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Ignoring the 800 Pound Gorilla

Posted by: Howard Silverblatt on January 18, 2008

In a sharp reversal to its 2007 performance where Emerging markets rose 42% and Developed markets gained 9.4%, both are now significantly down for 2008 with Emerging down 8.4% and Developed wiping out its 2007 gain by posting a 9.7% loss (the S&P 500 is down 9.8%). But the current housing situation, which started all this, was only suppose to be a U.S. problem, not a global one. While a slight inconvenience to developed markets, such as the U.K. or Japan was expected, Emerging markets were growing so fast that any minor annoyance from the U.S. would be muted by their own growth. The conventional wisdom was that the U.S. was yesterday’s news and yesterday’s growth — its manufacturing had been outsourced, its companies now looked to foreign markets for sales and quick cash infusions, and its dollars pour out for oil by the billions.

What the current trend of thought appears to have forgotten is that the U.S. is still the 800 pound gorilla. While the growth is abroad, the major consumption, spending and markets are still in the U.S.. America getting a cold may no longer cause the world to get pneumonia, but it certainly will cause a lot more than just the sniffles. So, if the U.S. enters, or as a growing number of the unemployed already believe, a recession, it will not be a U.S. problem, but a world problem. I’m not trying to be nationalistic, but the U.S., for better or worse, is the biggest component in the world markets – regardless of how you measure it. Public and investor attention has been almost entirely on foreign markets due to their current and expected growth – which is where the best returns should be. But the current lessons being re-learned of risk and reward should also be applied to international markets.

The American market works in bull and bear markets, recessions, depressions, in bubbles, and under democrats or republicans. Regulations and accounting needs to be improved, but overall they are the toughest, and of course the most costly and sometimes inhibiting, in the world. Twenty-five years ago Japan was expected to be the 800 pound gorilla; today, China is expected to be it – well, maybe they will be. But until such time as there are least two gorillas of somewhere near equal size and impact, ignoring today’s is just as risky as ignoring the up and coming one.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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