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U.S. Safe Haven, Not So Safe

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The U.S. dominated the 20th century from both an economic and political perspective, but it will not likely dominate from an investment perspective in coming years.

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Investors looked into the abyss this quarter and walked away unafraid. Fear of missing the upside is still the prevailing sentiment. We cling to phrases like "the market climbs a wall of worry." Just close your eyes and keep buying because you will always be rewarded.

We tend to forget past lessons especially when we can no longer see them in the rearview mirror. The rallying cry of "Don't Fight the Fed" can be heard as investors charge ahead.

I am going to think out loud for moment. Not as an American but as a professional investor. Can we really expect continued inflows of capital with U.S. GDP growth headed lower and the possibility of going negative? Now add a plunging Dollar and the fact that other parts of the world eclipse the U.S.' growth? I don't think so. The U.S. is no longer the center of the investment universe. The world doesn't get a cold when we sneeze anymore. Maybe if we get pneumonia there will be a reaction.

Investors in the U.S. excited by the recovery of the markets had better look outside the U.S. Yes, these markets have exploded upward but despite the increased volatility and likely draw downs this is where capital must flow if you want to be paid for the risk you take with your hard earned money.

The global theme is now mainstream so contrarians are looking to the U.S. markets for big gains. Calls to reduce your emerging market holdings and allocate to the U.S. are appearing throughout the media. It points out that investing in Third World countries has added risks.

Well, guess what. The U.S. is "The New Third World". Foreign investors will be increasingly concerned about their U.S. Dollar denominated assets. It is true that many foreign companies are looking to pick up U.S. assets on the cheap with their strong currency. However, those expectations will evaporate if the Dollar's slide isn't tempered. The safe haven of U.S. currency isn't so safe anymore. How many times have we seen the Treasury Secretary, regardless of the administration, make a statement supporting a strong U.S. Dollar policy as it continues to fall? The global themes driving fund flows are not cyclical. They are secular, have lasted for several years and will continue to do so.

Let me take an overly optimistic view. Let's say for the moment the Fed keeps cutting, halts the erosion in home equity prices and in turn is able to re-kindle spending by the American consumer. We would probably be looking at a 3-4% GDP. Why focus on that investment theme, which clearly has some hair on it, when consumers outside the U.S. have rising incomes, voracious appetites and rapidly expanding economies?

Goldilocks has tasted the porridge and it isn't just right. It's cold. U.S. investors are going to have to re-think their equity allocation between U.S. and foreign investments.

Years ago, many brokerage firms and asset allocators encouraged investors to keep 70% of their stocks in the U.S., 20% in foreign and 10% in the emerging markets. Back then, this allocation was considered pushing the envelope on safety.

I respectfully submit that the allocation needs to be turned upside down. If you want to build wealth over the next decade you will have to continually move your funds offshore to capture outsized returns. The 19th century was dominated by Great Britain and the U.S. dominated the 20th from both an economic and political perspective. The U.S. will not likely dominate from an investment perspective in coming years.

Common sense must prevail. Many will continue to focus on the United States because its performance lags many foreign markets. Wrong! I am saying it again. These markets will dominate for years to come.

And yes, many U.S. stocks have a large global exposure and will benefit from the themes I am discussing today. They can and should be considered part of your global allocation. I know these comments will seem unpatriotic to many but nothing could be further from the truth.
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No positions in stocks mentioned.
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