You might think so, judging by the spate of articles, on Seeking Alpha and elsewhere, that advocate investment portfolios heavy on inflation defense at one end, deflation defense at the other, and emerging nations and basic commodities filling in between. We own many of these, as well, but I don’t understand analysts who have given up so easily on the US who now ask us to jump on some other bandwagon which I believe has less staying power – just because it’s an easier sell right now.
The engine that continues to eclipse all others in this world is still the combination of American entrepreneurs and American consumers.
We lived through Millard Fillmore, Richard Nixon and Jimmy Carter and continued to thrive. We’ve been through panics, recessions, idiot politicians, bank closures, corporate failures, idiot politicians, depressions and idiot politicians before and continued to thrive. We will emerge from this latest bout the same. Some of the best corporate entities in the world are right here in America. But many investors are so justifiably disgusted with Wall Street and our banking industry that they are overlooking the obvious in search of the ephemeral.
As the Italians say, “Basta!” (“Enough.”) Whenever this country goes through a rough patch, the naysayers and worry warts leach out of the woodwork and inform us we are killing ourselves with (pick one:) global freezing or global warming, tell us we have exhausted our resources, claim our entrepreneurial pool has dried up, and proclaim our best days are behind us.
The hell they are.
I had the same reaction when Jimmy Carter told us our best days were behind us, that we were just one more member of the world community with no responsibilities to friends and allies that the United Nations couldn’t fulfill more effectively, and that we should all turn our thermostats down and wear cardigan sweaters to stay warm in the winter.
Horsefeathers. The intervening decades have shown this is still a great country which regularly has to turn away some of the best and the brightest from every nation in the world because if we allowed them to legally immigrate in the numbers desirous of doing so, we’d be crushed under the weight.
The point is – there’s a reason smart people who want to make a better life and a better world are clamoring to get in to this country. In not a single one of the emerging nations touted as “owning the 21st century” are there the economic, social mobility, cultural diversity, and entrepreneurial opportunities that are found in the United States. And to become #1, they have one rather important task before them. They have to dethrone the current #1. Only if the current #1 rolls over and lets it happen will they succeed.
Who is the world’s largest manufacturer? China? German? Japan? Nope. It’s the USA. China may sell us cheap toys, trinkets, and slap-together furniture, but we sell the world commercial airliners, oil refineries, nuclear plants, locomotives, medical technology, and, to our allies, tanks, sophisticated air defense systems, and jet aircraft. Care to guess how many GI Jane dolls you have to sell to equal one Joint Strike Fighter?
You don’t have to guess. The bottom line is there for all to see. With nearly four times the population of America, China produces just 12% of all factory goods sold worldwide. Japan, for all the difficulties they’ve had, is right behind them with 11%. Germany, bulwark of the EU, is a distant 4th at 7%. And America is the world leader -- American workers manufacture more than 20% of all factory goods. That includes farm equipment, chemicals, shipbuilding, skyscrapers, airplanes, power generation equipment, mining and energy extraction and telecommunications equipment, semiconductors, metals, and a host of other products.
We make things that help the world work smarter and better. When I think of heavy equipment, so essential to emerging markets, I think of Japan’s Komatsu (OTCQB:KMTUY) – formerly in our model portfolio – and Finland’s Konecranes (GM:KNCRF) – currently in our model portfolio – but I cannot imagine this sector without including US companies like Caterpillar (CAT), Deere (DE), and Titan International (TWI.) They are the true behemoths. It’s the same in aerospace, electronics, defense, metals fabrication, medical care products, and so many other fields.
Why is American manufacturing still #1 in the world? Because of American workers. The American work ethic is alive and well (maybe not on Wall Street, where they pout if they don’t get a million dollar bonus to match their million dollar salary for performing the arduous task of scalping a few pennies from investors on a few million day trades a day, but certainly everywhere else.) The more complex the task, as most are becoming, the more American firms benefit from using American labor. Because of their education and the cowboy spirit in this country, Americans’ learning curve is often faster. That’s why many of those outsourced jobs are coming home now.
Moving on to the service sector, the Cassandras bemoan that we have lost our manufacturing edge (which is simply not true) and we are becoming a nation of burger-flippers. Now, that is absolute malarkey. It is true that a greater share of GDP comes from services than in prior years. But that would be a good thing.
There is nothing wrong with switching assets from commodity manufacturing which anyone can do for lesser labor costs (as opposed to the skilled manufacturing the USA still enjoys a commanding lead in) over to the services sector. That’s where the future is! Being a cutting-edge nation that leads in information technology, life sciences research, internet content and so on is a far more intelligent use of resources than building mechanical toys. Why did Willie Sutton rob banks? “Because that’s where the money is.” Why is America on the leading edge of the information-based economy? Because that’s where the money is. Emerging nations are fine, but the countries that have made this switch, like Canada, Israel, Norway (and, indeed, most of Scandinavia), Singapore and the USA are the ones on the leading edge of the future.
“Services” doesn't mean flipping burgers. It includes software design, systems analysis, engineering services, retailing, transportation, and much more. If manufacturing declines as a percentage of total goods and services because the US is on the cutting edge of the global shift for advanced nations with high literacy and education to lead the new information economy, so be it!
Finally, America-bashers say we are a nation which has exhausted its natural resources. That’s going to come as a shock to the clean alternative energy natural gas industry, which estimates over 100 years of proven reserves, or the dirty old coal industry, which estimates 200 years of proven reserves! We have geothermal, hydroelectric, timber and all sorts of metal resources we haven’t even begun to tap. And we have a friendly neighbor in our biggest trading partner, Canada, which has far more than even the US does of these resources and a population that is just 8% our size.
This is a marriage made in heaven. (Rather than repeat what I’ve recently written about the extent of US and Canadian natural resources, you can read more here and here if you are interested.) Finally, while others are desperate to find ways to feed their people, between the US and Canada, we have what are probably the most abundant resources in agricultural land, food production and clean water of any two contiguous nations in the world.
Let me leave you with this. Because the United States is one of the world’s most open societies with a vibrant and muckraking free press, most of our problems are known. This can overwhelm an investor at times, leading us to believe things are worse than they are. Our problems are known, if only we will listen and observe. Many of the emerging nations, however, are statist, corrupt, centralized autocracies that manipulate the news at their pleasure. So the next time some tout tells you to sell Caterpillar, Deere, Honeywell (HON), Raytheon (RTN), Boeing (BA), 3M (MMM) and other American manufacturing stalwarts and put everything into Russia, China and Vietnam, look before you leap…
I promise I’ll write a follow-on article about the good side of investing in emerging markets as well as the bad and the ugly!
Full Disclosure: We own Konecranes and Honeywell, as well as beaucoup American and Canadian natural resource firms.
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