By Colin Moore, Global Chief Investment Officer
Amid the chaos of the 2016 presidential campaign, Colin Moore looks at six topics that deserve more thoughtful attention than they've gotten.
1. U.S. manufacturing - A resurgence will increase demand for capital, not labor
You've probably heard promises about a resurgence in manufacturing in the United States, but let me caution you: more manufacturing won't mean as many more manufacturing jobs as some may promise. That's because our competitive advantage is our low cost of capital. Suppose, for example, there's a factory that makes tablecloths. If that factory were in the U.S., you'd probably see a few people supervising the work. Robots, not people, would be doing the work because we can finance the purchase of machinery really cheaply. But if that factory were in Vietnam, you might see one hundred people doing the work. So if manufacturing does come back to the U.S., don't expect a surge in demand for domestic labor. On the other hand, it helps because more domestic manufacturing will increase demand for capital and improve our trade balance.
2. Immigration - Focus on the rate of immigration
The number of people working, and how much they are producing, are important inputs to productivity and GDP growth. And the only way to effectively change the working-age population, if it's not through some surprise in the birth or death rate, which is unlikely, is through immigration. So while we do need clear immigration policy, we've got to think about the rate of immigration. Germany's struggle to integrate 1.5 million immigrants shows just how hard it is for a large group to be absorbed in a very small timeframe.
Next, we need to ask to what extent we invite immigrants with skill sets in short supply. Some will say, "That's biased and you can't do that." But it's our economy, and if we need more engineers or farm workers, we should be able to target those skill sets. This will be an ongoing debate, and the answer may be as much in trade agreements that allow us to move the work to where it makes sense rather than just the people in. I don't know that we can have pressure on trade and pressure on immigration, because one tends to be the solution to the other.
3. Minimum wage - Room to grow
The split between corporate profits and wages has reached a point that we haven't seen before. That's generally where you get political unrest. The number of workers on federal minimum wage is relatively low. Twenty three states have mandated minimums above the federal minimum, indicating that they have decided the federal minimum is too low to lead a basic life, including being able to pay for health care, food and housing. Many living on minimum wage are young and may be living with family, so part of the solution may be a better definition of who is considered to be living on minimum wage. But for those who legitimately are, there is little doubt the rate is too low.
You need people to be spending money in an economy driven by consumption, and wealthy people tend to be net savers. People making lower wages have a greater propensity to spend. Raising the minimum wage opens up the opportunity for some workers to spend more and obtain health care coverage, but its utility in addressing broad wage growth is very limited. Some jobs may be lost initially as a result of a higher minimum wage, but economies adjust to higher costs through improved efficiency when allowed to do so. It is better to do the right thing and help those affected by the change and address the consequences than avoid doing the right thing in the first place.
4. Infrastructure - Another word for subsidies?
We should spend on infrastructure if it has a multiplier effect that helps to increase productivity. For example, does the project help move goods, services and information around? Does it help move energy supplies around quickly and efficiently? In 2009, workers repainted lines on the road thanks to the American Recovery and Reinvestment Act. It was a cosmetic improvement, but it didn't help trucks move more goods. It did put people to work, but only temporarily.
Up to 15% of the energy we produce is wasted through a terrible distribution system. That means you're paying for energy generation that you don't get to use. So there are infrastructure projects that I think could dramatically help us. But I am also very fearful that when politicians talk about their big plans for infrastructure spending, what they really mean is subsidies and wealth transfers.
5. Debt ceiling - No line in the sand
Even though debt has a negative connotation, it is a really important tool in getting the economy to work efficiently. I'm comfortable with higher levels of debt if it's been invested in projects that have a multiplier effect on the real economy.
With lower interest rates, you should be able to have higher levels of debt. The thing is, you can never afford for those rates to go back up because your stock of debt is too high to support higher rates. But that doesn't mean there's a line in the sand that gets you in trouble if you cross it. We could be growing the debt at roughly the rate of population-to-GDP growth and it would still be okay. So it's not that the debt ceiling is $20 trillion; it's what is it relative to the potential to pay it back at a more normal rate of interest, which I think we should gauge at about 3% or 4%, not 1.6%.
This rarely ends in a disaster - with one exception: If your debt is mainly owned by foreign entities and they lose confidence in your country and pull the debt out. If the bulk of your debt is owned domestically, then you're in better shape. Despite reports of China's debt holdings, we actually own a lot of our own debt. So I don't think we're at so much of a risk.
6. Capital discipline - Don't just blame companies for short-termism
Most of the companies we follow are focused on capital discipline, including generating excess capital and spending it on stock buyback programs, rather than investing for growth. As an investor, I don't like share buybacks because they put too much emphasis on the price of stock options, which encourages short-term thinking. I love dividends because they are a regular commitment that puts pressure on the company to produce a consistent cash flow. If capital were reinvested in longer term projects instead of buybacks, we could generate a lot more income for everybody over time.
While it's easy to blame companies for not investing in the long term, investors are part of the problem - we need to accept that margins are a little too high, because that erodes the long-term sustainability. Also, why should companies invest unless they believe the government can come up with policies that will encourage long-term growth and implement regulatory changes without undue burdens?
Bottom line: Political paralysis is not good
Normally, investors like and take comfort in a divided government. Democrats and Republicans tend to keep each other in check. The Senate and House offer balance, and can help rein in an overreaching president. We've tracked many election cycles where the mindset could be summarized as, "At least they are paralyzed, so they're not doing anything to interfere with the real economy." But at the moment, we actually need policy on important issues. So I don't think paralysis is such a good thing this time around. Voters deserve a thoughtful discussion of the important issues, regardless of where candidates stand on them.
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