Does the US vs non-US market cap make sense?

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s8r
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Does the US vs non-US market cap make sense?

Post by s8r » Tue Mar 05, 2019 1:01 am

Ever since starting my investing career a few years ago it has struck me as odd that even though the US is more than 50% of the global market cap, most goods seem to be primarily produced by non-US companies. I mean, the US is the leader in software, computer hardware, and aerospace & defense, but other than those everything else seems to be primarily non-US, for example cars, ships, consumer electronics, household appliances, industrial machinery, steel, [EDIT: removed "oil"], etc.

I know that market cap is not quite the same as GDP, but it still seems odd. I must confess that I haven't actually researched the matter; this is merely my impression.

Do you agree, or is this just a fallacy in the eyes of someone living outside the US? For example American cars are rare outside the US.
Last edited by s8r on Wed Mar 06, 2019 2:20 am, edited 2 times in total.

msk
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Re: Does the US vs non-US market cap make sense?

Post by msk » Tue Mar 05, 2019 3:48 am

Of course it's nonsensical. But it's for similar reasons that many BHs missed out on the rise and rise of tech stocks. Even Buffett could not fathom the true value of super high P/E of tech stocks. When the market next collapses we will all appreciate the folly and/or nonsense embedded in current valuations. Does Gazprom have such poor prospects as to have a P/E of only 4? Obviously the market believes so. Rear view is always crystal clear. In the meantime just enjoy the ride up. It's been going up for an insanely long time, and it can continue on for decades more. Or not.

andrew99999
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Re: Does the US vs non-US market cap make sense?

Post by andrew99999 » Tue Mar 05, 2019 4:48 am

Yes I agree it does not make sense. But I don't see a more sensible approach.

When the US went from 20% to 30% it seemed over priced. When it went to 35% also, and 40%, again at 45% and again at 50% and now at 55%,
If you made a bet against the US when it was lower, you would have missed out on a lot of money.

There is always one fundamental question for those who tilt away from cap weighting. Do you know more than the collective market? The answer is almost always no (regardless of whether they admit it).

There is a reason US companies are valued higher than their GDP, it isn't by accident. The market has priced it this way for a reason. I also don't see a huge amount of greed in the market as described shortly before other massive booms where every man and his dog are out telling you their stock picks.

I see cap weighting a bit like democracy. Is it ideal? No. Have we found a better way? Not that I know of.

ICH
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Re: Does the US vs non-US market cap make sense?

Post by ICH » Tue Mar 05, 2019 1:07 pm

There is a degree of fallacy.
In the middle east, there are plenty of American cars. In Europe not that many. Presumably it has to do with the no-customs within the EU.
Same with fruit. I try to avoid but sometimes buy US apples. I would never do that in Europe.
Oil? Believe it or not, US is exporting shale oil to Europe nowadays.
Ships: everybody is building either in China or Korea.
Industrial stuff: Not so much. Plenty of German and Korean.
Investing and financials: mainly US, a bit of UK institutions. Rest of the world is a joke in comparison.
Appliances: I have 2-3 from US, majority German. I replaced my US washing machine with Chinese: big mistake...

US is still strong in exports.

alex_686
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Re: Does the US vs non-US market cap make sense?

Post by alex_686 » Tue Mar 05, 2019 1:11 pm

s8r wrote:
Tue Mar 05, 2019 1:01 am
I know that market cap is not quite the same as GDP, but it still seems odd. I must confess that I haven't actually researched the matter; this is merely my impression.
And the relationship is falling each year. The market is dominated by megacap super-national companies where there is only a lose relationship between where their headquarters are, and where production and revenue takes place. As an example, the largest international company is Swiss's Nestle, and Nestle does almost zero business in Switzerland. You can go down the list of any market cap index and see the trends.

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galeno
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Re: Does the US vs non-US market cap make sense?

Post by galeno » Tue Mar 05, 2019 1:59 pm

I put my trust in FTSE and the US Aggregate Bond Index.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

Thesaints
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Re: Does the US vs non-US market cap make sense?

Post by Thesaints » Tue Mar 05, 2019 3:41 pm

The US stock market covers a larger share of the national GDP compared to most foreign markets. Also, the domestic US market (not the "stock market"!) is very large by itself. There is not really a pressing need to export in order for a US company to grow to a huge size.

EddyB
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Re: Does the US vs non-US market cap make sense?

Post by EddyB » Tue Mar 05, 2019 5:32 pm

Maybe the differing degrees to which companies "from" different countries are public removes any reason to expect that (public) market capitalizations would have much relationship to the underlying economies.

Ferdinand2014
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Re: Does the US vs non-US market cap make sense?

Post by Ferdinand2014 » Tue Mar 05, 2019 6:02 pm

s8r wrote:
Tue Mar 05, 2019 1:01 am
Ever since starting my investing career a few years ago it has struck me as odd that even though the US is more than 50% of the global market cap, most goods seem to be primarily produced by non-US companies. I mean, the US is the leader in software, computer hardware, and aerospace & defense, but other than those everything else seems to be primarily non-US, for example cars, ships, consumer electronics, household appliances, industrial machinery, steel, oil, etc.

I know that market cap is not quite the same as GDP, but it still seems odd. I must confess that I haven't actually researched the matter; this is merely my impression.

Do you agree, or is this just a fallacy in the eyes of someone living outside the US? For example American cars are rare outside the US.
Intellectual property, patents, technological development all have value that you don't directly see in your house, but it is all there and a great portion comes from U.S. companies. That has value. For example, patent approvals by country shows the U.S. has the 1st or 2nd most patent approvals (vs China depending on year and methodology). In 2014 302,000 patents were approved in the U.S. The next closest European Union country was Germany with 15,000. Most consumer electronics may say made in China, but the processors and technological development most likely came from the U.S. in one form or another. You mention oil. The U.S. is now the largest producer in the world. We also have a GDP and economy that dwarfs most everyone (except China). California alone has an economy larger than the U.K. Another way to look at it is in consumer goods such as from Proctor and Gamble, sell to 320,000,000 million consumers without ever leaving the U.S. border. Baked into the cake is a unique capitalist economy with a mobile dynamic economy that is (for good or bad) unique in its structure that encourages entrepreneur development compared to many European countries.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Does the US vs non-US market cap make sense?

Post by Ferdinand2014 » Tue Mar 05, 2019 6:05 pm

alex_686 wrote:
Tue Mar 05, 2019 1:11 pm
s8r wrote:
Tue Mar 05, 2019 1:01 am
I know that market cap is not quite the same as GDP, but it still seems odd. I must confess that I haven't actually researched the matter; this is merely my impression.
And the relationship is falling each year. The market is dominated by megacap super-national companies where there is only a lose relationship between where their headquarters are, and where production and revenue takes place. As an example, the largest international company is Swiss's Nestle, and Nestle does almost zero business in Switzerland. You can go down the list of any market cap index and see the trends.
The economy is not the market. GDP growth has a negative correlation to the broader equity market.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

crystalbank
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Re: Does the US vs non-US market cap make sense?

Post by crystalbank » Tue Mar 05, 2019 6:09 pm

I get what you're saying about American cars not being ubiquitous, but what about tech companies? I see American tech companies as household names all around the globe. Think how ubiquitous Apple, Amazon, Microsoft, FB, Netflix (not exactly tech) etc are all around the world. The digital economy has insane profit margins compared to manufacturing sectors.

Maybe US stocks are overvalued, but I don't think your examples are relevant anymore.

Ferdinand2014
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Re: Does the US vs non-US market cap make sense?

Post by Ferdinand2014 » Tue Mar 05, 2019 6:15 pm

msk wrote:
Tue Mar 05, 2019 3:48 am
Of course it's nonsensical. But it's for similar reasons that many BHs missed out on the rise and rise of tech stocks. Even Buffett could not fathom the true value of super high P/E of tech stocks. When the market next collapses we will all appreciate the folly and/or nonsense embedded in current valuations. Does Gazprom have such poor prospects as to have a P/E of only 4? Obviously the market believes so. Rear view is always crystal clear. In the meantime just enjoy the ride up. It's been going up for an insanely long time, and it can continue on for decades more. Or not.
Apple stock P/E ratio is 14.5, Microsoft is 25, Facebook 22, Alphabet A/C at about 25.

Not insane, moderate high by historical standards. Nowhere near 1999 levels.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Thesaints
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Re: Does the US vs non-US market cap make sense?

Post by Thesaints » Tue Mar 05, 2019 7:36 pm

To be honest, P/E above 20 are high by historical standards, unless one's history begins in 1990.
Of course, taking into account current interest rates makes us look at the present levels in a different way.

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s8r
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Re: Does the US vs non-US market cap make sense?

Post by s8r » Wed Mar 06, 2019 12:40 am

Ferdinand2014 wrote:
Tue Mar 05, 2019 6:02 pm
You mention oil. The U.S. is now the largest producer in the world.
Oops, apparently I got that one wrong. But like I said, it was just an impression.

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s8r
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Re: Does the US vs non-US market cap make sense?

Post by s8r » Wed Mar 06, 2019 1:10 am

I must say that I may have an additional personal bias due to my profession. I'm a mechanical engineer, and in my experience most things mechanical are primarily non-US (excluding aerospace).

But then again those mechanical things are often designed and analyzed using software that is American. :happy

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Re: Does the US vs non-US market cap make sense?

Post by msk » Wed Mar 06, 2019 2:53 am

I was busy investing in stocks during the 1980s. It's actually quite amusing to compare how the market (all of us investors) viewed Japan then to how we view the US tech these days. Sony was strong then and looked as unassailable as any one of today's major tech stocks. Of course things gradually get distorted to generate some under current that dramatically changes the status quo. E.g. my next phone will be a Huawei, a company that I had never heard of until recently! Sounds as if they have caught up? According to all the news... Problem with software tech is that the barriers to entry (moats) are not very deep. Witness Netscape and Yahoo! More difficult to explain Nokia's demise, but even the programmable-hardware tech does not seem so protected. And how on Earth can Open Office offer all that very competent software for free?! The world evolves, and just as Japan realized during the 1950s that Quality matters, so will China, and that if China wishes to tap the international capital markets to the extent that matches its GDP, China will fix market transparency, etc. I am invested worldwide by market weight (currently 55% USA), so, hopefully, I will not miss out that possible rise.

Ferdinand2014
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Re: Does the US vs non-US market cap make sense?

Post by Ferdinand2014 » Wed Mar 06, 2019 8:22 am

msk wrote:
Wed Mar 06, 2019 2:53 am
I was busy investing in stocks during the 1980s. It's actually quite amusing to compare how the market (all of us investors) viewed Japan then to how we view the US tech these days. Sony was strong then and looked as unassailable as any one of today's major tech stocks. Of course things gradually get distorted to generate some under current that dramatically changes the status quo. E.g. my next phone will be a Huawei, a company that I had never heard of until recently! Sounds as if they have caught up? According to all the news... Problem with software tech is that the barriers to entry (moats) are not very deep. Witness Netscape and Yahoo! More difficult to explain Nokia's demise, but even the programmable-hardware tech does not seem so protected. And how on Earth can Open Office offer all that very competent software for free?! The world evolves, and just as Japan realized during the 1950s that Quality matters, so will China, and that if China wishes to tap the international capital markets to the extent that matches its GDP, China will fix market transparency, etc. I am invested worldwide by market weight (currently 55% USA), so, hopefully, I will not miss out that possible rise.
I remember when Japan was taking over the world. Cars, electronics, buying up property in Hawaii and New York. I was in high school thinking America's best days are behind her. Warren Buffett talks about investing in the stock market right when it appeared America was losing the war in 1942. Now it's China with all the same worries as Japan. Yet somehow for all of our foibles and problems we keep coming out on top economically speaking. Just an observation.
Last edited by Ferdinand2014 on Wed Mar 06, 2019 8:32 am, edited 1 time in total.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Ferdinand2014
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Re: Does the US vs non-US market cap make sense?

Post by Ferdinand2014 » Wed Mar 06, 2019 8:31 am

s8r wrote:
Wed Mar 06, 2019 12:40 am
Ferdinand2014 wrote:
Tue Mar 05, 2019 6:02 pm
You mention oil. The U.S. is now the largest producer in the world.
Oops, apparently I got that one wrong. But like I said, it was just an impression.
The U.S. still manages to produce the second most number of automobiles by country (China first) at 12,000,000 per year. They are mostly located and used in North America, South America and the Middle East though. Japan is third with 8,000,000. My guess, perceptions can be based on where you live.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Hyperborea
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Re: Does the US vs non-US market cap make sense?

Post by Hyperborea » Wed Mar 06, 2019 11:10 am

Ferdinand2014 wrote:
Wed Mar 06, 2019 8:31 am
s8r wrote:
Wed Mar 06, 2019 12:40 am
Ferdinand2014 wrote:
Tue Mar 05, 2019 6:02 pm
You mention oil. The U.S. is now the largest producer in the world.
Oops, apparently I got that one wrong. But like I said, it was just an impression.
The U.S. still manages to produce the second most number of automobiles by country (China first) at 12,000,000 per year. They are mostly located and used in North America, South America and the Middle East though. Japan is third with 8,000,000. My guess, perceptions can be based on where you live.

Yeah, but about half of the cars and light trucks made in the US are made by non-US companies (Toyota, Honda, BMW, etc.). So, numbers by country of manufacture aren't a good measuring stick.

https://www.dispatch.com/business/20180 ... ufacturers
As of November, the Big Three U.S. automakers — Ford, General Motors and Fiat Chrysler — had produced 5.2 million cars and light trucks in this country for the year. That compared with 4.9 million units built at U.S. factories of foreign-based companies such as Toyota, Honda and others.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Does the US vs non-US market cap make sense?

Post by Valuethinker » Wed Mar 06, 2019 12:20 pm

ICH wrote:
Tue Mar 05, 2019 1:07 pm
There is a degree of fallacy.
In the middle east, there are plenty of American cars. In Europe not that many. Presumably it has to do with the no-customs within the EU.
American cars do not meet the European market needs. Jeeps are horribly unreliable (one of the worst brands) - just as an example. Where you do have an American brand (Ford) it sells fairly distinct cars here, and I think Ford had discontinued the Mondeo in the USA?

American cars have much worse gas mileage, on average - gas prices are 2x-3x US ones, here. American cars are too big for European parking spaces. Americans like a softer, "wallow" ride whereas European cars tend to be tighter sprung with more road feel. American vehicles are literally too wide for lanes on European roads (it depends which vehicle, and where). German cars are engineered for those no speed limit Autobahn, American are generally not. American manual transmissions tend to be lousy, and 80% of cars sold in Europe are manual transmission (at a guess) - even rental cars are manual.

Over half of US car sales are SUVs or light trucks. American light trucks really wouldn't work well over here (size aside) - workmen drive white vans, here. Most SUVs in Europe are relatively small by US standards - really crossovers (the fastest growing demand segment).

? When I was in Libya & Syria (pre civil wars) I saw lots of Japanese cars and pickups, but no American cars (other than 1950s models).

Or did you mean the Gulf States? I don't have the experience. Oman I think you run into a lot of Land Rovers (but more Toyota Landcruisers probably).

Do Saudis still drive Cadillacs? Aren't they more Toyota Lexus types, now?
Same with fruit. I try to avoid but sometimes buy US apples. I would never do that in Europe.
Oil? Believe it or not, US is exporting shale oil to Europe nowadays.
Ships: everybody is building either in China or Korea.
Industrial stuff: Not so much. Plenty of German and Korean.
Investing and financials: mainly US, a bit of UK institutions. Rest of the world is a joke in comparison.
Appliances: I have 2-3 from US, majority German. I replaced my US washing machine with Chinese: big mistake...
US is still strong in exports.
If you mean in Aircraft or software, yes. Consumer goods not so much. What makes them work for the US market (size etc.) does not make them work well anywhere else. For example I can't imagine there are many other places in the world where you find top loading clotheswashers? The rest of us have tighter water restrictions. I don't think I have ever seen an American Standard sink here (UK).

US is also world's biggest soybean exporter, I think. A world leader in agricultural staples.
Last edited by Valuethinker on Wed Mar 06, 2019 12:35 pm, edited 2 times in total.

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Re: Does the US vs non-US market cap make sense?

Post by Valuethinker » Wed Mar 06, 2019 12:22 pm

s8r wrote:
Tue Mar 05, 2019 1:01 am
Ever since starting my investing career a few years ago it has struck me as odd that even though the US is more than 50% of the global market cap, most goods seem to be primarily produced by non-US companies. I mean, the US is the leader in software, computer hardware, and aerospace & defense, but other than those everything else seems to be primarily non-US, for example cars, ships, consumer electronics, household appliances, industrial machinery, steel, [EDIT: removed "oil"], etc.

I know that market cap is not quite the same as GDP, but it still seems odd. I must confess that I haven't actually researched the matter; this is merely my impression.

Do you agree, or is this just a fallacy in the eyes of someone living outside the US? For example American cars are rare outside the US.
Consider Apple.

Very little of that phone is made in USA - maybe some semiconductors.

Yet it is almost the largest US corporation and it creates huge value - the value of the thing is in the software, market position, brand and intellectual property. Which are largely held in America.

But you could imagine a world where Apple's HQ and home listing are in some other country. That would change the relative market capitalizations of the 2 stock markets.

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Re: Does the US vs non-US market cap make sense?

Post by Valuethinker » Wed Mar 06, 2019 12:25 pm

Ferdinand2014 wrote:
Wed Mar 06, 2019 8:31 am
s8r wrote:
Wed Mar 06, 2019 12:40 am
Ferdinand2014 wrote:
Tue Mar 05, 2019 6:02 pm
You mention oil. The U.S. is now the largest producer in the world.
Oops, apparently I got that one wrong. But like I said, it was just an impression.
The U.S. still manages to produce the second most number of automobiles by country (China first) at 12,000,000 per year. They are mostly located and used in North America, South America and the Middle East though. Japan is third with 8,000,000. My guess, perceptions can be based on where you live.
Where in the Middle East do people drive these American automobiles?

Abu Dhabi they drive German and Japanese engineering? BMW Mercedes Lexus etc? Syria and Libya they drove Japanese small cars and pickups (which then turned out to make nice "Technical" flatbeds for cannon and rocket artillery).

I don't remember huge numbers of American vehicles in Costa Rica. Maybe Jeeps. Maybe the Japanese cars come from American transplant factories, or Mexican maquiadora ?

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Re: Does the US vs non-US market cap make sense?

Post by Valuethinker » Wed Mar 06, 2019 12:27 pm

Ferdinand2014 wrote:
Tue Mar 05, 2019 6:15 pm
msk wrote:
Tue Mar 05, 2019 3:48 am
Of course it's nonsensical. But it's for similar reasons that many BHs missed out on the rise and rise of tech stocks. Even Buffett could not fathom the true value of super high P/E of tech stocks. When the market next collapses we will all appreciate the folly and/or nonsense embedded in current valuations. Does Gazprom have such poor prospects as to have a P/E of only 4? Obviously the market believes so. Rear view is always crystal clear. In the meantime just enjoy the ride up. It's been going up for an insanely long time, and it can continue on for decades more. Or not.
Apple stock P/E ratio is 14.5, Microsoft is 25, Facebook 22, Alphabet A/C at about 25.

Not insane, moderate high by historical standards. Nowhere near 1999 levels.
What was hard to see was that the earnings could keep growing at the rates they have - 2 decades in from the inception of many of these companies, double digit. Not sure how much financial engineering is going on, but it seems quite genuine.

Amazon is fairly insane? Netflix?

Tesla ;-)

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Re: Does the US vs non-US market cap make sense?

Post by alex_686 » Wed Mar 06, 2019 1:33 pm

Valuethinker wrote:
Wed Mar 06, 2019 12:20 pm
? When I was in Libya & Syria (pre civil wars) I saw lots of Japanese cars and pickups, but no American cars (other than 1950s models).

Or did you mean the Gulf States? I don't have the experience. Oman I think you run into a lot of Land Rovers (but more Toyota Landcruisers probably).

Do Saudis still drive Cadillacs? Aren't they more Toyota Lexus types, now?
Define "American". IIRC, most of the BMW SUVs are built in South Carolina. So, "American" - right?

Which goes back to the OPs question and my answer. The "Regional" factor (US, Japan, Europe) has a lower power than Sector, and is falling.

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Re: Does the US vs non-US market cap make sense?

Post by Hyperborea » Wed Mar 06, 2019 5:15 pm

alex_686 wrote:
Wed Mar 06, 2019 1:33 pm
Valuethinker wrote:
Wed Mar 06, 2019 12:20 pm
? When I was in Libya & Syria (pre civil wars) I saw lots of Japanese cars and pickups, but no American cars (other than 1950s models).

Or did you mean the Gulf States? I don't have the experience. Oman I think you run into a lot of Land Rovers (but more Toyota Landcruisers probably).

Do Saudis still drive Cadillacs? Aren't they more Toyota Lexus types, now?
Define "American". IIRC, most of the BMW SUVs are built in South Carolina. So, "American" - right?

Which goes back to the OPs question and my answer. The "Regional" factor (US, Japan, Europe) has a lower power than Sector, and is falling.
Maybe not. If you buy a US only index, for example, then it doesn't matter that the Honda or BMW was manufactured in the US because you get no real part of that economic activity. Maybe some small spinoff because the Honda line employees eat out more at Chipotle or something. If you want to take part in the majority of that economic activity then you need to hold a fund that holds Honda (and BMW etc.).
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Does the US vs non-US market cap make sense?

Post by alex_686 » Wed Mar 06, 2019 5:31 pm

Hyperborea wrote:
Wed Mar 06, 2019 5:15 pm
Maybe not. If you buy a US only index, for example, then it doesn't matter that the Honda or BMW was manufactured in the US because you get no real part of that economic activity. Maybe some small spinoff because the Honda line employees eat out more at Chipotle or something. If you want to take part in the majority of that economic activity then you need to hold a fund that holds Honda (and BMW etc.).
Hyperborea, I am not sure what you point is. Can you go a bit more into this. The facts are correct - I am just not sure how they work into the conversation.

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s8r
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Re: Does the US vs non-US market cap make sense?

Post by s8r » Sun Mar 10, 2019 2:45 am

Here are some of the things that I use in my daily life and the domiciles of the companies that make/provide them.

VEHICLES
Car - Swedish (tyres: French/Finnish)
Bicycle - Japanese?

ELECTRONIC DEVICES
Laptop - Chinese/US/etc (HW), US (SW)
Smartphone - Korean (HW), US (SW)
TV - German
Sound system - Japanese
Blu-ray player - Dutch
Streaming dongle (Chromecast) - US
Wireless router - Chinese

APPLIANCES
Refrigerator - German
Freezer - German
Washing machine - US
Dishwasher - Finnish
Oven - Finnish
Microwave oven - UK
Coffeemaker - Dutch
Toaster - Swedish/Danish
Electric kettle - German
Vacuum cleaner - Swedish

SERVICES
Streaming - US/Swedish
Search & maps - US
Cloud storage - US
Social media - US

OTHER
Clothing & shoes - Swedish/Finnish/Danish/US/etc
Watch - Japanese
Eyeglasses - US
Electric system (fuses, switches, etc) - Swiss/Swedish
Lighting - German/Dutch/Finnish
TV antenna - Spanish
Tools & power tools - Finnish/Swedish/US/Japanese/German/etc
Pharmaceuticals - Finnish/Swedish/Japanese/German

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