Subject: Re: Brk annual meeting questions,
Say you're thinking about buying a nice big farm. If the northern field of a farm gets more water and has been more productive than the southern field for the last century, you don't make a huge wager that this will remain true just because it has always been true. First you check to see if there are new problems in the northern field's water supply that weren't there before, and you assess how likely it is that the water supply will last forever at its previous level.
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Not a very good metaphor IMO. If the nice big farm is the whole world, and the U.S. is the north field, then I would say the question is not whether the water supply to the north field will remain, but whether the whole farm is facing a biblical seven year drought. The U.S. economy is 25% of the world economy. As goes the U.S. economy so will go the world, to a very significant extent. We may be leery of U.S. governance at this point, but there will be nowhere to hide from the financial fallout.

Well, two points there.

First, I think my analogy is apt. Maybe the water just isn't coming back, ever, period? The US has been a fabulous place for business and investors for 80 years for a specific set of reasons. I would argue that most of those reasons are now partly or completely absent, and that no-one sensible will assume their presence or invest accordingly for (say) the next 30 years. In almost every respect, from an investor's point of view, the US is now a developing market. Get used to it. There is a new political (and legal and regulatory) risk premium, and that is definitely NOT going away in my life time. What would US equity returns in the last 40 years look like without any influx of non-US capital? What would the look like if that went into reverse?

As goes the U.S. economy so will go the world, to a very significant extent.

So I've heard. Yet...other than short term global equity correlations, which are understandably tight, it's possible for economies to diverge quite a lot over very long periods. Japan is not the best comparison in terms of reasons, as it has always had a fairly functional government, but an excellent example in terms of the range of things that can happen to a well run advanced economy and its markets. A leader is not necessarily destined to be a leader forever. Beirut used to be one of the best places in the world.

There is a general truth about the world: things tend to go on forever until they don't.

Admittedly, the US still has one thing going for it: it's very big and can't really be ignored. But from the point of view of the capital of Americans and the rest of the world, is that enough to make it an interesting place to risk one's money? I decided the answer is "no", so I divested the vast majority of my holdings and currency exposure. I rather suspect I'm not the only one, American or not, who has reached that conclusion. Rule #1: why risk it? Pick a place where your capital is safe.

Most recent big market movements and specific stock/sector movements in the US have not been driven by anything other than decrees and pronouncements. Not business fundamentals, not economic fundamentals, and not even Mr Market's mood about either of those things. The changes are not short term price changes, either--the most fundamental economic foundation blocks of major businesses are changing permanently. If business results and investment returns are solely about that the Big Man says, it's not a place for the rational fiduciary to invest. It takes decades to demonstrate predictability, primarily from the rule of law, but only a few weeks for the assumption to be proven false.

I never set foot in China or Russia, as I don't like being exposed to arbitrary legal systems. Similarly I wouldn't risk setting foot in the US, and I don't expect that ever to change.

As an aside, the divestment has been an extraordinarily good decision, so far. The currency movement alone has made me enough to buy a nice house. But I expect these divestment decisions to make me and my family poorer over time, perhaps more likely than not. Don't care.

Jim