globalization

Political Risk Rising

© Can Stock Photo / razihusin

Long time readers know we are fairly neutral about the impact of politics on investing. Our American system of checks and balances has served us well through the decades. The worst fears of those who let politics govern their investments may have not come about.

At the root, however, politics can affect policy that has an impact on the economy and markets. We prefer public policy that enables the greatest number of people to engage in the greatest amount of productive endeavor and enjoy prosperity. This is not always what we get.

There are two things being talked about in Washington that are problematic, in our view. Checks and balances may see us through, or we may end up with policies that hurt our economy.

In theory, trade lets us get more for things we produce and pay less for things we use. America and the rest of the world are potentially better off for it. But there is a political desire to put tariffs in place against major trading partners, we believe primarily for the sake of putting tariffs in place. A narrow slice of people and companies might benefit, but the economy may be hurt overall.

If trade volumes are materially restricted, average family incomes and corporate earnings are likely to decline, and the economy and the stock market may not do as well as they could.

Another thing: if you have ancestors that came from Germany, Ireland, England, Italy, Poland, France, India, Scotland, Norway, or anywhere else, some people that were already here were opposed to those immigrant ancestors of yours. But we believe that America is more prosperous today, with higher average incomes, because of the legacy your ancestors and others left.

But on top of the desire to fix our immigration laws so they make sense and are enforced, there is a desire to cut the volume of legal immigration, possibly up to one half from recent levels1. In our mind there is little doubt that our future wealth, prosperity, and standing in the world will be impaired if this comes to pass. We’ve been enriched by the immigrant scientists, doctors, entrepreneurs and others who have come to America in accordance with immigration rules.

You can etch this in stone: we are firmly against cutting our nose off to spite our face. Those who advocate for less trade and less legal immigration are doing just that, in our opinion. We are optimistic that sooner or later, we will end up with good policy—we always have. But there could be some unnecessary turmoil before we get there.

We aren’t suggesting that big changes need to be made in portfolios to reflect the political threats. But we are looking for opportunities that are less sensitive to how these policies work out. Clients, if you would like to discuss these or any other pertinent issues, please email us or call.

1New York Times, https://www.nytimes.com/2017/08/02/us/politics/trump-immigration.html


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing involves risk, including possible loss of principal.

No strategy assures success or protects against loss.

The China Syndrome

© Can Stock Photo Inc. / rfx

In today’s increasingly globalized world, actions can have far-reaching economic consequences.

Take, for example, China. If you pay attention to business news you will probably hear a lot about China; as the second largest economy in the world, this should not be surprising. China is a major importer of raw materials such as oil and metals, so any signs of the Chinese economy slowing down tend to be met with alarm and panic in the markets.

These raw material imports have fueled a massive construction boom unprecedented in human history. Over the past 25 years, the percentage of China’s population living in cities has more than doubled. Almost 500 million people have moved from rural China into the cities—that’s the equivalent of the entire metro population of New York City moving into China’s cities every year for the past 25 years. It’s no surprise that the Chinese construction industry has played such a huge part in the world economy.

Some skeptics will argue that this part of China’s role is over and the boom is unsustainable—Chinese construction will level off, China will import fewer materials, and much of the world economy will slow down.

We view this as short-sighted. To put China’s demographic trends in context, China’s level of urbanization is on par with where the United States was at in the 1920s. China’s urbanization is still a century behind ours, and at some point they’ll have to catch up. If China follows the demographic trends of every other modern industrial nation, at some point in the not too distant future another 500 million people will be moving into Chinese cities—and they will still need places to live there.

We may not be sure of the timing. It might take them another 25 years, or it might take them longer or shorter. But the demographic reality is that China’s urbanization is not done, and neither is the construction they need to do to make it happen, or the demand for raw materials to build with. In the big picture, we view concerns of China’s economy slowing down as premature.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.