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Ongoing Debate

02/24/2011

There is honest disagreement on Wall Street about the emerging markets. For the last several years, the U.S. market has substantially under-performed the stock markets in the emerging nations, like Brazil, China, and India. This changed in the fourth quarter of last year. Many analysts believe 2011 will be the year the U.S. market beats the rest of the world. I have previously written I don’t agree, because there is still too much deleveraging needed in the U.S. before it can really grow, relative to emerging markets.

Since the Tunisia/Egypt/Libya crisis, emerging markets have suffered even more. Most of those nations are even more energy-dependent on oil from the Middle East than the U.S. — which is somewhat amazing itself. There is a new report this morning that oil could reach $220 per barrel. As a result, the stock market in emerging nations are getting hammered. As I type this, the market in India is down over 3%, which is a big one-day move for any market.

I don’t worry that the report of $220 oil is true. The Saudis can easily make up the lost production and have promised to do so. Short term, an increase in gas at the pump is bad for America but good for us in the long term, as we might finally then move to renewable energy sources.

What does worry me right now is the change in the behavior of the dollar. Long term, I have been dollar-bearish, which means I think the dollar will continue to be weak and lose value. That’s one of the reasons I’ve favored international companies. As I’ve told clients many times, the dollar will always appreciate during a crisis, as it is THE safe haven currency. Yet, that barely happened during the last sovereign debt crisis in Europe and not happened at all during this crisis. Instead, the Swiss Franc has appreciated nicely. With the dollar as the world’s only reserve currency, we had the luxury of playing “fast and loose” with our fiscal policy, and we did!

If the world doesn’t rush into the dollar during a crisis anymore, can the bond vigilantes be far away? That worries me a lot!

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