The adulation about the American economy hit a new level of embarrassing this week. In a sure sign we are nearing the top, the following magazine cover hit the news-stands:
The cover article was, as you would expect, dripping with all sorts of bullish anecdotal tidbits about the resurgence of the American economy:
The global elites who congregate each year in Davos, Switzerland, are hardly representative of humanity, but you can still learn a lot at the annual conclave about who’s up and who’s down in the world. One of the biggest take-aways of the 2015 meeting was this: America is back. The world’s movers, shakers, and opinion shapers have stopped resenting and ridiculing the U.S. for its leading role in the financial crisis of 2008-09. “When you look around the globe, it’s just very hard to find a lot of big, bright lights on the economic horizon” except for the “amazing” U.S., says Michael Sabia, chief executive officer of the Caisse de Dépôt et Placement du Québec. He’s recently put his $173 billion pension fund’s money where his mouth is, buying a Manhattan skyscraper and participating in the purchase of Phoenix-based PetSmart
At the risk of offending my Quebecois countrymen, I have watched the Caisse de Depot’s investment prowess for the past few decades, and I would be reluctant to take comfort about investing in any theme they are touting. They are often late, too aggressive and just plain wrong. For example they were tagged especially hard during the 2008 credit crisis.
MONTREAL–The breathtaking, near-$40 billion loss announced by Quebec’s monolithic pension fund manager captivated the population yesterday, especially worried retirees. The Caisse de dépôt et placement du Québec said the value of its assets fell by $39.8 billion in 2008 – to $120.1 billion – a stunning 25 per cent writedown of its net assets and the worst results in its history. Senior executives refused to apologize, however, even though the Caisse underperformed its industry peers – one study pegged average retirement fund losses in Canada at about minus-16 per cent.
When I see the head of the Caisse pumping the merits of investing in America in a bullish Business Week cover article, I know it is time to take out some pink tickets.
Don’t get me wrong, I understand why investing in America seems like the smart and safe thing to do. The rest of the global economy is basically falling off a cliff, so it seems like a good place to hide.
International investors in US assets have had the good fortune to not only be invested in one of the best performing stock markets, but also have benefited from the strong US dollar.
Have a look at a chart of the S&P 500 priced in Euros.
A European investor has experienced a rise of more than 25% over the past couple of quarters. And although the Euro has been one of the weakest currencies, the US dollar has been strong against virtually every other country.
Although the Caisse and all the other “Davos elites” might be ploughing into American assets, I think that the recent rise in the US dollar will cause a serious hiccup in the American economy. We are starting to see signs of this headwind filtering into the economic numbers. From Businessweek:
Economists revised their estimates of U.S. economic growth downward on Thursday after the government reported a jump in the trade deficit during December to its highest level in more than two years. Americans exported less and imported more, in part because the dollar’s strength made American goods and services less competitive in the global market.
Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in a client note that he’s now estimating that gross domestic product expanded at an annual pace of only 2 percent in the last three months of 2014. Feroli called that figure “a little dispiriting,” considering that the economy was being boosted at the time by lower oil prices. (The government’s first estimate of annualized GDP growth in the fourth quarter was 2.6 percent.)
These sorts of big macro shifts don’t happen overnight, so I will probably look like an idiot for a while as the American success story continues to gain followers. But over the years I have found that markets often top when things look best. I continue to be weary of jumping on the “Yeah America” bandwagon.
It’s not that I don’t think America will continue to do well. I just think that expectations are way too high. With this sort of optimism running rampart, investors are bound to be disappointed…