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Market Memo: We're not as bad as you may think

As of 06-10-2013

No matter where you look, you can read about America’s impending decline as a global economic superpower, that our empire has had its day, that Pax Americana is over, that we are historic has-beens. 

Look no further than these recent non-fiction titles:

  • “Are We Rome?:  The Fall of an Empire and the Fate of America’’
  • “Day of Reckoning: How Hubris, Ideology and Greed are Tearing America Apart”
  • “The End of the American Era”
  • “The Post-American World”
  • “The Late Great USA: The Coming Merger with Canada and Mexico”
  • “America’s Financial Apocalypse: How to Profit from the Next Great Depression”

The arguments vary, but they share common elements: America is broken and in decline. After decades of success and affluence born of the American system, our country has become sluggish and soft. As we overextend militarily beyond our borders, we simultaneously rot from the inside as more nimble global competitors beat us in technology, business, construction, exploration and politics.

The combined weight of these pressures will ultimately cause the U.S. to collapse upon itself, leaving the future to the next emerging empires.

Don’t believe it. 

The truth is that America enjoys advantages that today’s cynics overlook as they write their gloomy forecasts. Maybe this oversight is intentional. After all, books are written to be sold, and “America Has Some Challenges: But We Have seen Worse and With a Little Time We Will Work Through Them” probably wouldn’t fly off the shelves.

Resource abundance—raw and human
The reason these authors may be disappointed by America’s failure to fail lays partly in the tremendous reserve of resources which we have at our disposal. We have incredibly abundant raw materials (one example: 275 billion tons of coal, which equates to 250 years of supply at current rates of consumption). We also enjoy reliable, inexpensive power and agricultural self-sufficiency.

But our advantages are not limited to natural resources; U.S. human and capital resources are also strong. With a liberal immigration policy, 99% literacy and a relatively young median age of 36.6 years, we have a population ready to work. This significant human resource can be accessed by using America’s financial resources: $15.4 trillion of capital is in the U.S. stock market every day, stalking for the best ideas.

Most importantly, America has one resource which is scarcer and more valuable than all the rest—the “secret sauce.” If you were in Junior Achievement, they called it entrepreneurship; in the world of high finance, “risk tolerance.” You might hear a politician refer to it as “the American Spirit.”

Simply put, there is a reason to try in America which doesn’t exist in most countries. American workers statistically are the most productive per capita laborers in the world because hard work is generally rewarded. You can go from dorm room to mansion with one good idea. A poor single-parent Arkansas boy can become president. A college dropout can become the world’s richest man.

Not only do we enjoy the secret sauce, but we have the mechanisms within our society to protect it. Rule of law (there is one lawyer for every 265 Americans), freedom of the press, and Darwin-like criticism of political, social and economic ideas lead the list.

Relatively speaking, we’re all right
Our comparative positioning relative to other countries is something many pundits overlook. Look at how we stand relative to other nations. How would you like to have Japan’s demographics? China’s property rights? Russian rule of law? France’s labor flexibility? Or consider that our military expenditures equal that of the next 15 nations combined, that our stock market capitalization is bigger by a factor of three to No. 2 Japan, that our GDP is No. 1 by a factor of two, that among high-income countries, we rank third for new business creation. The list goes on ….

Even if the U.S. is stronger than some pundits suggest, isn’t it important to focus on a country’s growth rate when investing? It is a common belief that in order to get in on the rapid growth occurring in emerging economies, you must invest into their respective stock markets. Over the past seven years, investors removed $613 billion from U.S.-focused funds while simultaneously depositing $300 billion into international funds. Buying stocks of “The Late Great USA” has now become the contrarian position.

But would it surprise you to know that just as the U.S. meets its “Day of Reckoning,” the Indian stock market is flat year-to-date, or the Chinese market is off 25% from its October ’07 peak? Meanwhile, the S&P 500 has set new record highs and is up 15% year-to-date.

This performance may be another emerging example that as an investor, taking the contrarian position is often very rewarding. Buying low and selling high—the basic rhythm of “value” investing—requires the ability to go against popular opinion if the evidence supports it.

And the evidence suggests the “End of the American Era” crowd hasn’t done all its homework. The reality is that forecasts describing America’s decline—and the latest incarnations aren’t the first ones—will always serve us well as a sort of wake-up call, a fire alarm, a drill sergeant.

Indeed, this self-criticism is part of the mechanism which keeps the nation healthy. Yes we have problems, but the solution to them will simply be what it has always been—being ourselves.

This article first appeared on

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.
Federated Global Investment Management Corp.
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