False diversification and the U.S. world position

[OrangeCat]

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Simple question, how do you know when your portfolio is diversified correctly?

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It is not a simple question at all. There is an old saying “When the US catches a cold, the rest of the world gets pneumonia.” IOW, simply going international could actually increase risk.

Here is a link to a website specializing in the topic http://www.riskbook.com/

I was browsing through and found a few titles that appear to cover methods of quantifying risk and diversification

http://www.riskbook.com/link/fabozzi_and_markowitz.htm

http://www.riskbook.com/titles/scherer_b_(2002).htm

[laserboy]

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Go back to when the US was an industrial economy. Then picture someone saying that because nobody wanted to work in factories anymore, the US economy would go in the tank. Or picture someone saying, when the US was an agricultural economy, that since nobody wanted to work on farms anymore, we wouldn't be able to compete in the future.

What makes you think that the situation is any different now?

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What industries are we still competitive in?

Manufacturing? No. Agriculture? No. Natural resources? No. IT? No. Customer support? No. Even our back office legal and financial services work is starting to move offshore. I just read an article about an advertising agency moving their operations offshore! I don't care what Rich Dad says, an economy based on buying and selling mortgages from each other is not sustainable...

The reality is we have not been competitive in the global markets for the past thirty years. Look at our deficits. The only reason we enjoy such a high standard of living is because the government continues to pump about $400 billion worth of borrowed money into our economy a year. Our entire economy is basically at the mercy of Asian central banks buying our sinking currency solely for political reasons. How long can this continue? How much farther does the dollar have to fall before they refuse to lend us any more money? Japan was a net seller of US treasuries at the end of last year...

As lehighguy stated, the future does not look bright. If you are banking on the younger generation of Americans to bail us out with breakthrough technologies or quantum leaps in productivity, you can just forget about it. We are an entire generation of debt laden, sitcom-watching, fastfood-eating morons. 87.3% of the people I know my age just out of college are either working in the real estate industry, getting some worthless graduate degree, playing cards for a living, or are unemployed. Our education system is in shambles... Our national savings rate hovers at around 0%... Our President is a functional retard... Game over, man! Game over!

On the bright side, I do think bankruptcy law and debt collection will be solid growth industries!

[lehighguy]

When people left factories it was clearly to go to service sector jobs with higher added value. The problem going foward isn't that low skilled labor is going oversees, its that high skilled labor is going oversees. And while we have been able to rely on luring smart people from foriegn countries to come to the US this may not continue as conditions in those countries improve.

The fact that a large sector of the economy which is clearly vital to our future (engineering, hard science, etc.) is being ignored is a big problem. It might not seem as bad now but in 20-40 years we might not be the most educated workforce.

The idea of free trade does benefit all. Our open economy has outperformed all of its closed market counterparts. But this isn't a question of wether we need to close of our economy. Clearly that would be a mistake. What we need to do is improve our education system so we can compete decades down the road. Otherwise I don't see these deficiets fixing themselves.

[lehighguy]

While I share laserboys sentiment, I am not quite so pessimistic (though the facts clearly lean in that direction).

The big long term problem is education. Our system sucks. And no one is going to fix it because the rule in politics is such (if it won't be a problem for 20 years, its not my problem). Take the NYC public schools my mother works in. Mayor Bloomberg threatened to hold students back if they didn't pass certain basic skills tests. Then the political forces of apathy attacked. Parents rallied against the mayor trying to hold thier kids back. After all, thier kids aren't stupid or lazy. Eventually the mayor gave in, and a bunch of kids who can't even read got to advance again. I could give a million other examples.

There is one competitive advantage we do have in the United States, individualism. Asian economies are plauged by corruption, cronyism, but most importantly a lack of individual reasonig on most peoples part. A system based on family loyalty and honor and societal pressure is great at getting someone to study 12 hours a day, but bad at getting them to think for themselves. Having grown up in largely asian communities in the US and spent time in Japan I can tell you there is a serious critical thinking gap. Take the following example from when I was playing at the Borgota and talking to another gentlemen at the table who had been sent over to Japan as a manager.

American Manager: So it seems you missed your profit target by 60% last year. And now your requesting a higher budget and profit target. How are you going to reach your new target.

Japanese Worker: Yes, we are shamed by last years performance. This year we will redeem ourselves by reaching our new target.

American: Maybe I'm not making myself clear, HOW ARE YOU GOING TO MAKE THE NEW TARGET?

Japanese: We will make the target because we must. Because we have to.

American: Well unless I here something better then that I'm going to recommend against increasing your budget.

Our entreprenurial spirit is the major advantage that has kept us on top, but you need to do the background work. It doesn't matter how creative you are if you can't add or subtract. Well that's my take.

[Mark Heide]

Wayfare,

Before you go start buying up ADRs consider that right now is about the lowest the US dollar has been. This is due to a few factors, including interest rates, Iraqi War(deficit). When interest rates start to climb and when we finally pull out of Iraq, the dollar will strenthen. When that happens your ADRs will lose money. If you were going to deversify this way you should have done it before the Iraqi War. Furthermore, Europe, Asia, and South America depend on exporting to the US, so if the US collapes, so will the rest of the world.

Good Luck

Mark

[lehighguy]

Its true that you don't want to buy high and sell low, but listening to that logic kept me from buying oil at $35. Until something happens to make the dollar go up it won't. And the policies in place right now are unbelievably irresponsible. Pulling out of Iraq will not solve our trade deficiet. If you can find someone willing to buy dollars right now I'll start to believe you, but I can't find anyone. Perhaps in two years, when the dollar is even lower, it will be a good value play, but not right now.

[adios]

[ QUOTE ]
[ QUOTE ]
Simple question, how do you know when your portfolio is diversified correctly?

[/ QUOTE ]
It is not a simple question at all. There is an old saying “When the US catches a cold, the rest of the world gets pneumonia.” IOW, simply going international could actually increase risk.

Here is a link to a website specializing in the topic http://www.riskbook.com/

I was browsing through and found a few titles that appear to cover methods of quantifying risk and diversification

http://www.riskbook.com/link/fabozzi_and_markowitz.htm

http://www.riskbook.com/titles/scherer_b_(2002).htm

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Simple question, not so simple to answer the question [img]/images/graemlins/smile.gif[/img].

[Dan Mezick]

Mark,

False diversification is an important insight.

The key to gaming this US dollar situation is understanding the motivations for expanding the money supply.

The first recipient of an inflated dollar enjoys the full buying power of current dollars. Thus the US Treasury, then the 1st tier US contractors, then their subcontractors enjoy advantages as the "first recipients" of freshly printed (inflated) dollars.

These recipients enjoy today's dollar current value with tomorrows less-valued currency. As such, they win.

Freshly inflated dollars are useful for paying long-term debts in cheaper dollars, cheaply financing current obligations, cheaply financing wide-ranging expansion plans, etc.

If the plan is to aggressively yet systematically increase the supply of dollars, substantial rate increases (ala "1980") will not be used to slow down price increases deriving from said massive and systematic money supply increase.

Thus, those who are working from an assumption of a "continued, systematic and world-historical devaluing of the dollar" believe dollar-inflation will be the dominant economic mega-theme going forward.

Derivative effects may very well be:

1. No real estate depreciation or widely-assumed real-estate bubble;

2. Steady rise in gold price, and the euro (in dollar terms);

3. "Camouflaged" interest rate management (moderate, well-timed increases) by the Fed designed to smooth the rate of dollar decline, but not stem the massive (yet orderly) decline itself.

It is useful to examine chart of the S&P and the Dow expressed in Euros rather than dollars.

The impressive 2003 results for the Dow and S&P look anemic when viewed through this filter.

It is also useful to examine the price of gold and the euro in dollar terms across the same time period.

[GeorgeF]

All my bond funds are international

I believe that on an interest rate basis the dollar is fairly valued against other currencies.

I think long term the US$ will decline as US government spending on US government objectives is out of control. Notice how the Europeans are building the biggest airliner while the US is building a failed state in Iraq, for about the same money and way fewer lives. If the super Jumbo is a success it is a major failure of the US, leaving Boeing pinned between EADS (super jumbo) and Embraer (regional jets).

China will have many booms and busts as it grows. If it avoids foreign wars, as Germany didn't, it will likely displace the US as an economic power. It seems that China is going to have a bit of a fall as they adjust to the US inablity to buy their stuff.

[natedogg]

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China will have many booms and busts as it grows. If it avoids foreign wars, as Germany didn't, it will likely displace the US as an economic power. It seems that China is going to have a bit of a fall as they adjust to the US inablity to buy their stuff.

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I've heard this stated quite often, that China will displace the US economically on the world stage. But is it necessary for there to be only one economic leader? I have always assumed that the rise of China's and India's economies will be beneficial to the U.S., especially the service industries.

natedogg