I’ve received some calls recently from my concerned American clients (who are invested in Israel) asking whether the U.S. stock market, or the whole world financial system, will meltdown this Fall. Here’s my response, and why I believe diversifying beyond Wall Street, stocks, and the U.S. Dollar, is wise.
The U.S. economy has been recovering since the worldwide Great Recession of 2008-2009, albeit at a growth rate that is considered at best tepid by economists. The reason the Federal Reserve has kept interest rates historically low (0%-0.25%) for a record seven years is that the growth we’ve seen is close to “stall speed” (not quite enough to “take off”, borrowing an aviation analogy).
I explain to clients that the Israeli economy did not undergo recession during the Great Recession, but kept growing during that trying time. Also, Israel has considerably outpaced the growth of U.S. and Europe in the years since. According to Tel Aviv-based Meitav Dash Investment House Chief Economist, “The economy is certainly not in slowdown or recession, but growing at a quite high rate of 3% [annually] - that rate would arouse the envy of many countries in the world.”
Only six years ago, the U.S. national debt was “only” $11.8 trillion, but now is close to $18.4 trillion. This represents $154,500 per U.S. taxpayer. The 56% growth in national debt, without a foreseeable plan to slow the rapidly increasing debt load, causes great concern to economists and Central Banks around the world. This of course doesn’t include the unfunded mandates, such as Social Security.
At some point, the cost of financing that debt will be overwhelming to the Federal government, and harsh measures such as dollar devaluation, high inflation, or even controlled default on certain payments may be ahead. Once the world determines that the U.S. may not have the ability to pay all their debt obligations (such as China, to whom the U.S. owes $1.26 trillion), they may either sell their U.S. investments (lowering the demand and therefore price of all U.S. bonds), or demand more yield on future government bond offerings (increasing financing costs to unsustainable levels). “A trillion here, a trillion there, pretty soon, you're talking real money.”
Israel’s debt per person is half that of the U.S., and stands at $226 billion. This is offset by the future revenues from the recently discovered natural gas fields, royalties of which to the Israeli government are estimated at $240 billion alone.
U.S. Debt to GDP
As the U.S. debt level increases, the country’s growth rate (GDP) isn’t growing at the same pace. The U.S. is growing further in debt faster than it can grow its way out. A decade ago, the U.S. Debt-to-GDP rate was a “comfortable” 63%, but now is over 100% (unsustainable for the long-term).
Israel’s GDP-to-Debt ratio is 67%.
U.S. Dollar World Reserve Currency Status Threatened
In October, 2015, the International Monetary Fund (IMF) is scheduled to hold its twice-a-decade meeting on global currencies. The largest (or second largest) economy in the world, China has been strongly lobbying the IMF during the past decade to be considered one of the world’s reserve currencies. With that status, nations may transact using the Chinese Yuan in addition (or in place of) the other official seven currencies.
For decades the only world reserve currency, the U.S. had enjoyed a built-in demand for its currency. With the addition of other world currencies in the recent decades, the U.S. Dollar is still used in 64% of those billion-dollar international transactions. The Euro is used in 20.7% of those transactions.
Assuming the IMF introduces this new world reserve currency and reduces Dollar dependency (in 2015 or 2016), there may be a reduction by half of the Dollar's importance. The currency foreign exchange market is the largest market in the world, 200 times larger than the New York Stock Exchange and 28 times larger than all stock markets combined. So its influence on world economies and currency values cannot be ignored.
According to Juan Zarate, who served as Assistant Secretary of the Treasury during George W. Bush’s administration, “once the [other currency] becomes and alternative to the Dollar, rules of the game begin to change”.
Dr. Steve Sjuggerud (a currency expert recently featured on CNBC and Bloomberg, PhD in Finance), says, “I’ve been active in the market for over two decades now, but I’ve never seen anything that could move so much money so quickly.” Experts say this announcement, whenever it happens, may trigger one of the most profound transfers of wealth in our lifetime.
This is why I have been encouraging American investors to consider linking some of their invests to the strong Israeli shekel, while each U.S. Dollar can still buy 3.9 shekels. Additionally, 70% of Israeli government and corporate bonds are inflation-linked to prevent inflation from eroding investors’ buying power. This is virtually impossible to obtain in the U.S. capital market.
Wall Street growth topping out in 2015?
Having risen 89% in the past 6 years, Wall Street stocks seems to have stalled in 2015. The widely-followed S&P 500 stock index has lost 6% Year to Date (as of August 26), causing investors to wonder if this is the beginning of a major correction (following the 7-year business and correction cycles seen in 2001 and 2008).
I then inform clients that the Tel Aviv 25 stock index has returned 8.6% so far in 2015. I also inform them that Israeli corporate bonds were much less volatile than Israeli stocks during that world crisis (and even during last week's major correction).
Some of my U.S. readers point to the decline of the U.S. moral standard as a major cause behind economy decline. They point to the recent Supreme Court decision to allow gay and lesbian marriages in all 50 states, government-sponsored Planned Parenthood activities, increasing Godless education system, and increasing violence and domestic terrorism as evidence that the U.S. no longer leads the world with high moral standards.
Waning Support for Israel
Many clients point out that U.S.-Israel relations have never been lower. While the U.S. used to vigorously support the only democracy in the Middle East, it no longer does so. The U.S. threatens to cut off financial aid to its “closest ally and friend”, doesn’t support Israel in the United Nations, pushes Israel to adopt security and political agreements not in Israel’s best interest, and lashes out at Israel for not supporting the pending Iran nuclear agreement.
Is the United States headed for a financial collapse? Only time will tell. But the writing may be on the wall, and this may an ideal time to consider placing some of your money abroad, invested in foreign markets and in foreign currency. As you diversify your global holdings, consider not only U.S. stocks, but stocks abroad, or even shorter-term government or corporate bonds outside of the U.S. market, while the Dollar is still strong.
Disclaimer: The above is the opinion of the writer and should not be taken as financial advice, nor is it a commitment to achieve any future returns. Past performance does not ensure similar future returns. This publication does not constitute an offer to purchase, sell or hold securities or units in a fund, and is not a substitute for investment and/or tax advice that takes into account the special needs of each person. Please consult a professional investment advisor concerning your specific situation before making personal financial decisions.