01/01/2010

USA: A Contrarian Trade for the Coming Decade

United States stock markets have just come off of their worst decade ever, with inflation-adjusted returns in the S&P 500 dropping as much as 30 percent. That’s a far cry from what investors were expecting at the turn of the millennium. Then, the Internet was creating paper billionaires overnight.

Fast forward 10 years and Nasdaq is still 40 percent below its peak. In addition, the Pew Research Center just designated the past decade as the “worst in 50 years.”
 
But, just as there was a technology bubble in 2000, today there is also a strong “pessimism bubble” about the U.S. economy over the coming decade. And like all bubbles, this one will eventually pop—as will the rising China bubble. Understanding this is the key to ensuring you don’t end up like investors who have spent the last decade waiting for Cisco to “get back up to $80.”

Rarely has the global stature of the U.S. been lower than it is today. A recent Washington Post/ABC poll found that 61 percent of the American people think the U.S. is in long-term decline. In another poll, 44 percent of Americans said that China was the top economic dog in the world, compared with only 27 percent favoring the U.S.

Much of the investment world holds the same opinion. In fact, the world’s top hedge fund managers are piling into gold, betting billions that the U.S. dollar is toast. Meanwhile, 17 percent of the U.S. workforce is unemployed, underemployed or has stopped looking for work.

And that’s music to the ears of contrarian investors.

Contrarian Trade #1: Buy American
After the financial meltdown of 2008, the greatest contrarian trade in the world became a bet on the U.S. But that’s exactly what I’m doing by shifting my own money and my clients assets back into the U.S.

First, investment is a game of expectations. Or as Bill Browder, formerly the largest investor in Russia, pointed out, Russia doesn’t have to turn into Switzerland for him make money. It just has to turn out better than people expect. In 1998, an investor I met in Russia said that he’d rather eat nuclear waste than invest in Russia. Yet, had he invested there, he’d have made 60x his money, just as Browder and his investors did.

Second, having lived abroad since 1991 has only strengthened my conviction that the global economy largely runs on U.S.-generated ideas. (This is not, as you can imagine, a popular position). The American Academy of Sciences estimates that 85 percent of economic growth in the U.S. is now produced by new ideas. In 2007, companies that were founded by entrepreneurs backed by venture capitalists provided 10.4 million American jobs and generated $2.3 trillion in revenues. That’s equal to the gross domestic product (GDP) of France.

Nowhere is the power of ideas more evident than in the case of decidedly unsexy U.S. manufacturing. On one hand, the media bewails that the American manufacturing workforce has shrunk by more than 40 percent since its peak in 1979, with 6 million of those job losses taking place over the last decade. But thanks to innovation and advances in technology, U.S. manufacturing output per worker recently hit an eye-popping $234,220 for each of that sector’s 11.6 million workers. Workers today produce twice as much manufacturing output as their counterparts did 20 years ago and three times as much as in the early 1980s. The U.S. steel industry—left for dead in the 1980s—produces more steel today than it did 30 years ago.

Source: January 28, 2010 by Nicholas Vardy

P4P Comment

We like contrarian thinking as it maximises the chance of serious profits. Jumping on the bandwagon usually means you’ve left it too late to buy cheap enough.

There has been a lot of negative comment about America, how the Government has been spending too much money, how people are losing their homes, tent cities filling with homeless.....all pretty grim stuff, that the media just love to heap on the public.

This could mean investors are frightened off. And miss the screamingly low prices  of some foreclosure property.  Such as US080 on this website, for example. Crashed from $167,000 to £43,900, full refurbished and let. But no sag in rental price, with $875 per month on offer. Income steady. Capital cost on the floor – that’s investing for big returns.

We’ve dealt with foreign property for years. Usually, very low property price means no chance to rent. Such as a cheap Bulgarian rural cottages. Not so in America. You can easily rent cheap but good property and that’s what signals a strong buying signal.

Our advice is always  not to let the Media’s current pitch put you off thinking for yourself and buying before the mass of investors wake up and buy.