The United States: Putting Things in Perspective
What's going on with the United States?

In my 20-plus years in the investment business, I have seen wild swings in the way the US economy is perceived. At times, circumstances look terrible (like right now!), and economic ruin is predicted; then, circumstances change, new growth emerges, problems get solved, and investors flock back in. At the extremes, investors and the media usually get it totally wrong. Take a look at today's headlines on the state of the US economy:

'Banks Putting Squeeze On Credit'
'Payrolls Shrink as Employers Cut Hiring'
'Global Effort Urged To Head Off Slump'
'Home Building Plunges To 16-year Low'
'January Retail Sales Numbers Worse Than Grim Forecasts'

Headlines, CBSMARKETWATCH.com, February 7, 2008

Right now, fear holds sway. House prices are tumbling. The sub-prime lending fiasco grinds wearily on. Budget deficits are huge, while consumers are loaded with debt. The dollar has fallen sharply, and the stock market is weak. Lastly, the expensive quagmire in Iraq shows few signs of ending anytime soon. Is the U.S. economy finished for good?

In the 80's, it sure looked that way, when Japan appeared to have overtaken the US in economic potential. U.S. trade and budget deficits were projected to continue on forever. Politicians couldn't rein in government spending. And there was an expensive war - the Cold War - which economically at least was similar to other wars, minus the casualties. Clearly, a long-term decline meant that investors would be better off elsewhere.

Well, as it turned out, in spite of expectations, Japan went straight to economic jail, whereas the US landed on Boardwalk. In the U.S., budget surpluses took the place of deficits, thanks largely to decreased military spending. The Internet arrived, and U.S. companies dominated: Google, Yahoo, Cisco, Apple, MSN, Facebook - all American. Of course, the cycle went completely overboard the other way, driving the stock prices of US technology and internet-related firms to absurd heights. The cycle was complete.

But aren't the current problems in the U.S. really serious and insurmountable? Or could once again the prognosticators be getting it wrong? Is it possible that right now the US might well be one of the best places to invest? I think it is possible. Here's why.

The housing market slump and sub-prime lending mess have hurt financial institutions, both in the US, and elsewhere. However, financial services are an inevitable business, meaning that we can't do without them. We will still have loans, credit cards, and insurance, regardless of the state of the economy. True, there is a credit crunch underway, but that's not fatal. Worthy borrowers can still borrow. As in the Savings & Loan problems of the 90's, there will be bankruptcies and losses, but that kind of 'economic housecleaning' tends to ultimately lead to a recovery and a stronger economy.

As for the Iraq war, regardless of which party arrives in the White House next year, staying in Iraq is unlikely to be a winning political strategy. Clearly the American public is fed up and wants out. Exiting might save the US budget a cool $200 billion per year. That would go a long long way to solving the Budget deficit problem.

The weaker US dollar is beginning to help American manufacturers, particularly exporters. Did you know that the US is a bigger exporter than Japan, and almost equal to China? Fully 45% of the sales of the companies in the American S&P 500 index come from outside the US. American firms are strong internationally, in many cases dominating their industries. Where is the foreign competitor to Coca Cola? To McDonalds? Or to Microsoft, or the entertainment industry? Or U.S. manufacturers of agricultural equipment, and genetically modified seeds? Our close proximity causes us to forget how truly competitive U.S. companies are. There is lots of growth outside the U.S. in newly emerging countries such as China and India, and many U.S. companies are benefiting. Did you know that General Motors is the leading automaker in China?

But the most powerful argument favouring the U.S. is its systematic, pro-business, entrepreneurial culture. New products and services are rapidly introduced, even as bankruptcy culls the inefficient and financially unsound companies. As the saying goes, America is business, and business is America. Entertainment, sports, education, legal services, health care, even - dare I say it? - religion, is a business there. Behind all this is a political system strongly supportive of business and investment. The legal protection of property rights and the rule of law ensure that assets are safe from arbitrary seizure.

How much has America's political system - its protection of individual rights, especially property rights…contributed to the gap between standards of living of U.S. residents and those of developing countries? I suspect a great deal.

Alan Greenspan, 'The Age of Turbulence', p.386

If you can foresee a United States that is out of Iraq, the housing mess resolved, and deeply involved in today's global economy, then perhaps the time to consider investing there is now. After all, markets generally start to go up before it seems obvious to do so.

Bear in mind that any investment should be part of a carefully constructed, personalized financial plan. Please call me to arrange a no-cost, no-obligation discussion of your financial situation. I have 21 years experience in investments, in Canada, London, and Singapore. Together we can discuss the potential merits and suitability of investing in the United States, as part of a diversified portfolio.

Sincerely,

Scott Swallow, HBA, MBA, CIM