Monday, July 21, 2008

Bull dirham

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Some of my money is now living in the Middle East. Yes, I'd like to be able to sensibly invest only in U.S.-based businesses, or those in U.S.-friendly countries (if any are still extant). But not only are we in for the mother and daddy of bear markets for an unknown period; even after the market starts a recovery, the long-term picture doesn't look very good.

The American economy has simply gone off the rails. The government is broke as far as the eye can see, but even that's probably not the worst news.

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For decades, the the nature of money making in the American economy has shifted: from manufacturing things, to selling services that only an affluent country can afford, to selling Asian-manufactured goods to each other on credit, and finally, to manipulating money obtained largely by debt, with hedge funds and corporations working through increasingly leveraged and arcane transactions.

And if you keep all your savings and investments in the United States, there is no way to put a firewall around them. You can put them in a money market fund but the interest paid to you will more than be gutted by inflation, and by the way, money market funds are not legally insured (read the fine print). You'll lose money on Treasury paper, even so-called Treasury Inflation-Protected Securities, because the government's way of calculating inflation has become a con game that makes sure the official rate is far below the real rate.

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That bit of flim-flam, as well as the way that risky financial monkeyshines have replaced true wealth building as the basis of the national economy, is explained in Kevin Phillips's Bad Money. Phillips is a liberal, and trusts in government regulation too much, but basically his book is fair, well documented, and a lively (if discouraging) read.

There are many ways not to entrust your savings to the U.S. economy. Foreign mutual funds and ETFs allow you to invest in various non-U.S. regions, market segments, and currencies.

Which brings me to GULF. It's an ETF launched last week by WisdomTree, and lets you buy into 100 dividend-paying companies in
Kuwait, United Arab Emirates, Egypt, Qatar, Morocco, Jordan and Oman. Geopolitics aside, the fact is that on the whole they are getting richer while we are going into the intensive care unit.

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Don't get the idea that makes me happy. I'm still an American patriot and want to see us get through our Time of Troubles and be smarter, as we did for a while after the searing experience of the Depression. But that could take a while, and things will very likely be worse before they're better. In the meantime, it's a service to our country as well as to ourselves to stay afloat economically, whatever it takes.

I realize, of course, that those are all Muslim countries. While the idea that terrorism is caused by poverty is mistaken, I don't see any particular reason why the Middle East represents a greater danger because the dirhams are rolling in. In fact, if I know human nature and history, the Muslim fat cat class will go out of its way to rid itself of pests like Al-Qaeda, and probably more ruthlessly and efficiently than the United States has done.

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So a small portion of my small portfolio is now at home in GULF. It is disturbing to have to resort to such measures, but there it is. I hope to live long enough to see the United States economy return to sound principles.

The usual disclaimer: I am not a financial specialist and have no credentials for offering advice, which this is not intended as.

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4 comments:

Dennis Mangan said...

All sentiments to which one can easily agree. I do wonder, however, about those "Muslim fat cats" and pests like Al-Qaeda: if they're going to get rid of them, why haven't they done so already? They don't need more money to do that. Maybe more likely is that the whole society will become wealthy enough that AQ no longer has much support.

Rick Darby said...

Dennis,

I claim no personal knowledge or experience of the Middle East, and certainly can't say what goes on behind the closed doors of its wealthy minority.

It seems, though, that as prosperity in that patch begins to extend beyond the petro-billionaires to entrepreneurs and perhaps ordinary businessmen, something like a middle class might develop. Its members might decide that they would rather get richer than chance a vast Western retaliation against fanatical Muslims, and would deal with al-Qaeda and its analogs accordingly -- which, in Middle Eastern terms, means severely in ways we haven't the will for. They might do what we cannot. No guarantees, but it's possible.

David said...

A few thoughts:

1)It certainly makes sense for people to diversify a portion of their portfolios outside the U.S.
2)I wonder how correlated the GULF fund is with oil prices?..given that these economies are so dependent on oil, is GULF really in effect a commodity play?
3)There is actually quite a bit more manufacturing in the U.S. than most people realize...our share of world manufacturing is considerably more than that of China. A big part of the employment reduction in mfg is actually due to automation, just as the harvester and the tractor reduced the % of the population working on farms.

Fuel price increases are resulting in reassessment of some offshoring decision--a large container ship uses about $3MM worth of fuel on a single transpacific voyage, and for some products, the economics of where it gets made have changed a lot.

Rick Darby said...

David,

In regard to (2), the top 10 holdings of GULF are banks and telecoms, plus Columbia Cash Reserve — probably something like a money market fund where they keep cash until they're ready to deploy it. Not an oil company among them.

(3) I don't doubt that automation is behind some employment reduction, but we're also seeing head count declines in lots of jobs that still require people to do them — administrators, salespeople, airline pilots, etc. As to the latter, maybe we'll soon be passengers on unmanned aerial vehicles, with one "pilot" on the ground controlling a dozen airliners remotely. Now that's ATC!