Global problems continue amidst U.S. company prosperity
We know that unemployment problems were not going to cease immediately, right? And we know, too, that Greece, Italy, Portugal, Ireland and Spain are not always fiscally responsible, right? Of the mix, Ireland seems most willing to adopt draconian measures to get its financial house in order.
So, when we loan money to those countries, via bonds and bond funds, we accept more risk. Maybe the monetary woes are because the weather is nice in those countries much of the year and people don't seem as work-obsessed as they do in the U.S., Korea, China, Japan and Germany.
The weather in Brazil is nice, I remember. Is there is more of a work ethic there, with Rio perhaps exempted? To a degree, it's been for a long time, the fun-loving Cariocas of Rio vs. the hardworking Sao Paolo Paulistanos to the south. Brazil is not immune from problems, of course, but it seems to have a better handle on government and business, and a large economy.
China and India? Clearly they are engines of growth. However, keep in mind that the good old U.S.A. represents 24% of the global economy and that our per-capita birth rate statistics are better than almost any other county.
China card
Ever wonder why China is so willing to loan the U.S. money via buying U.S. bond and treasury issues? In The Crisis of Capitalist Democracy (Harvard University Press, 2010), Richard A. Posner, a federal judge, makes this point: When China overvalues U.S. currency, it allows itself to export a huge quantity of inexpensive goods to the U.S., a process that insures that many Chinese will work at low-income jobs to produce export goods. These goods are primarily for the U.S. Since the Chinese are savers, Posner writes, there is not a lot of pressure on government to provide services, such as health care and other social services. Since China can't overnight create a credit card economy out of thin air, it is essential to maintain this imbalance between the two countries. Judge Posner has it right.
As one reads Posner, Jim Rogers and others, he or she is bound to wonder how long it will take China to catch-up and, ultimately, no longer care to support U.S. debt? The answer: Until it no longer needs to export cheap goods in order to keep people working. I suspect that will be some time down the road. Clearly, as the middle class grows, it will put increasing pressure on China's government to perform. It's not an automatic given, though, that everyone in China wants to live in cities and work at relatively low-paying jobs. In fact, there has been some push-back lately; some people don't want to leave the countryside, and its agrarian lifestyle.
China's goods are cheap in order to keep the trade flowing to the U.S. and the people in China at productive enterprise.
As to cheap goods, Japan, after World War II, had a rap for making shoddy goods; however, long before the war, it was a manufacturing society. The lesser-quality goods exported post-war to the U.S. and elsewhere were a temporary phenomenon. For all the jokes about the Zero, Japan's World War II fighter aircraft, the truth is that our pilots held the airplane in great respect. Jokes were made about the Toyota automobile when it first appeared here in the 1960s, but the digs didn't last long after it became clear that the post-Deming1 Toyotas were better made than U.S. counterparts. Toyota has had its problems in 2009 and 2010, but it is still the world's largest auto company and it is likely to survive and flourish. Its problems are minuscule compared to those of G.M. and Chrysler. In fact, it's the very quality of Toyota that made the recent accelerator-sticking recall such a surprise. Maybe, for an instant, Toyota forgot its Deming-inspired roots, but that's hardly the same as the U.S. carmakers caving in to decades-long union demands and creating overheads impossible to maintain.
At any rate, China's goods may be less expensive, but they are not necessarily cheap in quality. Consider BYD, the automobile and battery manufacturer. It makes batteries for Apple, and should introduce a new automobile or two here this year or next. (I saw three of the autos it makes at the 2009 Berkshire Hathaway meeting and was quite impressed; Berkshire owns just under 10% of BYD.)
The other elephant in the U.S. debt closet
Unlike many countries that get themselves into so much trouble that they have to simply cancel debt, -- in essence saying, "Hey, we're bankrupt and we can't pay; if you want your money, sue us or break our legs" -- the U.S. has a long stable history of actually repaying its debt.
It was not long ago that other countries thought about creating a new class of world debt that would be appealing -- the words "to China," were often left out of the description of the new class of bonds -- and an alternative to U.S. debt. In the face of possible defaults, this new class of debt has been left out of the news recently. In some ways, the new debt might have been the European version of tranches of U.S. mortgages, rated and packaged to fool.
Taxes and big federal government
The U.S. will have its problems to sort out as it contemplates higher taxes and perhaps smaller government, despite the fact that at the moment the federal government seems to be expanding -- three new agencies where there was one before. While the federal government grows, state and local governments are getting smaller by necessity. In the main, it seems far more desirable to have smaller government rather than to raise taxes. When unemployment is high, tax increases have the reverse of the desired effect; too-high taxes easily can slide the U.S. into recession or depression. Investors and business owners have to perceive that there is a reward for taking risk -- if the U.S. piles on new taxes, capital will flee to safe havens and its owners will believe that the negligible, over-taxed rewards will not be worth the risk. Taxes! Taxes are the reason why U2 frontman Bono left Ireland, right? Ireland was a haven for artists, but then it changed the tax on royalties. Capital is always in motion and likes low taxes (Bono moved his music publishing business to the Netherlands). Think about it: If Country A has a 35% corporate tax rate, and Company B has a 20% tax rate, the simple act of moving from A to B has created a 15% yearly return.
Having written that, I would advise to never bet that the U.S. will default on its government debt.
The U.S. growth engine
As you digest this information about the good and the bad, think about this quote from Michael Santoli in the May 17 edition of Barron's: "Across the industrialized world, governments are in hock. American consumers are battling a debt hangover 20 years in the making. Yet big U.S. companies collectively are lean, financially sturdy and richer in cash than have been for decades. Profit margins are approaching all-time highs a mere year after the Great Recession climaxed."
Broker's bookcase
The Next Hundred Million -- America in 2050, by Joel Kotkin (Penguin, 2010). I love a guy who refers to Europeans as escaping from "... the continental nursing home." When he writes "escaping," he means from Europe to the United States.
Ask yourself why people want to come here? What's the deal? Do you remember the 1970s and 1980s? Those two decades were full of pundits saying that Japan was clearly going to replace America as the No. 1 economy in the world. Remember that? Kotkin does. Did Japan? Of course not. That's the point of this well-reasoned book.
In writing about immigration and people coming here from there, the author says: "Some of the best educated and most successful will then go back home, as has been (the) case through most of American history. But many more will stay, often for very mundane reasons, such as the chance to live in a dwelling larger than a shoebox or to have more than one child. Others will cherish the chance to live without worrying about the depredations of some party bureaucrat, caudillo, or religious fanatic. These immigrants are not seeking a spot on the Titanic. They realize that, despite its many failings, America is uniquely able to reinvent and re-energize itself ..."
As discussed in my blog for May 19, the U.S. has higher per-capita birth rates than China or India (or in fact pretty much anywhere), which is how we will get to 400 million in 2050 or before.
America is a nation of immigrants. Do you see masses of people moving to China? Denmark? Sweden? I don't think so. Whereas we might have once been willing to accept the hungry, the poor and the teeming huddled masses, we are now far more likely to get those who either are educated or who want to be, and people who are really, really good at something.
Our intellectual elite tend to be rather pessimistic about the U.S., and this has always been so. "Backwards, provincial, and rough," the sophisticates say, whether they are here or overseas. Yeah, right. Here, you can be a Warren Buffett, Barack Obama, Steve Jobs or Bill Gates or -- even better -- your own version of success. There you can be a sneering intellectual, but you are probably very limited as to possibilities and growth, even if you do manage to get an education. Come to think of it, the people here who most criticize are usually the folks who have made it and are second- or third-generation wealthy. They don't seem to emigrate, do they?
This book will get you thinking -- it's refreshing to look at the U.S. as the engine of growth and see China as it is, an economy not much bigger than some of our individual states.
Richard Hoe, ChFC, CLU, AEP, has been an investment professional for 40 years, and is a registered
representative and investment advisor representative. He is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University. Readers may e-mail Richard Hoe at richardhoe@richardhoe.com.
Footnote:
1. W. Edwards Deming, a statistician, was the father of qualitative manufacturing processes -- techniques such as just-in-time inventory methods and other significant improvements that made for far better products -- that were eagerly adopted by Japanese auto manufacturers and famously ignored by their U.S. counterparts.
This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Evaluation copies of software and review copies of books are sometimes furnished by publishers without charge; however Mr. Hoe only reviews books and programs he feels will of value to LIS readers and avoids writing about books and programs he feels would be of little interest.
