Thoughts from the Frontline

The Case for Going Global Is Stronger Than Ever

By John Mauldin

August 5, 2011

Choose your language

The Case for Going Global Is Stronger Than Ever
The US Markets Are Still In Trouble
Undercapitalization
Emerging Markets Still Undervalued
Global Capital Shift Is Accelerating
The Biggest Growth Will Be in the Most Obvious Places (and Sectors)
Conventional Diversification Won’t Cut It Any Longer
Risks (and there are plenty)
Maine and QE3, Operation Twist, etc.?

As will be clear below, I had finished an earlier version of this week’s e-letter, but the events of the last few minutes require a few paragraphs. As I write at the end of the letter, Bloomberg kept their satellite truck here in Maine, as they had got advance warning of the downgrade by S&P of US debt and wanted to interview a number of the economists here, including your humble analyst. I can’t rewrite the letter at this late hour, but will send you additional comments on Monday. And you can go to www.bloomberg.com and see everyone’s remarks, including mine. It will be there somewhere, they promise me.

And now, a few questions and observations are in order.

First, as I walked to the area where the Bloomberg was shooting to go on, Jim Bianco and John Silvia told me that S&P had downgraded the Fed. I laughed and said, “If you guys want to make me look like a fool on TV, you have to at least make up a credible lie.” They kept insisting it was true. I finally asked Mike McKee of Bloomberg and Barry Ritholtz, who was on-air, if it was true. They claimed it was, too. I was still wondering if they were setting me up, but even Roubini (who wouldn’t do that to me) said it was true.

So, if the Fed, which doesn’t issue credit and can print money, can be downgraded because it holds AA+ debt, then why and how in hell can the ECB, which holds hundreds of billions of euros of the junk debt of Greece and Ireland and insolvent banks not be downgraded on Monday? And the Bank of Japan? REALLY? What are these guys smoking? Do we now downgrade GNMA? Of course. And the FDIC? What the hell will repos do on market open? The NY Fed says it won’t affect anything. Don’t ask me, I just work here. And how can you rate France AAA? And still give AA or more to Italy when the market is saying they are getting close to junk?

Side bet for Monday. This could make me look like an idiot, but I think treasury yields fall as the risk-off trade increases. Can this come at a worse time for a nervous market? By the way, maybe you want to go long Kimberly Clark, as they make Depends (the adult diapers here in the US, for my non-US readers), because sales are going to skyrocket all across the financial markets.

Can we say Endgame, gentle reader? Madness. And now on to the regular letter. More to follow Monday.

__________

This week I write from Maine, where, when we landed in the float plane at Leen’s Lodge in Grand Lake Stream on Thursday, we learned that the market had closed down 512 points. I was in the plane with Nouriel Roubini and Jim Bianco (plus a Fed official to be named later), where for whatever reason we could get reception on and off (no phone works at the lodge). We were just watching the market fall. It is fun to sit next to Roubini as a market crashes. He knows ALL the market crash jokes.

So, as is my normal routine for this fishing trip to Maine, I take the week off and invite a guest columnist in. This year it is Keith Fitz-Gerald, whom I have heard speak twice and have started reading. He has lived all over the world and spends a lot of the year in Japan, and is a true expert on emerging markets. I am a fan of investing in emerging markets (as I agree they are the future) but do not consider myself anywhere close to Keith’s level of expertise. So this week we take a look at the case for emerging markets.

If you are interested in subscribing to Keith’s letter and learning more about emerging markets, you can go to https://purchases.moneymappress.com/MMRKFGSHORT4950to79/LMMRM800/. It’s fairly inexpensive and my readers get half off. Now, let’s jump in, and I will end with some closing comments.

The Case for Going Global Is Stronger Than Ever

By Keith Fitz-Gerald

Chief Investment Strategist, Money Map Press

If we have learned anything from the current financial mess, it’s that building wealth is dependent on rational analysis, careful decision making, and risk management. That’s why sticking close to home at a time when our markets are more uncertain than ever is a recipe for disaster and absolutely the wrong thing to do.…

Discuss This

12 comments

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Jeff Little

Aug. 10, 2011, 9:03 p.m.

Good quote from the article:

“History shows that one of the single biggest drags on any economy is something I call overcapitalized infrastructure. What this means is that, dollar for dollar, there is so much money available that investments become a process of overallocation or overcapitalization. Or both.”

Another nail in the coffin-lid that tax cuts on the rich are a necessary part of economic stimulus.

Keith Springer

Aug. 9, 2011, 12:24 p.m.

Tums or Tequila for the market today? After the last several days, most investors have needed both! I still donâ??t believe that the S&P downgrade of U.S. Treasuries has anything to do with the drubbing weâ??ve taken. Itâ??s simply a cry for help to the Federal Reserve for more stimulus. Clearly QE Mini-Me isnâ??t enough. I expect a full blown QE3 and the market will rally.

In the bigger picture, everything I wrote about in my book, Facing Goliath: How to Triumph in the Dangerous Market Ahead, is coming trueâ?¦ and faster than I had expected, but thatâ??s the nature of a crisis of confidence. Investors need to take this book to heart, in order to protect their finances. When itâ??s time to Face Goliath, you better be ready or youâ??re going down!

Regards - Keith Springer
President of Springer Financial Advisors

Ernest M Kraus

Aug. 7, 2011, 5:48 p.m.

John:
Yet I see that the world is still willing to purchase our debt with the comments that ” it’s still the safest ” on the planet.
I look at China with a growing “middle class” and read that China is now outsourcing due to what they consider excess labor costs.
I look at countries that are exploring and harvesting mineral wealth while I see a president and his followers doing everything they can to through roadblocks at our own development.
Finally, I wonder about middle class in those quoted countries being the equivalent of $6,000 per year. Just what can one buy?
I see these countries trying to attract tourists because it’s a source of income that does not requier manufacturing.
Ernest M Kraus, President
Me anddelCano Travel consultants

James Slater

Aug. 7, 2011, 12:21 p.m.

Excellent update on the state of global capital markets in developing and emerging markets:

http://www.businessinsider.com/212-trillion-mckinsey-2011-8#global-equity-capitalization-remains-below-peak-1

Glen Austin

Aug. 7, 2011, 12:39 a.m.

Wow, amazing analysis with a simple, even Biblical conclusion.  “The borrower is servant to the lender”  Proverbs 22:7

The de-leveraging of the West will impact markets globally, but it is certain that the countries with the lowest debt, and holding the most foreign debt, with the best labor force, will be the ones to emerge out of the global recession the fastest.

The U.S. has been a tragedy in education for 30 years, held hostage by Teacher’s Unions, a requirement for “no child left behind”,  a culture of entertainment, idleness, and stupidity.  Graduates from Chinese and Indian schools are two YEARS ahead of their best/brightest peers in America.  We deserve what we get.

There are pockets of brilliance, ideas and companies in the U.S. that blossom, then flourish worldwide, but I would argue these are the exception, rather than rule.  We have to find those, invest in them, and find the best in each emerging market as well.

The U.S. as a whole needs a big lesson in humility, at the governmental, and the local level, and we’re about to get it.  Go BRICs!!!!  Go QID!!!!

Russ Robelen

Aug. 6, 2011, 9:32 p.m.

The piece by Keith Fitz-Gerald makes many good points and presents some very interesting data.  However, after all his advice to stay away from the US, Europe and Japan he feels compelled to add this caveat:

In closing, I want to leave you with one more thought.
Even though we have talked extensively about why the case for emerging markets is stronger than ever, I am not a big fan of abandoning the U.S., which is what some of my colleagues advocate.
The United States is a nation filled with resilient, clever people; and despite the fact that the chips are down, I wouldnâ??t bet against it.
We will find our way through this mess, even though the path we must take isnâ??t clearly defined nor brightly lit â?¦ yet.
Best regards for great investing,

Tell me where these resilient, clever people reside, surely not in Washington.

Charles Yaker

Aug. 6, 2011, 4:14 p.m.

Nice article. While S&P downgraded the US for the wrong reasons I wonder if AA is still too high. While the US can’t default involuntarily it can decide to default if it wants. Given our political situation that is a real risk. Furthermore the “moral hazard” that exists by our failure to bring the people responsible for the recent Recession to Justice including some people at S&P replaces the “rule of law” with the “rule of men” and such an environment is not a safe place to invest. ( I guess the same could be said of China).

as for Michael Bell’s amusement I would add funeral suppliers if Medicare get’s cut in November.

ivar laegreid

Aug. 6, 2011, 3:48 p.m.

Outstanding!

Howard Brickman

Aug. 6, 2011, 2:17 p.m.

There is an opportunity to start to fix a number of the US growth issues with the implementation of a moon landing style transition from our traditional liquid petroleum based transportation system to fully utilizing the new natural gas supply that is available in previously “too expensive to produce” formations.  We import 12M barrel/day @ $100 = $1.2B/day x 365 = $438B/year.  By replacing 1/2 of the off-shore purchases with domestic natural gas that shifts $219B from the Import column to the Industrial Production column for a net increase in GDP of $438B.  GDP would then increase by approximately 3% assuming that there is NO additional economic activity stimulated by the development of the fueling infrastructure and conversion of vehicles to natural gas.  There is also the potential of a greatly reduced cost of distribution since natural gas pipelines currently exist throughout the US.  Which could greatly reduce the number gasoline and diesel tanker trucks required since the existing nationwide natural gas distribution system could actually meter the purchase with the individual users and at fueling stations. 

If they are going to start up the presses again maybe this would be a useful target.  There would be so much potential money to be made that a great deal of the cash currently sitting on the sidelines would fly towards the companies involved in the conversion process. And perhaps millions of jobs would be created to build and service this new economic activity.  But never mind we wouldn’t want any of the stimulus spending to actually have a long term positive impact that could fuel growth, reduce unemployment and improve the environment.

James Slater

Aug. 6, 2011, 1:06 p.m.

While emerging markets may offer long term investment opportunity, at present, there appears to be a high correlation of the world markets in the negative direction.  Deleverging may not be confined to developed markets.

http://advisorperspectives.com/dshort/charts/markets/international/world-markets-update.html?world-indexes-since-090309.gif

http://advisorperspectives.com/dshort/charts/markets/international/world-markets-update.html?world-indexes-since-2000.gif

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