Global Diversification Is Key

Currency Manipulators And Other Global Demons

Nov. 19, 2012, Panama City, Panama

Quote of the Day:

"Kathleen, I'd suggest not using FATCA in subject lines anymore, or, worse, form numbers.

"The reason I say this is that I'm now moving money, this week, to beat the deadline that I've just been unceremoniously informed of by my U.S. bank.

"I should have known better. But the whole topic, for me, has become background noise...so here I am behind the 8-ball..."

--Lee Harrison in an e-mail over the weekend in response to notification he received last week from his U.S. bank

Dear Live and Invest Overseas Reader,

China has become the new American demon. During the campaign, Obama and Romney one-upped each other on how to get tough with China. Romney said his first act as president would be to label China a currency manipulator. Economists have no idea what a currency manipulator might be. For sure the Chinese are baffled by the term; I know I am. Yet Romney asserts that he knows what a manipulator is and that China is it.

Huge numbers of Americans think that makes sense.

As recently as 25 years ago, Japan posed the threat. The Japanese owned some 70% of downtown Los Angeles office space. In 1989 Mitsubishi bought Rockefeller Center, a historic landmark. Japanese investors even bought Pebble Beach golf course.

What a sacrilege.

Ford and GM workers and most everyone else, it seemed, drove Japanese cars. Toyota had the best-selling pickup in America's heartland. About that time, I audited the California operations of a Japanese keiretsu (conglomerate). Japanese executives there drove big American cars, mostly Cadillacs. Funny: The Japanese were the only people in America still driving American cars. Americans drove cars from Japan.

So now we have a new demon, China, but with the same problems as before.

I'm reading a Michael Crichton book called "Rising Sun," published in 1992, based in the Japanese community in Los Angeles. Crichton's characters express the same fears we hear about today, except that those fears relate to Japan instead of China. Very little else has changed.

A character in the books says, "In America you think a certain amount of error is normal. You expect the plane to be late. You expect the mail to be undelivered. You expect the washing machine to break down. You expect things to go wrong all the time.

"But Japan is different. Everything works in Japan. In a Tokyo train station, you can stand at a marked spot on the platform and when the train stops, the doors will open right in front of you. Trains are on time. Bags are not lost. Connections are not missed. Deadlines are met. Things happen as planned. The Japanese are educated, prepared, and motivated. They get things done. There's no screwing around."

A U.S. senator in the book gave a speech in 1990: "Yes, it's true that our industry is not doing well. Real wages in this country are now at 1962 levels. The purchasing power of American workers is back where it was 30-odd years ago...The truth is our nation is sliding badly."

The senator went on to say that back in the 1950s, "American workers could own a house, raise a family, and send the kids to college, all on a single paycheck. Now both parents work and most people still can't afford a house. The dollar buys less, everything is more expensive. People struggle just to hold on to what they have. They can't get ahead."

Now here's a story from CNN last summer: "The middle class is struggling to survive and shrinking before our eyes. 'America's middle class has endured its worst decade in modern history,' the Pew Research Center said in its report. 'It has shrunk in size, fallen backward in income and wealth, and shed some--but by no means all--of its characteristic faith in the future.' ...The middle class also took a bigger hit on the pay front.

"While incomes across all class levels declined for the first time since World War II," the CNN story continued, "the middle class saw the biggest decline, with a median income for a four-person household declining to roughly US$70,000 in 2010 from about US$73,000 in 2001."

To take another example, we complain about our litigious society sucking the life out of the American economy. But 25 years ago, a character in the Crichton book says, "We have 4% of the world population. We have 18% of the world economy. But we have 50% of the lawyers. And 35,000 more every year, pouring out of the schools. That's where our productivity's directed. Other countries think we're crazy."

Other countries make stuff and do stuff while Americans just push paper, in law offices, on Wall Street, in Washington, D.C.

Kind of eerie, don't you think? To see the same concerns as 25 years ago? Japan has crumbled, only to be replaced by China. But the United States seems to confront the same sad story.

I think we can draw two conclusions here. First, as a stock broker friend once told me, "It's never different." My friend was talking about the stock market, about patterns and risk, long-term versus short. But I think we can extend it's-never-different to the larger scheme of things. Americans still believe the country is on the wrong track, just like that Senator who says we're "sliding badly."

Economists still lament that average net worth has collapsed, these days since 2001, back then since 1962.

Whether you're buying stocks or real estate, bonds or gold, remember that it's never different. Stick with the basics: diversification, prudence, rainy-day cash balances, long-term thinking, attention to detail, controlled spending, and so on.

Second, think globally. Back then Japan threatened, these days China threatens. Tomorrow might be India or Brazil. But with a global portfolio, we'll participate in the successes and offset the laggards.

We should also do well with natural resource stocks. When we own oil or copper, mining or processing stocks, as the world economy rebounds, prices should go up. We're not smart enough to know whether the demand will come from China, India, or Brazil. But if we own the raw material we should do well regardless. Whichever country comes out on top, people there will want stuff. If we own natural resources we own the raw material for that stuff.

Paul Terhorst

Paul Terhorst writes a monthly retirement and financing planning column for our Overseas Retirement Letter. Read more here.Continue Reading: