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Michael Frost


Why not Invest Only in the US?

| November 18, 2020
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Why not Invest Only in the US? 

 

I did some thinking over the weekend. I did some thinking and rethinking about a good friend and client who was very adamant about his friends telling him that he should be 100% invested in the US stock and bond markets.  That the United States was the only country you could trust and that our technology would move us further in front of all the other countries going forward.

 

I am a person who thinks just about everything is a mathematical equation. My degrees are in accounting and economics, so a lot of this thinking is mathematically based.

 

For me to believe that the US was the only place to invest, I would have to believe that this argument would supersede other things I believe. Here are some of those things that I would have to un-believe.

 

  1. For it to be true that the United States should be the only place to invest, over the next 10 years I would first believe that the earnings that were created by US corporations over the last 10 years could be duplicated over the next 10 years. A major problem with that would be the fact that US corporations would have a tough time doing that if buybacks slow down significantly. It seems that that theory does not consider how much the last 10 years were predicated on corporations buying their stock back.  This of course has skewed traditional metrics such as earnings per share. But they do not account for that and we would have to consider that the corporate buybacks would continue at the rate that they had been for the next 10 years.  Here is something from a previous newsletter.

 

There was an interesting article on the Bloomberg website entitled, “Goldman Considers ‘A World Without Buybacks.’ It Looks Ominous”, by Lu Wang, dated April 8, 2019.

The article starts out saying, with political scrutiny of stock buybacks growing, Goldman Sachs started assessing an extreme scenario: “a world without buybacks.” The picture doesn’t look pretty. 

That is because corporate demand has far exceeded that from all other investors combined,according to strategists led by David Kostin. Since 2010, net buybacks averaged $420 billion annually, while buying from households, mutual funds, pension funds and foreign investors was less than $10 billion for each, Federal Reserve data compiled by Goldman showed.

 

  1. The second thing you would believe is that the emerging markets think and do like they did 20 years ago, and they will think that way 10 years from now.  Emerging markets have made a big effort to become easier to do business with.  Look at where they were 10 years ago vs. today.  They are worried about managing expectations and civil unrest. Growth is a major concern for many of them. It seems that many of the emerging countries are much more trade oriented right now than we are.

 

  1. You would believe that the public debt does not matter. You must believe that the US is doing all the right things and none of this will come back to be a problem later.

 

Here is a look at the publicly held debt under current policies constructed by the Congressional Budget Office at the beginning of 2018 and produced by justfacts.com.

 

 

 

 

 

 

 

 

  1. You would believe that urbanization rates do not matter, and that the middle class increases in emerging markets based on consumption is just a mirage. This is also from an earlier newsletter.

 

 

  1. You would believe that the Harry Dent’s demographics argument is not correct for the United States with our population aging. That somehow this will not apply going forward.

 

 

 

 

  1. You would believe that the trend of the countries that have been poor and unhealthy and that have been increasing towards the healthy wealthy sector will totally stop and reverse itself. This was also in a previous newsletter.

 

Technological innovations allowing the rest of the world to catch up.  Hans Rosling created the website www.gapminder.com .  In his research, he concludes that because of the spread of technology and the speed of knowledge moving across borders and the movement of free ideas across the world, that the rest of the world is catching up to the established countries at a rate for greater than anyone would have thought of even 10 years ago.  Based on his research, he says the rest of the world will catch up in short order and he believes that more people will enter the middle class in the next 10 years then the rest of the history of the world combined.

 

 

 

 

 

 

  1. You would believe that the developed countries with 50 million less working age people over the next 20 years will overcome the demographics of emerging countries creating 1 billion new working age people over the next 20 years. 

 

 

 

Graph from Hartford Funds 2019

 

By 2025, there will be about 4.5 billion workers in emerging markets versus 800 million workers in developed markets.  And those numbers will increase for emerging markets and decrease for developed markets. It is an easy mathematical equation to see where the growth is going to come from.

 

 

  1. And lastly, you would believe that the valuations will keep going higher from here in the US based on what Warren Buffett thinks about the metrics of valuations. This is also from a previous newsletter.

 

Fortune Magazine had an article written by Shawn Tully on July 20th, 2019 titled One of Warren Buffett's favorite metrics is flashing red, a sign that corporate profits are due for a hit. It goes on to ask the question can this continue.

“Here's a crucial question for investors that the Wall Street crowd seldom addresses: Can corporate profits keep booming by growing faster than the economy? Is this the new normal, or will the GDP-gobbling trend reverse, as it always has in the past, turning today's record-shattering rally into a rout?”

Here is a graph of what the author is looking at.


Gurufocus.com 7/24/2019

Why is the market so highly valued?

As we talked in one of the last issues, corporate buybacks have been the biggest source of funding for the market over the last 10 years. Look at the graph below and you can see how the corporate buybacks have influenced the stock market.  The obvious question from here is whether this can continue.  Many emerging markets like Singapore are at their lowest valuations.

 

 

All investing, including stocks, involves risk including loss of principal. 

Government bonds in treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program.

An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.

Investing in mutual funds involves risk, including possible loss of principal. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

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