Take Your Pick: Sinking US
or Soaring BRIC
John Browne
Posted Aug 23, 2010
Since March 2009, the S&P 500 has surged by nearly 60% and
US Treasuries have continued to surge, pushing yields close to
all-time lows. This has elicited sighs of relief from professional
investors, who see the strength as sure signs of recovery. Yet,
these investors are ignoring - willfully or otherwise -- the
very thin trading volume upon which this rally is built. Retail
investors remain scarred by the '08 collapse and have steered
clear of the stock market altogether. Instead, they have parked
cash in the Treasury market (hence the low yields).
Still, financial gurus are flush with tales of deep value that
await investors who have the fortitude to wade into the market.
This past week, with significant fanfare, Warren Buffett reduced
his position in Proctor & Gamble while increasing his holdings
of Johnson & Johnson. Perhaps Buffett is growing increasingly
distrustful of a consumer revival, but feels that government
support will keep health care from feeling the pinch? While parsing
the nuance of Buffet's stance, most American investors are missing
the big picture.
For want of a better cliché, reallocating US stock positions
is like rearranging deck chairs on the Titanic. It would be far
wiser to seek passage on a sturdier ship that is sailing with
the tide, rather than against it.
When compared with the US markets, the stock markets of Brazil,
Russia, India, and China (collectively known as the BRIC economies)
have shown far greater returns over the past decade. Over the
past five years, the S&P 500 has declined more than 12%.
Over the same period, the Shanghai Composite has more than doubled.
Brazilian, Indian, and Russian markets have shown lesser, but
significant gains. These returns were based on economies with
faster growth rates than what we have come to expect in the US.
What's more, the growth was primarily achieved not with government
subsidies, but with organic market demand fueling legitimately
productive enterprise.
The conventional wisdom is that investing in dollar-based equities
is "safer" than parking capital abroad, but we have
several reasons to believe this is no longer true. Massive government
stimulus packages appear to have failed to restore confidence,
but have widened the federal government's fiscal gap. States
are edging toward bankruptcy, many remaining solvent only because
of the market's assumed guarantee of federal backing. The nation's
largest banks are entirely dependent on federal support. On top
of all this, Congress is now discussing nationalizing the mortgage
insurance market, officially transferring tremendous unrealized
losses to the taxpayer.
America is effectively bankrupt, but refuses to acknowledge the
losses. Instead, they are being assumed by Washington, which
is itself hopelessly indebted to foreign governments. This risks
an international run on the dollar, which early indications show
has already begun.
Meanwhile, the American private sector is exhausted. Anxiety
over future stimulus and debt is now combined with fears over
tax increases, greater corporate regulation, renewed political
strength of organized labor, and new employer health care burdens.
If America is headed for depression, then US equity, real estate
and even bond investments may become increasingly risky relative
to the BRICs (and resource economies like Australia and Canada).
Still, many may be reluctant to increase their overseas holdings
out of lingering concerns about risk. The guarded approach has
been to invest in US corporations that generate a high proportion
of their earnings from abroad. We see this as a poor substitute
for the real thing. While it is true that foreign markets plunged
more steeply than the US in 2008, it is also true that their
rebound was far more dramatic. For the most part, the BRICs were
dragged down in the credit crunch due to their dependence on
the dollar-centric monetary order. They learned from this, and
are diversifying as rapidly as possible.
As the severity of our troubles becomes clear, US stock markets
will experience another major correction (in real terms). Even
good companies with overseas earnings will likely be dragged
down by the chaos of inflation, protectionism, regulation, and
taxation that tend to follow economic upheavals.
Now may be a time when those individual investors still holding
US securities and bonds might wish to follow the example of the
People's Bank of China and begin harvesting their dollar gains.
With the proceeds, investors should allocate to economies showing
growth based on genuine demand and solid fundamentals.
Please note: Opinions expressed are
those of the writer.
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Aug 20, 2010
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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