The stock market has gone down a good bit the last month and some analysts are now opining that one the reasons is that investors see the coming tax and fiscal train wreck that awaits us at year end 2012 due to expiration of so much of the current tax and spending laws. There is also the worry that Obama will be reelected and the result will be a continuation of doing nothing to fix this fiscal mess. Even if he is reelected and wins some seats in Congress if he does not change this highly negative approach to the election he has likely poisoned the well so much no one will want to cooperate to make the situation better and that is assuming Obama man's up to the financial mess. There remains the real possibility that Romney could win and with him we might see some light at the end of the fiscal tunnel all be it a very long tunnel. Let's consider a future without Obama.
Here are six items and some fact about China that most investors and the media do not see which will be big underpinnings to the economy once business and investors begin to consider investing in new ventures. They are game changers.
One is the fact that interest rates have been low for some time now, generational lows, What this means is that corporations, businesses, and individuals have been able to refinance or finance debt and loans at these low rates for several decades going forward. Heavy users of capital, such as utilities, have done extremely well with this cheap financing. This huge expense saving going forward is going to reap dividends for US business not only in making profits, but also in hiring decisions and most importantly in being able to compete with other countries. You will also find that utilities will be able to keep energy rates lower and that in itself will keep US business more competitive. This is one of the reasons utilities have moved upward in price in the last few years.
Two is the gas shale revolution. As we have opined in a posting like it or not the Obama administration, environmental extremists, and states such as New York this revolution is real. Again utilities will be the main recipient of this huge cost savings event. Utilities are closing coal fired plants and replacing them with natural gas plants across the US and this is NOT because of EPA rules it is due to the cheap and long lasting natural gas supply right here in the US. A little known benefit of this changeover is that coal will still be mined and shipped to China for use there so the coal industry will still prosper. You also have many other industries that use coal or oil now that will switch over to gas and save money. Now add in if we change administrations and the new one moves forward on using our new huge shale gas reserves for trucking and you get additional savings. Gas at around 3.5 cents per kwh is the cheapest fuel, cheaper than hydro, cheaper than coal, half the price of wind and nuclear, and only 10% of the price of solar. Obama being gone also allows the new Keystone XL pipeline to go forward and sometime in the next decade American will finally be totally independent on gas and oil energy via US shale gas and Canadian oil. This could allow America to pull back on their forces in the middle east and have savings there as well.
Three is the simple fact that US corporations have taken the financial crisis to shed expenses and restructure balance sheets that are very solid. That is one of the reasons these companies are turning out nice profits currently. Unlike bloated government the efficiency of business has allowed it to get lean and mean. When an upturn comes these same lean operations will be prepared to add employees and spend capital on building for future sales and profits. This is one area where American corporations are at their best and that is making tough decisions and following through. It is also why we continue to opine in my postings that these newly downsized corporations are able to pay nice dividends that are good safe alternatives to low payout US Treasury bonds.
Four is that one of the things holding back a recovery is scared money. Investors and consumers who do have resources to invest and spend at this point in any recovery are being held back due to the fear of being targeted by the Obama administration as well as the unending verbal pounding anyone with assets is receiving directly from Obama. Once this money is turned loose jobs will begin to appear as consumers begin to make purchases. One of those purchases is likely to be in the housing area where investors could begin to buy up the over inventory of housing.
Five is the huge stock buy backs going on behind the scenes currently. In my 30 plus years of investing in the market I do not remember stock buy backs at this pace ever. not only is it the large number of companies doing it, but the size of the buy backs almost always in the billions of dollars. Two factors here are important. One is that corporations currently see no better use of their cash reserves than buying back their own stock. This likely is the consequence of point number four above. That also means companies believe their stocks are good buys so maybe it is time for you to consider investing as well. The next factor is that once the economy turns around and Obama is gone the surge in business and investment will reap profits and those profits will be spread across a much smaller shareholder base. Stocks will move up due to lower PE's. Much of that money being used for stock buy backs will turn into investments in people and capital for expansion.
The last reason is something most people overlook in the current world and that is unlike just about every other developed country the population in the United States is growing. Yes, it is aging some, but for the most part nothing like what is occurring in places like Europe, Japan, Russia, and even China. These countries by mid century will be places full of very old citizens. America will be young and vibrant by contrast.
Now let's address a long standing "truth" you hear constantly from the press. The ongoing consensus currently is that China is going to surpass the US as the leading economy and leading global power by 2050. Let me put this question to bed by saying simply, "a'int going to happen." Lots of reasons, but the most important is culture. I believe the reason the idea of Chinese supremacy is believed to be fact is many in this country want that to be fact. This fact is like other "consensus facts" such as global warming and peak oil, people with agendas WANT them to be so.
China's culture is authoritative driven with most decisions coming from the top. This is similar to the current US Federal Government and it is highly inefficient. That produces investments in construction and industries that simply do not work efficiently. Many do not have a piece of the action so those people have no interest in improving the business in which they are employed. Tom Friedman and Paul Krugman praise Chinese getting it done with one person dictating decisions but never has a economy of that type ever beaten a true capitalistic economy. Americans are the ones who invent the new technologies, perfect the latest trends, and our businesses produce the best workers in the world. Our schools might send out some of the least ready employees in the world but the fact is by age 30 American business has retrained them to be the most productive on the planet.
China also has a Achilles heel in it's one child policy. That policy is around the year 2035 or so going to bring some serious problems to China. Aging population to care for with many less young people to handle the task. Lots more retirees and many less people to handle exporting business. A population that actually will be shrinking. This again might thrill some environmentalists who believe the world is overpopulated, but the truth is the bigger problem is declining population. America on the other hand has a large immigrant population that is young and even with lower birth rates Americans have never gone below population replacement level.
The economy if turned loose we could roar ahead. There is pent up demand for just about everything except houses. Cars, which are the second largest major impetus behind economic expansion in this country behind housing could literally roar ahead if allowed to do so. Average car ages in the US are the highest ever.
Housing is another story but even there we are finally seeing some bottom in this industry. Again another president would finally allow the prices here to bottom out allowing investors to come in and buy up the excess inventory.
Frankly the only thing holding back a robust recovery is government and once government becomes accommodative you will get a recovery like the 1980's.
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