Sunday, October 18, 2009

Are We Selling the US Too Short?

Almost everyday the global financial headlines discuss the decline in the value of the US dollar relative to other currencies. Many economists and others talk about a slow recovery here, and faster in Asia. Because of the difficulty in obtaining student visas for university students since 9-11-01, there is wide-spread concern that we are no longer attracting the brightest minds to study and work in the United States.

The fear (and perhaps a distaste) of investing in US stocks has been translated to Main Street. As of September 30th of this year, 53% of all money invested in Stock funds are in US Diversified Equity funds, according to my old firm. Another 6% is invested in Sector funds, some of which have a distinctive global tinge to them. Combined, Global and International funds alone account for 22% of American fund owners’ assets. These numbers understate the total exposure we have to non-US influences on our wealth. A number of analysts have estimated that over 40% of the revenues of companies within the S&P 500 come from overseas. Foreign earnings of these companies are not often disclosed, but I would not be at all surprised to learn that they represent over half of the total earnings of American companies (particularly if we include earnings from exports). I am well aware, and have benefitted from the fact, that investing globally for many years have produced better results than investing primarily in the US. This may not continue forever.

One of the first things I did as a Wall Street bank trainee was to physically account for the foreign shares in our bank’s vault (investors were issued American Depository Receipts or ADRs). Many years later my fellow trainee became one of the leading investors in both domestic and foreign bonds for central banks outside of the US. Almost from the beginning of my personal investing at the odd-lot, below the 100 share size, I invested either directly or indirectly in foreign trends. At times over recent years my foreign exposure in equities was over 40% including funds, individual stocks, currencies and some operating investments. I am no neophyte to investing globally.

One of the many lessons that I have learned from a number of older and wiser investors is to tend to invest against the headlines. The current pessimism about the long term future of the US is just such a time. For the accounts that I am responsible for (including my own), I seriously doubt that I will be adding to the international allocation in the near term.

Why do I take this point of view? Is it just to be contrary? No, while I am professionally trained to look at the other side (or sides) to any investment before making purchases, my optimism is based elsewhere.

We are incredibly fortunate to have three of our family beginning studies this year at William and Mary, Georgetown, and Carnegie Mellon. Not only are we listening to them discussing their courses, but also hearing about what their friends are doing at other leading universities here and abroad. They all appear to be working long and hard, and their courses are subjects that their parents and grandparents would like to take now. Our young will be much better prepared for the globally competitive world that they are inheriting. Their youthful enthusiasm, with some idealism thrown in, has a much more practical base to them than when I was in college. We are producing great raw material for the future.

While waiting for our young to earn their commanding positions, the current pace of technological development in many fields appears to be on the verge of major improvements for mankind. The discussions from graduates, professors and current students that I hear from my exposure to Caltech, suggest that we do not live in a static world. There will be breakthroughs in energy, medicine and their underlying physics, chemistry and biology. Big problems will be addressed and solutions identified. In the scientific fields, most of the awards are going to people who teach or were educated in the US. In science we have been punching way over our population weight class for some time and this is likely to continue at least for a few more years.

Focusing briefly on the price of the dollar, I would rather be a buyer than a seller. At some point, perhaps right now, our trading partners will want to prevent a further decline in the dollar. They will become buyers rather than sellers to protect their own export books and internal currencies.

My bottom line is I believe that one should not now be increasingly short of US dollar investments.

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