One of the unintended consequences of the stimulus legislation passed on Friday will be the potential validation of Jeff Immelt's vision of a truly global corporation. Since Congress has made the Buy America provision subject to current trade agreements, General Electric (GE) may well become a unique contender in the bidding process for infrastructure projects.
Speaking at the Canadian Club in Toronto last Tuesday, Mr. Immelt said that the strong Buy America sentiment in America was a mistake, and that business must "embrace the power of globalization." General Electric, in fact, has led the field in constantly identifying cheaper raw materials and cheaper production outlets internationally for the better part of the previous decade. As one Middle East banker told the BBC yesterday, "GE's timing was widely questioned in recent months, but the philosophy could well prove itself now with billions of dollars being dedicated to infrastructure, energy and health care, and with the G-7 determined to reject all protectionist measures."
At the end of the day, it is indeed all about protectionism. And, in this writer's view, the Obama Administration should have taken a leaf out of the emerging-market book and acted on the premise that a third-world nation (i.e. America, notionally) is confronting serious challenges deep inside its economy. There is little point in being the leader of the "free world" if the only freedom the developing world recognizes is the freedom to retain and construct formidable barriers (bureaucratic and fiscal) to international capital.
Besides, America is showing specific third-world characteristics: the jobless number, the poverty of the inner cities, the millions of undocumented workers, the sharp deterioration in household wealth, the constraints on consumer spending and falling asset values. Protectionism is the only answer. Without the umbrella of protectionism, stimulus legislation is counterproductive and will quickly turn into an illusory quick-fix.
Washington lawmakers are either unable to comprehend or unwilling to acknowledge the real crisis within the American economy: globalization has rendered numerous key segments of American manufacturing conclusively uncompetitive. It is, no doubt, politically correct to claim that "American labour is the best in the world". But, best or otherwise, a huge proportion of working Americans are engaged in the production of goods at prices which can be easily challenged by factories in China, India and at least three dozen other developing nations.
A logical approach to the current crisis would require a forthright analysis of the elements within the American economy which are essentially superfluous in the global context, absent protectionism. No politician, regulator or economic advisor appears capable of declaring that, without comprehensive barriers to the import of foreign goods, thousands of American companies engaged in the manufacturing of textiles, machinery, package foods, toys, furniture and personal items should simply be shut down. But the fatal flaw in the Obama plan is a subject outside the confines of this recommendation.
For our present purposes, the fact is that the manner in which the Buy America clause has been written into law offers General Electric the genuine opportunity to transform its international presence into a money spinner. Just a few weeks ago, Wall Street was debating the real value of GE's foreign asset; now, given the last-minute dilution in the Buy America clause, a good portion of those foreign assets are likely to become a significant advantage.
Though concerns regarding GE Capital's loan delinquency allowances still linger, and GE's reliance on the government (for commercial paper support and bond guarantees) will continue for an extended period, a share price in the $10-11 range represents an exit for shorts. Long positions in General Electric are not being recommended, not by any means, for two reasons. Firstly, this writer is basically reluctant to go long on any stock in a climate where the systemic risks within the financial system are still very much intact. Secondly, the actual implementation of the stimulus package, which will without doubt be a trial-and-error exercise, needs to be tracked closely. But the shape of the Buy America clause does serve to severely limit GE's downside from last week's lows.
Disclosure: No Outstanding Short Positions on GE.