globalization

We Are All Globalists

© Can Stock Photo / lucidwaters

Global trade and international relations have dominated the news lately. The president signed a pair of sweeping tariff proclamations and issued a number of statements about trade.

Each of us has been mostly free to buy the goods and services we choose, regardless of origin. Chanel, Honda, Burberry, Adida, Mercedes Benz, Nestle, Armani, Samsung, Phillips, LG, Toyota, AXA, Bayer…these global brands earned their position because enough of us voted for them with our wallets.

If you are of a certain age, you remember when ‘fruits and vegetables’ meant about a dozen things. Now the produce section features products from dozens of countries.

Trade is not a one way street, either. Within forty miles of beautiful downtown Louisville, the small town of Valley Nebraska hosts Valmont. The company began in the irrigation equipment business in 1946. Today Valmont does business in one hundred countries on six continents.

Likewise, the farms surrounding these towns help feed the people of many nations.

Many of the most iconic American companies like Caterpillar and Boeing produce for the whole world, too. As with those international brands, they earned their position by being valuable to their customers.

We could buy Fords instead of Toyotas. And people in other lands could buy Kubotas instead of Caterpillars. But what would be the point? The U.S. and the whole world has steadily gotten wealthier and more prosperous by doing business in a relatively free system of global trade.

Because citizens of each country may or may not choose to buy and sell equal amounts to other countries, so-called trade deficits result. You have a trade deficit with the grocery store—week after week, you are in there buying things. Yet the grocery store never buys anything from you. This is not a problem, is it?

Trade has made us richer and our lives better. Less trade will make us poorer and life more difficult. (A trade war and collapse of trade was at the heart of the Great Depression, after all.) We are watching current developments carefully.

Clients, if you would like to talk about this or anything else, please email us or call.

Review and Outlook: Perception and Reality

© Can Stock Photo / sborisov

The gap between perception and reality is a key concept for us, as contrarian investors.

Year-end is a logical time to stand back and assess the year just ending, our current situation, and prospects for the next year. Many others ably describe the facts and statistics and the major themes. We will look at a pair of critically important things that may have fallen into the gap.

We believe the president has a flawed understanding of global trade. He recently spoke again of disastrous trade deals, massive profits to other nations, and millions of American jobs lost. The reality is, trade lets us get more for everything we produce, and pay less for everything we consume. It enriches America and the world.

We aren’t here to argue politics. But we are here to understand economics and markets as best we can, for your benefit and ours. The markets may be underestimating the potential for damage to the economy, corporate profits, employment, and stock prices if the president’s rhetoric ever translates into actual policy.

The second concern is about Congress, and a problem to which both parties have contributed (in my opinion.) The American system of governance historically produced major legislation through a bipartisan process. The Civil Rights Act, Social Security, Medicare, and the Tax Reform Act of 1986 were all products of give and take between members of both parties. All of these endured.

Without debating the merits of either, the Affordable Care Act and the recent tax legislation are the products of a partisan process. Both featured closed-door negotiations by small groups, deal-making that benefitted narrow groups to win votes, and straight party-line votes that produced less-than-perfect outcomes.

The ACA has been under attack since it was passed, and is now being unraveled by the opposition. The same thing could happen in the years ahead to the tax legislation. Uncertainty about tax policy may create problems for companies and the economy.

The short version of all this is that we are optimistic—as always. But our eyes are wide open. We will continue to diversify into sectors that may be less affected (or unaffected) by these issues. This is consistent with our core principles of seeking the best bargains and avoiding stampedes.

Clients, if you would like to discuss these issues further, or have anything else on your agenda, please write or call. In the meantime, we are enjoying the results of 2017 and hopeful about what will happen in 2018.


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

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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.