It's a Wonderful World for Global Investors

by Paul Sutherland

Posted July 6, 2010

Current Observations

July Edition

Wealth Transfer

by Barry Hyman

Buy or Bye-Bye Banks

by Suzanne Stepan

PDF Version

On June 19, the People's Bank of China concluded its two-year examination comparing the Chinese Yuan currency to the U.S. dollar. The bank opted to return to a more flexible system for managing its currency which would allow the market to decide the Yuan's worth. Though the impact of this simple measure will be slow and subtle, it is positive for the Asia region and likely will have positive side effects for developed Europe and the Americas.

However, today's financial markets still seem compelled to obsess over the news of the day: oil spills, government spending gone irresponsibly wild, bank failures, unemployment, low interest rates, and insurgents not only in Afghanistan but apparently amongst our own military's four-star generals. Both Republicans and Democrats would want to say "no" to more spending sprees. Our system is upside down, and more Americans are drinking from the trough than filling it.

I have written before that "democracies are reactive systems" as they tend not to change until people are affected enough to cause change. It would be easy to succumb to a melancholic indifference when we realize that the engines of growth in the U.S. for more than 200 years – industrious, hard working, creative entrepreneurial and opportunity-seeking people who pay taxes and give back more than they take – are now the minority. In Michigan, for example, the average state employee makes twice the average person's wage in the private sector, public service is twice as profitable and, based on current trends, it is a very stable area of employment. This is not healthy for an economy, and it will be a drag on the U.S. for years to come.

There is a Pony in Here Somewhere

We will solve our problems … but we first need to realize that we are the problem. Only then will we be able to eliminate the economic and social sloppiness, fear, complacency and indifference. I read a great essay recently about BP that said something to the effect of: We knew the risks of drilling thousands of feet under the ocean, and we did not vote against it nor write letters to express our disagreement or pester our lawmakers to do something about it. Instead, we were too happy about the jobs and lower energy prices. The article then went on to discuss what the U.S. is made of – virtue and responsibility! The author challenged his readers to become responsible citizens and help get our country back on track. President Kennedy once said, "Ask not what your country can do for you – ask what you can do for your country."

Most importantly, we should invest in anticipation of the fix. Once the problems are fixed many unique investment opportunities disappear. It's hard to not smile when I think of Ronald Reagan surrounded by tax laws, pounding the volumes as he lamented about our complicated tax system in the early 1980s. I loved how he just "shut down" the pessimists and naysayers of that era of double-digit interest rates, inflation and unemployment and gave the cold shoulder to the whiners who said that America was on its last legs. His "pile of manure" story has become as analogous to our dear country as it has to optimism. One of my favorite quotes comes from Henry Kissinger, talking about George Schultz, the U.S. Secretary of State under President Reagan. I think it reflects on the state of our nation where politicians feel that a newspaper story without substance is more important than actually getting something done. Kissinger said, "He preferred accomplishment to fame." I am optimistic that we will start electing politicians who live by that motto.

All Global Investors Should Be Wildly Optimistic

There are so many reasons to be optimistic whether or not you're a global investor. Even U.S. investors have something to cheer about. Out of the 131 dividend actions taken thus far in 2010 by the S&P 500 constituents, 129 companies have raised dividends. So when naysayers talk about the manure, Current Observations readers can say, "Did you know that of the 131 dividend actions taken thus far in 2010 by the S&P 500 constituents, 129 companies have raised dividends?" Companies don't raise dividends unless they are optimistic about their prospects. If you're an energy company not involved in drilling offshore, you have reason to be optimistic. If you're a drug company making important compounds that help people, you have reason to be optimistic. If, however, you're a bank along the Gulf Coast with lots of real estate loans or a retailer selling uncompetitive products in malls, then you have reason to worry. But as investors we don't need to go there. This is the reason we believe investing in ALL the companies in an index is counterproductive. Why be forced to own the good, the bad and the downright ugly?

huge and it makes no sense to be constrained to investing only in the U.S. (See chart 1) If the U.S. is going to have taxes and spending drag down our country's growth, no one says we have to invest in those companies that are impaired by our excess taxregulatory or trade-restricted luggage. As illustrated below, the returns from global investments have been quite robust compared to the U.S., especially in the developing and emerging markets.

The financial tsunami of the past few years has brought prices on assets like stocks and real estate to very favorable levels, allowing for a significant margin of safety for investors. The economic "action" truly is overseas, and overseas investors are "getting it" and developing their own stock exchanges and robust financial markets.

It is becoming more and more apparent that economists, U.S. companies and those with common sense are realizing that the action is going to be in the emerging world. The U.S. has seen a 1/3 share of Global GDP slowly decrease from 1995-2009. (See chart 3) For example, China has less than $1,000 of infrastructure behind each of its citizens, while the U.S. has well over $100,000. A significant amount of growth is needed just to catch up with a modicum of our country's success. As can be seen below, real growth is coming from global sources rather than domestic sources. Globally, there are more than 40,000 stocks to invest in; millions of bonds and even more individual investments, so there are lots of places where investments will prosper.

Blessings

All of our clients live in the U.S. or are U.S. citizens, and all of us should feel blessed. By some measures we are over 100 times richer than China, enjoy many freedoms, have clean water, go to sleep feeling safe and have great health care. Most of the world's population lives on less than $2 a day, and 880 million live on less than $1. We are blessed and lucky to have the privileges bestowed upon us that resulted from the hard work of those who came before. If I can leave one thought to those reading this editorial it is this: we are lucky. I would rather have our issues of high taxes, entitlement programs, ridiculous government spending and slow economic growth than no electricity, no water, no health care, no education, poor-quality food, and no government protection from natural disasters like hurricanes, tsunamis, floods and earthquakes.

In an ancient text, a student asked his teacher, "Why do all these problems exist?" The wise teacher said, "So we have something to do."