Monday, June 30, 2008

View of a Fading Giant

Gloom and Doom? Nah; Just for the U.S. - Barrons.com: "You continue to be very bearish on the U.S. But haven't there been other times when there was lots of negative sentiment toward the U.S., only to see another era of prosperity emerge? Such as the late 1980s, when there was concern that Japan would take over the U.S. economy. Look at how that turned out.

Yes, but we haven't been through anything like what we are going through now. The United States has really been living in a fool's paradise, or a phony economy, probably for more than 20 years. But our economy has been growing and getting bigger and bigger. We have been able to convince the world to lend us money and to provide us with goods that we don't produce and that we can't afford to pay for with exports. And it has gotten to the point now where the problem is so big, especially since the real-estate bubble. We've now borrowed so much money from abroad. Our trade deficits are now very big, and our industrial base and our infrastructure have been allowed to decay for so long, that we are now at a point that we can only survive as an economy thanks to the charity of the rest of the world. They have provided us with all the goods that we can no longer produce because we lack the industrial capacity. And they have to lend us the money because we don't have any savings"

I think this is a very hard point to argue against. After reading a little bit of the intelligent investor this weekend, I feel like forecasts can be deeply subject to time horizon. With the cheapness of many sectors of the United States economy right now I feel that one can't ignore large companies. One can almost dig for them like that treasured DVD at the bottom of the Wal-Mart bin, yet the cheap ones seem everywhere.

Nonetheless, the majority of my recommendations lie in multinational and international companies.

But isn't there an argument that once we clean up this housing mess -- along with the credit bubble, whenever that occurs -- the U.S. will be a lot closer to a bottom, where the outlook begins to improve?

I don't think that's true. The resolution to the housing problem is going to mean housing prices are going to be a lot lower than they are now, and most Americans are not going to have any home equity. It's going to mean that trillions of dollars will have been lost by the lenders. When the home equity is gone, Americans are broke, as they don't have any savings. All they had was their home equity. They were counting on their home equity, without which they will be unable to pay off their credit cards

I think this is not crystal in ball at this point. The while we are a nation of consumers, we are quite good at it. I believe that very many people are about to become very wealthy in the country because of the transfer of assets from the baby boomer retirement. The true test in my mind, will be if the middle class will exhaust this capital or ride the wave of international growth. The upper classes are growing as the defensive sectors like health care and utilities are strong. There are some good ideas in US Stocks as well as new the bond market.

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