One of my favorite examples of onomatopoeia is 'splat,' which I learned about as an avid adolescent fan of Mad Magazine. (Didn't everyone read it as a 12-year-old') What was particularly fun was how Mad illustrated the word as a large and colorful word balloon, sometimes dominating the entire page: 'Splat!' That made it visceral.
Years later, I'm reminded of splat! by the plunging performance of virtual currencies this year. Since the end of 2017, the cryptocurrency market is down nearly 70%, according to Fundstrat. Bitcoin, in particular, has slid to $6,463, two-thirdsbelow its high of $18,675, reached in mid-December.(For more on blockchain and virtual currencies, see this week's cover story.)
At some $200 billion in total assets, the virtual-currency market remains a flattened fly'there's that splat! again'in a world where, depending on how you define it, there are hundreds of trillions of dollars in assets.
If this sounds like a victory lap on skepticism voiced here in December, it's not'well, maybe a little. Back then, I noted that Bitcoin was a bubble waiting to pop. It did. But don't call me a 'nocoiner.' According to the Urban Dictionary, a nocoiner is a person 'who has no Bitcoin. They are people (usually socialists, lawyers, or economists) who missed their opportunity to buy Bitcoin at a low price because they thought it was a scam and are now bitter at having missed out. The nocoiner takes out his or her bitterness on Bitcoin holders by constantly claiming that Bitcoin will crash.'
While it's true I don't own any virtual currency, there's no animus here. At a minimum, such assets might turn out to be a check on excessive government taxation. Someday. That would be a good thing, but it's far from a sure thing. I'm pretty certain that George Washington would approve. For most investors, cryptocurrencies remain a speculative asset, and worthy, for now, of only a tiny portion of a portfolio'small enough that you won't notice if it goes much lower.
It's no surprise that Wall Street is pitching vehicles for investors to part with their cash for virtual currencies. Nevertheless, the Securities and Exchange Commission recently delayed until Sept. 30 a decision on a proposed Bitcoin exchange-traded fund. If the SEC blesses this, look for virtual currencies to rally with verve. That will be followed by virtual-currency ETFs of every flavor and esoteric name. If the SEC demurs, Bitcoin, Ethereum, Ripple, and others will probably slide some more.
Unfortunately, an essential proof of virtual currencies' potential might come only with the next bear market or recession. No one wants a trial by fire, but if the money chases Bitcoin during severe financial stress, virtual currencies will have arrived as a store of value. For now, they're not much of a medium of exchange or a unit of accounting. Indeed, cryptocurrencies still don't fulfill the traditional three characteristics of a currency. And to paraphrase Warren Buffett, if Bitcoin isn't a currency, then what is it'
Why U.S. Stocks Rule the World
A nocoiner might even argue that virtual currencies have failed a mini stress test. Granted, the global turbulence caused by a collapsing Turkish lira seems minor. Yet it's telling that virtual currencies continue to drop and haven't attracted money seeking a haven. Admittedly, gold also has continued to soften on world markets, but the yellow metal did rise in Turkey. The greenback also probably attracted some risk-off money. Bitcoin' Not so much.
Perhaps cryptocurrencies will be less speculative when you can buy an issue of Mad with them. But which cryptocurrency will it be' Good luck with that.
Stock markets outside the U.S. haven't exactly gone splat! this year, but they've trailed American equities, in some cases by large margins. Apart from Mexico and Norway, the U.S. is the only sizable market lit up in green on quote terminals. Globally, prices are down, a sea of red lights.
To date, the MSCI USA Index is up 6%, while the MSCI World ex-USA Index is down nearly 5% (both in dollar terms). The strong greenback is partly responsible for that differential, but hardly all of it. In local currencies, other major indexes in Japan, China, and Germany have all underperformed the U.S. Germany, for example, is off 5% in euros, versus 10% in dollars.
Don't take this as rah-rah triumphalism. It would be great if all markets rose. Spread the wealth. Lift standards of living.
Despite the spectacular rise of the Chinese economy and the heft of the European Union, there are good reasons for U.S. outperformance. Global investors recognize that economic and corporate earnings growth are much more robust here than in the rest of the world. But that's nothing new.
What market wisdom also recognizes, but individual investors might not, is that this showing also reflects the trading muscle the U.S. maintains over the rest of the world. Many folks probably don't know how powerful this advantage is, but as tariff and trade tensions rise, the market knows.
'The world still largely beats to the U.S.'s tune,' says Joseph Quinlan, head of market strategy at U.S. Trust. He surveyed 18 major indexes around the globe (representing about 60% of the world's market capitalization) and ranked each country's revenue exposure to the U.S. in terms of total revenue generation for companies listed in the indexes. The U.S. is among the top three in each country index'a powerful testament to U.S. leverage.
In the Eurostoxx and German indexes, the U.S. is No. 1, representing 19% and 22% of revenue, respectively. You might think that buying into the DAX gives exposure to the land of Goethe, but you're buying more global than domestic exposure.
In comparison, the U.S. is an island unto itself, with 62% of the S&P 500's revenue derived domestically, 5.5% from China, and no more than 3% from any other country. Bluntly put, in order to grow at a faster clip, the world needs the American economy more than the U.S. needs the world.
China also largely depends on itself. Some 92% of revenue for companies in the China MSCI originates domestically. The U.S. generates just 2.2% of China's revenue, but that's still good for second place. Everyone else pales in comparison.
Quinlan points out that China's linkage to the U.S. comes via trade and the need for intermediate parts and components for final assembly. This reliance, he adds, and China's position as the primary U.S. target in a trade war, have contributed to the weak performance of Chinese equities this year.
It's thought that President Donald Trump's stentorian stance on tariffs is part of a larger get-tough strategy aimed simply at extracting concessions. Maybe. Yet the risk is that antitrade pressures keep rising and the tit-for-tat nature of tariffs spins out of control.
Don't get complacent.
For the long-term investor, diversification is a key to good returns. Quinlan says global growth in the second half should be 'decent, but weaker than the first.'We probably have reached a peak in synchronized global expansion.'
It's true that Wall Street's performance since 2007 and the financial crisis has left other major markets in the dust, in dollar terms. 'You can't assume the past is prologue, however,' warns Nicholas Colas, co-founder of DataTrek Research.
Over the past 20 years, U.S. stocks have returned, on average, 7% annually, he says, versus about 10% longer term. That has pushed money out of stocks and into private-equity and venture-capital funds, Colas adds. Moreover, since 1999, emerging markets have risen 255% in dollar terms, double the U.S.'s return over the same period.
Short term, there could be a reversal. A report from Bespoke Investment Group says that since 1984, whenever the ratio of the MSCI USA Index to the MSCI World ex-USA Index hits a new high'as is the case now'the U.S. has underperformed three months later. A year later, however, U.S. primacy resumes. Another potential negative: U.S. stocks are a crowded bull trade. Global fund managers are running the biggest overweight in them since January 2015, according to a Bank of America Merrill Lynch survey.
Capital goes to the places that treat it best. Strong and deep as U.S. equities markets are, they're not made of Teflon. If protectionism gets out of hand, everyone loses. Says Quinlan: 'They can go too far.'