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Outlook for the USA is Grim
The financial meltdown was caused by sixteen years of
GOP "we don't need no stinking government oversight" attitude
and as a result the American economy will be suffering for many years
to come. The first eight was spent trying to impeach Clinton instead
of minding the store. During the second eight years the store was
run by the slushy machine. Bush was allowed to stay in the store as
the resident good-old-boy as long as he did not touch anything.
(Gosh that's awfully bitter for a Canadian. . .okay I'll try to be
nice but its hard to do when you see a friend becoming increasingly
belligerent and self destructive. There's a lot more bad news so I'll
be nice later.)
The problem was Americans were told "If you spend like you are rich then you
are rich". What they were not told was that Only the
rich can afford to spend like they are rich. If an
average guy spends like he is rich he will make himself poor - and
make the rich richer in the process. So the middle class spent themselves
into poverty and the rich used the extra liquidity in the system to
play an elaborate casino called the derivatives exchange.
When the average guys who were deepest in debt started to default
it was like a chain reaction in a nuclear bomb. Like a nuclear bomb
the result was a very large radioactive crater that represents what
is left of the US economy.
The Obama administration is doing its best to cover up that crater
with a cardboard facade and a coat of paint. It is working because
people are talking about green shoots in the economy. The problem
is those green shoots are the green glowing tendrils of a radioactive
ecosystem evolving behind the facade.
Obama is probably the only one who can fix the problem. He has a huge
job to do and it will take most of his first term just to get the
US economy back on the rails again. It won't be moving by the end
of his first term but it will be ready to move. With any luck the
GOP will still be bouncing from one loud radio talk show host to another
looking for a leader. An Obama second term is probably the only thing
that will prevent a total collapse of America as the last great empire.
A BRIC Lead Recovery and US Dollar Risk
The BRIC countries (Brazil, Russia, India, China) are less affected
by the US collapse than the more connected economies of NAFTA and
Europe. China has trillions in cash reserves (mostly US) and an export
component that is tiny (5%) and shrinking part of its economy (compared
to the 30% component in the Canadian economy). Brazil is built on
a state run bank that was not seduced by the American financial excesses
and their economy is in good shape. India is troubled and bureaucratic
but should be able to maintain a health growth in their economy just
focusing on expanding their consumer culture. Russia is a basket case
but they have oil and gas and a huge European market next door to
bail them out.
During 2010 (Sooty predicts) the BRIC countries will resume
10% growth, Europe will return to its plodding 2% growth and the US
will be stuck on a long term recession. Canada and Mexico will limp
along selling oil and electricity to the US and the rest of Asia will
learn to export into China and India instead of the USA.
Stockless Recovery in the USA
Normal recessions go through this phase of "jobless recovery" where
the stock market expands and companies increase profits by increasing
production without hiring staff. Only after companies exhaust their
spare capacity are they forced to hire staff to retain market share.
Everybody but the US will follow this pattern.
The US is in such a deep hole that they will not recover without help.
There have been times in the past where countries would devalue their
currency to make exports cheaper and imports more expensive. The result
is an expansion in their economy as local industry grows to compete with
the expensive imports and also grows to meet the demand from other countries
for their cheap exports. Of course this trick is quickly copied by their
trading partners and everyone enters a devaluation death spiral.
In some cases a wealth country will allow the devaluation by its competitor
because it provides political stability. After WWII the US allowed
Japan and Europe to keep their currencies below market value because
it was the right thing to do. The world viewed the US as nice guys
for doing this (and they deserved all that praise and more). Starting
with Nixon's visit to China the US did this again by allowing the
Yuan to have a competitive advantage against the USD. Not much happened
until the 90's when the Chinese economy started to take advantage
using state controlled capitalism. The result is a far safer world
and the US should again be praised for it.
Now the US is in trouble and I believe the world will return the favor.
If the US devalues their currency it will reduce imports (except for
oil), increase exports, and reduce the value of loans held by foreign
governments. Their industry will grow to replace expensive imported
products and compete well in the export market. If they also push
to fix imported oil problem with alternative energy this will further
increase local industrial growth. This means jobs, jobs, jobs and
probably starting early in 2010 (won't fix everything - they'll still
have a health care and social security problems but people will be
working again). Companies will become profitable and the DOW, NASDAQ
and S&P will grow.
The downside of course is that the value of US companies while increasing
in USD terms will be declining in terms of the Euro or the Yuan. This
means that companies with only US sales will be a terrible investment
for anyone except an American. Their stock price will grow in USD but at the
time the USD will drop so the adjusted value of the shares will be flat in terms
of a basket of world currencies.
Sooty predicts the USD will fall to 60% of its 2008 value over the next four years
then stabilize. This would mean in 2013 a Canadian dollar would buy USD 1.50
and a Euro would buy USD 2.50. Gold which is denominated in USD would rise in response
to $1600/oz with similar increases in most other commodities (copper, silver, oil).
Of course these would show little or no growth if measured in other world currencies.
So Americans will find an investment in commodities will provide great returns but
the rest of the world would find them a poor investment.
A more complete explanation of the timing and effects of a US Dollar collapse is
here.
The US ecomony at $14 trillion would decline to $8.5 trillion in 2008 dolars.
This would be much smaller than the European Union (already larger with a GDP of $18 trillion).
The Chinese economy which is currently $4.4 trillion would
be $8.5 trillion after seven years of compounding at 10% growth. China
is likely to also have an appreciating currency and could
overtake a stagnant US economy with a falling dollar by 2015.
For these US based companies there would be a growth in employees
(and Obama re-election votes) but no growth in constant dollar stock price. Sooty
calls this a "stockless recovery".
If you want to track this: watch the news for the phrase
monetization of the debt. . .or the government plans
to repurchase Treasuries. Both of these mean printing money to buy back
government debt. Of course they don't actually print money they just digitally
deposit cash into a creditors account without doing the double entry bookkeeping
thing of adding an equal amount on the liability side of the government balance
sheet. Its so painless - just do half the job and everything looks better in the
short term. It is what made every Zimbabwean a billionaire. The USA will not go that far
(Sooty predicts) but a 40% dilution on the USD will have enormous (positive) concequences on US
competitvieness in the world ecomony.
Buying Stocks on US Exchanges
The US stock markets are the largest and most liquid in the world.
Despite the recent problems with financial products like swaps and
derivatives companies listed on the US exchanges are under strict
regulation and generally their financial reports can be trusted. The
problem is US based companies will be a terrible investment because
the falling USD will swamp any gains in stock price reported on the
exchange.
There are a couple of exceptions - the first is foreign companies
listed on US exchanges. Their stock prices will include not only their
growth in business value but it will also include the growth in the value
of their "head office currency" against the USD. For example
a Chinese company listed on the NYSE will be subject to US financial
reporting rules but be "currency hedged" against the falling
USD.
The other case is a US headquartered company with most of its business
done in non-US markets. General Electric is a good example because
over 50% of its revenues come from non-US sales and operations (probably
the new General Motors as well). In
general if you want to invest in stocks on one of the US exchanges you will
have to be extremely aware of the currency risk.
Choosing a Stock on a US Exchange
Sooty has done some of the work to help identify stocks that are worth
investigating. These are not "buy" recommendations. Sooty is a fellow
investor not a financial advisor.
On the "candidates" page you will find two sections; one for each
of stocks listed on the NASDAQ and NYSE exchanges. Included
for each exchange (about 3000 stocks in each) is a spreadsheet in CSV format
along with financial performance measures extracted
from the "Key Statistics" section from Yahoo Finance.
Also on the candidates page is a table for each exchange that highlights
foreign owned companies that pay dividends.
It is suggested you read the lecture on shipping
companies to understand the kind of investment strategy Sooty
recommends. Shippers are exactly the kind of stock you should look
at because; 1) they adhere to US rules, 2) they are foreign companies
(mostly Greek), 3) they have foreign customers, and 4) they pay dividends.
If you are still interested in buying US traded companies through these tough
economic times proceed to:
Sooty's Table of
Candidate Stocks on US Exchanges |
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