Wednesday, July 8, 2009

The US's Relative Economic Position and Manufacturing - An Argument Without Numbers - Alpha

Big Picture US Outlook: For the macro situation, I expect the US's situation over the next 20 years to be similar to the UK from 1950-1970, or Japan from 1990-2010 (very bad times for both countries). Both remained rich countries, per capita, leading the world, but their relative wealth came down (as it should if poorer countries grow faster). Britain's debates about the importance of manufacturing and concern about its decline started in the early 1900s with PM Asquith on, and its overall share of world manufacturing output declined. See: British Decline

Basics on Growth: Stepping back to the big picture, a country can only get richer in real terms if it produces more with the same resources (productivity), or finds/makes a new natural resource that is very valuable (oil in the desert, silicon in computers, etc.). Countries then trade what they can produce most efficiently in relation to others, and everyone is richer. If one country consistently imports more than it exports, in the long run, woe to it! Also, it's common sense that the best productivity gains and increases in material wealth come from manufacturing, whether physical like cheerios or intellectual like software, because producers get economies of scale and scope. Now the question is whether the US will be more like the UK or Japan.

Analogy to the UK: If the US loses manufacturing and keeps high current account and fiscal deficits, then the UK is the better analogy: the currency depreciates, manufacturing gets liquidated and the country's economic base degrades to services, many of which are low-value add. High value add services, like law, medicine, and finance, still stay because they are the result of technology, the rule of law, and better transparency/governance (these are supported by Anglo-American institutions, like universities, republican democracies, more minority rights, and common law courts, which span the globe through the US, Canada, UK, and Australia).

Analogy to Japan: If the US manages to create/upgrade manufacturing and and reduce current account deficits (fiscal deficits sadly are here to stay until taxes are raised again), then Japan is the better analogy: currency stays weak, and if the US can, it pursues a mercantilist export-led strategy and slowly improves its NIIP. This doesn't seem too likely. Beyond banking/deleveraging, Japan isn't the right analogy (the demographics of their cultural habits and population are too different - Americans are much more like spendthrift Brits). One of the best macro books on Japan is Koo's "Balance Sheet Recession", with a review here.

Promising Macro Themes: I am most positive about mid to large corporations in the Anglo-American countries (UK-US-Canada-Australia, or GBP-USD-CAN-AUS, or GUCA countries), which do heavy business in the BICA countries (Brazil, India, China, and Greater Asia which includes Malaysia, Indonesia, Vietnam, etc.). But even multinationals can get screwed in BICA countries, and the Danone/Wahaha example is only one of many. Sorry to throw around the acronyms, but I will start referring to GUCA and BICA, and throw out the silly BRIC acronym (because Russia is worthless, a dead end). I trust GUCA corporations/jurisdictions more than the BICA, but BICA is where the growth is. Also, high-tech in GUCA will always do well, as there will always be more Googles, Apples, RIMMs, etc. every decade to keep the engines going.

Bottom Line: In investing, you have to follow the social and economic demographics about where wealth is created. Today, that means tech in the west and goods in the east. Buy GUCA companies that focus on BICA countries, or GUCA companies that innovate through tech.

No comments:

Post a Comment