This is going to be an exciting week that began with a hurricane, but it could end with a firestorm after the jobs report is released on Friday. There was tremendous controversy the last time out after the unemployment rate plunged. I think we need a benchmark participation number; the month Reagan came into office would be a great starting point and use that to assess the unemployment rate. This way we get a true reflection of the US economy currently, and historically. Of course, I've argued that employment-population ratio is the best component anyway.
Be that as it may, I'm bracing for an October Surprise on Friday, but it could be a hell of a ride just to get there. You can ride out turbulence with the new picture book from President Obama- his new glossy on fixing the economy is kind of funny https://secure.assets.bostatic.com/pdfs/Jobs_Plan_Booklet.pdf.
Actually everyone should read the President's plan, and Romney's plan, but also really consider what's going on in the nation. This earning season has been ugly. This is a trend that's been going on for some time, but the market was able to rationalize poor time results with earnings beats. Maybe, it's because this has occurred for so long, and has gotten worse, the street is junking the spin and spying the exits.
Stocks in general are still cheap, but not if the economy continues to only skim along or slips into another recession.
I gave a speech to the American Association of Port Authorities (AAPA) that covered post-election economy, challenges and opportunities. I piggybacked off comments Mitt Romney made in the second and third debates about America being attractive. I don't think there has ever been this much prosperity around the world at the same time. Yes, the west is in trouble, and without tough decisions, will just live off their laurels and past success until it gets to the point of no return- this could include America if we choose that path.
My AAPA Speech
What an exciting time to be an American. Not only are we on the cusp of making a decision about leadership that could reverberate for decades, but we are at a moment in time when the rest of the world and mankind’s decisions will also impact America for decades to come. In fact, we are at the dawn of a seismic shift in prosperity and power in large part because movement of man for survival and wealth has given way to movement of wealth for survival and growth.
From the beginning, man moved upward through Africa into Europe and then followed the migration of fleeing reindeer into the less hospitable areas of the continent. Once a livable environment was established came the evolution of civilizations and the brutality of man on man that was once reserved for nature against man.
The next reason for movement of men was the search for greater wealth and greater power, although saying it that way would seem redundant.
We've all learned of the great Greek and Roman empires, and lately, we are also learning from great empires in the East, Africa and other parts of the world. All these stories share the bottom lines of new riches from land to gold to people. These were truly ownership societies. Along this arc, nature occasionally struck back to remind mankind of its power and fury.
Take the story of Erik Thorvaldsen also known as Erik the Red. This infamous Viking was banished from Norway after being found guilty of manslaughter. He then moved on to Iceland where he was eventually banished for committing several murders. He fled there to a giant land mass that legend says he called Greenland. Of course, Greenland was anything but...yet, to lure settlers, Erik added master marketer to his resume of exploration and mayhem.
At one point, Norse settlers numbered north of 5,000 with churches and long houses and other aspects of thriving society. Yet, the climate was difficult, but initially, hospitable enough to raise cattle and even farm. Eventually, the onset of the Little Ice Age saw settlers shift from their traditional diet to hunting seal and fishing. In addition, their trading partners became enamored with ivory from Elephants and stopped trading with Greenland which relied on such trade for wood and other essentials.
Ultimately, the tough Vikings vanished from Greenland either through starvation or returning to Iceland (whose name, legend has it, was designed to keep people away).
Fast forward to the second presidential debate where Mitt Romney talked about America being an attractive place to do business as a way to mitigate outsourcing of jobs. While many liberal commentators and good old boys took his comments the wrong way, the fact is wealth now moves the way people used to move and just as the settlers of Greenland eventually found the climate too unattractive for survival so, too, will capital seeking survival and expansion.
It wasn't about dissing America as much as dissing the harsh climate of huge deficits, high taxes, giant regulatory hurdles, breakdown in the foundation of rules and laws, fading educational excellence of the work force and general resentment toward success that could trigger a bum's rush on earnings beyond established tax rates.
Just as those that followed Erik the Red to Greenland enjoyed initial success, America has feasted on a foundation of laws, belief and spirit of success. Yes, The Great Recession hit with the same impact as plunging temperatures hit Greenland in the late 1300s. Sadly, too many Americans have forgotten we can control our destiny better than ill-equipped Vikings reduced to plundering ice waters for seal and fish. We have the benefit of hindsight to study and understand why civilizations collapsed in the past and why empires couldn't hold it together, and yet, there is always debate on how to keep America as the number one nation in the world.
These days we also have to concurrent benefit of watching what happens when great empires not only fade, but box themselves into a position of further decline.
Noted author Jared Diamond proposes there are five ways for civilizations to collapse:
Relations with Enemies
Good or Bad Political Decisions
At this moment the world, including America, are grappling with the last two. This brings me to the election in America.
I think the nation is poised to rebound in general as consumer sentiment is improving and housing seems to have finally hit terra firma. But, I'm extremely worried about a mandate that would allow an extension of the war on business. Sure, the system ran amok, but mostly because it was allowed to do so and not because there were enough agencies and rules-makers to stall or step into the breach.
Instead, a booming economy felt great, but it was built on too much easy money, too many places to hide bad loans and expectations that separated from reality. Now the nation is dealing with Dodd Frank, which has already triggered a surge in fees for a number of bank services and the rapid decline of things like free checking. This could eventually fade into oblivion like the Vikings of Greenland.
There are the economic levies associated with Obama -Care that will deter investments inside and outside the medical industry. The US economy is becoming insular just as the rest of the world is becoming wealthier. I understand President Obama talks about exports, but we can't make that happen with trade wars and fiscal and monetary policy seen as protectionists by would-be trading partners.
Yes, Mitt Romney has made tough comments about taking on China, which has to happen, although nobody knows where on the scale from kid-gloves to ham-fisted such pressure would work best. There irony is China's currency is climbing in relationship with the rest of the world in part to domestic economic realities. In other words, the Obama administration should have taken a shot at this obvious currency manipulation anyway. Moreover, even though China holds a lot of our debt, the fact is they haven't been buying a lot lately, and it’s unlikely they would begin to dump meaningful amounts.
We need more than cheap currency to truly compete on the global stage. Free Trade Agreements (FTAs) could be the answer, especially those entered into that would include China and the rest of Asia. We must also connect with the super-hot economies of South America and not just watch as China continues its de facto colonization of Africa.
It's taken four years to finalize and implement free trade agreements with South Korea, Columbia and Panama that were already "done deals." These deals were held up to support unions whose agenda is more precious than true economic growth. Even when President Obama bragged about actions taken against Chinese with the WTO as saving "thousands of jobs" one has to wonder how many jobs have been lost in the long run because unions take precedence in major economic decisions.
From 2000 to 2009, FTAs soared from 3 to 54 in Asia of which only two involved the United States. These have cost America dearly as US imports decreased in recent years.
? Indonesia fell to 7.3% from 10.1%
? South Korea 9.0% from 18.2%
? Philippines 12% from 19%
These are sizzling economies to go along with Brazil, India, Malaysia, Peru, Chile, Vietnam, Singapore, Australia, and Russia.
There is a huge FTA brewing that could cover most of these nations, but if it’s dragged out too long or held up for union approval, then it will not happen. In the meantime, the rest of the world will keep rocking. The rest of the world outside those fallen empires of Europe and aging Japan are rocking and seem to understand they need America less than ever, and they can control their own destiny.
We must come along for the ride. This brings me to my top concern in a second Obama term. I think there would be action that sees American companies taxed on overseas profits before they're repatriated.
The rhetoric is already there. While it's impossible to claim credit for creating the oceans and seas (although you never know), the administration would point to military support and other rationale for reaching over in an emergency to take money and put it in things like an infrastructure bank or general welfare fund.
I'm of the belief we shouldn't tax these profits anyway as we are the only major economy that doles out such punishment. American companies are worried about this as well, although they aren't saying so directly, indirectly, comments from many multi-nation corporations have been like pleas to the White House to shift direction.
The CEO of Caterpillar takes great pains each earnings release to get the administration to understand how its success abroad generates opportunities in America. With 70% of revenue coming from outside the USA, Caterpillar in the past year created 6,500 jobs overseas and 6,000 in America.
Beyond policy is the aura of success and achievement that has faded, and in its wake, created things like the Occupy movement, millions to drop out of the jobs market and a plunge in entrepreneurship. Americans have to believe they can pull themselves up by the bootstraps through education, hard work and moxie.
Using SBA data, it’s clear people believe less and less. It's also clear that small businesses already established have given up on traditional sources of capital or just simply given up.
Existing declined from 2010 to 2012 down 8,000 to 28,500
African American loans decreased 29% to 1,000
Women loans tumbled to 6,732 from 9,043
Loans under $150,000 plunged to 23,900 from 32,100
Giving up is a global theme...
In Portugal, the center-right government recently threw in the towel on a pro-growth plan that would have seen workers put up 18% into social security from 11% and companies reduce payments into the nation's welfare fund to 12% from 18%. The idea is this would trigger job growth and help to bring down massive debt levels and annual deficits. The latter was promised as condition for receiving more than 70.0 Euros. Instead, that nation will hike taxes on income, asserts and even gas emissions. Portugal isn't much of a spoke in the global economic wheel, but the idea a center-right government couldn't act upon a pro-business agenda should be a warning sign for all.
One of our top trading partners, France, is imploding in what could be the final act of a socialist roman candle. The nation is losing is richest citizens and companies are not investing. A punitive tax policy is reducing the nation to country that looks my old neighborhood in Harlem during the 1977 blackout. It's a free for all as looting of prosperity and progress is being stoked by the government.
Ironically, the Minister of Industry is on the current cover of La Parisien magazine in a French sailor outfit holding a French-made blender while wearing a French-made watch. France has gone 30 years with unemployment at 7% or better, but instead of attempting pro-growth policies hatred for the rich dictates policy. Like many other former empires still able to live off the glory years, France commands a lot of foreign direct investment, but the needle is either stagnant or falling.
In 2011, France received $42.9 billion in such investments, but ten years earlier that number was $52.0 billion. During that same period, capital into other nations has increased dramatically.
Movement of Wealth for Survival and Growth
Foreign direct investment from 2001 to 2011 underscores the notion capital is looking for new homes not just to hide out, but also to expand.
Brazil $22.5b to $66.7b
Columbia $2.5b to $13.2b
HK/China $23.8b to $83.2b
Malaysia $553m to $10.8b
Russia $2.7b to $52.9b
Turkey $2.7b to $15.9b
Money is on the move, and nations are feeling great. Last year, a poll asked if people agreed strongly or somewhat with the statement that a free market system was the best system for the world's future. Germany, Brazil, China and India embraced the statement more so than Americans. In fact, Americans making less than $20,000 saw their approve crash to 44% from 76%. Just as people typically leave where they feel unwelcomed so, too, does cash taking along with it prosperity.
Despite urges to go the protectionism route, most of the countries that ranked high on this list understand there is more to gain from growing their domestic economies by growing their presence around the world. This is great news for the global economy.
At some point, the Fed will run out of tricks and actually tend to its balance sheet, but when that happens or if the seeds of disaster will be deeply rooted is uncertain.
The stronger dollar will increase the need for free trade policies in America as imports would instantly react as its unlikely either presidential candidate or their cabinet members would down a navy uniform and hawk American made products.
On that note, we must make sure US corporations are empowered to make money around the world and bring it back home for tax-free and debt-free job creation and true long term investments.
• US economic slowdown -private sector (GDP and jobs moving wrong direction)
• US economic slowdown- earnings (95 negative warnings versus 24 positive preannouncements)
• Global regulations on banks too onerous
• Fiscal Cliff
• Second Obama Term (impact on natural gas)
• Near term Global slowdown and protectionism (Cat earnings miss and warning)
Other pluses I expect include:
• Pent-up demand and offensive-minded government policies
• The new Panama Canal
• The shift in manufacturing from China to Mexico and other nations
• The expulsion of Bo Xilai from the Communist Party in China
• Resolution on European crisis although it will only be a band-aid (see education levels, see actions in France)
• Iron ore prices may have hit a bottom
• Baltic Dry Bulk acts better
For too many years, America rested on its laurels. We put it in neutral for a couple decades at the same time many Europeans put it in reverse with socialist policies that killed the entrepreneurial spirit. It's time to wake up because we are in a deep freeze that could become a Little Economic Ice Age that cuts short the nation's rein as wealthiest nation in the world. Erik the Red had no choice in fighting the elements and the odds.
In the meantime, the world is rocking. Africa has hit an inflection point, and while bumps remain in the road, the continent should avoid the wars, genocide, and backward problems to become an economic force. They're making the choice.
In South America, nations are actively recruiting the smartest talents from the planet as ridiculous green card policies in America are forcing talented people to stay home or go to places like Chile. In South America, they are making the choice. The next century will be the Asian Century because of choices they've made to excel academically and promote prosperity.
We have a choice to dictate our economic climate and fight for wealth and prosperity that will occur in the world...with or without America. America is beautiful, but there are other nations that are becoming as attractive. No time to rest on our laurels or divvy of wealth regardless of who created it.