On The Fourth Of July: Bullish On America

Includes: DIA, IWM, QQQ, SPY
by: Eric Parnell, CFA


The United States of America is well-positioned to lead the global economy in the 21st century.

A number of forces are supportive of the America's continued strength.

It is time for policy makers, including the Fed, to allow the U.S. free market system to stand on its own.

It is a question that is often raised as we progress through the 21st century. Knowing that the 1800s are widely regarded as the British Imperial Century and the 1900s are generally seen as the American Century, what is the country that is best-positioned to lead the global economy for the rest of the 21st century that lies ahead? This is a question that is not centered on anything that is happening right now or even what we can expect over the remainder of the decade. It is the ultimate long-term view question. And the possible answers are boundless. But when asked what country has the greatest potential to lead the global economy in the 21st century, my answer is simple: the United States of America.

For those who have followed my articles on Seeking Alpha, you likely know that I have had genuine concerns about the outlook for the global financial system, including the U.S. stock market (NYSEARCA:SPY). While I recognize that asset prices are poised to continue rising in the short-term as long as the forces of unprecedentedly aggressive monetary stimulus continue to inflate markets, we are likely to eventually arrive at an inflection point where a new major bear market begins. And the subsequent correction has the potential to be either longer in duration, deeper in magnitude, or both, relative to its two predecessors since the beginning of the millennium. Why? The fact that valuations have been driven to historical extremes beyond the current underlying potential of the economy and speculative excess have been encouraged once again, at a time when massive debt burdens have now been transferred to sovereign balance sheets, central banks have already deployed much, if not all, of their stimulative firepower and the global economy continues to sputter - is all slowly accumulating into a toxic convergence, where once asset prices begin to unwind, the drop could prove precipitous. Such is the nature of the ultimate cleansing process when more than a quarter of a century of excesses have been amassed without allowing the recessions associated with the rhythm of the normal business cycle to meaningfully play themselves out at any point along the way.

But this raises perhaps an even more important question. Exactly what might we expect from the global economy and its financial markets, including stocks, once this cleansing process is finally allowed to take place? The answer? We are likely to find ourselves at the dawn of the next great secular bull market. One could think of it as the 1921, 1949 or 1982 moment when the financial system has fully completed the corrective process. The excesses have been cleansed, the necessary pain endured, and the economy and its markets have been made fit, lean and strong in the process. While the required path to arrive at this new dawn for the global economy and its markets would clearly be challenging, and would include some pain along the way, such are the important foundations and sacrifices required to arrive at the next major phase of growth.

What is perhaps most exciting is that the economy of the United States of America is well-positioned to lead the major growth phase once the next secular bull market finally arrives.

The following are just three of the many reasons why the United States of America may be poised to lead the global economy once again in the 21st century. It is worth noting that some of these themes are not necessarily immediate. They may take years, if not a decade or more, to begin playing themselves out. But the foundations for these forces exist today, and are slowly building.

1. America's Energy Independence

Energy has arguably been the most challenging obstacle for the U.S. economy to overcome over the last half century. Not only have expenditures on imported oil resulted in a steady leakage of capital out of the U.S. economy and been a major driver of its trade deficit over the years, but it has also resulted in periods of crippling economic uncertainty and numerous geopolitical conflicts along the way. But with the massive reserves of shale oil and gas that are now being accessed here in this country, the United States has the opportunity to claim its energy independence. Not only would this alleviate future geopolitical burdens, it would also likely lower input costs for domestic industries and increase productivity. Such developments would be particularly supportive of the next item on the list below.

2. Manufacturing Renaissance

Just like energy independence, the resurgence of manufacturing in the United States is likely to slowly develop over time and come with fits and starts along the way. But the fact that we have seen a rising trend toward "reshoring" or "onshoring" is a positive development in and of itself, for the idea of companies bringing manufacturing production back home from overseas would have seemed unthinkable less than a decade ago. This is being supported, in part, by the recognition that lower labor costs are only one factor in the total cost equation and that greater efficiencies from other factors, such as lower transportation costs, just-in-time delivery and improved quality control, can be better achieved by either keeping or bringing back production to the United States, in many cases.

Businesses have had varying degrees of success with onshoring thus far, but we are still in the very early stages of this trend reversal and it is likely to take time to play out. It is also not likely to take place across all industries, as production that is more heavily dependent on lower-cost, unskilled labor is likely to remain abroad. But the reality remains that the United States remains a country of more than 300 million people, many of which are smart and skilled blue collar workers that are ready, eager and able to go to work making high-quality products here in this country for a competitive wage, which would only be supported further with the lowering of other input costs, such as energy, as discussed above.

The more the U.S. is making its own products here at home, the more it supports the income of its citizens and the growth of its economy in the process. The lack of dependence on foreign producers for our goods helps to enhance national security in the long run as well.

3. Continued Technological Innovation

One of the key forces that have driven the success of the United States over the decades is the inventiveness of its people. Many of the greatest technological advancements and products in the world have been developed right here in the United States. And this fact is a testament to the ambition and entrepreneurial spirit that exists in this country. We live in the land of opportunity, and when presented with an opportunity or a challenge, the American way has almost always been to seize on these opportunities and overcome these challenges to achieve new heights. Clearly, this position of global technical superiority has been heavily challenged at times along the way, including by the Soviets in the middle part of the last century, Japan toward the end of the millennium and many parts of the globe, including China, today. But it is the animal spirits and the drive toward innovation that is part of the fiber of the American being that has enabled us to rise to the challenge in the past and is likely to continue to do so in the future. And the development of new technological innovations in the future may also serve as a source for additional future high-skilled manufacturing work here in the U.S., as mentioned above.

Closing Thoughts

All of this leads to some closing thoughts on this the 238th anniversary of American independence. The United States of America is a great country that is founded on resilience and the ability to endure and overcome whatever has been put before us. It is one of the reasons that I have found the increasing dependence on government stimulus so dismaying in recent years.

In particular, the actions of the U.S. Federal Reserve were laudable back in 2008 and 2009, as they acted decisively with monetary policy to rescue the global financial system from imminent collapse. But once they had successfully rescued us from the brink by the summer of 2010, it was imperative for them to step aside and let the economy take a breath and allow it to play itself out through the natural actions of the private sector. Unfortunately, this was not allowed to take place.

We are a great country with a free market capitalist system that was not founded on the basis of coddling and endless support from a handful of appointed policy makers in Washington. Americans recognize that failure is an outcome that comes with the potential to succeed, and that possible loss comes with the potential to achieve true greatness. It how our system works, and these are principles upon which our country is founded.

For this reason, among others, it is finally time for the Federal Reserve to grant the United States' economy its financial independence once again and to allow its private sector participants to determine who wins and who loses, who succeeds and who fails. Will it be tough along the way? Sure, but we as Americans are strong enough to endure it and figure things out on our own. That is the nature of innovation that exists within us. And the sooner the Fed and its central bank counterparts from around the globe finally step back and allow the global economy to stand and act on its own, the sooner we can finally move on, cleanse the excesses and work our way to a new dawn of economic greatness that lies ahead in the future.

Happy Fourth of July to all readers that are celebrating the holiday here in the United States of America!

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long stocks via the SPLV and XLU as well as selected individual names. I also hold a meaningful allocation to cash at the present time.