Yesterday, we went to visit Julian Mayo, who runs Charlemagne Capital here in London.
“The results from investing in emerging markets, over the last five years, have been spectacular,” he said. “It’s only in the last few months that they have fallen off. But this probably means that this is a great time to get in.”
Julian reminded us of one of our 5 “Big E” themes – the Exodus of wealth from the developed countries of the emerging markets.
Some day, when the economic history of this current period is better understood, people will see that the world owes a huge debt of gratitude to the American consumer. Against his own interest, he has put himself deep in debt so that others could have prosperity…and have it in greater abundance. The Exodus of U.S. wealth was probably going to happen no matter what. But the American consumer – like Pharaoh’s army – chased it to the waters’ edge, where the Fed, with its easy money policies, parted the sea so it could get across. By spending money he didn’t have on things he didn’t need, the US consumer hastened the flow of money from America to the exporting nations – the Arab oil exporters, China, India, Brazil, and Russia. Now, all these nations are flourishing…with rising currencies…huge current account surpluses…trillions of dollars in reserves…growing middle classes…and soaring wages. And the poor American consumer? Again, like Pharoah’s poor soldiers, he is being swallowed up under the waves of “flation.” The value of his house is being reduced by deflation. And the value of his time and his money are being cut down by inflation. The poor fellow. The Chinese, Indians, Russians et al should at least thank him.
*** What about Japan, we asked Julian? Japan is a special case. It is the only country to maintain low rates of currency growth, and the only one to be locked into an on-again, off-again deflationary recession for the last 18 years. Stock prices in Japan are barely a third of what they were in the ’80s…and the country has no exposure to sub-prime debt, still investors sold Japan along with the emerging markets in October of last year.
“Is this a good time to buy back into Japan?” we wanted to know.
“No, I don’t think so,” was the answer. “Japan is not a bad economy. And stocks are not bad values. But there is nothing on the horizon that is going to make them go up much either. The emerging markets are good places to invest because they have huge domestic markets and they are growing rapidly. Japan is stable…”
Japan also has the distinction of actually losing population. In America, we honor mothers and fathers. In Japan, they celebrate “National Child Day.” But for the last 27 years, there have been fewer children to celebrate each year.
*** A contrary view of Japan comes from Christopher Wood. Here is the Bloomberg report:
“The ‘bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies’ pricing power and, consequently, their profit margins.’ Consumer prices rose at the fastest pace in a decade in March, suggesting the economy has emerged from a deflationary spiral. Price gains also boosted expectations the Bank of Japan will raise interest rates, allowing banks to charge more for credit. Wood increased the weighting of banks in his model portfolio of Japanese shares, recommending investors hold 24 percent of their assets in the nation’s four largest lenders. Banks comprise 12 percent of Japan’s 1,722 member Topix index. Sumitomo Mitsui Financial Group Inc.
*** Meanwhile, our friend Michel reminds us that not all investments in art are bad ones.
“One day in 1880, a dealer proposed to Collis P. Huntington, one of the founders of the Central Pacific Railroad…and the state of California, a certain number of old paintings, unsigned, at $2000 each. Huntington chose one, ‘The guitar player,’ and paid $750 for it. Later, experts attributed the painting to Vermeer.
“I saw the money in it,” said Huntington.
Markets and Money