Today I went to listen to Professor Jing of Renmin University speaking about US – China relations. The last time I went to listen to the same subject, it was Professor Mearsheimer of the University of Chicago speaking. His theory predicts that the US and China will come into conflict inevitably. I was curious to hear a Chinese perspective.
When I told Professor Jing about Dr. Mearsheimer’s theory and prediction, I was surprised to learn that the two professors are friends. In fact, Dr. Mearsheimer teaches at Dr. Jing’s Renmin University as a visiting scholar.
Dr. Jing does not agree with Professor Mearsheimer’s theory and prediction.
He does however agree that the rivalry between China and the US will intensify in coming years. In his words, “This is structural.” No matter how hard the leaders of the two nations try, the most powerful nation on earth and the second most powerful will always be suspicious of each other.
However, Professor Jing believes this rivalry need not result in open conflict. “Both the US and China are nuclear states. Should war break out between us, only cockroaches will survive.”
One very very sharp reader of my blog sent an email to me, and here is what it said:
Aren’t these 2 philosophies opposites of each other? If the market prices correctly based on all available information, how can the stock price be different from the expected dividend? Aren’t these 2 prize winning economists speaking in opposites?
As far as investment philosophy is concerned, I am solidly in the camp of Nobel Prize winner Eugene Fama and Vanguard founder Jack Bogle. They both believe that the market is by and large efficient, and there is no point in picking stocks.
Most of my money is in broad-based passively managed asset class funds, but I do set aside 5% just to have some fun with and right now I only have three stocks in my fun account.
I bought SWY last November after going to the Chicago Booth Entrepreneur Advisory Meeting. From the meeting, I learned that big retailers routinely write off their inventory at a huge loss. The reason being that they can not control demands as they have little information about the needs of the individual consumer, though they can usually make a rough guess on aggregate needs.
I noticed my wife had been shopping at Safeway more and more. After a little digging, I found out Safeway had set up a technology system to track each individual’s needs and price sensitivities. Then it can make targeted offers to shoppers like my wife that unfailingly brought her back over and over. I recalled my earlier meeting and realized they would save tons of money just from better inventory management.
OK sure, I can understand his point. Why invest outside of the US when the US markets already account of 40% of world capitalization? “The U.S. market is so well-diversified already that combining it with global markets doesn’t really matter,” so said Fama.
However, I think it actually does matter ….
Proportionally, the US market is getting smaller. Right after the second world war, the US market accounted for 70% of world capitalization, now it only accounts for 40%. For a country that boasts only 5% of of the world’s population, this is still exceptionally high.
For the foreseeable future, there are better than even odds that the combined markets outside of the US will grow faster than the US market will do alone. Why forego those opportunities?
The diversification benefit you’d get is certainly not negligible either. During the so-called ‘lost decade’ of 2000 to 2009, the US market, as measured by the S&P 500, had a net loss of 9.1%, while international developed markets went up by an anemic 12.4%, but emerging markets went up by a whopping 154.3%.
It would have made a bog difference if you have a piece of emerging markets in your portfolio.
Seriously! Congress established it in 2008 in House Resolution 1499.
I only know this after getting an email from my estate planning attorney friend. I think you should read it as well.
According to the resolution passed by Congress, “Many Americans are unaware that lack of estate planning and financial illiteracy may cause their assets to be disposed of to unintended parties by default through the complex process of probate.” The resolution goes on to state that “careful planning can greatly assist Americans in preserving assets built over a lifetime for the benefit of family, heirs, or charities.”
Professor Mearsheimer is a geopolitical realist. He has an intriguing theory about global political order which states that there is a 75% chance that the US and China will come into conflict.
I care about this subject because, being a Chinese American, I know that my life would not be too pleasant should that come to pass.
Professor Mearsheimer’s theory is based on the assumption that the global order is anarchic, by that he means there is no higher authority above states, and that each state will fight for a better position in the order.
The US, now being number 1, is not going to willingly give up the top spot, and China, if given the opportunity, is not going to settle for second best.
Professor Mearsheimer explains how the US became #1 in the first place:
I jumped out of my chair in delight when I learned that Eugene Fama and Robert Shiller had won this year’s Nobel Prize in Economics. These are two economists that greatly influenced my investment philosophy and their works have been an integral part of how I help my clients build and preserve wealth.
Let me explain their contributions: