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

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Craig Cheatum

Aug. 6, 2011, 12:19 p.m.

Hey John, I think this article hits on some important points.  Underpinning his discussion are two points,  the relative importance of productivity of labor versus capital, and the consumer versus investment driven economy in various countries.  I just want to make a few observations (or maybe questions). 

The private sector has focused on productivity of labor for at least the last 10 years;  through their union (K St) have rigged the tax system in their favor; their rich owners have managed to get massive tax cuts; and focused on consumer driven expansion—all factors that are important in an expanding economy and close to a balanced budget.  But weâ??re way beyond that.  You can add to that health care costs that a at least two times our developed economy competitors (we need to cut $1 trillion/year off this), and defense spending that is more than all other developed countries combined (the official number is $700 billion, but if you add veterans affairs, homeland security, and intelligence agencies its $1 trillion, or half of federal revenues).

In a declining economy we should focus on factors that will prepare us for the next expansion, or largely productivity of capital.  Rather than wasting money on consumer goods, tax cuts, and excessive health care and defense spending, we should focus on infrastructure, education, and energy (or add your own) innovation.

I think the article provides a basis for someone to develop case studies on what makes emerging countries successful and how they can be implemented in the US.  Singapore is probably a good example.  They focus on infrastructure, education, support innovation (especially biotechnology), have contained healthcare costs and defense costs.

I think a lot of this will happen over a period of time through reverse globalization as mentioned by one of your Outside the Box contributors.  But that may not be enough on its own.

Craig Cheatum
Geologist, Retired
Houston, Texas

Michael Bell

Aug. 6, 2011, 11:02 a.m.

John,
Opening salvo is hilarious - I laughed out loud. Go long Kimberly Clark - too funny.

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