US markets delivered truly outstanding, amazing results last year. On average there was no better place to be invested, optimism reached new highs and everyone is convinced a recovery is in play, even though for some reason or another people still talk about how times are tough.
Those who own stocks have seen their assets go up incredibly from the insane market bottom that was 2009. 2011 saw another pullback and now 2013 has been crazy. But the question is, can the US continue to deliver such outstanding returns on investments? or even a better question is, was the insane returns justifiable? The US economy isn't substantially better, and defintely not 30% better, and the outlook is still somewhat hazy. Although most people would agree a modicum of a recovery is happening, real wages, unemployment and the like continue to improve rather slowly.
From a technical standpoint, US markets haven't touched their 200 DMA average in around 400 days, and haven't been below it for any significant amount of time since 2011. The markets experienced a pullback last few weeks, but have quickly readjusted. the question is will this adjustment go through? how far will we go? Noone knows the answers to this question, but in my opinion, a macro rotation is at play.
What do I mean by macro-rotation? I mean I a long term money flow cycle is slowly changing, and it will effect just about every kind of money flow imaginable. Bonds, equities, commodities, emerging markets etc.
It all starts with the falling of U.S. Hegemony. Last year We saw the number one indicator of the U.S. hegemony take on a massive reversal, that is the 10 year treasury yield began to break out of long-term decline. it is uncertain if the breakout will continue, but one thing is for sure, demand for U.S. treasuries is beginning to wane. At the same time, The US dollar index has also began to wane, even though there has been an insane amount of money tied up in he U.S. dollar the past couple of years as the dust settles around the world and investors consolidate.
The surprising thing is how demand for treasuries have fallen (interest rates increase when demand is low in order to attract investors) but only a handful of markets (Japan, Germany, U.S.) actually performed exceptionally in the past year. In fact a lot of emerging markets actually fell, and even some other developed markets or mid-developed markets are trading below pre-recession levels (Italty, Spain, Greece etc.). Commodities have also remained largely uninteresting, until lately when they started breaking out.
So what does this all mean: It is my belief that the money isn't going back to treasuries. The fear is slowly but surely leaving, and countries around the world are restructuring to incentive investment. On top of that, a lot of the world is starting to realize the U.S. isn't the be all end all and domestic money flow and other players are stepping into the field. Lastly, almost every currency is significantly more sovereign and has had less exposure to the dollar than before. Back in 1997 a lot of foreign debt was tagged in Dollar, but that has slowly disappeared as central banks have vyed for more control of their monetary policy going forward.
The money is going to go to emerging market equities and commodities, and possibly gold and maybe even bitcoin.
1. Emerging markets are still offering insane growth rates and are continually depending less and less on foreign investment, or at the very least , less in U.S. investment. education rates and opportunities abound in foreign countries, were the only missing link is capital goods, which technology makes more accessible by the day.
2. Emerging markets have a lot of commodities, and the world will probably continue to be hungry for commodities as more and more people worldwide get out of poverty. Not only do emerging markets dominate commodities, they also have high quality commodities from a relative standpoint because for the most part they have not been as exploited as in developed countries, e.g. mines haven't been fully excavated, gas hasn't been completely depleted. and of course, labor is for the most part cheaper.
3. the continual rise in wealth amongst these developed countries will continue to seek a place to store their money in order to beat inflation or get a return. Little by little the money from increased wealth in these countries will flow to domestic equity markets and to stores of value like gold, and possibly bitcoin.
4. less trade will be done in the U.S. Dollar as other nations seek to have more control over their exposure to U.S. economic policies. Countless countries have complained about how U.S. monetary policy and its effects on the world's currency have prevented them from competing in the global marketplace. As the U.S. share of world gdp continues to wane and investments between other countries continue to flourish, I expect other countries to begin to negotiate in other currencies. Euro, Yuan, Indonesian rupiah, Rupees and Real all look like strong potential candidates that stand to gain from dollar hegemony decline. I also expect the yen to possibly continue to lose value, although I haven't researched this enough and am purely saying this because other players in the Asia sphere seem so ready to take off.
For the last 50-60 years the U.S. has been the world's oyster for investment. Any sane investment manager probably had a large share of his directly exposed to the U.S., and even if not directly, even indirectly was vastly influenced by its policies. I am not saying this sort of influence will disappear or fall drastically, but I do think it is beginning to wane from its peak. Many will ask "you think the peak is now? that is crazy it was XYZ years ago" or some might say "The peak is nowhere near". I don't know if the peak is now, or later, but what I do think is that the variables are in play. A lot of people thought emerging markets were going to conquer the world back in mid 2000s, but what ended up happening was that as emerging markets gained wealthy particpants, they ended up moving money to the U.S. and other OECD countries in order to manage risk and volatility (ask any rich latin american, Asian or Middle eastern person and a lot of their money was tied up in London or American markets) but now the risk in emerging markets is starting to disappear and opportunities are arising again. The 10 year treasury yield is sending a powerful, powerful signal that the world is slowly unraveling their exposure to the Dollar and american debt, and this last, large push in U.S. equities which are almost parabolic coupled with vastly oversold, high growth emerging markets might finally be sending the signal to the world that the U.S. isn't the end all and be all of investing