A few months ago I was watching a nightly newscast in Pittsburgh. It was unremittingly grim. From the global to the particular, the newscaster moved from Middle East strife, the rising price of oil, to inaction on the federal deficit, the potential bankruptcy of Harrisburg, Pennsylvania’s capital city, to a series of stories about local murders and fires, ending with sports (the Penguins won) and a human interest story about how a few firemen went through a great deal of trouble to retrieve a cat for a little girl. Upon queries from me, a native responded that the commentary, and the percent of time relating what went wrong in America that day, versus what went right, was roughly the same every night.
An Investor’s Perspective
It turns out this is generally the case every evening all over America. But is this truly a reflection of what is going on in the United States? I don’t think so. It is too one-sided. I think like an investor. Investors are likely to be much more analytical in their assessment of America’s present and future. They play it by the numbers. But to be an investor one must always be considering what the future will look like. Even though most investors commit funds to maximize returns based on their own individual risk profile and time horizon, since stock prices tend to rise over the long run, most of us will focus on those sectors and companies that will at least grow with the economy over time. If stocks rise roughly 10% a year as they have over the last 84 years, a little more than a typical lifespan, emphasizing the negative is a surefire way to under perform over time. Oddly enough, although most pundits view equity investors as conservative folks, investors, nonetheless, are typically betting that something will go right.
When looking at a company, an analyst typically starts with the macro view. What are the company’s competitive advantages? Let’s look at the United States in the same light. What are the country’s long term capabilities which are unlikely to go away any time soon and which can keep the country in a leadership position for decades to come? And let’s look at all this in relation to China, what is likely to be our main economic and political rival throughout the twenty first century.
Political Stability
The first sustainable advantage we have is political stability, which is why the Chinese yuan is very unlikely to displace the dollar any time soon. The orderly transition of power is fundamental to investing for the long run. What is likely to be more stable, with a more predictable regulatory environment over the ensuing 25 to 50 years, China or the U.S.?
Ingenuity
Next on the list is the ability of a country to sustain innovation in order to take advantage of global demand. Capital has to be allocated efficiently. An environment has to be engineered and sustained to attract people willing and able to discover and exploit new innovations and manage their development and profitably deploy them.. How is America doing? We have the most distinguished universities. We have the finest business schools. And we spend more on R&D, both as a per cent of revenues as well as on an absolute basis, than companies and governments located in any other part of the world, including China. Until recently, Americans invested more in venture capital sponsored firms than the rest of the world combined.
38 million people in the U.S. were foreign born. This is the country people still emigrate to when seeking social acceptance and wealth.
More important, we welcome intellectual capital to a greater degree than any other major nation. At recent count, and as noted in Eric Catts’ recent book, Up on America, 38 million people in the U.S. were foreign born, 12 million in Russia, 10 million in Germany, 4 million in China (!), and 2 million in Japan. This is the country people still emigrate to when seeking social acceptance and wealth. It is true, Europeans typically get 400 more hours of vacation time than in the U.S. But our society is designed for the ambitious. Half of the people earning in the bottom quintile in this country, climb to a higher rung within 10 years. There are few countries that can match that. Plus, as opposed to most developed countries, and China, our population is scheduled to rise through 2050, which will also foster economic growth and expand our human capital. By 2050, thanks to immigration, the population of the U.S. will increase by almost a third to about 400 million people. The population of Japan will decline by over 25 million individuals. Working age people are expected to fall by 30% over the next 20 years in Italy, Spain, Germany and Greece. By 2050, based on current trends, China’s population will fall by an estimated 100 million people, which will put the labor pool at a competitive disadvantage versus other emerging countries with growing populations, like India, Vietnam, Pakistan and Nigeria. As Casey Stengel the old perfessor, used to say: “You could look it up”.
Lastly, and probably most important, this country, along with Europe, unlike what is still the case in most emerging countries, provides women, half of the world’s population, much more of an opportunity to fully participate in the affairs of state, commerce and academia. And because so much of the world has already been exposed to our language, English is likely to remain not only the lingua franca of commerce throughout the twentieth first century but the common language for scientific and general academic conversation.
One only has to look at the list of transforming technologies to see that the U.S. still leads in their development, application and deployment. We lead in chip development, computer software, broadband and wireless technology, Internet software and information and data gathering tools, entertainment dissemination, health care robotics and other surgical devices, drug discovery and genomics, nanotechnology, specialty alloys, metals processing technology and tools for energy exploration and development. Semiconductors, mobile infrastructure, information storage, routers, switches, smart phones, cable boxes, bio-tech, the Internet, and fracking tools were all developed and exploited by American firms.
Global Reach
Another sustainable competitive advantage we have is the global reach of our largest companies. China may export more than the U.S., but it is American companies that have mastered the deployment of capital on foreign soil for the benefit of domestic owners. About 40% of sales generated by companies in the S&P 500 are in foreign countries. America, more than any other nation, has perfected the ability of a corporate enterprise to market products beyond its borders for profit. This capability also means that our profit pool from foreign activities is greater than anyone else’s, and can be put to use for sustained growth.
This is the country that perfected capitalism. There is still no other form of economic enterprise that can direct the desire for personal betterment to maximize a greater common good for the majority of a population. China has unleashed tremendous economic forces via the profit motive. However, it remains to be seen whether a command economy can enhance economic development versus our brand of more market driven capitalism. It also remains to be seen whether the implementation of most basic civil rights is enough to sustain its brand of capitalism without political freedom.
The U.S. versus China? Right now, the expectation is for the U.S to generate GDP growth in the 2%-3% range. That is more than any other developed nation. If China grows at its current rate, it will overtake the U.S. by 2050. But given its aging population because of the old “one child rule” and the inevitable decline in growth which will occur once it completes its transition from an agrarian to an urban economy, the current rate of GDP growth is much less likely to continue over the entire period than what is projected for us. China’s growth rate will revert to the mean just like any growth economy, growth industry or growth stock, pushing out the day when China will have greater productive capacity than the U.S. well past mid-century.
What could undermine our advantages?
What could permanently undermine our competitive advantages? At the top of the list is regulation. Our government has implemented a contract to provide an environment to encourage individual achievement and consequent economic rewards. That cannot change. Regulation cannot be unilateral. It must be globally implemented and the U.S. must encourage that. Next on the list is our current debt level. We are living beyond our means. That is the one thing we have in common that has undermined great nations throughout the centuries. Another is crime. We have 5% of the world’s population and 25% of the prisoners, and it is not only because we are better at catching or punishing criminals. But there is nothing we face that could undermine our way of life than what we have already surmounted: slavery, segregation, political and corporate corruption during our period of fastest growth, the disenfranchisement of women in the workplace, the Great Depression, Nazism and communism.
This country has just come through a period of great economic stress that has shaken our confidence, but consider how much more successful our navigation of this great storm was, thanks to Mr. Bernanke and others, than this country fared during the 1930s.
This country has just come through a period of great economic stress that has shaken our confidence, but consider how much more successful our navigation of this great storm was, thanks to Mr. Bernanke and others, than this country fared during the 1930s. Financiers rarely make the same mistake twice. It’s like raising children. Most of us don’t make the same mistakes our parents did. We make different ones. Fortunately, our economists continue to develop a collective consciousness to help us to better deal with the inevitable adverse consequences of a less managed economy structured for ambition and economic success.
During the over 30 years that I have been a securities analyst, research director and portfolio manager at Standard & Poor’s, Bear Stearns and now at Yellowstone, I have searched for companies with sustainable competitive advantages and underlying equities at attractive relative values. As I look at the valuations that exist today and the still very attractive overall equity risk premium for U.S.-based stocks, betting on America now is a relatively easy call.