Welcome to the worst economy in the world

Welcome to the worst economy in the world   October 11, 2015 In the center of a bustling city with more than 3 million people - larger than Chicago - sits a massive "Tower of David." The 52-story building was to feature a gym, hairdressers, shops, a church, and more than 5,000 residents. There's one major problem with this building though. Until recently, it was also the world's tallest slum. A half-constructed building lacking elevators, installed electricity, or running water ... inhabited by hundreds of families desperate for a place to live in what should be one of the world's wealthiest countries. The tower has become a symbol of failed capitalism in a country whose economy is contracting more than any other in the world. While China's teetering economy dominates the news, developing countries across the world have seen growth hit their lowest level since the crisis of 2009. How has this slowdown affected your portfolio, and how can you invest to protect yourself in the years ahead? A failed state with so much promise The "Tower of David" I described above is a planned financial center that stands half complete in Venezuela ... its construction stalled by the financial crisis of 1994. Though it lacks basic amenities - electricity, water, windows, and even some walls! - thousands squatted in the tower until its evacuation that finished a few months ago.   The exterior of the building; squatters have placed brick walls hundreds of feet up where windows should be. Image credit: Wikipedia. The country around the tower is a wreck. This year, the IMF predicts Venezuela's economy will shrink by 10%, the worst growth rate in the world. That's worse than Ukraine, a country that's a warzone. Inflation in the country is expected hit 159% in 2015. Grocery stores have had to install fingerprint sensors to prevent food hoarding. The situation is ugly. Conditions shouldn't be this bad in Venezuela. The country won the geological lottery, and claims the largest proven oil reserves in the world. Yet, it has squandered that wealth. Over the past year in the United States, one of the biggest storylines has been the rise of "cheap gas" as oil prices plummeted. However, while the United States is a net importer of gas and sees benefits from this decline, many developing countries have fallen into a tailspin as oil revenue disappeared. It's not just a problem for Venezuela. Saudi Arabia, whose oil is far cheaper and easier to extract than Venezuela, spent decades building up a massive $700 billion-plus reserve. As oil prices have plummeted this year, the country has already had to drawdown 10% of that money. If oil stays cheap, that will continue. A disappointing asset While there's talk of historically low interest rates creating an asset bubble, investors in emerging markets have seen a dismal five years. One of the most striking charts in finance is the performance of these fast-growing markets over the past five years compared to the United States stock market.   A comparison between a U.S. market index (SPY) and developed market index (VWO) over the past five years. Data courtesy of S&P CapitalIQ. The poor performance in these markets is in spite of economic growth rates that have been multiples higher than the U.S. across most of the past 15 years. Even in this, a disappointing year, growth in emerging markets is 4.6%, a good deal higher than the United States growth of 2.5%. U.S. growth is world growth So, what's causing this massive divergence in asset prices across the past five years? There's also an old saying from Warren Buffett that goes... "Only when the tide goes out do you discover who's been swimming naked." GDP in these countries might be growing, but that alone doesn't necessarily lead to countries developing the kind of well-run and innovative companies that drive high share price returns across time. As we've seen in Venezuela and, recently, Saudi Arabia, years of high oil prices helped drive GDP ... but that masked deeper economic problems. Many other developing countries blessed with abundant natural resources are also struggling as commodity prices have collapsed. As oil prices have plummeted, the United States has proven to be a surprisingly resilient market ... in no small part because the oil boom here has been driven by innovation and cut-throat competition, rather than winning a geological lottery. American oil companies have managed to relentlessly cut costs at a pace that was believed to be impossible just a year ago. America: a creative destruction machine The oil industry is a great example of the business climate of the United States, but it's hardly the only one. Just look at the American stock market. Last week I noted that the average company in 1958 lasted in the S&P 500 for 61 years. Today that number sits at just 18. This rapid level of "creative destruction" presents challenges to investors as more companies flame out. Yet, it also shows how dynamic American companies are at creating the future. Since 2002 we've seen innovative businesses like Whole Foods, Amazon, and Netflix enter the index while old stalwarts like Kodak, Sears, and The New York Times dropped out. Compare that to France. In the country's S&P 500 equivalent - the CAC 40 - the youngest company is nearly 50 years old. It was founded all the way back in 1967! Perhaps not coincidentally, Europe has also dramatically underperformed America across the past five years. Fueled by fresh thinking and innovation, American companies are stronger at global competition. Roughly 33% of all revenue in the S&P 500 comes from overseas. Apple now sells more iPhones in China than the United States. Netflix first launched outside the U.S. and Canada in 2011, and today is seeing huge subscriber growth in more than 50 countries. The majority of the value for both of these companies is based not on their American operations, but their potential for global dominance. Remember, an iPhone sold in China increases the country's GDP, but the sales come back to a U.S.-listed company. Putting it together None of this is to say America doesn't have problems. The headlines remind us of that every week. But the global competitiveness of American companies is a storyline we can all be proud of. More to the point, it helps explain why the U.S. stock market has done so well even as the country trudged out of the recession. Investors have found what could be the safest way to invest in the growth of developing countries is simply by holding dominant and innovative American companies. Industries that have always done things the same way - think oil, electricity, banking, and cars - are suddenly in the midst of massive upheaval. As the pace of innovation and technology continues accelerating, stocks from the most competitive and innovative companies will create massive wealth for investors. I hope you're one of them. Fool on, Eric Bleeker, CFA P.S. If you're looking for more insights on investing in innovative companies, in his newest podcast Motley Fool co-founder David Gardner describes three unique kinds of thinking investors can use to get an edge. It's invaluable information for investors of all experience. P.P.S. David Gardner just issued a new buy recommendation in his innovation focused Rule Breakers service. It's a company he truly believes in, since this is his third time recommending it! Here's what interesting about that - this is only the sixth time David found a company so exciting that he issued a three time buy recommendation in Rule Breakers. The average return of companies recommended three times or more? Up an astounding 292%! The company is an American innovation machine taking home huge profits from China, and looks set for big gains in the years ahead. We're offering a free trial to Rule Breakers exclusively through this column that you can access simply by clicking here now.   Having trouble seeing this email?  View on Web We work fervently, feverishly, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. David Gardner owns shares of Amazon.com, Apple, Netflix, and Whole Foods Market. Eric Bleeker owns shares of Apple. The Motley Fool owns shares of Amazon.com, Apple, Netflix, and Whole Foods Market. Returns as of October 8, 2015. S&P figures as of October 8, 2015. To ensure you receive the latest and greatest from us, add Fool@foolsubs.com to your address book. 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