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China, Greece debacles good for U.S. markets

How sweet those times were.

Remember when all the world was agog about the ascendency of the European Union? How it would ultimately overtake the economic powerhouse of the United States? How American companies would finally be stopped at the shores of the Continent? Remember that?

Remember when all the world was agog about the ascendency of the Chinese economic engine? How the yuan would replace the U.S. dollar? How the new Asian markets would supplant the American markets? Remember that?

For all it matters, you might as well remember hula hoops, mood rings and Beanie Babies. Just as consumer fads come and go, so do investing fads. Nothing shines like a car right off the dealer’s lot. But give it a few years of rugged wear, inclement weather and the consequences of planned obsolescence, and you’ll see a sagging frame, rust spots and increasingly large repair bills. So it goes with the European Union. So it goes with China.

China entered the global economic casino with much fanfare when it bet it all on red as host of the quadrennial Summer Olympics in 2008. In a master stroke of Keynesianism, the Chinese pumped up their economy through the building of massive Olympic structures, while at the same time ensuring the hometown crowds had a team worth rooting for. Contrast that to the slow-speed (perhaps self-induced) economic crash America found itself in the midst of.

Sure, America won the total medal count at those 2008 Olympics, but China soared with the most gold medals. The world viewed the United States as past its prime. China was all the rage, and, with the barechested Russia offering a second, the stage quickly moved from the sports fields to the economic markets. Word spread of the global economy eventually eschewing the U.S. dollar as its basis and switching to the Chinese yuan.

My, what a difference a few years and the natural rhythms of the economic cycle can make. Today the Chinese markets (and, by proxy, the companies they house) teeter on the edge of a bursting bubble. All that hot money, all that smart money, wants to flee. But to where?

The folly that is Greece proves Europe can offer no sanctuary to beleaguered investors. The EU was supposed to be the “United States of Europe,” a greater equal with the United States of America. Unfortunately for the EU, they chose the wrong American document to use as a model. Rather than the centuries-proven U.S. Constitution, they created a union based more on the principles of the Articles of Confederation. That original American constitution proved so flawed, it almost led to the unraveling of the country even before the end of its first decade of existence.

At root lay the failure of the Articles of Confederation to adequately address interstate economic matters. This led to intrastate problems (the most famous being Shays’ Rebellion in Massachusetts, a seminal event in the history of both Western New York and the United States, as it led, respectively, to the Constitutional Convention and perhaps even the default of Phelps and Gorham). The EU, as we now see through Greece, appears to have duplicated the economic ineptitude of our Founding Fathers’ first attempt. In this way, anyone with the “sense” of history could see the EU was doomed from the beginning—hmm, could it be that’s why Great Britain never officially joined the Eurozone?—and anyone with the “cents” of investing acumen could see this was not a reliable long-term play.

So, again, as with China, all that hot money, all that smart money, wants to flee. But to where?

In times of crisis, in times of uncertainty, all money, no matter how hot, no matter how smart, ends up in the same place. It’s a haven. It’s a proven winner. It’s a stable home that has dependably and steadfastly ridden out the storms of turbulent economic markets. It’s a place called America.

Yesterday’s crisis may be today’s sigh of relief. But as surely as history repeats itself, markets will again be torn asunder by international crises, and investment dollars will, just as quickly, look once again to America.

Christopher Carosa, CTFA, operates a registered investment adviser headquartered in Mendon. He is the author of five books, including his latest, “Hey! What’s My Number?—How to Increase the Odds You Will Retire in Comfort.”

7/17/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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