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Morning in America

Buy American

By Elliott H. Gue, on Jun. 7, 2014

This lie has already cost investors hundreds of billions of dollars and threatened the financial stability of millions of retirees.

By appealing to emotion over reason, sensationalist hucksters are coercing even experienced investors to make the biggest financial blunder of their lifetimes, passing up one of the most powerful trends and money-making opportunities in a generation.

Meanwhile, those peddling these myths continue to line their pockets at your expense. Don’t fall for the scam and miss out on a trend that’s already generating impressive gains and reliable income for millions of investors.

Every week, I receive dozens of e-mails and promotional mailings from financial publishing firms touting everything from investment newsletters to trading services and online webinars.

A common theme of many advertisements: America’s best days are in the past, and the nation’s fading economic hegemony will spark a global financial calamity that makes the 2008-09 crisis look like a walk in the park.

Here’s a sampling of these over-the-top claims that prey on investors’ worst nightmares:

  • Inflation will soar to double-digit levels last seen in the 1970s;
  • Unemployment will skyrocket to more than 20 percent;
  • The US government won’t be able to borrow money at any price; and
  • The American dollar will soon become next to worthless.

In the world of financial publishing, failed promotions don’t have a long shelf life. The reason so many doom-and-gloom advertisements hit your inbox is that they’re generating subscriptions, website traffic and revenue. Spreading pessimism is good for publishers, but bad for you.

Investors’ receptiveness to gloomy messages shouldn’t come as a surprise; memories of the 2007-09 Great Recession remain fresh in their minds.

Some self-proclaimed experts have used the crisis to establish credibility, claiming to have called the downturn and saved investors from the worst of the decline.

However, dig a little deeper and you’ll find that many of these self-proclaimed soothsayers have predicted a calamity for years or, in some cases, decades. Like a broken clock, they’ll be right twice a day but wrong most of the time.

Even worse, following the advice of these naysayers has been nothing short of financial suicide.

Most told investors to sell stocks in the spring of 2009, predicting that the worst for the markets was yet to come. Those who heeded that advice have missed out on the 170 percent jump in the S&P 500 since its March 2009 lows.  

Disenchantment with Washingon

Regardless of their political party, Americans are fed up with the government and politicians in general.

President Barack Obama’s approval rating stands at 40 percent, a slight improvement from his first-term low of 37 percent. And more than half of Americans in a recent Gallup poll said they disapprove or strongly disapprove of the president’s job performance.

Congress is even less popular. Only 13 percent of Americans approve of the legislative branch’s performance. In November 2013, Congressional job approval reached an all-time low of 9 percent.

Americans have become deeply divided along party lines, but they seem to agree on one point: The nation’s prospects are dim. 

A recent Rasmussen poll shows that only 29 percent of likely voters think the country is on the right track, while an overwhelming majority–almost two-thirds of those surveyed–believe the country is headed in the wrong direction.

This toxic environment makes investors particularly susceptible to politically charged ads about how Washington’s blunders are forcing the nation into inevitable and terminal economic decline.

But following the crowd and accepting conventional wisdom about America’s fading glory will not make you money.

An Outside Perspective: Invest in America

Forget what you have heard about foreigners’ unfavorable opinion of the US–Americans are their own biggest critics.

Although less than one-third of voters think the nation is headed in the right direction, a 2013 Pew Research study found that 76 percent of Italians, 69 percent of Japanese and 58 percent of Britons have a favorable opinion of the US as a country.

And here’s a number that might find surprise you: Almost two-thirds of French citizens surveyed have a favorable opinion of the US and close to 70 percent like Americans.

The same is true of American companies and brands.

The world’s most popular tourist destination, France hosts more than 80 million international visitors every year.

What’s the most popular tourist destination in France?

It’s not the iconic Eiffel Tower, which attracts 6.8 million visitors each year, or the Louvre, which pulls in 8.3 million visitors.

The winner is Disneyland Paris, owned by California-based The Walt Disney Company (NYSE: DIS). More than 14.5 million people visit the theme park each year, according to the French National Statistics Office.   

Foreigners also believe that the US is a great place to invest.

Foreign direct investment (FDI) measures the total amount of money companies and individuals outside the US have invested in American businesses and physical operations. FDI does not include passive portfolio investments by foreigners such as purchases of stocks, derivatives, and government and corporate bonds.

At the end of 2012, cumulative FDI in the US totaled more than $3.05 trillion–by far the highest in the world. In comparison, China has attracted FDI of US$2.16 trillion, or about one-third less than the US.

FDI represents decades of international companies acquiring and investing in US-based assets.

But US dominance of global FDI is set to continue. Contrary to popular belief, the US has consistently been the largest recipient of FDI inflows over the last decade.

Even amid the dark days of the 2007-09 financial crisis, the 2006-12 housing bust and the 2011 downgrade of US government’s credit rating, US FDI inflows have consistently outpaced investment in China or any other nation in the world.

Some pundits claim that America doesn’t make anything anymore and that the nation’s manufacturing and industrial base has departed to China, India and other countries with lower labor costs.

Tell that to the foreign companies that in 2012 invested more than US$79.5 billion in US-based manufacturing businesses and operations, including US39.9 billion in the chemical industry, US$23.3 billion in facilities to build electrical equipment and appliances, and almost US$6 billion in the auto industry.  

The boom in US oil and natural-gas production has also attracted plenty of foreign capital; the petroleum and mining industries pulled in almost US$30 billion of FDI in 2012.

Sophisticated foreign investors understand something the naysayers do not: America’s energy cost, productivity and wage advantages make it the world’s most competitive manufacturing, industrial and technological power.

The Capital of Investment Capital

The US is also home to some of the world’s largest and deepest capital markets.

At the end of 2010, the value of all stocks traded on US exchanges exceeded $17.1 trillion–about 70 percent more than the value of stocks traded on all of the national exchanges in the EU.

America’s stock market is larger and more liquid than any other market in the world.

International investors have poured money into the US corporate stock and bond markets in recent years.

As of June 30, 2013, foreign investors owned a record $4.32 trillion worth of US equities and $2.94 billion worth of corporate bonds. And that’s on top of the $5.6 trillion in US Treasury securities held by foreign individuals, governments and companies.

A Rational Take on US Debt

Bearish commentators often highlight America’s soaring government debt as a key risk to the economy. After all, total US public debt reached 72.6 percent of gross domestic product (GDP) at the end of 2012, compared to 32.5 percent at the end of 2001.

Yes, US government spending is a cause concern. But investors need some perspective. This saying from American oil magnate John Paul Getty is particularly instructive: “If you owe the bank $100, that’s your problem; if you owe the bank $100 million, that’s the bank’s problem.”

The idea that international investors will dump their US Treasury securities suddenly is pure lunacy. The US government bond market is far too large; a collapse in the price of these securities would send the entire world into crisis. The nation’s creditors can’t afford to write off the value of their Treasury holdings.

Moreover, consider the competition. The US Treasury market is by far the world’s largest and most liquid. If you’re looking to put hundreds of billions of dollars to work, US Treasury notes are one of the few security classes that can accommodate this influx of capital without moving the market.

And the alternatives aren’t particularly attractive. The UK’s government debt stands at almost 90 percent of GDP, Germany’s sovereign debt comes in at 78.4 percent, and the French government’s obligations amount to 92.7 percent of its GDP.

Meanwhile, yields on bonds issued by the Italian and Spanish government have soared because of concerns about these countries’ solvency.

Of course, Standard & Poor’s downgraded the US government’s credit rating to AA+ from AAA in 2011, serving as a wake-up call that the nation eventually could squander its status as a safe-haven investment.

Nevertheless, there’s no imminent risk of a credit crisis originating in the US Treasury market.

Top Dollar

And that brings me to one of the most pernicious rumors spread by the doom-and-gloom advertisements that apparently work so well: Despite what you may have heard, the US dollar remains the world’s preeminent reserve currency and the preferred global store of wealth.  

As of the most recent quarter, the US dollar accounted for 61.2 percent of the world’s US$6.1 trillion in allocated foreign exchange reserve holdings. In 1995, the ratio was about 59 percent.

Over the past 18 years, the dollar’s prominence as a reserve currency has increased.

And what are the alternatives to the dollar?

The EU economy is roughly the same size as the US, and the euro trades with enough liquidity to serve as a reserve currency. At present, the euro accounts for slightly less than a quarter of total allocated reserves, up from about 20 percent in 1999.

But the euro has serious flaws. Although the countries in the eurozone share a currency and the European Central Bank (ECB) sets the region’s monetary policy, each member sets its own fiscal policy and issues its own bonds.

While Germany and other EU member states have a history of responsible spending and low public debt, Italy, Spain and Greece find themselves saddled with high government debt after long histories of running large public-sector deficits.

Over the past few years, Greece and Italy’s borrowing costs have spiked relative to the yields on bonds issued by Germany, Holland and other fiscally prudent member states.

The region’s credit crisis has forced some nations to accept painful fiscal austerity as a condition of receiving EU support.

There are legitimate fears that one or more EU member states facing painful spending cuts and soaring borrowing costs could eventually be forced out of the currency union.

Ultimately, the region may solve this problem by allowing countries to issue bonds backed by the entire EU. But these eurobonds are unpopular in Germany and other fiscally sound EU countries and remain years away.

Although the US dollar has its flaws, the euro won’t topple the dollar as the world’s main reserve currency until the EU tackles puts its own house in order–a task that’s easier said than done.

No other currencies in the world except the euro and dollar are large and liquid enough to serve as global reserve currencies.

The assertion that Australian or Canadian dollar could supplant the greenback as a store of global wealth is particularly farfetched.

Although Australia and Canada’s economies are reasonably sound, the two nations’ combined GDP amounts to about one-fifth of the US economy; neither currency has the scope to take the greenback’s crown.

Catching the Gold Bug

What about gold?

We’ve been fans of the yellow metal for years. In The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, Yiannis Mostrous and I asserted that all investors allocate some capital toward physical bullion and shares of gold miners.

When the book hit shelves on April 6, 2006, gold fetched less than $600 per ounce; the precious metal peaked at more than $1,900 per ounce in mid-2011. Despite gold’s recent pullback, we expect the yellow metal to surpass its 2011 high eventually.

That being said, far too many fear-mongering promotional pieces suggest that the only sure way for investors to protect themselves against financial collapse is to avoid equities and load up on gold.

Even worse are the myriad schemes hawking gold and silver coins, usually at marked-up prices.

Buying gold to the exclusion of other assets has proved disastrous advice. The price of gold is up 37 percent since the end of March 2009–well shy of the almost 150 percent total return posted by the S&P 500.

And the Philadelphia Stock Exchange Gold and Silver Index, a widely watched basket of names that mine precious metals, has given up about 15 percent over the same time frame.

The Strategy

Our bullish out for the US economy and industry–a second coming of Morning in America–underpins the Wealth Builders Portfolio’s emphasis on domestic equities, as well as cyclical sectors such as industrials, financials, technology and consumer discretionary.

And given the strong performance of the names in our model Portfolio, it clearly hasn’t paid to be pessimistic.

Investors should take advantage of any pullback in the broader market to add to positions in our favorite names; the wintry weather’s effect on the domestic economy and operational disruptions to some of our holdings could provide an excellent buying opportunity in coming months.

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