While I claim no originality with this, it is both interesting and possibly very important to all our investing futures.More attention has been paid to the fact that the US is being kept afloat by the sorts of emerging market countries that the US used to help keep afloat, provide aid etc.
While many people (me included) have said that this will China's century I think the big idea there was China ascending to great prosperity and prominence but while that is occurring the US seems like it may have a tougher time staying in place.
Relying on the kindness of strangers becomes problematic. The eagerness to buy our debt stems from what a great customer we are of so many countries. If the US starts to consume less or if other countries catch up to or surpass our consumption the US would then become less important to these places and so keeping us afloat might become less important.
The scenario would seem to be about the US losing control of its economic destiny, some may argue this happened a long time ago.
You can decide for yourself how real this is but if this is happening it is big and stands to have long term portfolio implications.
As a first step this makes the case for more foreign. It does not have to mean buy a lot of China, India and Taiwan (three countries that own a lot of US paper). The emerging markets that are part of this dynamic should be expected to continue to have a lot of volatility. They will have booms, busts and some of them will mismanage their prosperity now and then.
So if 40% emerging markets is not your cup of tea you will need to explore and learn about countries that stand to not be terribly effected by this. While the possibilities are wide open I think the best types of non-emerging market countries to own are surplus countries like Norway, countries who have stuff that the ascending countries need like Australia and countries in their own world like Iceland.
Before you jump on me about bring up Iceland again. This is an example of an investment destination that had trouble handling prosperity. The country is not permanently broken. Iceland is feeling the financial crisis badly, the crisis will end and they will know a little more about how to manage things for the future. Meanwhile as energy costs stay high their essentially free energy source will become compelling enough for certain types of industry to set up shop there. Clearly when is just as much of a variable as if in this theory. Maybe this started last week? Maybe there will be no movement in this direction until 2018?
Also, this is just an example. If you study countries then you probably have a couple you can make a bullish long term case for (and if you do why not leave a comment sharing the country and your thesis).
Lastly, if any of this holds any water then it should be realized that this is a big, big macro that will unfold over many years--it probably started to unfold a while back actually. If you have owned any foreign stocks in the last few years then you have already mitigated some of this issue. This post acknowledges the possibility of having to do more mitigation in the future.
The picture is from Juneau, AK, a couple of streets above the downtown.
6 comments:
Innovation and Capital Markets.
America is still way ahead in the business of creating the future.
Deluding yourself into thinking China is an ascending capitalistic society with the self-policing nature of a democratic government is like snuggling up with a pet rattlesnake to watch a movie. Its gonna bite, and it can kill when it does. China is likely to be our number one military adversary in the near future, espcially if and when the U.S. defaults on its debts.
China's people still risk death to escape to the United States. How many U.S. citizens are clamoring to escape to China?
The United States' problem and U.S. society in general is that it continues to believe that it can live beyond its means. China (OPEC et. al.) is simply taking advantage of an economic opportunity, at its own peril by the way. If and when the people and the government of the United States wake up and start living a bit more modestly with an eye toward building a secure future, the great rewards that can flow from our society will resume.
In my opinion, all of this is temporary and the United States will remain the world's dominant economic society for a long, long time.
anon in cg
you raise the possibility of the US defaulting and at the same time hold out the hope that the US will get religion about living more modestly?
which one is more likely? is either one likely to happen?
I'm a long term fan of Brazil, Roger.
It's a major exporter of iron ore (materials), soybeans (farming), it's sitting on huge oil deposits (energy), all major investment themes. Even automotive manufacturers find Brazil a desirable location. Despite strength in the real, Brazil is still running a trade surplus.
Brazil has run a current account surplus for the last five years, though it has recently slipped into a deficit situation. That could be a red flag, but the Brazilian central bank just raised interest rates to 12.25%, an interesting development vs. our Fed funds rate.
Finally, S&P and Fitch both recently upgraded Brazil's soverign credit rating to investment grade, which has increased the flow of foreign funds into the country.
I suspect that the recent decline in commodity prices could cause some volatility near term as could a global economic slowdown, but I think the outlook overall is pretty rosy.
agreed on brazil, current correction notwithstanding. in this post i was trying to highlight non-emerging market countries.
My number one consideration for evaluating a country's prospects, developed or emerging, is whether its government policies attempt to benefit all of its citizens or just a narrow elite minority. This is not simply a matter of "socially conscious" investing. I just believe that the economies of those who practice the former will be generally healthier; more stable and sustainable.
Sadly, the US today ranks near the bottom of this particular league table and I'm not hopeful that this will change soon regardless of who wins in November.
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