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Argentina made headlines last month when its currency, the peso, crashed 15 percent in one fell swoop. The government had little choice but to devalue the currency after the Argentine Central Bank had sold off most of its dollar reserves — at the staggering rate of $1.1 billion per month — in a futile attempt to defend the peso in foreign exchange (FX) markets.
While this saga was in the news just last month, the story about what led to Argentina’s devaluation goes back much further.
Fiscal mismanagement, rampant money printing, and failed currency exchange controls by the Argentine government over many years culminated in this moment of truth, with no choice but to devalue the currency, after the global FX market forced their hand.
You could chock this up as just another emerging market crisis; a banana-republic too deeply in debt, with no other option but to devalue its currency overnight. But this also serves as a cautionary tale for developed economies whose own finances are beginning to resemble those banana-republics of yesteryear.
Sadly, this includes most of Europe, Japan and even the U.S. today. After all, our deficits and the long-term downtrend in the dollar are no less real than those experienced in some South American economies.
As my colleague Charles Goyette often and correctly points out: economic freedom and prosperity go hand in hand. What’s more, economic freedom can lead you to some of the most promising and profitable global investments if you know what to look for.
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| Stock markets in countries boasting superior economic freedom scores should outperform U.S. stocks over the long run. |
The Heritage Foundation, in partnership with The Wall Street Journal, publishes an annual Index of Economic Freedom, as it has been doing for the past twenty years. Routinely, the countries near the top of this list are fast-growing emerging markets with:
* LESS heavy-handed government intervention …
* MORE fiscal and monetary responsibility, and …
* Economies with more freedom to innovate and where investments can prosper.
It’s no surprise that the U.S., Europe, and Japan have been slipping lower in the rankings nearly every year. In the 2014 Index of Economic Freedom, the U.S. finished 12th and has the dubious distinction of being the only country to experience a loss of economic freedom in each of the last seven years!
At least we can take some comfort in knowing that we have company; many other developed nations are ranked even lower including: Germany (18th), Japan (25th) and France (70th).
The payoff for investors is this: Economies achieving high levels of economic freedom outperform others in dynamic economic growth and long-term prosperity, as the authors of this index correctly point out. Or, to quote directly from the 2014 Index of Economic Freedom (emphasis mine):
“Economies rated ‘free’ or ‘mostly free’ … enjoy incomes that are more than three times higher than average incomes in all other countries and more than 10 times higher than the incomes of ‘repressed’ economies.”
Cleary, there is a well-documented link here between economic freedom and prosperity for those willing to invest in free economies and markets globally.
As an added bonus, it is much easier today than ever before to invest globally with the simplicity of low-cost ETFs and the ease of U.S. listed ADRs, representing more prosperous international stock markets.
For example, at the very top of this year’s rankings are two fast-growing Asian economies, Hong Kong at #1, and Singapore at #2. In fact, Hong Kong has been top-rated in economic freedom for 20 straight years, thanks in large part to a small government, low taxes and a light regulatory burden.
As a result, Hong Kong achieves a high degree of “market openness,” according to the index, because it consistently gets high grades in fiscal, financial and investment freedom … three of the MOST important components to economic freedom and long-term prosperity.
Compare Hong Kong with the U.S. in each of these categories, and the contrast in relative economic prosperity is striking, as shown in the graph below.
* Financial Freedom is the all-important factor of responsible monetary and fiscal policies; where governments don’t exercise too much control over the financial sector and don’t abuse the financial printing press. Hong Kong ranks 1st … the U.S., 19th …
* Investment Freedom means open markets with little or no government interference in the free flow of capital. Government doesn’t exercise undue influence over (or control) particular sectors of the economy. Hong Kong ranks 2nd; the U.S. trails far behind in 46th place …
* Finally, Hong Kong ranks 17th in Fiscal Freedom, meaning restrained government spending and a lower tax burden imposed on businesses, individuals and investors … the U.S. ranks a dismal and distant 154th by comparison.
It makes perfect sense why stock markets in countries boasting superior economic freedom scores should also outperform U.S. stocks over the long run. In fact, Hong Kong, Singapore, South Korea, Sweden and others that get consistently high marks in financial, investment and fiscal freedom are also likely to have the best profit potential for investors.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.