The Global Guru: Is the USA Back on Top?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Among the global investing set, the U.S. stock market is red hot.

Among the 39 global stock markets I follow on a daily basis, the United States is now the No. 2 performer year to date — trailing only Japan.

After being denigrated as the “the best house in a bad neighborhood” only a year ago, it took only 12 months of global stock market trouncing returns for the U.S. economy to be viewed as a “very good house in a very bad neighborhood.”

The USA: Global Top Dog, Once More?

The recent economic data support the improved sentiment toward the United States.

Vehicle sales are the highest in the United States since 2007. Rising house prices have taken 1.7 million Americans out of negative equity. Household wealth is at an all-time high. U.S. manufacturing orders and production are increasing even as activity slows in Europe, Latin America and China.

The United States is on course to produce more oil than Saudi Arabia by the end of this decade. It already produces more natural gas than Russia.

Even employment is looking better, with the private sector adding over 200,000 jobs in June for the third straight month.

And in what was one of the most underreported stories ever, the United States regained the No. 1 spot in IMD’s annual Global Competitiveness report thanks to “a rebounding financial sector, an abundance of technological innovation and successful companies.”

The U.S. economy’s star has risen even as China’s has faded. According to AT Kearney, the United States just replaced China as the world’s top spot for foreign direct investment. Japan’s Toyota, Germany’s Siemens, and, yes, even the Chinese themselves are pouring money into the United States.

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The reason?

The United States’ common language, common currency, social stability and developed legal system make doing business there a cakewalk compared to China.

Equally importantly, the cost of production between goods in China and the United States has fallen dramatically. The Chinese are no longer willing to crank out Wal-Mart’s knick knacks for a dollar a day.

The USA: The World’s ‘Secret’ Emerging Market

The United States is a large country and some regions are clearly doing better than others.

As Meredith Whitney points out in her book, “The Fate of the States: The New Geography of American Prosperity,” the U.S. national economic data obscures the strong growth of the central corridor by mixing them in with the housing-bust states.

While the Northeast, California and the “sand states” of Nevada and Arizona struggle with massive state deficits, high taxes and unemployment, the “Central Corridor” — the so-called “flyover states” that many Americans never actually visit — are recording remarkably high economic growth rates.

It turns out that the United States has its own set of high-growth “Asian Tigers” — featuring economies right in its heartland.

Between 2008 and 2011, Louisiana’s economy grew by 16%, North Dakota’s by 27% and Iowa and Nebraska’s by 11%.

Overall, the 17 states of the “Central Corridor” collectively grew their economies by 8% from 2008 to 2011, while the United States as a whole grew by 6% and the housing-bust states grew by 2%. Wyoming is now the fifth-wealthiest state per capita in the United States. That makes it wealthier than Singapore, which itself is tops among the Asian Tigers.

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Their secret? The Central Corridor states are not choking on debt and crazy pension obligations, nor are they dependent on higher tax rates.

I’ve already written about how Texas is trumping California in the business attraction game. And it works. In the 2000s, 20% of Californians leaving the golden state decamped for Texas.

And while windfall revenues from Facebook’s initial public offering helped California kick the fiscal can down the road, Orange County lifeguards retiring at 50 with $200,000 pensions are the real problem.

The contrast with Central Corridor states is revealing.

While California chases the rich away, Florida Gov. Rick Scott gets on the phone with Connecticut-based hedge fund managers, such as Eddy Lampert who was asked to come to Florida. And Lampert did. Gov. Mitch Daniels engineered a similar turnaround in Indiana, a state whose “AAA” credit rating is now better than that of the U.S. government.

All this rah, rah America stuff makes both Europeans and Americans on both coasts cringe.

After all, they say, who would want to live in a cultural wasteland like Florida or Texas.

That cultural snobbery is both self-serving and delusional, on both sides.

Your average San Francisco or L.A. art critic would be shocked to learn that to an average Londoner or Parisian anything outside of Manhattan might as well be a cow town in North Dakota.

On the flip side, that same Londoner may only be able to afford to live in a closet above a Chinese restaurant, while eating canned beans every night for dinner.

Both may be secretly jealous of their provincial cousin living in a 6,000-square-foot mansion outside of Houston.

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The USA: Still the #1 Investment Bet for 2013?

From an investment standpoint, I am cautious but optimistic.

I think it’s no accident that tales of the U.S. recovery are woven just after the U.S. stock market has had a good run. The question is whether it will continue.

Yet, as the recent market hiccup confirms, it’s not all smooth sailing for investors.

The huge jump in interest rates in the past few weeks may stifle the pace of the housing recovery. After all, mortgage rates are up an astonishing 45% in just the past six weeks.

The distortions caused by quantitative easing (QE) may have already driven some housing assets into bubble territory.

An uptick in U.S. growth will spur the Fed to “taper” sooner rather than later. And we’ve seen how the slightest uncertainty causes global financial markets to fall out of bed.

Finally, as we enter earnings season, analysts predict the biggest slowdown in U.S. corporate earnings and revenues in years.

That said, I am bullish on the U.S. stock market over the coming months.

But keep your eyes open.

After all, it is remarkable how quickly market consensus can change.

And as John Kenneth Galbraith noted: “The financial memory is very short.”

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

P.S. Join me for the San Francisco Money Show, Aug. 15-17, at the San Francisco Marriott Marquis. There is no charge for this conference, but you do need to register. Call 1-800/970-4355, and mention code #031736.

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