Made in the USA is back
Fantastic post by Michael Sankowski. This is part of the ground work being layed for a new secular bull market in the US economy (which I don't think we are in yet. I think this cyclical bull market since 2009 will be followed by one more cyclical bear and I think both the economy and stock market will be on secular bull market footing after that). Combined with the technology and energy posts that I have been highlighting I think we have makings for an upcoming golden era of American manufacturing redux.
This among so many other reasons makes me extremely optimistic about the long term prospects of the US economy.
However, the reasons why I don't think we have smooth sailing ahead from here (why I think we have another cyclical bear ahead) are outlined here.
My thoughts are:
long term (10+ years): extremely optimistic and bullish
medium turm (~5 years out): bearish due to these observations.
I also don't think this cylical bull market is over. I think the S&P 500 will test (and like make slightly higher new) all-time highs before this cyclical bull is done.
So from a cyclical perspective (for anybody who cares what my thoughts are on the matter), I think the next cyclical bear will offer a fantastic opportunity to get positioned for the upcoming secular bull. I don't think we are at that place yet.
Made in the USA is back
from Modern Monetary Realism by Michael Sankowski
This might sound incredible, but we are at the beginning of a secular change in our economy which will be absolutely gigantic. It’s going to impact everything we do, everything we buy.
I pointed out a few months back a gigantic change for the Aluminum industry. China lost their price advantage against the United States in Q3 of 2011. From my work in the Aluminum industry, I know aluminum diecasters are booming. Everyone I speak with is talking about record years in 2012.
It’s easy to imagine why – after decades of losing business to the Chinese, the same companies, making the same parts, are taking business away from the Chinese because of price.
The secular trend has been picked up by Jason Kottke, who writes one of the most interesting blogs on the web. Jason K wrote the exact piece I thought of writing when I saw the American Giant clothing piece in Slate:
”Earlier this morning in a post about Apple manufacturing their products in the US, I wrote “look for this “made in the USA” thing to turn into a trend”. Well, Made in the USA is already emerging as a trend in the media. On Tuesday, Farhad Manjoo wroteabout American Giant, a company who makes the world’s best hoodie entirely in the US for a decent price.
I wanted to link this piece to the recent piece in the Atlantic about “inshoring”, and James Fallow’s piece about China, and that’s exactly what Kottke did. Since Kotke wrote his article, Business Insider picked up the Atlantic piece and featured it.
Charles Fishman’s piece identifies five reasons this insourcing boom is happening:
--- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
--- The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
--- In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
--- American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
--- U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
But I think there is something more to this. China no longer is able to keep it’s currency massively undervalued compared to it’s “fair value” level, so Chinese goods no longer have a cost advantage.
Here is a chart from a MR post a few months back. We can see the cost of delivered aluminum parts closely tracks the Yuan/USD level in these two charts. There is a massive correlation between currency levels and the cost of Chinese goods.
As long as China was able to manipulate its currency to keep it undervalued enough, China wins, and manufacturing facilities get closed in the United States and open in China.
We would have seen the in-shoring boom happen sometime in 2009, but the global financial crisis caused China to fix the price of the Yuan for several years. As a result, the U.S. didn’t start beating China in price until July 2011.
China is once again letting the Yuan appreciate in value (a lower price means a stronger Yuan in this chart), and so now the U.S. is clearly beating China on the price of Aluminum goods. My sources in Steel and other manufacturing are telling similar stories – they have excellent demand for their product right now, because they are beating China on price.
But this manipulation does have a price for China – inflation. Keeping your currency undervalued results in imported goods – think oil, coal, copper, and other commodities – going up in price far faster than they should. This is why China was forced to let the Yuan begin to appreciate in value again in late 2010.
Since China allowed the Yuan to rise again, Chinese inflation has fallen dramatically. Holding the Yuan in place caused inflation pressures to increase until they allowed the Yuan to appreciate in value once again.
Inflation had not mattered much for China until the late 2000′s, because China was killing us on labor costs. Labor in China was so cheap, Chinese companies could “overpay” for commodities because they were “under paying” for labor. Think back to 2003, when every commodity on the planet was 50-90% less expensive than today. Paying an extra 10-20% for something which was only a fraction of input costs didn’t matter – because China was still killing us on labor costs.
Yes, this boom won’t take hold and just skyrocket. There will be bumps in the road. According Alan Tonelson, last year wasn’t so great for manufacturing. Well, it wasn’t that bad either. Here is a chart of US manufacturing jobs. Note the U.S. is not loosing jobs! Thats an important first step!
There is a setup for a huge secular trend – a boom in U.S. manufacturing. China can’t reverse the clock and reset their wages to lower levels, so we can expect a much more level playing field in the next decade. The manufacturing sector has been beat up so badly that just staying level will feel like “good times” to the sector.