Books paint grim picture of U.S. 'empire'

Books paint grim picture of U.S. 'empire': "With just five weeks left in 2005, tax-loss selling, rebalancing and foreign content are all top-of-mind topics for advisors and their clients.

The three are, of course, related. Year to date, Canadian markets were up 17% as of Nov. 21, while the Dow Jones industrial average more or less broke even and the S&P500 and Nasdaq were both up 3% or more.

Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., suggests it's time to tweak asset mixes and that many investors may be overweight in equities and light on fixed income.

One problem is that with the removal of the foreign content limit, it's more tempting to rebalance into global equities, as several fund fims have urged all fall.

You might well conclude that some of those Canadian profits should be parlayed into more equities from that bastion of capitalism: the good ol' U.S. of A.

After all, the United States still makes up more than half (52.5% as of last week) of the MSCI world index. And there is a long-standing argument that the giant U.S.-based multinationals provide Canadians with all the global exposure they'll ever need.

On the other hand, the trials and tribulations of General Motors Corp. might give advisors pause for thought before recommending wholesale shifts into the U.S market. Based on its MSCI World weighting, you could argue that for every $1 rebalanced into the U.S. market, at least another $1 should go into EAFE (Europe, Australia, Far East) and Emerging Markets.

The relative levels of the Canadian and U.S. dollars also need to be considered. But in the long run, you have to assume such moves are as unpredictable as calling the next direction of interest rates or the stock market in general.

Advisors interested in global economics and top-down themes might want to get hold of two recently published books that question the United States' long-term preeminence in the global economy and stock market.

One is The European Dream, by Jeremy Rifkin (Penguin, New York, 2005). Rifkin is a Wharton School fellow famous for writing, among other things, The End of Work. The subtitle of Rifkin's latest effort is "How Europe's vision of the future is quietly eclipsing the American dream."

On the one hand, Rifkin chronicles what he describes as "the slow death of the American dream." He bemoans the end of the can-do spirit of America's pioneering days, which has been replaced by a "Getting something for nothing" mentality. He sees a country where citizens spend too much time hoping for the big score via lottery wins or a shot at fame and fortune via reality TV. "Today, for a growing number of Americans, risk-taking has been reduced to little more than gambling." Rifkin also sees a decline in civic participation and volunteering, as American youth become more distracted by a myriad of electronic gadgets, such as TV-enhanced cellphones and iPods.

He believes the United States is being usurped by a new "economic superpower" -- the 450 million citizens of the European Union. In a compelling thought exercise, he invites readers to equate the economy of Germany to that of California, the U.K. to New York, France to Texas, Italy to Florida, Spain to Illinois and so on.

For every world-class corporation domiciled in an American state, there is an equally fine company located in a European country. "European-based global companies are able to match their American counterparts more often than not," Rifkin writes. He adds that Europe "also sports more small-and medium-sized enterprises than America."

I promise you that after reading this book, you may have an entirely new perspective on European equity funds and international equity funds or exchange-traded funds that own European stocks.

An equally compelling read is Bill Bonner's Empire of Debt: The Rise of an Epic Financial Crisis (Wiley & Sons, New Jersey, 2006). Bonner, perhaps best known for his Daily Reckoning Web site and daily newsletter, paints a chilling picture of how the American "empire" has been built on a paper currency no longer backed by gold bullion.

He recounts the creation of the U.S. federal reserve system, the imposition of income tax to fund the First World War and subsequent wars, and finally Richard Nixon's infamous decoupling of the dollar from gold. The result is the "largest edifice of debt ever built up." In the two years since the Bush administration launched its war on terror, it has "added more debt to the nation than had been built up in the first 200 years of its existence."

Consider the long-term investment implications of the following paragraph: "On the one side of the globe [the U.S.] are the consumers. On the other side -- principally in Asia -- are the producers. One side makes, the other takes. One saves, the other borrows. One produces, the other consumes."

Looking at foreign ownership of U.S. financial assets, he suggests China or Japan "could bring the U.S. economy to its knees with a single word." [Sell.] The final two words in the book are: "Buy gold."

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A few weeks back, we asked advisors to fill the rest of us in on a visit by Fidelity mutual fund legend Peter Lynch. I'm told it was a primer on investing fundamentals, most of which can be found in his books.

So while the above-mentioned books on the United States make interesting reads, remember, too, Lynch's dictums: "It is futile to predict the economy, interest rates and the stock market."

He reminded advisors "there is always something to worry about" but "you have plenty of time." There is a correction every two or three years and a recession every seven to 10 years. Fortunately for those with a long-term perspective, time is our ally.

My source also noted a message implicit in Lynch's visit: "By spending big bucks on this event (the open bars and endless hors d'oeuvres in the Thomson Hall lobbies), Fidelity was saying to advisors, 'We admit we have mostly ignored marketing to both advisors and the public over the past few years. We want you to know we're back, and in a big way.' "
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