Change is inevitable in life and in markets but that doesn’t mean you’re always going to like the new direction. For as long as most of us can remember U.S. equity markets have ruled the world. If Wall Street stumbled the rest of the world would fall flat on its nose. As late as 2007 that was still mostly true as the collapse in the U.S. stock market brought the rest of the financial world to its knees.
With that historical view you can guess that it’s no coincidence that financial institutions around the world started building firewalls between themselves and U.S. equity markets.
The Great Recession
The financial damage done by the meltdown of U.S. equity markets, while significant, was nothing compared to the psychological damage that took root in the days after the great crash. Big banks had sold bogus AAA rated securities to financial institutions around the world and few were ever held accountable for one of the worst financial disasters in modern history. The world and the average U.S. citizen wondered how such a pillaging of our financial system could not be illegal. If it was bad enough that financial executives were not prosecuted, even more stunning few lost their jobs and managed to keep lavish bonuses. Up until 2007, the U.S. had enjoyed the reputation of being the country that could always be counted on to do the right thing; after 2007 that view changed. Not only could the U.S. not be counted on as a financial ally, but now anyone who ever voiced distrust of the U.S. now had a glowing example to point to as proof.
We’re Number Two
Though there is still some disagreement among financial scholars, by many measures China has displaced America as the world’s largest economy. The sheer scale of the Chinese economy made that inevitable but it was still a shock in many circles. Today China is flexing those new economic muscles, particularly in Asia. One of its first bold moves was developing an alternative to the World Bank. Even though the U.S. discouraged participation, major economies around the world rushed to join the Asian Infrastructure Investment Bank, or AIIB. China is also flexing its military might in territorial waters around the region, including building an airbase on islands of disputed ownership.
Quantitative Easing For Everyone
In the months and years after the great recession, the U.S. Federal Reserve Bank cushioned the economic blow with an ongoing program of quantitative easing. The Fed dumped cash into the economy by the truckload fueling one of the greatest recoveries in market history. It wasn’t long before other countries figured out they could play that game, too. Europe went on its own QE binge which not only worked, it worked like a house on fire. China did something similar but funneled its efforts into massive new infrastructure projects like high speed rail, renewable energy and new hydroelectric dams. The lavish spending has propelled overseas markets higher while equities growth here in the U.S. has remained relatively flat with the Fed still threatening interest rate increases starting in June.
Leaving the argument over the merits of QE and its effect on currency valuations for another day, it’s apparent that the rest of the world is no longer content to let the U.S. dictate economic policy. Many may see that as a disturbing development but maybe it’s time to let someone else set the pace for a while. There are many instances in financial history where it’s been more advantageous to be number two rather than leading the pack.
It also opens up whole new vistas for entrepreneurs and investors. Instead of having all your money in U.S. markets, now you can invest in developing countries where returns can be significant.
Like any major change there will be adjustments and not all of them will be pleasant. All the same, the new world order brings with it a new set of opportunities. Whether the change is good or bad may well depend on how you react to it as much as the new reality.
