The Developing World Takes Over 18 comments
Submit
an article to
an article to
-
Font Size:
-
Print
- TweetThis
A couple of economic statistics released last week suggest the economy may be growing more slowly than expected/hoped/prayed. These statistics included a slowdown in housing and weaker durable goods orders (now that the "Cash for Clunkers" program has ended).
The biggest news, however, came out of the G20 meeting in Pittsburgh where it was decided that the annual summit of the G8 (an organization of the world's top 8 developed economies) will now be replaced by a meeting of the G20 – a group that includes many of the developing and resource-rich nations on which I've been bullish. This passing of the baton signals an important change in the world.
The days of U.S. hegemony have ended. Political power is shifting from Europe, Japan and the U.S. to Asia, South America and other developing nations, with economic power going the same way. In terms of goods produced, the economy of Chindia (China and India) has surpassed that of the U.S. The economy of the entire developing world now equals that of the entire developed world, and given the huge population of the developing world we must conclude its growth potential far exceeds ours. If we ever get back on top again, it won't be for a very long time.
We've talked before about what this change implies. The developing world's voracious appetite for commodities promises to act as a tax on the developing world – pushing up prices to new heights and choking growth. Oil and some commodities may have corrected recently, but another 10%-20% decline will only be a buying opportunity. As long as worldwide growth remains positive, commodities will be in a long-term bull market.
What's more, this change will have a more subtle but important impact on stock market returns.
Move Over England and Rome. The U.S. Takes a Seat on the "Former Center of the World" Bench
If you've been told you can expect to make 10-12% a year from an index fund, think again. The stats don't back up such creative spin.
People who talk about the long-term average return on stocks generally rely on some 83 years worth of data. A few people trace market history back as far as 1804, but it's not clear whether stats from back then are reliable enough or standardized enough to base conclusions on.
Nonetheless, whether you start from 1804 or 1926, all the data on long-term stock market performance is based on the U.S. Moreover, the numbers cover a time when the U.S. went from being a developing nation to king of the developed world.
When looking at this data, you must realize that the U.S. did not grow at the steady pace suggested by the long-term average. In the developing phase, growth was far more rapid. But as our economy matured, growth began to slow. Therefore, as an 83- or 205-year-old economy, the U.S. is unlikely to ever enjoy the pep and vitality it did in its youth. Nor will it likely become the fastest growing nation ever again, not when there are young whippersnappers like China and India running against us.
True, between 1970 and today, the growth rate of the U.S. exceeded that of the equally mature, developed nations (excluding Canada) by about 0.5% a year. We were the best of the old-timers.
However, during this period, average real returns from stocks were far less than in the 40 years before 1970 – despite the Great Depression of the 1930s. We had reached middle age and didn't realize it because the developing world was still in diapers. But the U.S. and the rest of the developed world were past their prime.
Now, it's not impossible that in the future the U.S. could regain some of its former influence. Kind of like a spry octogenarian who still has a few tricks up his sleeve. However, as we become a smaller piece of the global economy we are losing status. With power shifting elsewhere, the U.S. will have to accept other nations' terms more often and dictate terms a little less. Consequently, our stock markets probably won't produce the same high returns everyone has been raised to expect.
Indeed, rather than plan on the long-term average returns continuing, we must recognize that real returns have been in a slow decline for 40 years (the late 1990s being just a bump in the road).
As investors, our path is clear.
Don't Bet on Granddad
If we could give you one overriding piece of advice for the next few years, it is to avoid index funds or any other strategy that replicates the return on the S&P 500. We simply cannot see any scenario in which that would pay off well. Of course, there are many money managers who don't come close to beating the market, so an index fund might outperform the laggards. But if you want to get rich, you'll need to beat the S&P by a wide margin, and that means investing elsewhere.
We've said before that the economy seems destined to experience further bouts of either high inflation or deflation. It's hard to say for sure which. Curiously, whichever one you hope for depends a lot on your financial status.
If you're a financial institution, for instance, or simply very wealthy, you will probably hope for deflation. During the Great Depression of the 1930s, stocks, bonds, and T-bills all posted fairly decent returns. Certainly, they were more profitable than in the 1970s when inflation ruled. So if you're living off your financial assets, deflation will seem more appealing.
On the other hand, if you are struggling to raise a family in an economy where jobs are scarce, deflation is your worst enemy. Consequently, the majority of voters will find inflation more bearable, which is why we expect the government will err that way.
Yet, since we don't know for certain which of the two 'flations will result, we must find security in either event. Which brings us to the subject of gold.
Since 1971, gold bullion has returned an average of 9% a year – roughly equal to the long-term return on the international stock markets. In the more recent past, gold has outperformed every other major asset.
What makes gold's performance in the past four decades especially impressive is that it took place during periods of both inflation and deflation.
So gold is more than a hedge. It's an asset class of its own, and one that deserves a heavier weighting. (An example of a hedge would be zero coupon bonds, which protect you even better than gold against a deflationary event.)
As for stocks, apart from avoiding index funds or any other overly diversified approach, we will steer you toward companies that can thrive in either inflation or deflation. We are looking now at companies which have dramatically outperformed over the last 10 years, produced strong double-digit returns, are sound enterprises, and retain the fundamental advantages they have enjoyed in the past. Since these companies thrived in both inflationary and deflationary periods, they have a better chance of thriving going forwards.
Some obvious examples of such companies are Apple (AAPL) and our recommended defence stocks. Stericycle (SRCL) has the advantages of being a deep franchise in the growing area of medical waste. Another curious success story is FPL (FPL), which is one of the few utilities to produce double-digit returns.
But whatever you invest in from now on, bear in mind that times have changed. You cannot depend on the past as a reliable guide to the future. Just like you wouldn't expect Muhammad Ali (now age 67) to win the heavyweight title again, don't expect the U.S. market to outperform the rest of the world. You must look at who's up and coming now.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Capitalism, i.e. the pooling of capital for fast growth and value creation can not be learned over night by other nations which for hundreds of years lived by different values.
Those are fundamentals of an economic system. That's why it is too early to bet against America.
And if the author can't even tell if we are going to have inflation or deflation, then how does he even know if we are in a world wide recovery? In the 70's we could afford inflation. We cannot afford the tax for the rich that is inflation at all right now.
So the Fed will raise rates and housing will die and the consumer will save. How is this a recovery?
On Sep 29 06:07 PM conceptwizard wrote:
> You say to yourself how could this happen? It didn’t just happen
> it was planned that way to force the world’s inhabitants to accept
> world government. Zero interest rates guarantees the destruction
> of new capital formation as money runs to asset accumulation or preservation
> of wealth.
WHO/WHERE IS THE MASTER PLANNER?
On Sep 29 06:07 PM conceptwizard wrote:
> You say to yourself how could this happen? It didn’t just happen
> it was planned that way to force the world’s inhabitants to accept
> world government. Zero interest rates guarantees the destruction
> of new capital formation as money runs to asset accumulation or preservation
> of wealth.
I believe that you're going to see exactly that happening (a growth in the consumer sector in the developing world). I'm referring specifically to China and India, although its happening elsewhere in Asia, too.
To an extent, one can see that happening as evidenced by the growth in auto sales in both countries. I'm not saying those populations will replace the US consumer's spending overnight, but the trend is in place.
On Sep 30 03:44 AM Gary A wrote:
> The folks in the developing nations have to turn into consumers.
> I don't think they will soon replace the Americans. And the Americans
> have hunkered down because they know that the financial system has
> screwed them.
>
> And if the author can't even tell if we are going to have inflation
> or deflation, then how does he even know if we are in a world wide
> recovery? In the 70's we could afford inflation. We cannot afford
> the tax for the rich that is inflation at all right now.
>
> So the Fed will raise rates and housing will die and the consumer
> will save. How is this a recovery?
- the global history and nature of mankind has not changed[those without will be more aggressive to "get" than those that "have"]. has this history escaped us? how and why did we in this country get to where we are?
THE WORLD MOVES ON!
Why not ask yourself "who does Benanke answer to"? The FED is not owned by the Government, but controlled by the Bank of International Settlement", as are all central banks.
Does he answer to Congress--- No, he wont do anything they ask.
Does he answer to the President----NO
Does he answer to little Tim Geithner---No
So who then? is he on his own? what gives him the authority?
I for one have major concerns that the FED has no mandate to protect the American public. Its plain who they favor.
We as taxpayers pay interest on the money that he is printing with no oversight or controls in place, what has to happen before people wake up to the fact that we have no control over our destiny.
On Sep 30 10:04 AM fran wrote:
> pray tell--
>
> WHO/WHERE IS THE MASTER PLANNER?
what action before this tyrant is reappointed for another term?
are the BANKERS and POLS in bed/in agreement on this? shall we reappoint Paul Volcker? we rejected Ron Paul! where is Art Laffer when needed? how about the CLUB of ROME or the COMMITTEE of 300?
WILL YOU LEAD THE NEXT TEA PARTY? WERE YOU THERE AT THE LAST?
On Sep 30 11:22 AM conceptwizard wrote:
> 'I believe that banking institutions are more dangerous to our liberties
> than standing armies. If the American people ever allow private banks
> to control the issue of their currency, first by inflation, then
> by deflation, the banks and corporations that will grow up around
> the banks will deprive the people of all property until their children
> wake-up homeless on the continent their fathers conquered..' Thomas
> Jefferson, (1743-1826), 3rd US President, 1802
>
> Why not ask yourself "who does Benanke answer to"? The FED is not
> owned by the Government, but controlled by the Bank of International
> Settlement", as are all central banks.
>
> Does he answer to Congress--- No, he wont do anything they ask.<br/>Does
> he answer to the President----NO
> Does he answer to little Tim Geithner---No
>
> So who then? is he on his own? what gives him the authority?
>
> I for one have major concerns that the FED has no mandate to protect
> the American public. Its plain who they favor.
> We as taxpayers pay interest on the money that he is printing with
> no oversight or controls in place, what has to happen before people
> wake up to the fact that we have no control over our destiny.
On Sep 30 03:22 AM TheFounder wrote:
> You make some very good points. But we should not underestimate the
> power of the very extreme capitalistic system which was created in
> the US. It is not just about size. It is a way of thinking. There
> is a very unique set of circumstances in the US, which simply does
> not exist elsewhere, including, but not limited to, competitiveness,
> rationale thinking, appetite for risk, a win win approach, enterprenurial
> spirit and ability to collaborate.
>
> Capitalism, i.e. the pooling of capital for fast growth and value
> creation can not be learned over night by other nations which for
> hundreds of years lived by different values.
>
> Those are fundamentals of an economic system. That's why it is too
> early to bet against America.
Close a real estate transaction, negotiate any deal, start a new venture, find investors, raise funds, discuss yield, get a loan, pay taxes, piss off a neighbor, seek police assistance, call customer service, return a product to store, activate a warranty, seek road assistance, find a trusted brand of any kind in a new town, purchase a product online, scedule delivery, and many more, and you will appreciate the Unite States which still exists today. In fact, you will run back to mama like a crying child.
On Sep 30 02:41 PM Tony Daltorio wrote:
> You are living in the past - the United States of your father and
> grandfather. That country no longer exists.
On Sep 30 10:24 AM Old Trader wrote:
> Gary A,
>
> I believe that you're going to see exactly that happening (a growth
> in the consumer sector in the developing world). I'm referring specifically
> to China and India, although its happening elsewhere in Asia, too.
>
>
> To an extent, one can see that happening as evidenced by the growth
> in auto sales in both countries. I'm not saying those populations
> will replace the US consumer's spending overnight, but the trend
> is in place.
On Sep 30 04:12 PM TheFounder wrote:
> Tony, go to most countries the author is referring to, and try any
> of the following:
=====================
Keep in mind you can't hardly get a loan here. Most major projects have lawsuits filed, delaying them for years, The tax code (not rates) costs more than the taxes you pay for many businesses. The education system is in decline, infrastructure in decline, and the buying power of the dollar is falling.
The U.S. is in deep trouble, too, because its European allies in economics is turning its back on it too, and going with the emerging markets.
Investment dollars, jobs and business is fleeing the U.S. for the emerging markets.
Remember that the consumer won't be back for 5 to 10 years and then won't be more than about 62% of GDP which was "normal." The 70% was only accomplished by spending more than we earned.
The biggest hurdle is the government,
quote
Americans this year had to toil until August 12 to pay for federal, state, and local governments, according to the annual Cost of Government Day (COGD) report by the Americans for Tax Reform Foundation and Center for Fiscal Accountability (CFA).
In 2009, government will consume a whopping 61.34 percent of national income.
www.heartland.org/publ...
==================
We are still using the same policies we used for decades to drive jobs and business out of the U.S.
China will not replace us so much as the entire block of emerging market nations. Also, the dollar is in very deep trouble and even the President of the World Bank has said it can't continue to be the world currency.
The IMF that had issued loans to nations, 100% in dollars, is now starting to use $100's of billions of SDR's for loans that reduces demand for dollars. Some of our S. Am. nations that we used to be the number one trading partner with have created a new financial system to end the need for as many dollars. Non-dollar after non-dollar trade deal has been made with China. All the BRIC nations are buying IMF bonds.
The FED was reported to state in one meeting "no net new jobs for 5 years" and that means tax revenues, profits and economic recovery here are all in deep trouble.
If you listen to foreign news, you get a lot more than you do from our media about what is going on with the dollar.
However, I do believe the dollar could rally as I think the global economy is still fragile enough, that it could have a major correction if the stimulus spending globally doesn't continue long enough for real internal consumer growth to take hold in several nations.
On Sep 30 11:22 AM conceptwizard wrote:
> 'I believe that banking institutions are more dangerous to our liberties
> than standing armies. If the American people ever allow private banks
> to control the issue of their currency, first by inflation, then
> by deflation, the banks and corporations that will grow up around
> the banks will deprive the people of all property until their children
> wake-up homeless on the continent their fathers conquered..' Thomas
> Jefferson, (1743-1826), 3rd US President, 1802
>
> Why not ask yourself "who does Benanke answer to"? The FED is not
> owned by the Government, but controlled by the Bank of International
> Settlement", as are all central banks.
>
> Does he answer to Congress--- No, he wont do anything they ask.<br/>Does
> he answer to the President----NO
> Does he answer to little Tim Geithner---No
>
> So who then? is he on his own? what gives him the authority?
>
> I for one have major concerns that the FED has no mandate to protect
> the American public. Its plain who they favor.
> We as taxpayers pay interest on the money that he is printing with
> no oversight or controls in place, what has to happen before people
> wake up to the fact that we have no control over our destiny.
Their reason" It has the likleyhood of putting a run on the banks". Well, enough said, if they are worried about an audit there must be cause to worry. We all know the "mark to market" ruling allowed these institutions to take these toxic assets and set them off their balance sheets. They are marking trillions at 100 cents on the dollar when their worth appox 30 cents.
So what will I do, support everyone who is in the position of doing something about it. And every opportunity I get to testify on why I feel that America is being pillaged by the Financial Warlords, I will present the facts.
This is really all we have is each other and the believe in truth, liberty and our fellow man, sounds like hogwash but it has to come to that in this situation as we dont have the power or the money.
On Sep 30 12:52 PM fran wrote:
> what pray tell would you recommend we do? what will you do/are doing?
>
>
> what action before this tyrant is reappointed for another term?<br/>
>
> are the BANKERS and POLS in bed/in agreement on this? shall we reappoint
> Paul Volcker? we rejected Ron Paul! where is Art Laffer when needed?
> how about the CLUB of ROME or the COMMITTEE of 300?
> WILL YOU LEAD THE NEXT TEA PARTY? WERE YOU THERE AT THE LAST?
>
> On Sep 30 11:22 AM conceptwizard wrote:
On Sep 30 04:12 PM TheFounder wrote:
> Tony, go to most countries the author is referring to, and try any
> of the following:
>
> Close a real estate transaction, negotiate any deal, start a new
> venture, find investors, raise funds, discuss yield, get a loan,
> pay taxes, piss off a neighbor, seek police assistance, call customer
> service, return a product to store, activate a warranty, seek road
> assistance, find a trusted brand of any kind in a new town, purchase
> a product online, scedule delivery, and many more, and you will appreciate
> the Unite States which still exists today. In fact, you will run
> back to mama like a crying child.
As for America losing its edge, part of that was engineered by many companies bringing in a deluge of cheap skilled labor as well as outsourcing which uprooted a lot of middle-class consumers working in various industries (high tech, engineering, IT, financial, etc.).
Funny, how few of the experts add this to their "formula of the downfall" or talk about the huge undercurrent of underemployed highly skilled people (MBAs (from TOP schools), engineers, even PhDs (with REAL PhDs)) who don't pop up on the unemployment statistics but nonetheless have negatively affected the power of a consumer-led recovery because their buying power has been greatly diminished.
If you were making $200K, and now making $36K, you are not going to lighting a fire in fueling up spending in the economy.
If the federal government won't do it, then the states could double the sales tax on imported goods and eliminate it on domestically produced goods. States are not covered by any trade agreements in this regard, that I know of.