Saturday, October 9, 2010

[Video] Should the U.S. be Classified as an Emerging Market for Investment Purposes?

An interesting debate on CNBC on whether the U.S. should now be classified as an emerging market for investment purposes?  While easy to laugh it off, the country is exhibiting many of the risk factors traditionally correlated with developing markets.  For example:

  1. Out of control debts
  2. Crony capitalism socialism whatever-ism
  3. Decision making at the government level dominates all facts of economy & markets
  4. Dysfunctional government
  5. Growing chasm between rich and poor
  6. Dysfunctional financing - a Treasury which issues debt, and a central bank which buys it
If I gave you those risk factors and did not say which country it applied to, the majority of people would say "that's an emerging market"...

This is an important discussion because generally due to atypical risk factors, emerging markets have been priced at a discount to more stable developed markets.  As I look at the risk factors above I see none of them improving as we look out 5, 10, 15 years - in fact, based on the path we are going they all could be accelerating in the coming decade(s).   Hence the U.S. market may lose (or may have already lost) the premium it once enjoyed in valuation.

Now on the flip side the U.S. does have going for it the biggest advantage in the globe - the reserve currency.  This allows the country to do things no one else can get away with.  Further, it still has what is considered a solid judicial system (while 'enjoying' 80% of the attorneys that live on the globe), and thus far has been able to separate its armed forces from government.   But those are really the only remaining factors that the U.S. still has in it's favor to not classify it as an emerging market. 

5 minute video

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