After Japan beat the United States in the World Baseball Classic and Argentina topped the "Dream Team" in Olympic hoops, it’s no wonder foreign stock markets are beating Wall Street at its own game.
Sure, the Asian financial crisis and Russian debt default of the late nineties spooked international financial institutions. Even earlier this year, we saw how a Shanghai slide could cascade across the International Date Line and give the world’s richest nations a jolt.
But what about the dot-com bust and today’s sub-prime mortgage crisis? Moscow and Beijing are making a sharp turn towards capitalism, which makes some skidding understandable.
So why have American investors not yet figured out that companies with no existing product aren’t worth 100 bucks a share, and that if your household or your government spends more money than it has, you’re up a creek without a paddle?
These are rookie mistakes made by seasoned veterans, and I, for one, am not giving any more free passes just for old time’s sake.
Fleeing to Foreign Stocks
The U.S. Treasury Department’s own figures show that foreign investors would rather take the ball and go home. The Treasury International Capital report (TIC) shows that not only is the dwindling dollar diminishing the allure of Wall Street, but also that smart U.S. investors are purchasing bonds and stocks from overseas markets in record numbers.
This August saw a fire sale of bonds, commercial paper, and equities–all of which are sitting atop a veritable tinderbox of bad debt.
Net foreign sales of U.S. equities topped $40 billion in that month, and U.S. residents bought a net $34.5 billion of foreign long-term securities.
"Long-term" is the key here, as Americans are waking up to the fact that the rest of the world’s markets are no longer a roulette wheel. These bulls are here to stay.
What’s more, increasing wealth in emerging markets like Brazil, China, and Russia is breeding a new crop of investors. These are people whose recent memories include endless bread lines and riots, but whose future is as bright as America’s was at the end of World War II.
Take a look at the iShares Brazil (NYSE:EWZ) and Hong Kong (NYSE:EWH) exchange-traded funds over the past year, and compare them to the Dow.
After an 11% drop in February, Brazil’s benchmark BOVESPA index bounced back in just six weeks! That’s the kind of resilience you get from a remarkable matchup of market forces:
- Commodity prices are at record highs, also creating demand for sugar-based fuel.
- Brazil is adopting pro-growth strategies and getting out of debt.
- Greater telecoms capacity is bringing Brazil to the world and vice-versa.
Don’t get me wrong–I love my country. America is still the land of opportunity and great ideas, and I’m grateful to have been born in such a place.
However, I have to say I’m more excited that today’s world affords you and me the chance to take advantage of what the rest of the world has to offer so easily.
Ask yourself, "Where’s the real risk?"
Is it in China, with a middle class today that outnumbers the entire population of the United States (and another billion clamoring to join their ranks?) and the kind of real money to fuel a new state-backed investment fund that launched this month?
Or is it in the United States, dependent on cheap imports and expensive severance packages, a "knowledge-based" economy that somehow forgot the value of a dollar?
The answer is clear.
Regards,
Sam Hopkins
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