The global economy is firing on all cylinders, as the chart below illustrates. This is both good and bad news. Good because the world is getting less dependent on the US consumer; bad because it’s likely that interest rates in most major economies will continue to rise. Rising interest rates in Europe and an end to the zero-interest-rate policy in Japan may hasten the US dollar’s downfall.
The strengthening world economy is boosting commodity demand, masking seasonal weakness. But stable economic growth in most parts of the world is not the only reason for escalating demand of raw materials and commodity stocks. Interest rates, even after recent hikes, are still at low enough levels to boost asset prices. Moreover, institutional managers are gradually realizing that in the medium and long term rewards on many commodity based stocks will be considerably larger than on the low-growth, mature companies that make up indices like the S&P500. Finally, in the energy complex, a political risk premium is now a permanent fixture. And with Middle Eastern, Nigerian and Venezuelan supplies constantly at risk of being interrupted, it’s probably justified. None of this guarantees that commodity stocks won’t experience a correction after their major advance. If you’re not positioned yet, that may be your chance to build a meaningful exposure to the natural resource part of your stock portfolio.
If you want to stay on top of America’s fiscal household, here are some data. Fifty years ago, in the wake of financing the largest military intervention in history and massive post-war reconstruction, the US national debt was roughly $200 billion, of which 5% was owned by foreigners. In the early 1990’s, which seems just an eye-blink ago, the debt had swelled to $3.2 trillion; 20% of outstanding Treasuries were now held by foreigners. Today, the US has $8.4 trillion in debt of which foreigners hold 57%. Some say that a federal debt equivalent to more than two thirds of the Gross Domestic Product poses grave and inescapable danger. I would disagree with the word “inescapable” if the US Treasury’s debt were held primarily by saving-conscious Americans. But that is clearly not the case; ever more creditors are foreigners. Which is why, in the end, there will only be three things the US can do to reduce its debt burden: raise taxes, cut back program spending (such as infrastructure, health, education, defense, etc.) or devalue the currency. Monetary history suggests that the latter will be the preferred route. It is far less noticeable to Americans than the other alternatives and primarily hurts foreign bond holders.
Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!