Don't Bet Against the U.S.

Includes: DIA, QQQ, SPY
by: Lollapalooza

There is plenty of negative sentiment permeating the American psyche these days. Without having fully recovered from the Great Recession, familiar rumblings can be heard about how America is losing its competitive position in the world and will soon be taken over by emerging BIC countries (apparently people are having second thoughts and are omitting the ‘R’ from BRIC).

Before I proceed in making my point, let me first say that I completely agree with the basis of this argument. And while I consider myself very fortunate to have been born in the U.S., I consider myself a world citizen and would like to see all people prosper and have access to equal opportunities. However, there are a few things that people are overlooking when they predict an eminent fall of the U.S. and then invest accordingly.

The idea of the U.S. losing its place as the dominant world power is usually made with the assumption that its people can’t or won’t adapt to a changing competitive landscape. Although many “old world” economy workers are currently struggling, it is premature to count out the proud and resilient American spirit. Should the flame of the American spirit burn out, then admittedly, we may indeed end up passing the baton to China sooner rather than later.

Assuming America is losing its place atop the economic food chain, many pessimists are likely too aggressive in their predictions about the rate and magnitude of America’s decline. This is the focal point of my counterargument.

The U.S. has some very unique qualities that are likely to keep it near the top, if not at the very top, of the global economic landscape for a long time. Let’s examine some facts (data gathered over the past couple years from the CIA World Factbook, World Energy Council, Energy Information Administration, World Gold Council and other sources).

Every modern economic force needs energy to propel its economy. Our world is substantially dependent upon hydrocarbons. This is likely to change at some point because our current rate of hydrocarbon consumption is unsustainable. However, due to the economic and geopolitical interests tied to hydrocarbons, this change is not likely to come full swing for another decade or two.

The U.S. has about 2% of the world’s total proved oil reserves. Saudi Arabia leads with about 20% of world reserves. And the U.S. has about 3% of the world’s proved natural gas reserves. Russia leads with about 25%, while Iran and Qatar each have about 15%. These are two points of weakness for the U.S., which is a key reason why oil is a hot button topic in the U.S. The U.S. does have the world’s largest coal reserves at about 27%, while Russia has the second largest coal reserves at about 17%.

These main energy sources account for a majority of global energy consumption (oil 36%, coal 27%, natural gas 23%, others 13%). Outside of coal, the U.S. is heavily dependent upon foreign energy sources in the near term. However, the energy picture is much different over the long-term for the U.S.

First, the U.S. has a friendly neighbor in Canada, which has the world’s second largest proved oil reserves at about 13%. These reserves are not subject to strategic choke points that other major oil reserves face, such as in the Straight of Hormuz and the Straight of Malacca. Canada’s proximity reduces transportation costs and geo-political risk.

The U.S. owns 78% of the world’s oil shale resources, which are estimated to contain almost twice the number of barrels as the total world proved oil reserves. The aforementioned friendly Canadian neighbor also owns 73% of the world’s natural bitumen resources, which are estimated to contain roughly the same number of barrels as U.S. oil shale resources. There are plenty of hydrocarbons for the foreseeable future—they will just be more expensive—for the U.S. and other countries alike.

When the world begins to transition away from hydrocarbons, the U.S. is in a unique position to harness renewable energy resources (hydrocarbons are renewable, just not within a useful time period). The U.S. is the third largest land mass in the world, meaning it has more potential area from which it can harness solar and wind energy.

Besides long-term energy resources, the U.S. has many other favorable qualities that should give it a chance to defend its position. The U.S. features economic opportunities in virtually every type of climate, which could appeal to a diverse range of talented potential immigrants. It also has one of the most diverse populations and is highly tolerant of cultural and religious differences.

The U.S. does have an aging population with a complicated entitlement problem. Fortunately, Japan and many European countries with similar problems are slightly older, which potentially allows the U.S. to see the effects of different policies. The U.S. also has an aging transportation infrastructure. However, the fact that it already exists is a major advantage because it simply needs to be updated.

The U.S. also benefits from the fact that it is bordered by two friendly neighbors and the two largest bodies of water. This affords the U.S. a level of protection enjoyed by few other nations. Should the U.S. ever become the subject of a major attack, it also has far and away the world’s largest military budget at 43% of total world military spending in 2009. China is a distant second at about 7% of the total. This protection, along with a relatively calm socio-political environment, provides stability, a key ingredient for cultural and economic progress.

While the education system as a whole is anything but spectacular in the U.S., it is still home to many of the top universities in the world. These top universities have produced some of the world leaders in technology, science and medicine. This intellectual capital base is one of America’s key competitive advantages and should be vigorously protected.

Another key competitive advantage enjoyed by the U.S. over the past few decades has been its place as the world’s reserve currency. The U.S. dollar accounts for about 62% of foreign exchange reserves, while the Euro is 27% and others account for 11%. The U.S. dollar “brand” allows the U.S. to borrow money at a much lower risk-adjusted cost than the rest of the world. While the status of the dollar is in question, the entire world can’t rush out of the dollar tomorrow because there is no liquidity when everyone seeks it at the same time.

Ironically, the large external debt of the U.S. may actually work in its favor in the short-term. Remember the old joke, “If I owe the bank ten thousand dollars, that’s my problem. If I owe the bank ten million dollars, now it’s their problem.” This reality should buy the U.S. some time to get its fiscal house in order. If it doesn’t, then the long-term outlook for the U.S. dollar is questionable indeed.

If fiat currency means nothing (which means debt based on fiat currency means nothing), the U.S. also has gold, holding about 30% of the world’s gold reserves. Although, about 2/3 of total existing and proved reserves are held by publicly traded companies (many of which are Canadian).

While the U.S. has seen its competitive position significantly weakened over the past decade or so, it will likely be a long time before it is overtaken as the supreme world economic power. Additionally, if countries such as China have grown to power largely on the back of western importing of Chinese goods, then the effects of a weaker western consumer on China must also be considered. Those betting against the U.S. may be right in the end, but that end may be in the far distant future… perhaps too far from which to make a materially beneficial investment today.

The U.S. is still a leading global brand. And as many first generation immigrant success stories will attest, America is still the place where you can reach the shores with only a nickel in your pocket and become a millionaire in a relatively short period of time. People may be currently living through the Great Recession nightmare, but the American dream is still alive.

Disclosure: No positions