Go East, Young Man; It's a Changing World

    If you have been following the market over the last year, you have noticed the glaring dichotomy between the rebound in corporate earnings and continued sluggishness in the US economy. It seems almost impossible for companies to be doing so well when there is 10% unemployment, a housing depression, and debt deleveraging in all aspects of the economy. Yet with all of these headwinds, corporate earnings are strong and growing.  Why?

    S&P 500 earnings are no longer as reliant as they once were on US profits. In fact, 30% of total sales are coming from outside of the US, and in some instances (top 50 largest companies in the S&P 500) the number is around 50%. So in many respects S&P earnings are no longer a great gauge of how the US economy is doing. It is more of an indicator of how the world economy is faring. This situation is masking how truly weak the US is, while revealing how well emerging economies and Asia are doing. As we have discussed on this blog before, through economic data such as railroad carloadings in the US and port volume in Asia, the US economy never recovered from the financial crisis. At best, we can say the US economy stabilized at a permanently lower level of economic activity. However, the crisis proved to translate into only a minor panic in Asia (ex-Japan); other emerging markets  almost instantly recovered and never looked back. You can clearly see this in the GDP numbers from Brazil, China, Taiwan, Singapore.


  This unbalanced economic recovery from the financial crisis was initially disguised by world financial markets which move in perfect unison tick for tick. Economists, politicians, and even market pundits were forced to concede that the huge rally in the S&P of 80% must mean we are having a real economic recovery. It really did look like green shoots until May 2010. It was at this point that US markets finally woke up and discovered that without all of the stimulus packages, liquidity facilities, money printing, etc, there was no real recovery. The truth is that you cannot have a sustaining recovery when you have all of the problems that the US and Western Europe do.

   I expect the trend of strong corporate earnings to continue even with continued weakness in the US and Western Europe. You can also expect commodity prices to stay high as Asia and the emerging markets consume more and more as they get wealthier and start to live like people in the West. This is one of the reasons that we can have oil at $70 and copper at $3 when the US is so weak along with sovereign fears in Europe. These dying countries no longer matter in the grand scheme of things. I recently read a chart from Marc Faber's Gloom Boom Doom report, which showed that car sales in emerging countries surpassed sales from developed markets in 2009. This really did take me by surprise, even though I have constantly read for the past 15 years or so about how rapidly emerging countries were growing. Only then did I really understand how important emerging countries' contribution is to the global economy. This is most likely because I live in the US and have somewhat of a US/Europe-centric point of view. But I think the 2008-2009 financial crisis elucidated the point that these emerging countries have become economic powers adn that as a collective group,they easily rival if not surpass the US and Western Europe.

   It is for these reasons that I am somewhat concerned about the future of the US. While I am certainly happy that people in China and India are living better and not starving, I cannot but think that this is due to the destruction of the US economy and manufacturing base. It seems that at the same time emerging markets rise, Western economies are gradually declining (albeit at at a slow rate). The political and economic elite told us that globalization was a system that raised the living standards of all countries through increased trade. Has this occurred? The US has gone from a top manufacturing powerhouse to a service based economy which produces nothing except CDO's and other garbage debt products. Real wages (inflation adjusted) in the US peaked in the 1970's and have been falling ever since, forcing millions of Americans to rely on debt to finance their lifestyles. No longer do Americans have access to well paying manufacturing jobs; instead, all that is left are menial McJobs which pay minimum wage. Even with one of these crap jobs you can no longer afford to feed yourself and your family, which is why 1 in 8 Americans are on food stamps and 1 in 4 children. It is really hard to claim that the US has benefited from globalization. Global multinationals, of course. have done incredibly well as they manufacture products with slave labor in emerging markets and sell those products in the West.  I love how economists postulate that outsourcing manufacturing jobs is actually good for the US economy because it creates more service jobs. What they forget to mention is that those service jobs pay less than manufacturing jobs. The final irony comes when those newly created service jobs are eventually outsourced!

   It has become clear to me that if you are a young person in the US or Western Europe, you may want to consider moving to an emerging market, particularly Asia. There are simply more opportunities to prosper and enjoy lower taxes and the assistance of a growing economy. Staying in the West will condemn you to a declining standard of living with higher taxes, large unemployment, and a financially bankrupt country--not to mention significant inflation as insolvent Western economies print money to finance their operations. The old saying was once:  Go West, young  man.  Today we should say: Go East.

Black Swan Insights      

Go East, Young Man; It's a Changing World