If you read any paper or magazine, few writers find anything good about the United States economy and its financial system. The election year has every candidate saying that this car wreck of a country has to be fixed.
But is America really a car wreck?
Yes, we endured a scary, stormy night. The United States financial system had dark days a few years ago, and we survived the difficult test. Today, banks and corporations have greatly reduced their risk exposure to derivatives while adding lots of cash to their balance sheets. They are much better prepared for another stormy night. America is capitalism and capitalism adapted and is moving forward.
What’s the state of our best corporations?
Strong companies make for a strong America, lest the Occupy people forget. Corporate earnings are solid and growing. Price / Earnings ratios are very low by historical standards. Yes, stock prices are up, but generally not because stocks have gotten more expensive as measured by P/E multiple expansion. Prices are up because business is solid. Prices are up because markets tend to predict the future.
The government is still a mess, but that’s not new news.
There are numerous challenges and our elected representatives seem unwilling to make any tough calls, choosing to procrastinate and defer all decisions time and again. No elected official wants to fix the country if it means losing the votes of some constituents. The burgeoning deficit is a top topic and the politicians are all falling over each other with ideas to tax our way out of the hole. Higher and higher taxation doesn’t work. Few are willing to admit that the government simply spends way way too much and borrows $4 of every $10 that it spends. The budget “Supercommittee” is the poster child of everything that ails Washington D.C.
A friend of mine who is nearing retirement (not that I personally believe in retirement — my must-read post on that subject is here) approached me to discuss “where to invest” after he read numerous articles tearing down the prospects for the U.S. stock market. The market has been on a great run since the financial subprime uglies of late 2008 and all the pessimists are scratching their heads.
After thinking about it for several weeks, I have come to the one logical conclusion: right now, the U.S. stock market is the single best place on Earth to invest one’s money. That is why the market is going up. I am comfortable that it should continue to outperform other investments for this decade to come.
To understand my optimism, you must first take a global view of rich individuals and organizations. There are many trillions of dollars in many countries around the world that must be invested if the capital is to be preserved. Wealthy individuals hire plenty of investment professionals to help them invest these trillions, so these funds know no borders.
Imagine that you are an investment manager with $20 B to invest, residing in oil producing Saudi Arabia. Where would you put the funds? Lets compare the countries that are viable options.
Invest in China? Well, China is looking to stave off a housing collapse. The economy is slowing. The Chinese stock market does not have a stellar record over the last few decades. Chinese companies do not do a good job reporting factual numbers. Government oversight is lacking and there is favoritism. The government is communist. No, investing the money in China is too much like gambling.
Invest in Japan? No, Japan has been struggling for decades and on life support. There is little reason to believe that a sustainable decade of investment growth is about to start.
Invest in Europe? Europe is in worse shape than the U.S. The hangover from Greece, Spain, Italy, Portugal, and Ireland is not likely to go away soon, even though Germany is flourishing. But Germany is tied to the common currency and they must keep it that way, as it favors their export-centric economy.
What about Great Britain? England is outside the Eurozone currency-wise, but its economy is just not growing at all. No, not there.
Invest in emerging markets? Well, Russia has corruption and the Kremlin to run off investors. If there is a place where you face the risk of investment confiscation, Russia is the place. Brazil has a lot of people, but now faces slowdown issues. They are just starting to cut rates so an instant turnaround is not in the cards. India? India has inflation problems and government controls up the wazoo. Australia? Australia is rich in natural resources, but it heavily linked to China and its current slowdown issue.
Compared to the rest, the United States has a stable government, low inflation, an economy that is improving, a housing crisis that is unwinding, corporate balance sheets that are strengthened, and better transparency and oversight than everywhere else.
The USA is the best choice, given the alternatives. Nothing else comes close.
Here is the U.S., the choice then comes down to stocks vs. bonds vs. cash. Keeping the money in cash is a fools game unless everything else melts down, and even then, cash is not a for sure winner. Bonds are paying so little that it makes the next decision simple. Real estate is now very affordable but not liquid or flexible — you have to have time and patience. U.S. Equities win. This is why the U.S. stock market continues to climb. If you have serious money to invest, you are far more likely to invest in America than any of the other usual suspects until conditions change dramatically. It is not that we don’t have issues, but that the alternatives are far worse, and our companies are definitely performing well.
Don’t listen to the pessimism of the writers. They are missing the big picture story. Few writers are good investors anyway. Buy good companies with low P/E’s and excellent growth prospects and strong competitive advantage / barriers of entry to competitors. Times are much better than Main Street believes.
I.M. Optimism Man