Oswald Spengler was a late 19th century German historian, philosopher and man of letters. Like so many artists, his work only gained international notoriety posthumously. During the German Weimer Republic period of hyperinflation (1922), Spengler observed that “…the soul of the German people is filled with a surprising and dumbfounding capability for extreme failure followed by extreme success.”
The disastrous effects of defeats in both World Wars speak to the former, while Germany’s remarkable resilience in the wake of various economic disasters speak to the latter. What follows are a few historical examples of Germany’s unique ability to adjust, thrive and ultimately to prosper in the wake of economic turmoil. Confronted with yet another period of economic turbulence, Germany finds itself in the epicenter of the eurozone crisis. Investors might consider Germany’s economic legacy as a way of increasing information and analysis which effective decision making requires. Consider;
The aforementioned Spengler did most of his writing, and was profoundly influenced by the hyperinflation that marked the Weimer Republic. In the wake of their WW1 defeat and the resulting Treaty of Versailles, Germany was forced to pay impossible reparation payments for their role as “belligerents”. Furthermore, they were forced to cede the highly productive industrial areas of the Ruhr and Saar regions. The German consensus felt that the ceding of these territories violated the terms of the Treaty.
Subsequently, German finance ministers stopped the gold standard that backed the Mark, but started up, to a startling degree, the printing presses. During the first half of 1922, the German mark had stabilized at 320 per (1) U.S. dollar. By December it had spiked to 8000 marks per dollar. The cost of living increased by a factor of 16 while ultimately it took 1 quintillion (1,000,000,000,000) marks to stabilize it to (1) unit of the new currency, the Rentenmark.
The new currency managed to tame the hyperinflation, leading to a period of relative economic stability. Favorable loans and debt restructuring brought about improved relations (read; foreign investment) with the Soviet Union, France, the U.S. and Britain resulting in a completely revamped German infrastructure. Additionally, tighter fiscal controls, reduction of bureaucracy and tougher requirements for collateralized loans, were factors that led to a decade long period of prosperity. This decade has often been called the “Goldene Zanier”, or the German Golden 20s’.
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At the end of WW2, with its infrastructure in ashes, huge reparation payments to Allied countries, a demographic brain drain, and a devastated coal and steel industry, Germany began yet another profound march towards economic prosperity. By 1950, West Germany that progress had taken on the moniker of “an economic miracle” or Germany’s “Wirthschaftuwundur”. The fundamental reasons for this quick economic recovery can be found in the dynamics of what is known as the Exogenous Growth Model.
Simply put, German productivity, population growth, capital accumulation, technological progress, currency reform converged in such a way as to protect a competitive economic environment from monopolistic or state controlled tendencies. Wirthscaftewunder was a curious mix of Keynes and Hayek type contradictions that drew upon the German tradition that acknowledges that at least some state control (albeit with a cautious attitude) toward investment and risk taking is required, but only when a private dynamic vision of market systems is directed toward growth. Between 1950 and 1960, German national production had risen 2.5 times, GDP rose by 66%, and unemployment fell from 10.3% to 1.2%.
In the 1980s the Soviet Union experienced a period of economic and political stagnation effectively devolving its influence into East Germany. Two weeks after the fall of the Berlin Wall, Helmut Kohl announced his infamous German Reunification Plan. Overnight, a western system of justice, regulation of labor, banking, education, social security and welfare were all transplanted from West to East. Faced with the colossal task of integrating East Germany’s decrepit infrastructure, limited technology, and lack of capitalistic experience, West Germany began to institute an exchange rate to affect monetary union, privatize eastern industry, and decide how to raise capital through taxes and/or debt. Once again, but by no means seamless, West Germany’s path to prosperity was one of assention as by the dawn of the 21st century, a united Germany stood as the undisputed economic powerhouse of Europe.
Today, Germany stands as the major actor in the eurozone crisis. Has it yet crossed the rubicon from Spangler’s failure to success paradigm? Certainly at this point, the answer is unclear. For today’s investors however, there are practical and actionable applications for those who feel that Germany’s proclivities for sound strategic management, for German high precision manufacturing skills, workforce discipline, trade surpluses etc. can, once again translate to wise investment decisions.
Van Eck’s Market Vectors Small Cap ETF (GERJ) for example, gives exposure to German innovation and niche market strengths synonymous with strong export demand and solid domestic consumption. German exports have flooded Europe and the world and remain the most sought after within its own borders. The top represented sectors in this fund are industrial, information technology, machine tools, local market consumer discretionaries and financials. Small cap fund companies comprise a vast majority of the German economy and they employ 70% of the German workforce.
By contrast, iShares MSCI German Index Fund (EWG) seeks to replicate the performance of the greater German equity market. As the second largest exporter on the globe (far and away the largest exporter in Europe), Germany is in a position to benefit from a weaker Euro as a diminished single currency is favorable for exports. EWG indexes 51 German firms including; industrial giants Siemens (SI), Volkswagen, and Daimler. Pharmaceuticals such as Bayer (OTCPK:BAYZF) and Merck (MRK). Financials such as Deutsche Bank (DB), Hannover, and Commerze-Bank and such popular consumer discretionaries like Addias, Puma and Porsche.
The New Germany Fund (GF) is a closed-end fund, administered by Deutsche Bank that specializes in medium and small German companies that have been viewed to carry the banner of German innovation and precision. These designated small and mid-sized capped funds have been traditionally been better able to adapt and navigate mercurial economic swings. Does this week’s failure of a German Bond auction signify that, like Greece and Italy, German sovereign debt is at risk? Or reward? In either case, Pimco’s German Bond Index ETF (BUND) and Powershares D.B. German Bund ETN (BUNL) and 3x German Futures (BUNT) remain vehicles whereby one can gain access to what is still the eurozone’s most highly rated AAA country.
Economic problems have never been far from the surface in most narratives in modern German history. Once again, the German people find themselves at the apogee of yet another economic crisis with potential widespread consequences. The question we have to ask ourselves as investors is at what point on the Spangler failure/success paradigm are we located? Is the fiscal trajectory such that we are living through a crisis of transition to perhaps a new market model? Are the investment tools available flexible, transparent and comprehensive enough to afford wise investment decisions? These are questions that have historically been asked of the German people…perhaps we should consider their legacy.