June 22, 2011

The advancement in science, technology and politics from the end of the second World War and the birth of the first baby boomer about a year later in 1946 has exceeded all previous human progress. Many of us carry (within an Iphone or Blackberry) more computing and communication power then our living grandparents could possibly have conceived or existed in all the world when they were born.

Communism is in retreat, a free market economic model is spreading through all countries of the globe raising the standard of living of more and more people. Many diseases have been eliminated or treatable, the human genome decoded, with space the new tourist destination and anyone with an internet connection able to have video conversations anywhere on the planet for pennies.

Stock markets have gone up over 300 times or more since 1950. $100 invested in January 1950 to June 2010 would have grown to:

– in the TSX = $ 33,570

– in the S&P 500 = $ 50,802

– in world markets = $ 48,807

Despite this demonstrated ability of humans to achieve and solve all the technical, financial and political problems we’ve faced and with businesses continuing to increase shareholder value and raise the standard of living we now enjoy, we somehow get drawn into believing our existing problems are some how insurmountable. Whether it be the 2008 US financial crisis and ensuing debt, the Greek debt crisis, China’s slowing economy, middle east unrest or whatever, the media and investors worry that this next crisis will somehow create a market decline that will finally wipe out savings just when needed for retirement.

There is one investment principle required for anyone saving or going into a 30 year rising cost retirement – that is – faith. Faith based on our history, believing we will solve the problems we create and continue to increase our wealth and standard of living. With faith, temporary market declines become buying opportunities or pauses in a never ending rising global economy.

(inspired by the writings of Nick Murray)

US has hit their debt ceiling

The United States reached the maximum amount of money they can borrow in May. Surprisingly, US Treasuries (government bonds) rallied rather than declined in value suggesting the investment world continues to have faith in the US economy!  Note that the debt ceiling has been raised every year for the last 10 years.

Much is being made of this but we need to understand this is a political issue. The republicans are using this to demand that spending in all areas, (other than for defense) and including social programs, be cut. The democrats want to continue spending on social programs and possibly increase it to provide some type of universal healthcare and cut defense spending. A key date occurs in August when payments are due and the debt ceiling must be raised or the US will be in default because they cannot legally make the payment. It’s likely the debt ceiling will be raised – as it has over 100 times in the past.

Why Invest Globally

There continues to be reluctance on Canadians to invest more globally. Whether it’s a home bias or making investment decisions by looking backward at recent performance, I’m not sure. It’s true Canada’s economy has outperformed global markets in 6 of the last 10 years – but the reason for that out performance (low dollar and demand for commodities) has changed.

Another problem is Canadian productivity just isn’t where it needs to be. Canadian businesses have a greater aversion to risk than US counterparts. Investment in technology and processes to improve productivity just doesn’t happen as quickly.

The resource boom over the last 10 years that has driven much of Canadian stock market performance will cycle downwards – as all cycles do. Demand from China will subside and we will see slower growth in our equity markets.

There are three reasons I believe its important to have a significant allocation in global markets:

1 – Out performance – Global markets have outperformed Canadian markets historically and are due for a turn around.

2 – Diversification – Global markets have businesses not available in Canada.

3 – Demand – Increasing demand from emerging market consumers is an opportunity to invest early.