Where will investment dollars flow?

It seems many bloggers read The Trader Wizard written by Bill Cara. He has a lot of experience and a lot of insight. If I am reading his stuff correctly, he seems to be very pessimistic about the US markets for the foreseeable future. He and I share similar concerns about what could hurt US stocks but I believe he comes to a more negative conclusion than I do.

The US financial markets not doing well brings up some interesting questions, most importantly is where will investment capital that is fleeing US stock and bonds go to? Some of it I'm sure will go into money markets and t-bills, but being too conservative can be as bad as being too aggressive. If you have been too conservative it will be inflation that will hurt you.

Investment capital, I believe, will have to find a place to invest. If the US gets knocked off of its perch somehow for some reason I have to believe it would be to the benefit of some other country or region. We all know China will one day be the largest economy on the planet so it makes sense to find a way to benefit from that and have at least a little exposure to China. That might mean Chinese equities, or investing in one of China trading partners (like Australia), or having exposure to the resources that China is consuming. There are probably other ways I am not thinking of too that could help you capture the effect of China.

Ditto India.

The Trader Wizard lays out a very compelling case for owning gold. I have to say I am not much of a gold bug but I maintain a small exposure with Anglo Gold as a counter strategy to equities. If something catastrophic happens again that causes a short violent down trend; gold and gold stocks would do well. The reason for Anglo Gold in particular is that it would capture the above effect but if there is some sort of slow spiral down of the US economic and financial system (which I do not believe will happen) Anglo Gold would benefit from strength in the South African Rand.

I have done some reading that concludes the bull market for stocks is over and now will be a twenty year bull market for all commodities. Maybe maybe not, but some exposure to commodities is probably a good idea. I do this in the equity markets and it captures most of the effect plus usually these stocks have some yield to them.

I believe emerging markets could come to play a more important role for American investors. Navigating emerging markets can be tricky They often are at different points in the economic and stock market cycles than the US and as such can zig when our markets zag which provides true diversification.

In a big picture sense, as I have written before, I think investment demand will flow to foreign stocks, foreign bonds (both industrialized and emerging for stock and bonds), other non-dollar denominated assets and commodities.

Part of my approach to portfolio construction is that I don't make oversized bets on any one outcome. I will overweight to what ever outcome I expect. However if I expect one thing to happen and I am wrong my clients aren't hurt by my being wrong. It would be correct to say I am worried about US stocks and I have been defensive for months now but I still have 35-40% of my equity exposure in US stocks, about 30% in foreign stocks and the rest in cash. I covered what I am looking for to invest some of that cash in a posting I put up yesterday.