Kass: More Than Ever, Buy American
As I expressed yesterday, Europe is the tail that is wagging the dog of the world's markets.
A sharp difference in growth is now emerging and will likely continue to stay in place over the balance of the decade. This differential -- in the current pace of economic activity and in the future outlook -- highlights the diverging investment and economic growth opportunities between the world's regions.
Europe's economies are moving in reverse. At best, a deepening recession is in the cards.
In Europe there is hopelessness.
The U.S. economy is moving forward, with steady growth expected and growing signs that the domestic recovery will be self-sustaining (albeit at a muddle-through pace).
In the U.S. there is hope.
Moreover, the flight to safety around the world is paying short- and long-lasting dividends for the U.S. in the form of much lower interest rates. (The 10-year note yield just hit an all-time low this morning at 1.68%). The beneficiaries are U.S. consumers and corporations who have locked in these low interest rates in the form of mortgage loans and corporate borrowings. (I expect the U.S. Treasury to sell as much long-term paper in the months ahead in order to also lock in low interest rates and further expand our country's financial and economic differential advantage above other regions.)
I believe, more than ever, that the events over the past few years have highlighted the likelihood that the U.S. stock market (the best house in a bad neighborhood) will be favored among most other investment markets in the world. As I expressed in yesterday's opening missive, containing European debt contagion could lead to a surprisingly outsized and favorable reaction in the U.S. stock market, both absolutely and relative to other markets around the world.
Here is a summary of the 10 reasons why, more than ever, I remain optimistic about the investment opportunities in the U.S.:
- Above all (and as cited above), U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
- U.S. banks are well-capitalized, liquid and deposit-funded. Notwithstanding JPMorgan's
recent trading gaffe, our banking industry's health (which is the foundation of credit and growth), is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary capital raises. Importantly, our banking system is deposit funded, while Europe's banking system is wholesale funded (and far more dependent on confidence).
- U.S. corporations boast strong balance sheets and healthy margins and profits. Our corporations are better positioned than those in the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.
- The U.S. consumer is more liquid and stable. An aggressive Federal Reserve (through its extended time frame of zero-interest-rate policy) has resulted in a U.S consumer who has re-liquefied more than individuals who live in most of the other areas in the world. (Debt service and household debt are down dramatically relative to income and back close to historic averages.)
- The U.S. is politically stable. After watching regime after regime fall in Europe in the last year (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that contributed to social stability and a sense of overall order.
- The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)
- The U.S. is rich in resources.
- The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.
- The U.S. dollar is (still) the world's reserve currency and is far more solid than the euro.
- The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)
In summary, conditions that have evolved over the near- and intermediate-term have conspired to favor risk assets in the U.S. over many other areas of the world.
In the period ahead, look inward (not outward), as I expect a powerful reallocation trade out of non-U.S. equities and into U.S. equities.
Buy American. I am.