2010’s Contrarian Trade: Buy US, Sell China

01/18/2010 12:00 pm EST

Focus: MARKETS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of the Global Guru, says too many “experts” are betting on China and against the US, and as a contrarian he’s going in the other direction.

US stock markets have just come off their worst decade ever, with inflation-adjusted returns in the Standard & Poor’s 500 dropping as much as 30%. That's a far cry from what investors were expecting at the turn of the millennium.

But just as there was a technology bubble in 2000, today there is just as strong a "pessimism bubble" about the US economy. And like all bubbles, this bubble will eventually pop.

Understanding today's conventional wisdom—the decline of the US and the rise of China—as nothing but another bubble is the key to making sure you don't end up like investors who have spent the last decade waiting for Cisco Systems (Nasdaq: CSCO) to "get back up to $80."

After the financial meltdown of 2008, the greatest contrarian trade in the world became a bet on the United States. And within the US, real estate is the most hated asset. When I told an (American) friend that I bought real estate in Florida over the Christmas holiday, he looked at me with a combination of disbelief and knowing pity.

Yet at $90 per square foot, Florida real estate costs roughly 1/10th of what it costs in central London [or] 30% of what property costs in an Eastern European capital like Budapest, Hungary.

Here's why I am shifting my own money and my clients' assets back into the United States.

Having lived abroad since 1991 has only strengthened my conviction that the global economy largely runs on US-generated ideas. The American Academy of Sciences estimates that 85% of economic growth in the US is now produced by new ideas.

Despite my inherent skepticism, I have a naïve belief that there is some idea out there that will be a game changer for the global economy over the next 20 years. And it's a lot more likely to come from MIT or Stanford than Brazil or China.

Nowhere is the power of ideas more evident than in the case of decidedly unsexy US manufacturing. Thanks to innovation and advances in technology, US workers today produce twice as much manufacturing output as their counterparts did 20 years ago and three times as much as in the early 1980s.

Twenty years ago last month, Japan's Nikkei index reached its historic peak of 38,916. In 1989, Japan was [number one]. A mere decade later, Japan had been long forgotten, and the world was in the midst of another frenzied bubble called the "New Economy." Today, Japan and the Internet have been supplanted by the "China Miracle."

Everywhere you look, you see serious experts earnestly predicting the decline of the US and the rise of China. But if the fates of Japan and Internet stocks are any guide, a similar fate awaits your "China strategy."

[So,] the two themes I'd bet on over the coming decade are to buy the United States and to sell China.

For the sake of my financial future, I hope you disagree.

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