Saturday, June 13, 2009

Is the USA Still The Place To Be?

I just wanted to share some thoughts today.

I asked myself the question above in my headline today, and once again the contrarion in me has me leaning against what the majority of Wall St believes.

Most pundits argue that we are screwed but the rest of the world is screwed worse. As a result, many think that when this worldwide financial house of cards comes tumbling down, the rest of the world will come running to the USA with their money to hide.

Another common belief on Wall St is "we were the first to go into a recession so we will be the first to come out of it". My first thought here is "says who?".

I am starting to believe that this is no longer the case as we spend ourselves into oblivion.

If I was an alien with assets(I know I'm stretching it here) and I landed here on earth without knowing anyone's financial history, I think the last place I would invest is the USA.

I mean think about it: Why would you place your money with a country that has more debt than anyone else?

Many believe that deflation is inevitable and as a result, the US dollar will strengthen as we see massive debt defaults while our economy "resets" to a more affordable standard of living. Cash will be king in such a world! This is true in such a scenario.

Money from around the world according to this thesis would then come flying into the US dollar because there is simply no other safe haven alternative. Wall St will claim that this is the only alternative because the Euro is a mess and no other currency is a viable. This could very well happen, but I think that this belief is far from being a lock.

I say this because I have seen ZERO evidence that Ben will stop inflating this bubble. I pray to god that he won't flat out print money, but after watching his helicopter respones to this crisis, how can you strongly believe that he won't do it?

The recent trends worldwide suggest that the world is also concerned about our reckless monetary response to our financial crisis. Doug Noland from Prudent Bear discussed this yesterday.

The reflation trade is telling you that money wants to flow outside the US into natural resources and emerging markets. This trade got hit hard on Friday but its far from over in my view. The reason I say this is because there is no fundamental reason for money to flow back into the US.

I mean why would money want to flow into a country like the USA that is destined to default on itself? The money flows into the US for two key reasons: Fund our consumer and our economic reputation. I don't think you would see a dime come over if it was based just on our current piss poor economic policies.

I think the world is slowly coming to this conclusion that the USA isn't the place to be anymore. The doubling of treasury yields in about a month is pretty much telling you that this is the case. I used to believe that Peter Schiff's "decoupling" was wrong. I now believe that he just might have been too early.

In my view, we have destroyed our reputation economically. China and Russia are running for the hills looking for alternatives. Both have agreed to buying IMF bonds. China comtinues to scramble around buying as many natural resources as it can find. Their gold reserves have doubled from a few years ago.

I think Jim Rogers may turn out to be right. China and the Far East may be where it's at in the next cycle. I mean if you had billions to invest, would you invest your money in a county that has a $2 trillion surplus like China or would you choose a country like the USA that has $2 trillion in debt and another $9 trillion in guaranteed debt that backs our financial and housing corporations(Fannie, Freddie, AIG etc.)?

Bottom Line

It's time for this country to wake up and smell the coffee. Its become clear that the world has lost confidence in our economic ways. Eventually, viable alternatives will arise in the wake of our economic death. The USA stock market despite its recent rise is under performing versus the markets in the rest of the world.

If inflation hits down the road as we continue to destroy ourselves economically which will result in a cheaper US dollar, many viable investment alternatives will arise. Natural resources like oil, gold, and other commodities will become the rage. Money will flow into the countries that have them.

Other money will flow into countries that are more financially sound.

As for the USA? Run Forrest Run!

The signals that this is the case are sitting there right in front of you. If the USA was such a sure bet as a safe haven then why have our treasuries(which are considered to be our safest haven) been selling off at such a frightening pace?

If our country continues down the economic path they have chosen, we will lose our status of being the place to be economically.

The economy has become global and the fallout from this change means that there are many alternatives to the US when it comes to investing. I still hold a small sliver of hope that our government will wake up and begin to make the tough decisions that will shrink our deficits and save our country from economic ruin.

This process(although painful) is a must if we plan on keeping up with the rest of the world.

Its time to quit resting on your economic laurels Washington! We are about to become a has been!

15 comments:

teddy bear said...

http://www.youtube.com/watch?v=6GukmDO89KI

;)

BAM said...

Jeff,

While I understand your concerns and reasons for doubting the future of USA, I would have to respectfully disagree with you're conclusion.

I've always wondered what made USA the greatest country in the world in such a short time. I realized that the reason is simple. Innovation. Let's look at all the major innovation (game changer) that has changed the world. Telephone, Car, Airplanes, Nuclear energy, Computers and Internet. These are what I would call inventions that have literally transformed the world overnight. All of these were developed/invented in USA. It's not hard to see why we are the richest and strongest in the world. It wasn't by an accident. However, I agree with you that we have plundered much of our wealth and assets with so called financial innovation in the last couple of decade.

The key to the next big cycle will be solving the energy crisis. Which ever country can come up with the ultimate energy source without resource constraints (solar, nuclear, wind, fusion, whatever) will lead the world for the next century. I believe USA will come through again.

Another reason why USA will not fail is because of our military. Like it or not, if push came to shove we can literally take over the world and take all the resources we need. I know it's frightening thought but nevertheless a real possibility....

BTW, the confiscated bond in Italy is becoming interesting.... Perhaps this is the tipping point for our stock market?

Jeff said...

Teddy

Nice to hear from you!

Great video. The Germans have been the most disciplined throughout this economic crisis.

Great catch!

Jeff said...

BAM

I agree with most of your points. The problem is it might be years until the next "big thing" arrives.

Green energy is promising but I don't think its enough to replace what our economy jobwise.

From a military standpoint, we need money in order to fund them.

I hope we don't have to resort to war like we did in the '40's.

I agree that we are more innovative than everyone else in the world. The problem is it takes money to innovate, and we need consumers that have the financial ability to buy this innovation.

Right now I don't believe that our consumers have the ability to support the new tech.

With unemployment at 9.4% it will be diffucult for for us to afford new innovations.

Let's both hope that we find a way out of this!

snood said...

I think the USA can credit natural resources and geographic separation as the main drivers behind its speedy rise to greatness.

Having more fertile farmland than any other country coupled with iron/coal/oil/timber drove the engine that drove manufacturing.

Having two large oceans and only two non-threatening neighboring countries(we still don't care that thousands of people cross into the country undocumented enough to secure the borders) enabled us to fight all of wars in Europe/Asia.

Nuclear energy (Enrico Fermi and Einstein, Heisenberg, etc all being European), computers (Charles Babbage being English of course), and the internet (Tim Berners-Lee at CERN in Geneva) were not really developed in the US. Karl Benz of course invented the car and named one of the early ones for his daughter Mercedes.
Alexander Graham Bell from Scotland invented the telephone and Orville and Wilbur may or may not have invent the first airplane depending on whether or not an airplane that needs a catapult and a stiff breeze to take off really qualifies.

Having said that, I think the countries most likely to recover will be those that had the least developed financial institutions. Probably Zimbabwe.

Jeff said...

Snood

I agree.

New Zealand is a great place to be if you are looking for a country that has avoided the financial crisis.

I have no desire to live in Zimbabwe :)

The USA needs to wake up and realize that we need to innovate at a lower cost if we want to be competetive with the rest of the world.

The days of easy money in this country are over.

BAM said...

Snood,

Perhaps my comments weren't clear. The items that I listed were either invented or developed in USA. You are right in that many of them were first invented by others but it was USA that took the innovation and made it marketable. Nuclear energy: Einstein, Openheimer, etc all immigrated to USA and it was US that produced the first atomic bomb. Cars: While Benz may have first invented the car, it was Henry Ford that developed and marketed the concept. Computer: Depending on the definition of the word, it can be argued that it was the Chinese that first invented the machine. Chinese are known to have developed a binary based calculating machine as early as 500AD. But again it was USA that took the concept and marketed it world wide. I am talking about IBM and Apple here. Internet: Invented and marketed by USA. First used by colleges and government. Now everyone in the world is connected by it.

This really brings up another great point. The willingness of US to accept immigrants that brings wealth of talent and knowledge. Can you imagine what would have happened if Einstein and Openheimer were denied Visa and had to go France?

My point is US is still a place full of talents and innovations. And like Jeff points, the break through may be years away. But if it does come, I have now doubt it will be within the border of this country.

As a disclosure, I am also a second generation immigrant and have the fortune of knowing a culture other than that of US.

John Maynes said...

What makes USA different from any other country and very succesful in the past are two very important things:

1.) Private venture capital
2.) Forgive debts in case of failure so you can start all over again.

Put that in the context of the current crises and you know the US has blown it. The future is China. It was written on the wall for a long time but now as the decline of the US will accelerate their rise will too.

jeff said...

John

I would add one more key to our success that is now gone.

THE RULE OF LAW.

Many countries don't have this which makes any investment risky as a result.

Up until this crisis, we had a strong rule of law that protected your investments.

The Chrysler bondholders learned that the rule of law no longer exists anymore in this country.

Private capital could very easily flow into other countries as a result. Why invest here if the government can change the rules at a moments notice?

I hope BAM is right and we find the next big thing. Unfortunately, our response to this crisis has lowered the odds that it will happen here in the US.

John Maynes said...

Jeff, you are 100% right. Forgot this point. But it's a very important one. I would like to subsume this point under "moral hazard." When I read about moral hazard in the US I hear a lot about favoring the well connected (mostly on WallSt and how they have taken Washington. Now do you wonder where Obama got all this money for his campaign? To return this favor Obama brought Geithner into office.) But actually it's punishing the not well connected which is by far the majority and they will turn their back the first moment they can.I tell you so many people in the world would love to see the arrogant US going down. They can't wait to see it happen.

Jeff said...

John

I agree

China and Russia and the ROW would love to see us fail.

They know we are going down, and they are both plotting ways in which they can use this to their advantage.

The financial world will look very different once this is all said and done.

flipdippy said...

China was the second largest economy at the end of the 19th century...having a large economy is not a guarantee of success.

Also, China has zip zilch zippy protections for intellectual property. This is the quandry they are in now. They show a strong reluctance to grant individuals or entities rights to their inventions within China. All they do is make stuff. They may make a whole variety of iPhone clones that are damn good but they didn't make the iPhone.

Unless that changes, seems like the US is somewhat safe.

Unless of course, because we're so indebted to China, we are forced to turn over our nation's IP in order to prevent an economic meltdown.

Jeff said...

Flip

What intellectual protections do you have in the USA now?

The rule of law is gone.

The government is dictating corporate salaries and dictating what bondholders receive in BK court(Chrysler).

The PPIP failed because no one wanted to invest with the government because they were afraid the rules might change.

Who knows whats next? The path we have taken can lead to a very dark place.

Everything that made America great is now in question.

Lets hope some sanity comes back to Washington and we get away from all of this insanity!

Peter said...

The US has about ten minutes left to save itself. We are on our last breath. To me it seems highly unlikely that this will happen.

First, the Republicans must retake the house in 2010 so as to stop all spending the day they are sworn in. However, we must pray that the Republicans that win are really Libertarians and not the same losers that have been running the party for the last two decades. Unfortunately there is no time to establish a third party.

Second, we must re-establish the rule of law, arrest and jail all the bankers who stole money and the politicians that they bribed.

Third, we must return this country to a republic where states have rights and the federal government has limited power. This includes abolishing medicare, social security and every other Ponzi scheme program the federal government has created in order to centralize power in their hands. It also means dismantling our education system and giving it back to the localities where the students live. In addition, we must abolish all government college loan programs. A college degree is worthless these days because no one has to make an effort to get one and colleges are structured around getting government funds and not educating our future. The country does not need ditch diggers with a college degree. I basically see our college system as one where the progressives in government transfer wealth from productive people to their progressive friends in education.

Fourth, we must outlaw all unions. Unions are nothing but a coercive monopoly on labor. They steal from the populace in order to get paid more than a free market will allow, and even more is siphoned off to their leadership and to bribe their political cronies. We the taxpayer are being stolen from by union workers in order to fund the democratic party.

Fifth, it is never going to happen.

For those who count on the ingenuity of the American people, I don't see it. The American dream was built around freedom, property rights and the rule of law. That is what inspired Americans to create great things. Do you really think Americans are smarter than Russians or was it the system that we functioned under that allowed us to reach our potential?

The battle is lost. This has been a long term plan by the progressives to redefine this country into something they envision as a utopia, with them leading it. They know what is best for everyone, even though they don't understand the first thing about economics, which is that it is a philosophy. It is the study of human behavior. Progressives can't comprehend that people might actually not work if they are not rewarded for their success.

Last of all, this will probably end up in one big ass war. China and the rest of the world know that they need us while the global economy is in a mess. But mark my words, the day their economy is stabilizing and they have an opportunity, they will pull the rug out from under us. They are not our friends, and don't get me wrong, they should not be. The Chinese are looking out for themselves, which is exactly what a country should do. They intentionally built up their country's capacity on our debt laden backs, it was genius. We paid for their industrialization because we have become lazy, stupid, complacent fools.

Jeff said...

Peter

Here here

You are on a roll today!

One day this will all come home to roost. It's just a matter of time.

Things will then never be the same.