Euro Area Positive Economic Surprise: Window Of Opportunity?

We have highlighted in previous Insights that sentiment toward euro area growth is dismal and that the bar for positive surprises was low. Indeed, incoming data is now beating these low expectations, which if history repeats, could trigger a near-term bounce in euro area stocks.


Since 2010, bounces off the bottom of the Citigroup Economic Surprise Index have corresponded with lift-off in European equity prices. Recall that a similar phenomenon was true for the U.S., particularly in the early years of the recovery from the GFC. As investors consistently doubted the recovery, equity prices slid when the data was disappointing and rallied whenever economic data was better relative to expectations.

The forward looking component of yesterday’s ZEW survey for the euro area is still at a very low historic level, but nevertheless reached an 11-month high and beat expectations. This is one example, but by and large, European data has been slightly stronger than forecast in recent days, according to the Citigroup gauge. If history is a guide, this trend could persist, opening up the possibility of a near-term rally in euro area stocks.

Top Ten Books On Geopolitics

A number of clients and colleagues have asked me for a recommended reading list on “geopolitics.” This is the “top ten” list.

Geopolitics, as a discipline or social science, does not exist. Furthermore, for many investors, it is simply a catch-all term for everything that is not economics or finance, but that still leaves a vast subject area that covers everything from history, political science, sociology, anthropology, qualitative methods, and psychology. Within each of those disciplines, some methods and ideas are more relevant for investors than others.

My reading list is therefore an eclectic mix of topics that cover qualitative methods, psychology, and political science (with a special skew towards international relations theory and the ‘classics’ of geopolitics). I only recommend two history books, largely because I believe one should always be reading history. The two books cover the episodes I think are particularly relevant to contemporary geopolitics: Imperialism and late 19th century European history.

Readings that you will not see recommended in my list are works by Halford Mackinder and Alfred Thayer Mahan. These two men are considered the fathers of geopolitical strategic thought, but I recommend that instead of reading their work in detail, investors read summaries of their work (such as my own blog post on the subject). Both have influenced strategic military planners from Wilhelm II to U.S. defense planners at the Pentagon, but their ideas are fairly simple to digest and do not require careful study.

Below is therefore a “top-10″ list (I could not actually keep it to just 10!) of books that I believe will stimulate investors to think outside the ‘market’ box. Some books are useful for methodology, specific subject areas, and different levels of analysis (society, state, international system, human nature, organizational behavior, etc.). Therefore, I try to assemble a best of the best list, each with a little description for why I am recommending the particular book. They have all influenced my thinking and my own eclectic (‘fox’ as opposed to a ‘hedgehog,’ to use Isiah Berlin’s terminology) approach to analysis. Note that I tried to keep this reading list fairly up-to-date with recent titles and as such it ignores a slew of philosophical and theoretical works that have shaped modern social science. The point of the list is to focus on readable and accessible works.

  1. Psychology of Intelligence Analysis – Richards J. Heuer (2005). This book is actually published online in PDF format; it was commissioned by the CIA and provides a great overview of how to do intelligence-relevant social and political research. It is a methodology book, but it is also extremely accessible, intuitive, short, and useful.
  2. The Signal And The Noise… Why So Many Predictions Fail – But Some Don’t – Nate Silver (2013). Another methodology book. Silver shows the value of Bayesian probability modeling (crucial for thinking about investment-relevant forecasts), but also cautions against an overreliance on quantification and data. A more thorough study, but also far more tedious to get through, would be Philip Tetlock’s Expert Political Judgment (2005). Tetlock shows that most political judgment is not expert at all.
  3. The Person And The Situation – Lee Ross and Richard Nisbett (2011). The latest edition of this social psychology classic is a methodological must-read for anyone studying politics and societies. It illustrates the folly of imbuing personality with agency, as opposed to emphasizing the context/situation. This book essentially makes the point that context/situation/constraints are far more relevant than preferences. That is a powerful point for anyone trying to predict policymaker moves.
  4. Guns, Germs, and Steel – Jared Diamond (1997). As macro of an overview of human development as it gets. Diamond stresses geography, climate, and biology. The book tries to explain European/Western dominance from a very macro, super materialist (as opposed to ideological and cultural) perspective. It is an exercise in geographic determinism. I don’t agree with all its conclusions, but it provides a worthy mental workout that forces the reader to accept that there are impersonal forces shaping outcomes.
  5. The Dynamics of Global Dominance: European Overseas Empires (1415-1980) – David Abernathy (2000). A comprehensive overview of European colonization and imperialism, this book attempts to explain why Europe conquered the world. Unlike Guns, Germs, and Steel, it uses micro-analysis to explain European domination, relying on social and political factors rather than geography. Particularly powerful is Abernathy’s argument that inter-state competition and the lack of a central continental power created European imperialism.
  6. Modernization, Cultural Change, and Democracy: The Human Development Sequence – Ronald Inglehart and Christian Welzel (2005). The authors argue that wealth changes human values, which then leads to demands for democracy. I don’t necessarily agree with all of the conclusions in the book – I am of the belief that development and modernity can be reversed, for example – but it is certainly an important contribution to the study of social and human development. Also, great survey data that should be updated soon on their website, I have used it in BCA Geopolitical Strategy analyses before.
  7. The Rise And Decline Of Nations – Moncur Olson (1982). A completely different view of modernization and development from Inglehart and Welzel, Olson emphasizes interest group choices and policies. Olson is also best known for his “collective action dilemma,” which specifically explores the dynamics of interest groups.
  8. The World In Depression, 1929-1939 – Charles Kindleberger (2013, 40th anniversary edition). Kindleberger introduces the ‘hegemonic stability theory’ through the study of the Great Depression. The idea is that the world, lacking a single superpower, was allowed to descend into a Depression. The new edition has an excellent foreword by Barry Eichengreen, whose Globalizing Capital (1996) really should have made the reading list as well.
  9. The Tragedy Of Great Power Politics – John Mearsheimer (2014 edition). Mearsheimer makes a compelling case for why the unbalanced multipolar system is the most volatile geopolitical arrangement. The 2014 updated edition also contains a chapter on why China will not rise peacefully. There are many books of international relations (IR) theory that could have made the list, but this one is, in my view, the most relevant today.
  10. The War That Ended Peace – Margaret Macmillan (2014). The best overview of European history during the late 19th and early 20th century, and how that period led to the First World War. It describes very well the unbalanced multipolar context that led to the Great War. It is an empirical/historical complement to Mearsheimer’s theoretical work. Every investor should know about this period of global history.
  11. The End Of Power – Moises Naim (2013). The premise of Naim’s book is that power – the ability of those in positions of power to shape events at the expense of others – is decaying everywhere. Naim argues that changes in values (very much along the Inglehart and Welzel line of thought), education levels, and wealth are empowering individuals and the less powerful. He also points out why this is such a dangerous development, potentially leading to an anarchic world.
  12. A Logic Of Expressive Choice – Alexander A. Schuessler (2000). This book illustrates why voters vote to express their identity, not because of expectations of policy outcomes. A must-read to understand how voter preferences are determined. For example, this is a useful paradigm that explains why the Greeks continue to support the euro at very high rates, despite their severe disagreements with the Berlin-Brussels axis over policies.
  13. The Capital – Karl Marx (The Oxford World’s Classics abridgement, 1999). One of the most useful studies of social systems and economics. The chapter on ‘exchange’ is a classic example of materialist dialectic, a structural approach to analysis that disaggregates all societal and cultural factors and concentrates purely on the material structure.
  14. The Protestant Ethic And The Spirit Of Capitalism – Max Weber. Marx’s Das Kapital should be read in conjunction with Weber’s ‘Spirit Of Capitalism.’ Unlike Marx’s materialist dialectic, Weber introduces cultural and societal factors in explaining economic development. The two works complement each other extremely well and illustrate the different methodological approaches to the study of politics, economics, and societies. Also, Weber’s book is far more accessible, shorter, and interesting than Marx’s tome.
  15. The Prince – Niccolo Machiavelli. An absolute must read for anyone studying politics. It is short, to the point, and the first attempt at a systematic study of politics by any modern Western philosopher. Machiavelli is considered to be the father of political science.