by Dan Denning
Demand for energy, raw materials, and real assets is clearly booming. There will be quiet periods. But these are strong fundamental trends, driven by the money migration and the rise of the East. Yet the rise of China and India, the race for resources, and the threat of oil wars all seem like ominous events for investors. And it may turn out to be that way for some investors-those who ignore large trends the way you would try to ignore gravity.
When I was young, I remember watching a wall of water wash down the main street of my hometown in Estes Park, Colorado. An earthen dam containing Lawn Lake in Rocky Mountain National Park had burst at around 5:30 in the morning on July 15, 1982. A man named Steve Gillette was collecting trash at a campground nearby and heard the sound of the water rushing down from 11,000 feet, toward the Estes Valley, at 7,500 feet and about 10 miles away. He called ahead to warn folks in town.
Take the potential energy of 29 million gallons of water. Turn it into kinetic energy filled with boulders the size of houses and fallen trees. Steve Gillette saved a lot of lives by providing a warning. He was jokingly referred to as the Paul Revere of Estes Park. But it was a well-intentioned joke.
Most of us don’t have to worry about natural disasters. The December 2004 tsunami in Asia proved they still happen, though. If you get caught up in one, there’s not much you can do at that point. Human beings are clever and have figured out many ways to tame nature’s danger. But it still sometimes gets the best of us. Financial disasters, however, are avoidable. Even large financial forces like the money migration that seem to sneak up on other investors like a sudden storm can be planned for and turned into opportunities rather than threats. There’s no need to be caught by surprise. But you have to be willing to go beyond a superficial understanding of what’s driving those forces in order to see your way through them clearly.
Money goes where it gets the highest return. For the last 20 years, everyone in the world has wanted to own U.S. stocks and bonds. We haven’t had to work too hard to keep the money flowing in. The high returns in the stock market and the relative safety of the bond market did that.
But poor performance in the stock market and high government debts are lessening the attraction of American stocks and bonds. And meanwhile, confidence in America’s financial markets themselves has been eroded. When the reckoning day does come, a lot of the fictitious, credit-financed wealth in America will be destroyed- especially in the housing and government bond markets.
As Mephistopheles says in Goethe’s Faust, “Everything that rises goes rightly to its ruin.” Big things don’t last forever, especially when they got big by gorging on cheap credit and reckless speculation. The moral equivalent of gravity is sin. Both involve falling. Reckless investors will find out that there are consequences to spending more than you can pay back and intentionally misleading shareholders and investing in financial assets instead of real assets.
America’s financial economy will be destroyed, and a lot of capital will be lost. But creation and destruction go hand in hand. What sets in the West rises in the East. The money migration will lead to the creation of a new economy and new wealth, perhaps on a scale far greater than we can imagine.
The world keeps turning, too. The sun never really goes down on investors who look for good value and invest along with powerful trends. There will still be plenty of opportunity in America as well.
Editor’s Note: Dan Denning, editor of Strategic Investments, is one of America’s most respected “big picture” analysts working today. The above essay was adapted from his new book, The Bull Hunter.
In The Bull Hunter, Dan lays out all the details of how to profit in ways most investors never imagined just five years ago. What’s more, he’ll show you why it’s never been more dangerous to put all your investment eggs in the basket of the U.S. economy. It’s a timely warning, along with an exceptional opportunity.