2 Reasons to Hold a U.S. Stocks-Dominated Portfolio

Marcel wrote:

Shame on you for directing your readers toward mostly American stocks. You should be gravely concerned about America's inevitable decline, and attentive to what it means to a portfolio of American stocks. Like Rome before it, the American empire is headed for extinction. The Iraq War will bankrupt the United States and usher in that much more quickly the Chinese century.

This is patently untrue. It shows a lack of historical grounding and ignorance of current facts.

The only reason Rome is cited often by those making predictions of America's demise is that Edward Gibbon's The Decline and Fall of the Roman Empire was so popular. The memorable title became part of the common lexicon so that even those who've never read the book think they know the whole story by just pointing out that the Roman empire declined and fell. There were a few details, however, and those details make the comparison to America's current situation too simplistic.

In short, Gibbon thought Rome fell because its citizens lost their civic virtue, entrusted their empire's protection to barbarian mercenaries who turned on them, and fell so under the trance of Christianity that they cared less about worldly affairs and more about the rewards of the afterlife. There are other theories as well.

To me, the decline of Britain's dominance is a more appropriate focus of study when considering America's situation as other countries rise. The primary reason that Britain declined on the world stage is economic. Its economy could not keep up with the economies of France, Germany, Russia, or the U.S. The British politician Leo Amery said in 1905:

"How can these little islands hold their own in the long run against such great and rich empires as the United States and Germany are rapidly becoming? How can we with forty millions of people compete with states nearly double our size?"

That should seem a familiar sentiment. It's what many people in America say when considering whether the U.S. can compete with a rising China and India. It's why I prefer to consider Britain instead of Rome when looking for precedents to America's situation.

Happily, I find that America is not an economic lightweight, nor anywhere near extinction. The Iraq War, blunder though it's been and critical though I am of it, will not bankrupt the country.

For evidence, let's turn to Fareed Zakaria's new book, The Post-American World. The following appears under the subhead "America's Long Run" on pages 180-182:

First, however, it is essential to note that the central feature of Britain's decline -- irreversible economic deterioration -- does not really apply to the United States today. Britain's unrivaled economic status lasted for a few decades; America's has lasted more than 130 years. The U.S. economy has been the world's largest since the middle of the 1880s, and it remains so today. In fact, America has held a surprisingly constant share of global GDP ever since. With the brief exception of the late 1940s and 1950s -- when the rest of the industrialized world had been destroyed and America's share rose to 50 percent! -- the United States has accounted for roughly a quarter of world output for over a century (32 percent in 1913, 26 percent in 1960, 22 percent in 1980, 27 percent in 2000, and 26 percent in 2007). It is likely to slip but not significantly in the next two decades. In 2025, most estimates suggest that the U.S. economy will still be twice the size of China's in terms of nominal GDP (though in terms of purchasing power, the gap will be smaller).

This difference between America and Britain can be seen in the burden of their military budgets. Britannia ruled the seas but never the land. The British army was sufficiently small that the German chancellor Otto von Bismarck once quipped that, were the British ever to invade Germany, he would simply have the local police force arrest them. Meanwhile, London's advantage over the seas -- it had more tonnage than the next two navies put together -- came at ruinous cost to its treasury. The American military, in contrast, dominates at every level -- land, sea, air, space -- and spends more than the next fourteen countries put together, accounting for almost 50 percent of global defense spending. Some argue that even this understates America's military lead against the rest of the world because it does not take into account the U.S. scientific and technological edge. The United States spends more on defense research and development than the rest of the world put together. And, crucially, it does all this without breaking the bank. Defense expenditure as a percent of GDP is now 4.1 percent, lower than it was for most of the Cold War. (Under Eisenhower, it rose to 10 percent of GDP.) The secret here is the denominator. As U.S. GDP grows larger and larger, expenditures that would have been backbreaking become affordable. The Iraq War may be a tragedy or a noble endeavor, depending on your point of view. Either way, however, it will not bankrupt the United States. The war has been expensive, but the price tag for Iraq and Afghanistan together -- $125 billion a year -- represents less than 1 percent of GDP. Vietnam, by comparison, cost 1.6 percent of American GDP in 1970 and tens of thousands more soldiers' lives.

American military power is not the cause of its strength but the consequence. The fuel is America's economic and technological base, which remains extremely strong. The United States does face larger, deeper, and broader challenges than it has ever faced in its history, and the rise of the rest does mean that it will lose some share of global GDP. But the process will look nothing like Britain's slide in the twentieth century, when the country lost the lead in innovation, energy, and entrepreneurship. America will remain a vital, vibrant economy, at the forefront of the next revolutions in science, technology, and industry -- as long as it can embrace and adjust to the challenges confronting it.

That's the macro picture. The micro picture as it relates to our stock portfolio is that many of the companies we own will thrive no matter which countries dominate the global economy, because they operate everywhere on the globe.

Quick case-in-point: Apple's (AAPL) new iPhone 3G. It's launching on July 11 not just in the United States, but also Australia, Austria, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Switzerland, and the United Kingdom. It will eventually get to more than 70 countries, if not more.

So, for two reasons I feel no shame for holding a stock portfolio dominated by American companies:

• America is not in decline. 
• American companies can thrive regardless of which individual economies dominate.

Comments

[User 23493]

What bothers me most (and you do not address) is that America is giving away so much of its technology. We call it out sourcing. We are not selling our technological advantage to other countries, we are giving it away to reduce costs. Not good for the long run, IMO.
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[George Edwards]

Just a not in passing on the supposed parallel between the Imperial Rome and the USA. The rise of the Roman Empire was coincident with a major period of global warming. The collapse of the Roman Empire took place coincidentally with a significant period of global cooling. We are, I am widely advised, in a significant period of global warming at the present moment.

[ajhough]

As Pogo once said, "I have found the enemy and it is us." We are giving away what we are not selling. I found the third world and it is here.

[Thalamus]

It may be true about America's success, but the Achilles heal is energy dependence on rogue states, and peaking of the worldwide oil output, which will cause resource wars among the larger countries. Worldwide oil output is peaking and the increase in oil prices is a reflection of that. Look at oil inventories in the U.S. and the replacement rate by the major integrated oil companies, and you’ll see we’re in for trouble. Buy Food, Gold, Guns and Oil service stocks .

[dilettantedude]

This is simply ignorance of history. The Roman REPUBLIC declined because they spent too much on war, and allowed their favorite sons to begin evading the historic obligation of every political leader to serve his country in the army. They were able to pay the poor to serve in their place, and thus began the internal social and moral rot that within little more than 50 years ended the Republic. Discussing the fall of the Empire is irrelevant to where the US is today. You should stick to at least remotely comparable periods, and read some history instead of just assuming everyone who disagrees with you does so because they read Gibbon. You should also try reading Jane Jacobs on Cities and the Wealth of Nations, among many others, and educate yourself about the source of wealth creation before you start pontificating about how the US can thrive regardless of other circumstances. Then try some objective thinking instead of just being a brainless cheerleader.

[alphameister]

The US has lost its philosophical moorings and will increasingly lose market share to countries who have only lately discovered the virtues of capitalism. My only US investments are in technology and energy companies benefiting disproporionately from the growth of overseas economies.

[Xyrus]

Fareed Zakaria is either incredibly naive or deliberately misleading.

The US economy is 70% consumer spending on products from mainly foreign countries. Our innovation is being shipped off to the lowest bidder. Our education systems has been degrading over the decades, and now there is even an anti-science bias. Our medical system is so messed up it takes a damn Ph. D to decipher, and you need to make as much as one to get solid healthcare.

Now add to this our $10 trillion dollar debt and growing and the fact that our spending is exceeding tax revenue by close to a half-trillion a year, and the fact that we have $54 trillion in obligations and it keeps getting bigger every single year.

This is the elephant in the room no one has been talking about except for a precious few (who are often laughed at and derided). This country has some very serious issues to work out fiscally and every year that goes by just makes it less likely we will get out of the hole.

"We spend MASSIVE BUCKS on military....w00t!"... And that has led to the downfall of many an empire. Instead of taking that money and maybe doing something a little more productive like investing in our own country, we send it overseas for military bases and bombing runs. A military means little when you're country fiscally collapses.

The key for a country's survival is a sensible fiscal policy. Without that, then it is only a matter of time. There is only so much debt others will buy before they cut off the spigot, and that will be a painful day indeed.

The interest on the debt makes up over 13% of the budget. The top three expense items (military, social programs, and the interest payments) EXCEED that tax revenue by themselves. You can read all the happy happy joy joy books you want claiming the US is "too big to fail", but that fact by itself should be at least a concern.

There have been many things that have been "too big to fail". Don't fool yourself into thinking that the US is anything special in that regard. The only thing that will keep this country from failing is competent leadership on all fronts, including fiscal. It's something we have been sorely lacking.

~X~

[icandoitdon]

the decline of the roman and british empire....and ultimatley the fall of the soviet union in our own era, shared a common characteristic, touched on by dilettantedu de:

each had expansion-minded governments that pushed the limits of their natural borders, imposing their values and beliefs on other nations. imperialism is fraught with grave risk and it has been the downfall of many nations.

the u.s. has followed this tack time and again post WWII. our "war on terror" is the latest example. it wasn't glorious enough for us to merely capture and punish the evildoers behind the crime...we had to characterize it as a "war against evil" to justify invading iraq so we could remold it in our image.

we don't even learn the hard way.

[icandoitdon]

the decline of the roman and british empire....and ultimatley the fall of the soviet union in our own era, shared a common characteristic, touched on by dilettantedu de:

each had expansion-minded governments that pushed the limits of their natural borders, imposing their values and beliefs on other nations. imperialism is fraught with grave risk and it has been the downfall of many nations.

the u.s. has followed this tack time and again post WWII. our "war on terror" is the latest example. it wasn't glorious enough for us to merely capture and punish the evildoers behind the crime...we had to characterize it as a "war against evil" to justify invading iraq so we could remold it in our image.

we don't even learn the hard way.

[gail hughes]

The reason for this new technology is not for the United States to keep and compete with, it is a global solution because it is "GREEN Tech" and we all live in the same world,and we all need to try and fix it. that's my logic and I created the new technology now in use