the case for going global is stronger than eve

8/6/2019 the Case for Going Global is Stronger Than Eve

http://slidepdf.com/reader/full/the-case-for-going-global-is-stronger-than-eve 1/17

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TheCaseforGoingGlobalIsStrongerThanEver

TheUSMarketsAreStillInTrouble

UndercapitalizationMakesEmergingEconomiesMoreEfficient&DevelopedEconomiesLess

Efficient

EmergingMarketsStillUndervalued

GlobalCapitalShiftIsAcceleratingTheBiggestGrowthWillBeintheMostObviousPlaces(andSectors)

ConventionalDiversificationWon’tCutItAnyLonger

Risks(andthereareplenty)

MaineandQE3,OperationTwist,etc.?

ByJohnMauldin

August5,2011

Aswillbeclearbelow,Ihadfinishedanearlierversionofthisweek’se-letter,butthe

eventsofthelastfewminutesrequireafewparagraphs.AsIwriteattheendoftheletter,

BloombergkepttheirsatellitetruckhereinMaine,astheyhadgotadvancewarningofthe

downgradebyS&PofUSdebtandwantedtointerviewanumberoftheeconomistshere,

includingyourhumbleanalyst.Ican’trewritetheletteratthislatehour,butwillsendyou

additionalcommentsonMonday.Andyoucangotowww.bloomberg.comandseeeveryone’s

remarks,includingmine.Itwillbetheresomewhere,theypromiseme.

Andnow,afewquestionsandobservationsareinorder.

First,asIwalkedtotheareawheretheBloombergwasshootingtogoon,JimBianco

andJohnSilviatoldmethatS&PhaddowngradedtheFed.Ilaughedandsaid,“Ifyouguyswant

tomakemelooklikeafoolonTV,youhavetoatleastmakeupacrediblelie.”Theykeptinsistingitwastrue.IfinallyaskedMikeMcKeeofBloombergandBarryRitholtz,whowason-

air,ifitwastrue.Theyclaimeditwas,too.Iwasstillwonderingiftheyweresettingmeup,but

evenRoubini(whowouldn’tdothattome)saiditwastrue.

So,iftheFed,whichdoesn’tissuecreditandcanprintmoney,canbedowngraded

becauseitholdsAA+debt,thenwhyandhowinhellcantheECB,whichholdshundredsof

billionsofeurosofthejunkdebtofGreeceandIrelandandinsolventbanksnotbedowngraded

onMonday?AndtheBankofJapan?REALLY?Whataretheseguyssmoking?Dowenow

downgradeGNMA?Ofcourse.AndtheFDIC?Whatthehellwillreposdoonmarketopen?The

NYFedsaysitwon’taffectanything.Don’taskme,Ijustworkhere.AndhowcanyourateFranceAAA?AndstillgiveAAormoretoItalywhenthemarketissayingtheyaregettingclose

tojunk?

SidebetforMonday.Thiscouldmakemelooklikeanidiot,butIthinktreasuryyields

fallastherisk-offtradeincreases.Canthiscomeataworsetimeforanervousmarket?Bythe

way,maybeyouwanttogolongKimberlyClark,astheymakeDepends(theadultdiapershere

intheUS,formynon-USreaders),becausesalesaregoingtoskyrocketallacrossthefinancial



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markets.

CanwesayEndgame,gentlereader?Madness.Andnowontotheregularletter.More

tofollowMonday.

__________

ThisweekIwritefromMaine,where,whenwelandedinthefloatplaneatLeen’sLodge

inGrandLakeStreamonThursday,welearnedthatthemarkethadcloseddown512points.I

wasintheplanewithNourielRoubiniandJimBianco(plusaFedofficialtobenamedlater),

whereforwhateverreasonwecouldgetreceptiononandoff(nophoneworksatthelodge).

Wewerejustwatchingthemarketfall.ItisfuntositnexttoRoubiniasamarketcrashes.He

knowsALLthemarketcrashjokes.

So,asismynormalroutineforthisfishingtriptoMaine,Itaketheweekoffandinvitea

guestcolumnistin.ThisyearitisKeithFitz-Gerald,whomIhaveheardspeaktwiceandhave

startedreading.HehaslivedallovertheworldandspendsalotoftheyearinJapan,andisa

trueexpertonemergingmarkets.Iamafanofinvestinginemergingmarkets(asIagreethey

arethefuture)butdonotconsidermyselfanywhereclosetoKeith’slevelofexpertise.Sothis

weekwetakealookatthecaseforemergingmarkets.

IfyouareinterestedinsubscribingtoKeith’sletterandlearningmoreaboutemerging

markets,youcangoto

https://purchases.moneymappress.com/MMRKFGSHORT4950to79/LMMRM800/.It’sfairly

inexpensiveandmyreadersgethalfoff.Now,let’sjumpin,andIwillendwithsomeclosing

comments.

TheCaseforGoingGlobalIsStrongerThanEverByKeithFitz-Gerald

ChiefInvestmentStrategist,MoneyMapPress

Ifwehavelearnedanythingfromthecurrentfinancialmess,it’sthatbuildingwealthis

dependentonrationalanalysis,carefuldecisionmaking,andriskmanagement.That’swhy

stickingclosetohomeatatimewhenourmarketsaremoreuncertainthaneverisarecipefor

disasterandabsolutelythewrongthingtodo.Notonlywillyoumissoutontheworld’sfastest-

growingmarkets,buttheoddsareexceptionallyhighthatyouwillmissasmuchas50%ormoreinpotentialreturnsoverthenextdecade.

Don’tgetmewrong.



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Ifyouchooseto“stayhome”orgowithwhatyouknow,whichiswhatalotofinvestorsare

doingrightnow,chancesareyouwillprobablydookay.Afterall,therewilleventuallybeaU.S.

economicrecoveryandamarketrebound.

Butknowthis.

Youwillhavetowatchothersoutperformyouby50%,75%,even100%ormore–foryearsto

come.Addinginsulttoinjury,you’llhavetodealwiththeever-presentknowledgethatyou

couldhavebeenoneofthem.

Ifyoucanlivewiththis,fine…butmostinvestorsIknowwon’tbeableto.

TheU.S.MarketsAreStillInTrouble

DespitewidespreadbeliefinsidetheBeltwaythattheU.S.economyisonthemend,realityis

thatit’sgoingtobealongtimebeforeU.S.marketsreturntonormal–ifthereissuchathing

anymore.

Ourrealestatemarketsarelikelytobehobbledforadecadeorlonger,ourconsumersare

badlyscarred,chronicunemploymentislikelytobeapermanentfixtureintheeconomic

landscapeforatleastthenextfewyears,andthepersonaldeleveragingwe’reseeingasmost

Americanspullintheirhornsisreallystillinitsinfancy.

Factorintheeviscerationofournationalwealth,thedebtdebacleonbothsidesoftheAtlantic,

fecklessleadership,andregulatorswhoaretryingtomakeuplostgroundforhavingmissedthe

crisisinformation,andwehavearealwitch’sbrew,theresultsofwhichcannotbe

understated,especiallywhenitcomestocapitalmarkets.

Governmentbondmarkets,asIhavenotedmanytimesinpresentationsaroundtheworld,are

pricinginslow-growthtono-growthexpectations,asevidencedbythe10-yearnotes,which

havehistoricallyreflectedgrowth-rateexpectationsfortheso-calleddevelopedworld.Thisis

especiallyproblematicgiventhedebtcarriedbytheUnitedStatesandmostofitscolleagues.



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Figure1:Source:Bloomberg,FederalReserveBankofSt.Louis,Calamos.com

Thenumbersareevenstarkerwhenviewedthroughthelenseofforward-lookingannualreal

yieldonten-yeartreasuries,whichpencilsouttoapaltry0.6%,assumingannualizedinflationof

2.4%ayear.

Obviouslytheinflationnumbersarehighlysuspect,asisanythingcomingoutofWashington

thesedays,butthisiswhatwe’vegottoworkwith.

Ifindmyselfstruckbyaterriblesenseofdéjàvu,becausetheU.S.–debtdealornot–appears

tobechartingacoursedownthesametroubledpathJapanhastrodsince1990,whichis

somethingIfirstnotedinearly2000,baseduponmyfirst-handexperienceinthatnation.

Unfortunately,thispathislikelytobecharacterizedbythesameproblems:sovereigndebt

overburdenthatmakestheGreekslookpositivelymiserly,stagnantnationalwealth,andslow

GDPgrowthdespitetrillionsin“stimulus”thatisunlikelytocreateanyrealreturnswhatsoever.

Asbleakasthissounds,however,Ialsofindmyselfsalivating,becausehistoryshowsthat

periodsofgreatcrisisarereallyjustopportunitiesindisguise.

Caseinpoint,manyemergingmarketsarenowemerginginnameonly.They’vebecome“BEEs”

orBigEmergingEconomies,withsuperiorrisk-rewardcharacteristics,newlyunbridled

consumerpower,and–gasp–someelementofadultsupervisionwhenitcomestofiscal

fitness.



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Notsurprisingly,theirbondmarketsarepricinginanentirelynewsetofexpectations,6%-9%

growth,andcapitalmarketsthatmayexceed$300trillionby2025,accordingtoproprietary

research…morethan60%ofwhichwillcomefromoutsidetheestablishedplayersofthe

UnitedStates,theEU,andJapan.

Atatimewhenwearehamstrungbyourownproblems,thisishardtoimagine.Butit’snotdifficulttounderstand:sinceWWII,developedcountrieshavecontributedeverlesstoglobal

growth.

It’snotthatwe’refallingoffthemap.Infact,quitetheoppositeishappening,andother

nationsaresimplycominguptospeed.

Figure2:Source:PIMCO,HaverAnalytics,IMF,FGRP

What’smore,manyofthesameemergingmarketsweusedtoregardaslittlemorethan

entertainingbackwatertradingpartnersarenowsomeoftheworld’sbiggestforeigncreditors.

Virtuallyallhavelargereserves,andtheimportanceofthisdevelopmentcannotbe

understated.

Here’swhy.

Incontrasttoyearspast,whenafinancialcrisiswouldhaveeruptedintoafiscalcrisis,countries

likeChina,Brazil,andothershaveseentheircurrenciesstrengthen.Thismakestheirdollar-denominateddebteasiertorepay,especiallyasacreditor,becauseanyweaknessinthe

currencyactuallyimprovesfiscalaccounts.

Atthesametime,beinganetexternalcreditorgivesemerging-marketpolicymakerseconomic

flexibilitythatsimplywasn’tpossibleadecadeago.Asaresult,manyemergingeconomies,

particularlytheBEEs,cannowprovideasortofcountercyclicalstimulusthatiscapableof



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stimulatingdomesticdemand,evenastheybecomelessreliantontheirexports.Thisiswhy

China,forexample,hasnotcrashedandBrazilrefusestobuckle.

AccordingtotheInternationalMonetaryFund,worldwideofficialforeignexchangeholdings

reached$9.69trillioninthefirstquarterof2011.That’sa17%increaseyear-over-yearin

aggregate.

AsoftheendofQ12011,totalforeignexchangeholdingsbyadvancedeconomieswere$3.16

trillion,andtotalforeignexchangeholdingsbyemerginganddevelopingeconomieswere

approximatelydoublethat,or$6.53trillion.

Ifyourjawisnotontheflooralready,considerChina.AsofMarch2011,Chinahad$3.1trillion

inreservesallbyitself,whiletheU.S.showedmerely$128billionintheproverbialpiggybank.

Thismeansinnouncertaintermsthatsomenations,likeourown,havelittleornowealthto

drawuponwhileotherscouldrecapitalizetheirfinancialsystemsseveraltimesoverandstill

havechangeleft.

UndercapitalizationMakesEmergingEconomiesMoreEfficient&DevelopedEconomiesLess

Efficient

HistoryshowsthatoneofthesinglebiggestdragsonanyeconomyissomethingIcall

overcapitalizedinfrastructure.Whatthismeansisthat,dollarfordollar,thereissomuch



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moneyavailablethatinvestmentsbecomeaprocessofoverallocationorovercapitalization.Or

both.

Insimplelanguage,thismeansthere’ssimplytoomuchmoneychasingtoofewquality

opportunities,sothingstendtogetbiduporovercapitalizedintheprocess–likehouses,cars,

creditcarddebt,andmortgages.Allofwhichare,inreality,generallydepreciatingassetsthatcreatenothingmorethantheillusionofprofitsforveryshortperiodsoftime.

Underthisscenario,laborproductivitygenerallyrisesbutcapitalproductivitygenerallyfalls,

whichiswhygovernmentanalystsareflyingblind…theycannottellthedifference.

Ontheotherhand,theBEEsandmanyemergingmarketsdonothavesuchtroubles.Atleast

notyet.

Ifanything,they’vegotthereversetocontendwith:extremelycompetitivelaborthat’sfueled

byapowerfulcombinationofambitionandgenerallygrowingcapitalefficiency.

What’smore,becausetheyarestartingfromanincrediblylowbase,itdoesn’ttakealottoget

themmovingintherightdirection.Many,infact,areabletoengineeralevelofcapital

efficiencythatfaroutstripsourown,ledmostnotablybyChina,Brazil,andIndia.And,thanksto

millionsofunderemployedpeopleinlow-productivityjobs,theyhaveahugehumanreservoir

fromwhichtodrawfordecadestocome.Wedon’t.

AccordingtotheMcKinseyGlobalInstitute,theaveragecapitaloutputworldwidebycountryis

253,meaningthatittakes253dollarsincapitalstocktogenerate$100ofglobalGDP.Anation

likeChinacanachievethiswithaGDP“investment”percapitaofbetween$1,500-$2,500per

person,whereastheUnitedStatesrequiresmorethan$40,000andhasacapitalstockratioofapproximately205%.



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Whatthissuggestsisthathigh-GDP-per-capitanationsrequiremoremoneytomaintainthe

samerelativeefficiencyasnationswithlowGDP-per-capitaratios.

It’snowonder,then,thatwhiletheWestisforcedtocontendwithaproverbialalbatross

aroundournecksthat’sdefinedbysovereigndebtandbadlybrokensocialcontractsthat

nobodywantstorelinquish,othernationsareembarkingonagrandrunwayofgrowththatwill

resultinthegreatestgameofcapital“catch-up”theworldhaseverseen.



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Figure3:Source:IMF,McKinsey&Co.,FGRP

EmergingMarketsStillUndervalued

Obviouslythisraisessomeinterestingquestions,especiallywhenitcomestowhichmarkets

mayrepresentthebestinvestmentopportunities.

Here,too,thedataisquiteclear.

AccordingtoaJuly2011reportfromInvestmentMarketRiskMetrics,USmarketsstillappear

overvalued,eventhoughtheyaredownsubstantiallyfromotherpeaksoverthelast131years.



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Figure4:Source:PensionConsultingAlliance–InvestmentMarketRiskMetrics

Ontheotherhand,emergingmarketsstillappearcheap.Grantedthey’renotatthelevelswe

witnessedin2008-2009orintheearly2000s,butonecanmaketheargumentthey’re

undervaluedevennow.AndthereforemoreworthyofinvestmentthantheirWestern

counterparts.

Figure5:PensionConsultingAlliance–InvestmentMarketRiskMetrics



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GlobalCapitalShiftIsAccelerating

Againstthisbackdrop,it’snowonderthatmoneyisleavingthenannystatesoftheWestand

headedtotheFarEast,aswellastonationsthatarebackedatleastpartiallybynatural

resources.ThisincludesportionsoftheMiddleEastandSouthAmerica,too.

Inperhapstheultimateirony,ourownweakdollarpolicies,TARP,andQE2haveactuallymade

thiscapitalflightworse,becausetheyhavediminishedthevalueofthedollar.Sountil

Washingtonstopsjawboningandactuallydoessomethingproductivethatmakesmoneyfeel

welcomehere,thiswillcontinue.

Manyinvestorsthinkthisisnew,butinrealityit’sjustthecontinuationofatrendthatbegan

shortlyafterWWII,whenapproximately75%oftheworld’seconomicactivitytookplacewithin

ourborders.Wejustdon’tremember.

Today,thatfigureisreversed,andvarioussourcesestimatethatasmuchas75%oftheworld’s

dailyeconomicactivitynowtakesplaceoutsideourborders.

SomechalkthisuptothemythofAmericanindustrialmightandsuperiority.Inrealitywewon

bydefault,becausetherestoftheworldwasquiteliterallyinashesandhadn’tyettakenthe

field.

Now,however,they’rereadytoplay,whichiswhythetrendinglobalconsumerspendinglooks

likeaskijump,evenastheUnitedStates’shareofthatisindeclineoratbestflatlining.



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Figure6:Source:PIMCO,CreditSuisse,FGRP,IMF

Astohowthingswilllookinafewinnings,whatwe’redealingwithissimplyanumbersgame,

especiallywhenitcomestoconsumption.

Peopleforget,forexample,thatChina’smiddleclassaloneisestimatedtobemorethan300

millionpeoplestrong.FactorinIndiaandmuchofSouthAmericaandyouaretalkingaboutan

unprecedentedincreaseinconsumerismthatmayultimatelyinvolveasmanyas3outofevery

5peoplealiveontheplanettoday–that’sentirelyoutsideourborders.



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TheBiggestGrowthWillBeintheMostObviousPlaces(andSectors)

WhenIlookattheworldofthepastandtheworldofourfuture,somethingsjumpout.Chief

amongthemistheimmediateeffectthatnewlyemergingnationswillhaveonthingstherestof

ustakeforgranted–likeinfrastructureandinfrastructure-relatedholdings–whichareamong

mytopchoicesatthemomentandhavebeensincethiscrisisbegan.

Asrecentlyas1970,approximately25%ofglobalGDPwasinvestedininfrastructure,whichis

definedasfixedassetsandequipmentbytheMcKinseyGlobalInstitute.Notsurprisingly,this

declinedto20%in2010,leadingmanyanalyststomistakenlybelievethatglobalgrowthwas

slowing.



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Figure7:GlobalInvestmentRateasa%ofGDP,Calamos.com

Nothingcouldbefartherfromthetruth.

Whatisactuallyhappeningisthattheworldisbeingsplitintoatwo-speedeconomy:those

countriescapableofcreatinghigh-productivitycapitalinvestmentsandthosethatcannot

createsuchthingsabsenthuge,misguidedstimulusprogramsandbailouts.

Theformeraremuchmoreattractiveinvestments,becausetheyarecharacterizedbygrowth,

whilethelattershouldgenerallybeavoidedbecausetheywillbeadragoncapitalfordecades

tocome,absentacompletesimultaneousfiscalreset.

Generallyspeaking,thissuggestsmovingawayfromAmerican-,European-,andJapanese-

centricchoicesandintocompaniesthatfavorthefastergrowthofemergingmarketsandBEEs,

regardlessofwheretheyaredomiciled,i.e.,ontheNYSE,London,orTokyoexchanges.

Doingsowillhelpinvestorscapitalizeonburgeoningdomesticgrowthwhileatleastpartially

isolatingtheirportfoliosfromtheinevitableslowdownsandstagnantcapital“stock”discussed

above.It’sworthnotingthatanincreasinglylargepercentageofexportsthatwereoncebound

forourshoresarebeingrefocusedtootheremergingmarkets,suggestingthatfuturegrowth



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willbeevenlessdependentondevelopedmarketstabilitythanitisnow,whichisaprettyscary

thoughtifyou’renotpreparedforit.

Bythenumbers,thistooisprettystraightforward.

Unfortunately,thisiswhereitgetstrickyandwherewemustdepartfromthepastwhenit

comestoourinvestments.

ConventionalDiversificationWon’tCutItAnyLonger

Formillionsofinvestors,theverynotionofdiversificationisappealing:tosplityourassetsupso

thatnoonedeclinewilltakeeverythingdownatonce.Unfortunately,witheverythinggoingonnow,thisislikerearrangingthedeckchairsontheTitanic,andaboutaseffective.

Today’sfinancialmarketsneedaconcentrationofassetsthat’scharacterizedbysignificant

emphasisoncreditornationsversusdebtornations.Atthesametime,investorswhodon’t

wanttogetleftfarbehindwouldbewisetofilltheirportfolioswithcompaniesIcallthe

“glocals,”orbigmultinationalfirmswithstrong“fortress”balancesheets,experienced

managers,andgloballyrecognizedbrands.Technology,connectivity,andindirectresource

playsallcometomindhere,asdodividends,whichhelpoffsettheriskswetakeasapartofthe

investingprocess.

Ialsobelievethatinvestorswanttogenerallybelongresourcesandcommoditiesforthe

foreseeablefuture.BothwillbegreatplacestohangoutastheWestcomesapart,whilealso

providingameaningfulinflationhedge.Ifthingsdon’tcomeapart,that’sgreat,becausethey’ll

zoomhigherondemandasitresumes.

Andfinally,Ithinkinvestorswhobuyintotheinternationalgrowththatisourfuturewilltake

advantageofadefinitecurrencybiasthatwillkeepyourmoneyinvolvedwiththeefficient



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capitalcountrieswhilegenerallyavoidingtheslackers,exceptinveryspecificinstancesandonly

thenwithriskcapital.

Youcanfigureoutprettyquicklywhichiswhichbylookingatthecostoflivingversusvalueof

investments.Anytimeyouseetheformeroverwhelmingthelatter,it’stimetogo,asisthecase

fortheUnitedStatesandEuropenow.

Figure8:Source:PIMCO

Risks(andthereareplenty)

Nodiscussiononemergingmarketswouldbecompletewithoutaddressingthe800-pound

gorillaintheroom–China.Loveitorhateit,thatnationisonthemove.

Morebluntly,Chinawillaffecteveryinvestmentclassontheplanetforthenext100years,

whichiswhyinvestorswouldbewisetocometotermswithit.Ithinkthedecisionispretty

easy,evenasitisprettygraphic:theDragoniscomingtolunchonTuesday.Theonlydecision

youhavetomakeiswhetheryouandyourmoneyaregoingtobeatthetableoronthemenu.

Thesamecouldbesaidaboutvolatility.Ithinkit’sheretostay,particularlyasourown

demographicshiftresultsinfurthercurrencydebasementandinflationarypressure.Youcan’t justwishaway$202trillioninunfundedliabilities,despitewhatthoseinourcapitalmightthink.

Nomatterwhichwayyoucutit,it’sverysimple,asIseeit:theWest(includingJapan)faces

severestructuralimbalancesthat,whencombinedwithlimitedwillingnesstodealwith

meaningfulausterity,willholditbackformanyyears–whichiswhyI’drathergowithgrowth

anyday.



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Inclosing,Iwanttoleaveyouwithonemorethought.

Eventhoughwehavetalkedextensivelyaboutwhythecaseforemergingmarketsisstronger

thanever,IamnotabigfanofabandoningtheU.S.,whichiswhatsomeofmycolleagues

advocate.

TheUnitedStatesisanationfilledwithresilient,cleverpeople;anddespitethefactthatthe

chipsaredown,Iwouldn’tbetagainstit.

Wewillfindourwaythroughthismess,eventhoughthepathwemusttakeisn’tclearlydefined

norbrightlylit…yet.

Bestregardsforgreatinvesting,

KeithFitz-Gerald

MaineandQE3,OperationTwist,etc.?

IclosefromMaine,wheretheBloombergtruckwasjusttoldtostay,becauseevidently

thereisabouttobesomethingannouncedthatisgoingtobehuge(itischaracterizedasan

embargoedstory,whateverthatis).Andtheyhavealltheseeconomisttypesinoneplacefor

comment.Itreallyisanall-starline-upinoneplace.Gofigure.Itis6pm,andIhavenoidea.

MaybeI’llwritealast-minutenote.Wait:Latestrumor:agovernmentofficialtellsABCNews

thatthefederalgovernmentisexpectingandpreparingforthebondratingagencyStandard&

Poor’stodowngradetheratingofUSdebtfromitscurrentAAAvalue.Thatshouldmakefor

interestingdinnerdiscussion!

Thishasbeenaveryinterestingtimetotalkeconomicslateatnight.SomeVERYserious

economistsaretalkingQE3andanotherversionofOperationTwist(circa1948,wheretheFed

fixedlongbondrates)nextyearaswerollintorecession.OthersthinktheFedhastodo

nothing.Iamsittingandlearningandmaybethrowinginanopinionortwo.Iwillreportback

nextweek.

TodaymyyoungestsonTreyandIwentfishing.Thatis,fishingasopposedtocatching

anything.Onebassapiece.Butthetalkatlunchwasgoodandthebanterfriendly.Weflyback

onMonday.Thisismy6

th

yeartocomewithTrey,anditisourfavoriteweekoftheyear.

Yourhopingtobecatchingtomorrowanalyst,

JohnMauldin

the case for going global is stronger than eve

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