markets, continues to be attractive.

In conclusion, once the financial system becomes too volatile (and you will notice the signs), understand the concept of a rhythmic cadence, “a characteristic rhythmic pattern that indicates the end of a phrase.” So far, it is rather harmonic than rhythmic … but stay tuned.

Hotel California

Tuesday, May 7, 2013

Posted By: Matthias Paul Kuhlmey

 

My colleagues consider my distinct (possibly questionable) assessment of good vs. bad hotels as “diva-ish” (some may even think I am an idiot). Possibly a full and extensive topic for another blog, I can assure you, that with nearly 20 years of combined personal and business travel experience, one begins to have a good sense of the “dark side” of accommodations hidden behind the shiny stars. This writing should have carried the title “Reality vs. Perception,” but in our attempt to not immediately reveal our planned course of writing, as well as to deliver on our traditional music reference, it turned out to be Hotel California, possibly the best-known song by the Eagles. 

 

In 1950, Robert Schuman (not the composer, but the French Foreign Minister) became the promoter of a united Europe by announcing plans of the formation of the European Coal and Steel Community, which became the Foundation for the European Union (and later the EMU). On the surface, Schuman had the objective to establish a common value system, but part of his hidden agenda was to create an environment for European countries to never again be at war with their neighbors. German Chancellor, Konrad Adenauer, recognized as the first statesmen to have reconciled the relationship between France and Germany after WWII, subsequently bought into Schuman’s plan. Voilà.

 

With much “civic love” and reconciliation having taken place over the years, Germany’s Banking system now carries about $2.62 trillion in exposure to debt of other Governments across the world (Q4 2012), including $996 billion to the Euro area. When segregating those numbers to the PIIGS (Portugal-Italy-Ireland-Greece-Spain), German Bank exposure totals a little less than $400 billion (BIS) of an estimated Euro 8.3 trillion ($11 trillion) banking system (assets) or nearly 11% of German GDP (ca. $3.6 trillion at 2012 figures). Not a small chunk. These numbers do not even account for all the “other stuff,” including regular lending activities among banks, derivatives, etc. I guess Adenauer didn’t see this one coming. 

 

Another lesson in perceived realities: On the “home front,” everyone appears to have gone “gaga” over the latest employment report and related unemployment rate of 7.5%(!). Admittedly, it is not too shabby compared to previous years, but underneath the surface the story is different. “In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and 3 million more than there were when the recession began at the end of 2007.” The job market is only improving on the “net line.” When considering more and more people leaving the labor force, along with an increasing number of “underemployed” workers, the real unemployment rate (U6) still stands at nearly 14%(!). More tragic is the development in youth unemployment across the globe, now being called “Generation Jobless”: “OECD figures suggest that 26m 15- to 24-year-olds in developed countries are not in employment, education or training; the number of young people without a job has risen by 30% since 2007 … Depending on how you measure them, the number of young people without a job is nearly as large as the population of America.” In Spain and Italy, respectively, youth unemployment ranges between 40 and 55%(!). The situation is unsustainable, but for now it’s a breeding ground for radical measures and political opinions. 

 

The lyrics to “Hotel California” describe a “luxury resort where ‘you can check out anytime you like, but you can never leave.’ On the surface, it tells the tale of a weary traveler who becomes trapped in a nightmarish luxury hotel that at first appears inviting and tempting” … but then things change (as always). The Germans may have created this very constellation for themselves. In other words, it’s quite an expensive undertaking to “leave” now – either you pay up and help your ailing neighbors, or you let them fail, likely implying that Mrs. Merkel and friends would have to “bail out” or possibly nationalize the German banking system. Regarding the young and unemployed across the globe (and especially in Southern Europe), they are “stuck” in a similar dichotomy; improving headlines assessed on an incomplete basis with an underfunded education system, and their respective economies in dire straits.

 

What does this all mean in terms of investing?:

 

1. Beware of the vibrant “headline” news; we are most likely being told “stories of convenience.”

2. Should a “story of convenience” prove to be inaccurate, beware of volatility in markets.

3. As economic conditions continue to be “sub-par,” accommodative policies will exist (QE).

4. With further increases in the monetary base globally, asset price inflation will continue.

5. It will be fundamental to distinguish “inflated assets” from those that rise on good valuations.

6. As long as Central Banks keep easing, equity markets will have a “floor” … and so should bonds!

7. Central Banks will “take turns”:  After the U.S., it is now Japan’s turn. Europe (likely) will be next.

8. No country can afford a strong currency (competitive devaluation). Identify future stores of value.

9. Don’t turn greedy and “chase” markets. Manage volatility. Understand risk-adjusted returns. 

 

As HighTower is all about our 360 concept (i.e., “a look around the industry”), please find, in addition, an excellent opinion piece on Europe by our friends at Lord Abbett, specifically by Milton Ezrati, their Senior Economist and Market Strategist.

 

Germany ’jər-mə-nē: An Update

Thursday, April 4, 2013

Posted By: Matthias Paul Kuhlmey

 

Nearly a year ago, we reported on a question posed by The Economist, regarding whether or not it was worth copying the “German Model,” but (!) combined this with a recommendation (amusing then, amusing now) for the “cheap Germans” to get off their behinds and increase consumption. In other words, our Northern European friends were considered a pain to the rest of the world, as their surpluses (or savings on a national level) were “mounting” and were in urgent need for global redistribution, at least from everyone else’s perspective – in short, save less and give to the needy! It is worth revisiting the debate, as, once again, German decision-making has angered parts of the world, especially causing commotion with Germany’s neighbors to the South.

 

Maybe unnoticed (or simply the result of sloppy journalism by The Economist), redistribution is a concept very familiar to the Germans (they may even have invented it), but with a focus set internally: The term, Sozialstaat (“social state”), was established under Bismarck around 1870, a value system better known in our terms as “welfare state.” One of the main objectives of a welfare state is to address and close the gap between the rich and the poor on the basis of what is often referred to as a “mixed economy”; i.e. transfer (redistribution) of funds from the state to provide general services, including healthcare, education and “benefits” payments directly to citizens. Back to current affairs: There is a rising “South,” a conglomerate of European nations originally known as the PIIGS, but now extending to Cyprus, Slovenia, and more to come – all economies in need of financial aid to “shore up” their broken banking systems and local economies, including the social welfare framework.

 

Let’s put the picture together: Related to the unified rescue effort of the European model, a recent comparison has been made of current German politics to an empirical Germany of “many moons ago” – this, despite the fact that the German government has pledged about $280 billion through loans and financial support packages to numerous European neighbors. If one considers that Germans are ranked rather high on the global list of income taxation (47.5% vs. the U.S. at 35%), paired with extensive cost related to the upkeep of  their fine-tuned welfare state, you can easily spot the catch 22; i.e, you can only spend your money once – paying your neighbors or yourself … yet another systemic flaw of the European Union that has to be addressed in order to harmonize home and “away” concerns.

 

No wonder that the recent Cyprus rescue deal was a mess. The German publication, Der Spiegel, even suggested that “Germans have long had a deep-seated antipathy to tax havens [such as Cyprus] and have sought to correct the arbitrage in the financial system that gives rise to them. This intolerance has been a mainstay of the German approach to global governance for the last five years.” The Germans, on the other side of the argument, reportedly consider themselves as the only grown-ups in Europe, “responsible for bringing wayward children into line and to hold the family together” … and you thought the European Union was saved with the latest “deal,” right? 

 

The message of our blog remains unchanged: The European Union suffers from a distinct design flaw:  the absence of harmonization between a monetary union and the required fiscal transfer mechanism. As long as those fundamental cornerstones are not being reconciled, “stay tuned” to see further upset of the global macro picture; this aside, and as we have learned over the years, socio-economic conditions may not be reflective of stock market performance. Even within the backdrop of a recession, our friends at GaveKal and Ned Davis Research remind us that many European companies have global business models and may decouple from the “local” economy (depending on what happens in the rest of the world, of course). That being said, high quality European stocks look increasingly attractive, when compared to their U.S. counterparts. Investors should also keep in mind that, in our current environment, money creation has largely contributed to a positive stock market environment. As long as the European Central Bank (ECB) does not leave the table, we should be OK … or is the fact that the ECB operates out of Frankfurt, Germany, another sign of “empirical aspirations,” as suggested by other members of the EU?! To be continued … 

 

Economy Watch – Radio Interview with Matthias Kuhlmey

Monday, March 11, 2013

Posted By: Matthias Paul Kuhlmey

 

While we have seen some aspects of the economy stabilize, we must also consider other “vital signs” of global markets. 

 

To take a step back, review our current situation, and explore some areas of investment opportunity, please listen to my latest appearance on the Economy Watch segment of Chuck Jaffe’s Moneylife radio show.

 

Please follow the above hyperlinks for the referenced material.

 

Economy Watch – Radio Interview with Matthias Kuhlmey

Monday, October 29, 2012

Posted By: Matthias Paul Kuhlmey

 

In the past few weeks, we have witnessed continued issues in Europe, a rocky start to earnings season, downward pressure on global markets, and hurricane Sandy is due to reach the North Eastern U.S. later today. 

 

For continued thoughts on navigating this investment environment, please listen to my latest appearance on the Economy Watch segment of Chuck Jaffe’s Moneylife radio show.

 

Please follow the above hyperlinks for the referenced material.

 

Economy Watch – Radio Interview with Matthias Kuhlmey

Monday, October 1, 2012

Posted By: Matthias Paul Kuhlmey

 

In the past few days, we have witnessed downward revisions to some economic data, further negative investor sentiment, and continued problems in Europe. Are there still investment opportunities, and how can investors navigate this challenging environment?

 

For more background, please listen to my latest appearance on the Economy Watch segment of Chuck Jaffe’s Moneylife radio show.

 

Please follow the above hyperlinks for the referenced material.

 

Economy Watch – Radio Interview with Matthias Kuhlmey

Wednesday, September 5, 2012

Posted By: Matthias Paul Kuhlmey

 

The month of September has historically been a challenging one for investing, as it has been the single worst month for stocks since 1915, with negative performance “nearly 60% of the time.”  We have a feeling that this September will not disappoint (at least with respect to being challenging), as there are plenty of highly anticipated meetings and statistics coming our way, including the German Constitutional Court decision on the legality of the European Stability Mechanism (ESM), meetings of the ECB and G20, and continued employment and economic data from around the world.

 

For additional perspective on what September may bring, please listen to my latest appearance on the Economy Watch segment of Chuck Jaffe’s Moneylife radio show.

 

Please follow the above hyperlinks for the referenced material.

 

Number 13 (Part II)

Thursday, August 23, 2012

Posted By: Matthias Paul Kuhlmey

 

We were already scolded for having taken a short break from the “blogosphere” – let me assure you, it feels good to be missed. It is simply breathtaking (which clearly impacts the little fingers typing blogs) to understand what is going on in financial markets these days. The cynical observer of our writings may suggest that it is not altogether bad to take a +10% return in equity markets. Ever since Mario Draghi, President of the European Central Bank, promised the world that he will do whatever it takes to save the Euro, financial markets have “been on fire.” Investors have “shrugged off” poor economic data, as (of course) Central Bankers around the globe will “fix it.” It, therefore, should be no surprise that the VIX Index, a commonly accepted indicator of perceived future risk in equity markets, has marked a 5-year low – indicative of total investor complacency, a typically very questionable constellation.

 

Central Bankers can control the “creation” of money (i.e., the related quantity), but they cannot control where this money is being placed, invested, or how “flows” will occur. With this in mind, be assured that several speculative investment bubbles have been in the process of formation. One bubble may be in U.S. Equities … or is it really perceivable that the condition of the U.S. Economy, since 2008/2009, has granted a move in the S&P 500 from 600 levels to currently 1420? 

 

Pulling it all together:  In 2011, well-known author, Nassim Nicholas Taleb (of The Black Swan), co-authored (with Mark Blyth) a fascinating essay entitled, The Black Swan of Cairo; How Suppressing Volatility Makes The World Less Predictable and More Dangerous. In essence, both writers conclude that efforts of policymakers to make the world a safer place, by “smoothing out” volatility, actually make the system more volatile – a rather unintended consequence that investors need to account for in asset allocation and risk management decisions. 

 

At this point, you may wonder why this blog is titled, Number 13 (Part II). It is a (possibly) timely update to our previous Friday the 13th blog, Friggatriskaidekaphobia, but more importantly, we want to thank all of our respected clients and friends:  Earlier this week, our young and exciting company, HighTower, “was ranked #13 on the prestigious Inc. 500/5000 list of the fastest growing private companies in America in 2012. This achievement places HighTower among an elite group of companies, such as Microsoft, Vizio, Intuit, Oracle, and Zappos, all of whom have earned places on the list in the more than 30 years that Inc. has been compiling this ranking.” Please follow this link for the story.

 

 
 
 
 

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