The Future of Investing - September 8, 2009
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The stock market has been on a roll the past six months and all money managers are shaking their heads in disbelief while they try to get a handle on the future. Has anything changed? Is the world a different place or the same old? What could we expect in the future and how will money be made?
The jury is still in deep deliberations but there are trends developing that may be glimpses of the new age of investing. Here is something we are seeing but keep in mind that nothing happens quickly and it could take some time for things to play out.
The emerging market countries will most likely be the stellar stars of tomorrow. The U.S., Japan and Europe are rife with bloat and are not showing any indications of recovering anytime soon. When we say recover, we are not referring to what economists are referring to. We are looking for true growth and not merely avoiding a worldwide economic collapse. Anemic growth is probably going to dominate the world superpowers while China, India, Russia and Brazil provide the true impetus for global growth in the future.
Just this alone should make anyone wonder what the future looks like. Clearly this development is favoring fiscally responsible countries while the fiscal miscreants will simply putter along, stumbling aimlessly trying to get back on track. The U.S., Japan, and Europe are essentially broke and are spending trillions hoping-and-coping and resorting to prayer as a last resort. If history is any indication, all of this indiscriminate spending will not work. It rarely has but for some reason there is a popular belief that it will work this time. It did not work for Keynes; perhaps someone else has figured out a way to make it work but we can't see it.
If it does not work then why do it? And, if it does work and we need it so badly then why are we so slow in implementing the stimulus package. Perhaps it is more of a political gambit. The amount that Congress authorized in spending is $185 billion for 2009 and $399 billion for 2010. Clearly the reason is 2010 is an election year. By ramping up stimulus next year, there will hopefully be happy results the politicians can point to while pleading for their jobs.
The emerging nations are not so fiscally irresponsible, have good savings and have young populations that typically create vibrant economies. Many of these countries are like the United States in the 1940's. They are coiled springs in waiting. Furthermore, they are expanding their savings and investment base which is something we are sorely lacking.
As much as we trying to avoid it right now, savings are the true stimulus, not debt. While debt is money, it is not the kind of money we need to compete with the emerging countries. We only create money through debt but without savings there is no future growth, only constricting obligations.
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This sounds like a mouthful so an explanation is in order. Banks create money. They create it by loaning money. The more they loan out, the more that is created. The problem is we have used debt and credit as our source of consumption and have not planned a strategy of repayment. Americans have created enormous debt as they used their homes and credit cards as sources of cash to fuel spending on frivolous wants.
Meanwhile, the emerging countries have saved. The Chinese historically have saved 35% (and sometimes more) of their income. Americans just a few years ago registered negative savings and actually spent more money than they earned. Debt covered the gap. Today the savings rate is up to about 7% which is still low by historical standards. The reason is folks are paying down debts and trying to get back on the right track.
Those countries that save can then invest in plants, machinery and expansion. The only way for a country to be truly healthy is through savings and investments and not by spending money they don't have. Americans have discovered this amidst the housing collapse; Washington has not. China, Brazil, Thailand, Viet Nam, and Malaysia have figured out that if they build manufacturing plants and produce tangible goods that people want, that the "golden geese" will continue to produce golden eggs. Capitol Hill is continuing to throw financial burdens on its citizens and enslaving all of us with future debts and obligations and is not promoting savings and investments.
These countries are now looking at finding an alternative to the American dollar. In 1974, OPEC (Organization of Petroleum Exporting Countries) signed an agreement that all oil would be sold in U.S. dollars. Most commodities are traded in dollars. Because of our high and escalating debt levels, people are getting nervous and the dollar is destined to get weaker. Typically, the more fiscally responsible a country is the stronger the currency. Other countries are worried about having to buy dollars which will grow weaker just to buy commodity goods. Expect more discussion about a move away from the dollar as the world's reserve currency. What is being proposed is using a basket of currencies to spread risk.
As the developed countries continue to try to prop up their finances by printing money, the emerging nations are getting stronger. Many of those who have had financial problems in the past have learned from their mistakes and have made great strides in progress. Furthermore, as the dollar weakens it makes overseas investing all the more profitable. The future today as we can see it points clearly that the emerging markets will become the place to be for investors in the days to come. More than that, this will be exciting!
It may not happen right away but as the world's economic problems diminish we should see strength in the sleeping giants while our citizens deal with an ever increasing mountain of debts and obligations that will continue to weaken our economy, our nation and our future prospects. There is only one way we can regain our status and that is for Washington to put the brakes on spending and start saving. Yes, it is true that it could hurt in the short run but it would be wonderful in the long run. You can help by encouraging your representatives to follow the lead of the emerging countries and seeking fiscal responsibility.
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That does it for this week. Thanks for reading the Vance Advance!
Working for your Wealth and Peace of Mind,
The Vance Capital Management Team |
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