- No one can take a single-country approach to investing any more
- What happens in China can be reflected in the U.S. immediately, algorithmically
- Ignore the noise and focus on the long-term trend
We Are All One Market Now.
When America’s attention was turned to the Greek crisis on Monday, a curious thing happened.
The Euro rose and the U.S. market sort-of crashed. Shares in U.S. companies fell about 2%, leaving to a lot of head-scratching among tape watchers. After all, the U.S. economy is growing, consumer confidence is rising, unemployment is down, and happy days are here again.
What happened? China happened. Stocks there “corrected,” and have now fallen 20%. Many Chinese investors were using leverage, putting $1 to get $10 in stock. When markets are up (and the Shenzhen index is still up 67% on the year despite the latest fall) it’s party time. But when markets are down you’re wiped out. The bank sells out all your positions and takes your collateral.
This is Ragtime investing. Before the Great Depression, the U.S. had financial “panics” at roughly 20 year intervals, followed by economic and political turmoil. (Google Panic of 1837, 1857, 1873, 1893, 1907 and/or 1929.) The creation of regulatory agencies, the separation of investment from commercial banking, and limits on loans to traders kept these evils away for decades, but within 10 years of regulations being lifted under President Bill Clinton, we had another crash.
The difference between 1929 and today is speed. Trading is automated, algorithmic. An account hits its limit and it’s taken out, immediately, with no notice or phone call. Action is continuous, moving around the globe, never slowing. Anyway, the Chinese plungers got taken out, a lot of their collateral was in U.S. funds, and that released the American bears. My own portfolio took a hit, but I’m still up about 25% overall, and since I wisely kept 5% in cash for just such emergencies, I’m bargain-hunting.
The lesson in all this is that we are all one world market now. Nothing happens in isolation. If China sneezes India catches cold. If Greece has a heart attack, Europe goes into the hospital.
This applies to more than our stock markets. It applies to the money we use to trade, and to our very lives. What happens in Africa or the Middle East doesn’t stay there anymore – it comes to Europe in the form of violence and boatloads of refugees. This interconnection is only going to increase, as trade agreements like the TransAtlantic Trade Investment Partnership (TTIP) and TransPacific Partnership (TPP) are negotiated and take effect.
What is good for trade and investment generally, however, is really bad for autonomy and national sovereignty. You can no longer ring-fence your investments, your economy, even your borders. The U.S. can no longer export its manufacturing pollution to China and expect it to stay there. Neither the Internet nor the violence of ISIS can be controlled, it can only be contained.
For investors this is good news. The rising tide is raising all boats. More people have been brought into the “global middle class,” broadly defined as a roof, food, and hope for our kids – in the 15 years of this century than ever before in human history. But billions more want desperately to climb onto that boat, they know where it is, and those who are comfortable in it fear the whole thing will capsize.
It won’t. Any company with an international perspective and a global footprint knows better. If you’re in the U.S. market right now, you’re benefitting from the strength of the dollar. Even if you’re in GE (NYSE:GE), or Google (NASDAQ:GOOG), which have gone nowhere in the last year, you’re way ahead. As U.S. interest rates rise later this year, the dollar is only going to get stronger.
So that’s the place to be. For now. Buy the strongest U.S. equities you can find. And keep an eye on the headlines.