Wednesday Briefs – 2 June 2021

THIS WEEK: Memorial Day; European Stocks; LVMH, Luxury Sector.


War never seems far away, be it geographically or generationally. We all lived in or near a war zone, or had a relative or friend enlist in a war by volunteering or by draft. We have all seen images of war and have been aware of people fleeing war and sometimes settling not far from our doorsteps.

The ultimate cruelty of war is that it kills and maims primarily the young, thus destroying many more person-years than if it hit instead equivalent numbers among older age groups. In the past, combatant casualties were mostly young men in their late teens or in their twenties. For example, the average age at death of Americans listed at the Vietnam Veterans Memorial is 23 years. They were each at a different stage of life, but at a young stage for most: some had only just graduated from high school, others perhaps just acquired a car, taken a job, gotten married or become a father. The youngest US serviceman to be killed in action in Vietnam was Dan Bullock, gone at age 15, or about 6o years short of a normal lifespan.

For those who come back, there is the trauma of having been at the front, of having been in skirmishes, raids or bombings, of having seen death and destruction up close. This trauma can last a lifetime and too often ends in suicide. The suicide rate among veterans is significantly higher than among non-veterans. In recent years, there were over 6,000 veteran suicides in the US every year, or about 18 per day. See this Report from the US Department of Veterans Affairs. In total, there are over 40,000 suicides annually in the US, more than 100 per day.

Civilians of many recent foreign wars have suffered more than combatants. This may be an accelerating trend that started in the twentieth century. In WW1, the number of civilian deaths including from war-related famine and disease roughly equaled the number of combatant deaths. In WW2 however, twice as many civilians perished as combatants. As technology improves and combat becomes more automated and robotized, the ratio of civilian to combatant deaths would rise further. More reason to heed Churchill’s words: jaw jaw is better than war war.


Well, well, what have we here. After two decades of performance ennui, European stock indices are showing some life again. Sure, it only took a once in a century global pandemic and trillions of dollars in free money but a European investor knows better than to look a gift horse in the mouth. Except for a decent run in the mid 2000s, these periods of performance in the past twenty years have been rare and brief.

Yet we should differentiate between European countries. Since the previous cycle peaks of 2000 and 2007 (see table), German equities have performed far better than the other major Europeans, though not as well as US equities. This is consistent with the view that the Euro currency works well for Germany but not so well for other European economies. Before the Euro, other European currencies were in a near perpetual decline vs. the Deutsche Mark. Because this flexibility is no longer possible, the Euro is helpfully low for Germany, boosting its exports, but damagingly high for other economies, hampering their competitiveness.

The result can also be seen in the performance of equities in France, Italy and Spain. It has been dismal in particular among larger companies (small companies have performed better since 2008). France and UK indices are now near their previous peaks of 2000 and 2007. But Italian and Spanish indices are still 30 to 50% below their peaks.

The Europe wide STOXX 600 index encompasses all these divergences. Its performance relative to the S&P 500 has been very poor for two decades. Essentially dead money while the US benchmark has nearly tripled.


The new richest man in the world is Frenchman Bernard Arnault, chief executive of the luxury goods giant LVMH. Mr. Arnault’s unique genius is to have consolidated over a period of four decades a large number of luxury brands and to have then scaled up their reach by targeting the rising global consumer class, first in Europe and the Middle East, then in the United States and Japan, and then in China and the rest of Asia. No doubt his planners are now scouring other regions for future growth opportunities.

Execution is more difficult than strategy and Mr. Arnault’s execution stands out for its consistent success. Undeterred by criticism that retail is a lower margin business, he plowed ahead over the years with the acquisition of duty-free chain DFS in 1997, and with the expansion of cosmetics chain Sephora. In addition, several LVMH brands have their own retail stores. It will be interesting to see how Mr. Arnault applies his magic to further advance Tiffany, just added to his company’s watches and jewelry portfolio.

The table shows the other luxury/cosmetics companies in the French CAC 40 index. As their weighting in the index is significant, it is clear from the shown returns that without this sector the CAC 40 would have performed much worse in the past two decades. Investing according to a country’s comparative advantage is perhaps the soundest strategy of all: American intellectual property (software, pharma), French luxury/fashion/cosmetics, German engineering etc.

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