The Best Independence Day Investments
One thing bothered me and my friends the most when discussing the Upstate New York fugitives on the lam, and it wasn’t why law enforcement couldn’t catch them more quickly. It was — why didn’t they have a better escape plan?
Admit it, you thought the same thing. You weren’t rooting for David Matt and Richard Sweat to get away because they’re murderous lowlifes. But after all their meticulous planning and hard work, after cunning manipulation and patience, their shot at Mexico rested solely on Joyce Mitchell, a lovestruck but capricious prison tailor. Mitchell apparently left the two without a ride when they popped out of a manhole a block outside the prison.
She ruined their escape, not to mention millions of people’s escape fantasies (don’t judge, it was discussed on CNN).
Matt was shot and killed, and Sweat was shot and captured. But had Sweat slipped away, his disappearing act may have been deemed the “Swexit,” the way Greece potentially leaving the European Union is called the Grexit. The news networks are still covering the prison break, as Sweat sings like a canary.
Meanwhile, the Greece situation—a much more interesting and important drama—is getting short shrift in much of the media. Maybe we Americans are just tired of the “Should I Stay or Should I Go” drama, as the English punk band, the Clash, so neatly framed this dilemma in the 1981 hit.
Should we care about Greece leaving the Eurozone? Well, if that alone happens, Morgan Stanley says it’ll just drop the EU’s GDP by 0.2%. The real problem comes if it’s the first domino, and countries such as Portugal and Italy follow. Then the EU starts to unravel.
But Grexit, much like Swexit, raises an important question that both inmates and investors need to think hard about: What’s the escape plan? Or put another way: How free are the economies you’re investing in?
This question has been bubbling up in a number of our Investing Daily publications. Martin Hutchinson, the chief strategist for our new publication, Pacific Wealth, puts a premium on countries that have a positive balance of payments and avoids those that don’t. “Many countries grow rapidly for a number of years by sucking in foreign investment,” he wrote in the inaugural edition in May. This inevitably leads to speculative bubbles that “run aground when that investment ceases or slows.”
Those countries are painting themselves into a corner by becoming addicted to foreign investment.
Martin is also leery of Japan, which has an enormous national debt that leads the world as a percent of its GDP (226% of GDP versus 161% for Greece and 80% for the United States). Japan carries this debt like Jacob Marley, Scrooge’s business partner in A Christmas Carol, who was “captive, bound and double-ironed” in chains as a result of his own selfishness.
Martin does have a few Japanese holdings, but they’re export-focused and he’s keeping a sharp eye on them.
My colleague Richard Stavros, chief investment strategist of our Global Income Edge, recently wrote a cautionary column titled “Beyond Greece: The Global Debt Monster.” In it he spoke of a McKinsey & Co. study that found that seven years after the global financial crisis, no major economies and only five developing countries have reduced their ratio of debt to GDP.
“The consultants found GDP growth would have to be twice the projected rates, or more, to start reducing government debt-to-GDP ratios in six countries: Spain, Japan, Portugal, France, Italy and Finland,” Richard wrote. He addresses these issues by picking stocks of healthy companies that can afford to pay high dividends, and which are either domiciled in countries lacking financial shackles or are so well-diversified internationally their home economies aren’t big issues.
This week a friend of mine who works in the banking industry sent me a link to a story from The Telegraph, titled “The world is defenceless against the next financial crisis, warns BIS.” The Bank for International Settlements predicted that “the world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises,” according to writer Peter Spence. The BIS is especially concerned that interest rates can’t go any lower, and economies have locked themselves into a cycle of ever cheaper credit. “In short, low rates beget lower rates.”
Pretty grim stuff. But as our analysts have pointed out, smart investors pick investments in countries that haven’t shackled themselves with debt, poor balance of payments positions and addictions to low interest rates. That’s why Martin likes countries such as Singapore and the Philippines especially; it’s also why we’re particularly bullish on Canadian investments these days (see our publication Canadian Edge) and why Richard has moved more to U.S. investments.
Yes, despite our slow growth and debt, we still don’t need a get-out-of-jail free card to chart our own destiny, economically. True, “we are ridiculously interconnected” to the rest of the world, as Richard said this week, “but I think the United States is in a good position.”
So as we head into the Fourth of July holiday, take heart that our economic freedom, as well as our republic, is strong.
Wishing you a happy Independence Day,
Editorial Director, Investing Daily