Often Wrong, But Never In Doubt
Posted On: Wed, Oct 10, 2007
Author: Monty Guild & Tony Danaher
Fall is here but the living is easy. Contrary to many past September to October time frames, this past September and the first few days of October have been very pleasant for investors.
Several markets that we follow are at new highs, including Hong Kong, China, Brazil, India, Singapore and others. Gold is at a multi-year high, oil is doing very well, as are base metals. Clearly, things are salutary for global investorsa?|unless you are in mortgage debt and other related problem areas. It seems obvious that, as predicted, investors have sought solace in global fast growing markets like those mentioned above.
Of course, one reason that all of these markets are doing well is that the U.S. dollar is doing so poorly. When the dollar falls, many investors seek to protect themselves from a declining dollar by investing abroad or in commodities.
It can be fun to laugh at the foibles of others, but ita??s not so much fun to be confronted by our own foibles. Although we have had a good run of luck on our predictions for the last few years, I am sure we will someday miss a big one. Thus, I offer the following with the assurance that we can be wrong.
OFTEN WRONG, BUT NEVER IN DOUBT
A lot of western politicians are convinced that the emerging economies are all driven by exports, and this belief has found its way into the public perception of the world in the U.S. and Europe.
The fact that this is incorrect has little to do with its public acceptance. In our opinion, this misconception is potentially very dangerous ("nothing exists, except believing makes it so") as it can cause problems worldwide. If anti-free trade legislation is pushed and more free trade legislation is ignored, we run the danger of deeply damaging the world trade system, reducing economic growth, and damaging the rising standards of living globally.
Here are a few facts that people seem to either ignore or are ignorant of:
1. Chinaa??s growth is not coming from exports, it is mostly coming from domestic demand for goods, services and infrastructure (85% of their economic growth is domestic).
2. Indiaa??s imports exceed their exports.
3. The low and falling U.S. dollar will soon start to impact U.S. exports (by increasing them) and U.S. imports (by diminishing them).
In summary, people who are worrying about U.S. importing too much are fighting the last war....Those that think that as soon as if we curb our imports of toys from China and T-shirts from Pakistan, the U.S. industrial base will be reinvigorated. Perhaps then, the world will buy shoes made in New England, textiles made in South Carolina, and autos made in Michigan....Unfortunately, this is highly unlikely to happen. For example, Japanese cars cost more than comparable U.S. cars, and have for years.....but the Japanese sell more cars in much of the U.S. because they are perceived to be of better quality. The same is true with Japanese consumer electronics and Korean ships, etc.
While it may be hard to admit, it looks like the best solution may be for U.S. and European consumers to learn to live within their means, consume less and import less of what they probably do not need.
MANY COUNTRIES HAVE SOVEREIGN WEALTH FUNDS....THESE ARE PROVIDING A SOURCE OF CAPITAL FOR GLOBAL MARKETS
These funds will provide a huge demand for stocks, bonds and commodities worldwide. They total about $1.9 trillion currently and are expected to grow at $1.2 trillion per year, rising to almost $8 trillion by 2011.
Sovereign wealth funds exist so countries like those in the Middle East, Singapore, Russia, China and others can diversify their assets out of their home country and benefit from investing abroad to try and capture some global growth for their national funds.
Obviously, those countries with economic growth and positive current account balances and balance of payments are more likely to have larger and growing sovereign wealth funds. It is believed that China will have half a trillion per year to add to their fund.
A few additional points on SWFa??s:
These are generally not good for the U.S. dollar as the money will be exiting the dollar to be invested abroad. It is positive for foreign currencies and gold.
The funds will go for growth assets, not just conservative assets. They will invest in commodities and stocks as well as more conservative bonds.
Most of the money will be managed by outside managers, as most countries do not have the large investment management skill set to manage the funds internally. So we look for the global investment management industry to get an additional several billion dollars of revenue per year. |
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