The Writing Was on the Wall All Year Long

Don't you wish you had a one-year time machine these days?

Oh, the ways we could profit from a gadget like that:

  • Go back to January and bet against the 12-point favorite New England Patriots in Super Bowl XLII.
  • Jump back 365 days, take out the fattest second mortgage available, and ride tiny James River Coal (Nasdaq: JRCC  ) to a 160% return -- or leave a note to sell on June 23 for a whopping nine-bagger.
  • Give a copy of the World Economic Forum's just-released Global Competitiveness Rankings to Mssrs. Bernanke, Paulson, and Bush. Or just push the Forum to release this thing a few weeks early.

Quit dreaming!
OK, so maybe a recent issue of The Economist or The Wall Street Journal would fit that third bill just as well, but the GCR report shows plenty of early warning signs of the current calamity -- and it comes from data collected last spring. I love bullet lists today:

  • The financial health of the U.S. banking system is ranked No. 40 out of 134 nations under the microscope, behind such financial powerhouses as Canada (No. 1), Malta (No. 10), Namibia (No. 17), and Botswana (No. 38).
  • Sweden (No. 1), Switzerland (No. 6), Chile (No. 14), and Ireland (No. 16) all boast more efficient and/or transparent securities exchanges than ours. The SEC clocks in at No. 20.
  • We're in (or dangerously close to) the bottom 25% or worse in important macroeconomic factors like the national savings rate, government debt, and national surplus/deficit. Guatemala and Kenya beat the Yankees at every turn. Vamos arriba, mosongo!

Some of these rankings are based on hard economic data and others on more than 12,000 interviews with high-ranking financial and business experts across these 134 countries. Again, the information was collected between January and May, 2008, so these problems should not have surprised anybody.

What have we learned here?
I've got a few key takeaways for you, Fool. First, here's how you can profit from this knowledge.

Most of the American megabanks may be knee-deep in financial bat guano, but there are still a few genuinely sound financial systems out there. I don't expect Canada, Sweden, and Luxembourg (the three most solvent banking centers) to bail us out of this mess, but investing in their banks strikes me as the closest thing to a safe bet these days. Your money can stay out of the American turbulence, in the hands of conservative and strictly regulated banking markets:

Bank

Nation of Origin

Total Assets (billions)

Dividend Yield

CAPS Rating

Allied Irish Banks (NYSE: AIB  )

Ireland (No. 9)

$288

23%

*****

Royal Bank of Canada (NYSE: RY  )

Canada (No. 1)

$622

5%

****

The Bank of Nova Scotia (NYSE: BNS  )

Canada (No. 1)

$462

5%

****

Banco Bilbao Vizcaya Argentaria (NYSE: BBV  )

Spain (No. 20)

$795

5%

***

Westpac Banking (NYSE: WBK  )

Australia (No. 4)

$367

6%

***

Financial data from Capital IQ, a division of Standard & Poor's.

If you're feeling semi-adventurous, you could even dip into the Bulletin Boards. Swedbank AB is one of the largest banks in Scandinavia with assets of $278 billion, represents the second-strongest banking system in the world, and is regulated by the strongest market regulation environment.

Second, it's clear that the United States is falling behind many other industrialized nations when it comes to managing our vast financial assets. Stricter regulations, more transparency, and less risk-taking are all mandatory from now on -- and all of these things sound like reasonable outcomes of the current lending logjam. The invisible hand of the market might fix what our leaders wouldn't or couldn't do of their own free will.

Thanks for the report, Forum dudes. I just wish you had unleashed it a little bit earlier. Now, where'd my flux capacitor go?

Further Foolishness:

Allied Irish Banks is a Motley Fool Global Gains recommendation. The Bank of Nova Scotia and Banco Bilbao Vizcaya Argentaria are Motley Fool Income Investor picks. The Fool owns shares of Allied Irish Banks. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, though he probably should. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2008, at 6:32 PM, jettrey wrote:

    Sounds great.

    I bought AIB at $58.26, now it's at $8.48. So exactly what turbulence is it that I stayed out of? (Unless of course you mean stock prices going to $0.)

    Anyway, I might buy some more AIB now. I'd stopped looking at how low it had gone because it just hurts. But I do like dividends - if you think they can keep that up.

  • Report this Comment On October 16, 2008, at 12:39 AM, GoNuke wrote:

    Betting on banks anywhere is betting on house prices and local incomes. Ireland has already experienced a spectacular fall in house prices and Ireland is part of the EU which is going to experience job losses and stagnant incomes.

    Canadian house prices have remained stable because of rules that limit leverage when buying houses here. The Canadian economy is so closely tied to the US economy; however, that it is hard to imagine that we will not experience a major recession which will affect jobs and incomes.

    Our currency has fallen against the $US so when we bump into peak oil again in a few years you may get a boost from currency appreciation.

    There is one play the Canadian banks could make -pick up US commercial and industrial customers. Banks make money lending and Canadian banks have money and they are not faced with the pending alt-a mortgage fiasco.

    Canadian banks; however, do not like "chapter 11".

  • Report this Comment On October 16, 2008, at 8:35 PM, vermontserrat wrote:

    OK so I'm new to investing. I subscribe to Stock Invester and for awhile I subscribed to the Millionaire Portfolio letter. I think AIB was a rec there which is why I have a very small position which is down 75 percent. Yesterday I decided to try and find out why this one has fallen much further than my (own choice) stakes in Bank of America and Citi Bank which are "only" down by 50 percent for me. Anyone care to comment on this wickipedia article?

    I'd love to average down in the single digits but this entry is scary to me if to be believed. Someone has challenged some of it as being biased. See entries on "controversy", "tax evasion", "excess FX charging issues", etc. I'm no longer a member of the millionaire portfolio service so I don't know if Tom Gardner (who visited and met with top officials of this bank in Ireland) would be willing to comment here. ?? Thx, vermontserrat

  • Report this Comment On October 16, 2008, at 8:36 PM, vermontserrat wrote:
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