Over the years, I have been made the case that the U.S. economy is growing ever more slowly, while the rest of the world was accelerating; and that the U.S. markets are not an ideal place to be invested. I have been a Bear on the U.S. Economy for some time, and less than
enthralled of the U.S. equities for a while (recall my infamous Cult of the Bear column in TheStreet.com in January 2006).
I have discussed overseas (especially Asia) as a preferable place to be invested, and given the nod to Energy (5 years ago) Gold (4 years ago), Japan (3 years ago) and Agricultural commodities (2 years ago).
There are select places to put your money in the U.S., but they are few and far between. Over Summer 2006, we identified Big Cap US multi-nationals — those with heavy overseas exposure — as a valid place to be invested.
Apparently, many people think the only thing you can say about this investment posture is that I am Bear. I do not think that does justice to what some dismissively call nuance.
Is this perhaps too subtle? Can you be a fully invested Bear?
I have been thinking about this after three separate people this week asked me if I was getting killed shorting the markets. No, I said, we are mostly long the asset classes named above, with some U.S. exposure, some cash, and handily outperforming the SPX. Our short positions are very small, and either have reasonable stops attached to them, or are hedged with options.
Well, it turns out that this call hasn’t been so bad. According to Time’s Floyd Norris, there have been Strong Gains in U.S., Except by Comparison:
"FIVE years after the American stock market hit bottom after the bursting of the technology stock bubble and the 2001 recession, share prices as measured by the Standard & Poor’s 500 have doubled.
That growth amounts to a compound annual increase of 15 percent a year and is the fastest doubling off a market bottom since the 1980s. But in the current world environment, it does not look impressive. Nearly every other stock market in the world has done better.
Of the 83 countries for which records of a major stock index were available, the American share price increase in the five years after Oct. 9, 2002, was better than those of only four. All four are small countries, either in the Caribbean or Latin America.
But South America also produced three of the six best-performing markets during the period, in Peru, Brazil and Colombia. Peru’s annual gain of 87.5 percent was the best in the world.
That all 83 markets around the world had an increase is emblematic of the strength of the global economy and the willingness of international investors to pour money into markets that many had never heard of — or that did not exist — 20 years ago."
That’s correct: Out of 83 international bourses, the USA ranked 78th. (Where can I order one of those big foam hands with the index finger and the wording WE’RE # 78! on it?)
So while I get grief from people for being negative on the US economy and markets — versus overseas bourses — that has turned out to be the right investing position.
The graphs below are quite revealing:
graphic courtesy of NYT
>
Source:
Strong Gains in U.S., Except by Comparison
FLOYD NORRIS
NYT, October 13, 2007
http://www.nytimes.com/2007/10/13/business/13chart.html
As I warned in the companion to that Bear Cult column, there were quite a few caveats: At the time, I admitted the obvious: I don’t know what’s going to happen next year. Neither do you; nor does anyone else, for that matter. Further, I don’t believe in forecasting – for most investors, it’s a distraction from managing risk and finding opportunities.
And, as I said at the time, I’ve long ago dismissed the terms Bull or Bear as irrelevant labels.
Perhaps its naivete, but, despite all those warnings and caveats, I was surprised how so many people took that so seriously. I have been responding to cries of Dow 6800 ever since.
Oh, well, live and learn . . .
#78 hahahah…Greatest story never told..
“I don’t believe in forecasting”
But you do believe in music, which means you must…believe in love…
Know what I mean?
We kicked Trinadad’s ASS!
What are the currency adjusted rates? Sure Bulgaria looks great with a 77% return but what happened to their currency over the same time(not that the US currency has exactly been a gem over that time)?
Not so fast in the contrition act, as most of the top tier markets listed above, can be moved up with very infinitesimal liquidity and since it was agreed that they all had to move up in perfect harmony, they had no choice but to move higher and higher..
my mistake, reading the fine print shows those are in US dollars. I stand corrected
Barry,
What’s the method by which these “percentile” gains are normalized?
If you look at just raw numbers, percentile gains in small / low / emerging markets will be large.. because it’s much easier to go from 100 to 200 than 2500 to 2600, but I’d rather be in the stock going from 2500 to 2600.
Um, no.
Its based on average annual performance versus SPX (1561). Many of those other countries have HIGHER bourses than the S&P: China, Japan, France, UK, Turkey, FTSE, Canada, Australia, etc.
Nice try, though . . .
Wah hoo! France (63) beat the U.S. (79) in ranking! So much for the “sickman” of Europe! If they are sick then we must be close to death.
Market breadth, as measured by the NYSE advance/decline line, remains strong for the large-cap stocks, notes Natexis Bleichroeder technical analyst John Roque. Still, unlike the two large-cap indexes, the A/D line hasn’t yet made a new high. Small- and mid-cap stock breadth is lagging. The fourth quarter historically has been kind to stocks, but after soaring from August lows and five straight weeks of gains, a little breather wouldn’t be out of the question in the near term. That’s particularly so since many banks will be reporting this week and investors will be watching for damage from subprime mortgages and August’s financial-market turmoil
OK we beat Iraq, Somalia and Zimbabwe’s stock markets – who else did the mighty US outperform???
Inquiring minds want to know!
‘Risk-adjusted’ is the first thing that came to mind when I saw this analysis. The majority of developed countries are in the bottom 50% – the US is still the laggard of developed countries though. Maybe some type of risk-adjusted returns would tell another story?
I have to second the “risk adjusted” comment (curse you for beating me to it!). Although I agree that foreign markets, commodities etc. like you say have been the place to be (and have invested my own money as such) I look at that list and think “Peru. Hmm. How would I get access to Peru if I wanted to? What does Peru make? Are they a one product economy like Saudi Arabia? What’s the economic risk of the country?”
We are definitely under performing much of the rest of the world, especially “emerging markets”, but I suspect that has more to do with a newly awakened China and India needing what those countries have to offer (i.e. raw materials) more than what we have to offer (at least for the moment).
Barry – When you are finding foreign opportunities like the examples you give of “Asia” and “Japan” do you use the same investment process you do for the U.S.? In particular, do you examine their periodic economic releases the way you do U.S. CPI, NFP, earnings, etc? I don’t mean just GDP trends, for which you have described many problems. Where might we find some of that analysis?
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BR: Its been almost all ETFs: Japan, Hong Kong, Maylasia, Taiwan, Australia, Brazil, Canada, pacific rim etc.
Nothing as dramatic with Stocks as is implied in the story. The real news is US $ is sinking fast. It should probably lose another 50% and be almost worthless, by today’s purchasing power, in 20 to 25 years. The real fall will accelerate after 2011 when the Entitlement bomb goes off. American Pesos anyone?
3rd the risk adjustment comment but really wanna know where were you when that advice would have done me some good ? More to the point on this blog almost all the discussion (98% ?) is US-centric.
Better yet, w/o forecasting, what are the assets classes, regions/countries we should be looking at now ? Energy still looks strong but is reaching a lower growth rate. Emerging markets look extremely frothy and increasingly risky. They also (as Mr.El-Errian pointed out) went thru a 1 time structural shift to stability and institutinal soundness. While they still offer better returns it’s likely that again the rates are slowing. Japan’s been in the doldrums with slowing growth since Jan06 and don’t recall you mentioning AgCommodities here.
So looking back is all well and good. I believe you. How ’bout looking forward ? :) !!
When I tell people that I have most of my investments overseas, they sometimes ask if it isn’t risky to put all your eggs in one basket.
Mean reversion?
As Bob Doll said recently, many managers of global funds brag about having been underweight U.S. equities the past few years. That appears to be starting to change (Barry put up a chart a few weeks ago from Michael Panzer showing foreign buying is now at levels not seen since the 2000 top).
It’s a gigantic wall or worry, but if housing worries, recession worries, credit worries, etc. fade, those underweight the U.S. should rotate back in. Because of all those worries, U.S. valuations are cheap relative to many emerging markets. At current interest rate levels and earnings, stocks could easily support a 19x-20x multiple which represents significant upside.
The monetary and fiscal dynamics are setting up nicely as well. The FED is becoming looser and accomodative. And senators Frank, Dodd and Schumer intend to bail out reckless mortgage borrowers to score political brownie points for next year’s elections, providing fiscal stimulus as well.
“…I have been made the case that the U.S. economy is growing ever more slowing more than the rest of the world was accelerating…”
Groty,
Your last paragraph points to a major risk. From the point of view of foreigners, loose fiscal and monetary policy in the current environment translates to a defacto default.
Dud loans are first socialized through public debt, then the public debt is monetized.
If that’s the way things go, I hope the US doesn’t still need to borrow $2billion/day (much of it from Chinese and Persian Gulf governments).
I do remember Barry’s great Malaysia call.
rock on zappa man. BR are you the Frank Zappa of the markets??? that would be way cool and funky, white boy.
Typo in the title. We’re ranked #79, not #78
~~~
BR: I gotta stop doing math in my head (83-5 = 78)
I’ll fix it . . .
Does this mean that as the dollar sinks, U.S. company shares backed by hard assets continue to rise (i.e. XOM with large oil reserves and the mining sector) or do you think that shares are not a substitute for currency?
CrossProfit
I recall my MacroEconomics professor asking my class, “Which is better: China GDP 10, USA 5 or China GDP 1, USA GDP 3? Most of of the class chose the latter. Why? Does it matter that other countries are “ahead” of us if we are doing ok? As long as our economic conditions offer the opportunity for the enterprising individual willing to accept a reasonable amount of risk to flourish, then we’re in good shape. Who gets angry when people pass you on the interstate? As long as you arrive at your destination on time (or even early), what does it really matter what others are doing?
I’m a small business owner. I’m on pace to triple my year over year revenue this year. What are the chances of doing that in any of the 77 countries ahead of the U.S.?
With that said, however, I appreciate the perspective offered in this post and TFP remains among may favorite Blogs… I won’t argue that there are likely more investment opportunities overseas than here in the U.S. I just feel that there are enough opportunities here in our country to meet almost any definition of success and, therefore, find little interest in looking elsewhere (other than the simple foreign mutual fund for diversification).
Thanks for the post, Barry…
In my fantasy baseball league, we sometimes sell league dollars for actual cash. About five years ago, there was a 4:1 exchange rate league dollars to USD. The exchange rate in today’s trading is about 7:1.
Concerns about terrorism (caption on the graphic)? Terrorism can happen anywhere, but surely, it is less likely in the US than in most of the other 78 bourses! Turkey, Egypt, Columbia, Malaysia– these are countries its not even safe to visit.
No, its Bushenomics, plain and simple. Nobody bothered to tell Dumbo that economies require consumers, and if the working class lives in constant fear of unemployment, its a drag on spending.
Hey, wasn’t it #78 earlier today? Has inflation meanwhile happened to it?
“Nobody bothered to tell Dumbo that economies require consumers, and if the working class lives in constant fear of unemployment, its a drag on spending.”
Tom, I realy don’t think that the US is hurting for lack of consumers. Also, I would be very surprised if Joe Sixpack is living in greater fear of unemployment than the average Peruvian.
Next month I will attend a presentation on listing equity securities on the London stock exchange, a direct result of a relative flight of capital induced by Dumbo and others.
This chart for NYT looks good but if you plot the same S&P adjusted for inflation then you will see that it returned 0 (zero) since about 1999.
http://www.bowgett.com/Stocks/SP500.aspx
Isn’t the point to have a diversified portfolio, though?
We all know that basing investments on the previous 3-yr track record is a sure-fire way to under perform going forward.