Column

THE RIDE GETS WORSE

These turbulent times mean investors must play safe—and avoid U.S. dollars

DONALD COXE March 24 2003
Column

THE RIDE GETS WORSE

These turbulent times mean investors must play safe—and avoid U.S. dollars

DONALD COXE March 24 2003

THE RIDE GETS WORSE

Column

DONALD COXE

These turbulent times mean investors must play safe—and avoid U.S. dollars

AS ONE WHO flies weekly, I have accumulated considerable airline miles and considerable experience with rough flying. This is written on my bumpiest flight in months, so the experience does tend to concentrate the mind on the effects of turbulence.

We are living in turbulent times. That is so obvious as to seem banal, but it is, in truth, a relatively recent phenomenon. The last two decades of the last millennium were—or seemed to be—mostly calm, mostly prosperous and mostly progressive. The world got rid of Communism peacefully in Europe and Russia, recessions were mild by the standards of the 1970s, the really hideous war-related killing fields were in places like Rwanda or Kosovo that most people couldn’t find on the map, inflation went from being scary to being barely noticeable, and we revelled in the most magnificent equity bull market of all time.

In retrospect, those Rabelaisian celebrations of the new millennium were the equivalent of turkeys celebrating an early Christmas. Since the years began with a zero, they have given near-zero cause for rejoicing. The only benign trend of the Reagan era that has continued has been the decline in inflation (with its attendant decline in interest rates to levels that would have seemed Utopian in the 1980s).

The list of the lousy is long.

1. A weak global economy in which Canada is the star performer—too small to offset the deadweights of Japan, Germany, France, Italy et al., and the strain of a deeply stressed United States.

2. A crash in technology and telecom stocks that eventually engulfed most of the rest of the equity markets.

3. A War on Terror that began with the terrible events of 9/11 and then spread to many parts of the world, including Afghanistan, Pakistan, Bali, Morocco and the Philippines.

4. A breakdown in the international order. The first of the post-Second World War structures to be grievously wounded was NATO, as France successfully made opposition to

the U.S. the litmus test of acceptable behaviour for would-be members of the European Union. Next came the UN, which was forced to the edge of irrelevance as the France-U.S. clash became the first truly global confrontation since the end of the Cold War. (it didn’t help that, when that clash reached crisis stage, the head of the UN Commission on Human Rights was Libya, and Iraq was due to take its turn as chair of the 66-nation, UN-sponsored Conference on Disarmament.)

5. War looms in Iraq, while North Korea threatens to build and use nuclear weapons. In response, stock markets fall anew, led by a plunge in Japan to a 20-year low.

6. A breakdown in civility spreads across Western nations. Anti-Americanism and anti-Israelism gain ground by the day, triggering a backlash within the U.S., still suffering from the after-effects of 9/11 on its national psyche. Even Canada is infected, as prominent persons call the U.S. president (a graduate of Yale and Harvard) “a moron,” denounce Americans as “bastards,” and get enthusiastic support on phone-in shows. (Since a third or so of Americans are black, brown, yellow or Latino, this outburst means that a Canadian politician is including such protected groups in the category of “bastards” worthy of hate by the liberally enlightened. A human rights investigation will, one trusts, compel the public hater to restrict the American hateful to whites.)

So what does this seemingly endless flow of bad news mean for investors?

It means the overall level of market risk has risen sharply from the historically low level of the 1990s. That means portfolios

Now is no time for a Canadian to buy Florida real estate. Its price in loonies-and eurosis heading down.

need greater exposure to high-grade bonds, the bluest of blue-chip stocks and gold than was appropriate when the geopolitical news was mostly appealing, and the mostly lovely news in the financial markets was being airbrushed to perfection by skilful accountants, while the ugly news was being Botoxed to beauty by other skilful accountants.

It means up-front, reliable income in the form of dividends or trust payouts is worth more to investors than visions of massive capital gains in some glorious future.

It means investors must limit their exposure to the U.S. dollar, which is in a major bear market. Most of the greenback’s bull market in the 1990s came from the perceptions that the U.S. was the sole hegemon, with the best economy, the best stock market and the best accounting. Now that the U.S. is having trouble lining up friends in its hour of need, while its economy is struggling and the idiocy of Nasdaq and the gross inadequacies in its accounting have been revealed, investors can no longer overlook the frightening statistics of the U.S. current account. Each day, the U.S. goes deeper in debt to foreigners, to the tune of more than US$1.5 billion, mostly because of the rapidly deteriorating trade account. That monstrous deficit is made up by drawing down savings from across the worldmore than three-quarters of all cross-border savings transactions.

At some point, foreigners will decide they hold enough dollar assets. Indeed, if foreign holders of U.S. stocks and Eurodollars start to become infected with rabid antiAmericanism like their elites, politicians, and local leftists, there would be a run on the dollar of historic—and potentially cataclysmic-proportions. Now is no time for a Canadian to buy Florida real estate. Its price in loonies—and euros—is heading down.

Finally, it means diversifying globally. The economic balance of power is shifting away from the U.S. to China and other mainland Asian countries, at a time when U.S. stocks are still valued at more than all the other publicly traded stocks in the world. This will be a decade in which the relative market value of American stocks slides toward the U.S. proportion of global GDP—roughly 21 per cent.

This decade won’t be fun, like the last. But it’s the only one we’ve got. CT1

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca