Bernard Tan: Do not consume until you're competitive enough!
Comment of the Day

August 29 2013

Commentary by David Fuller

Bernard Tan: Do not consume until you're competitive enough!

My thanks to the independent author for his superb report which is posted in the Subscriber's Area and commented on extensively
This brings the narrative to the US.

I know many people who have written off the US as a country that produces nothing and imports everything. They cannot be more wrong.

The above chart clearly shows that US goods exports have grown relentlessly over the past 20 years albeit at single digit percentages (long run average) even as outsourcing became a household term.

Over the past 12 months (Jul 2012 - Jun 2013), the US exported US$1.6 trillion worth of goods. (China exported US$2.2 trillion while Germany exported US$1.4 trillion).

Here's another takeaway : The US is the 2nd biggest exporting nation in the world!

From the above chart, the US trade balance excl. oil and gas is obviously well on the path of moderation and even improvement.

The question is how was the US able to sustain consumption in spite of the current account deficit?

The usual answer is that the US is uniquely positioned to trade with other countries using the US dollar, a reserve currency that only the US is entitled to print in any quantity it chooses.

However, I believe that is only part of the explanation. The other part lies in the concept of "value ownership ".

An imported Nike shoe represents a trade deficit. However, since Nike is an American company, the bulk of the value-added and intellectual property resides and accrues onshore. The "shoe deficit" merely represents the manufacturing value-added which any shoe industry insider will acknowledge is actually the smallest part of the value that a Nike shoe represents.

Even though an iPhone is assembled in China, all the value-added and intellectual property behind the iPhone lies with Apple Inc in the US. Furthermore, some key components like the Gorilla Glass screen is entirely manufactured in the US.

The 3rd takeaway : The US workforce and economic system is sufficiently competitive and advanced that it actually captures much of the value of the products that it physically imports!

David Fuller's view This is such an enlightened report by Bernard Tan that I can only quibble with the paragraph shown immediately above. I do not think that the US workforce is all that competitive and advanced, unless he is talking about the non-biological workforce of intelligent machines which will become increasingly dominant. In fact, human labour had been too expensive for many years, resulting in a competitive disadvantage, to the point that salaries and benefits have subsequently been reduced along with job offers.

Where I do agree with Bernard's paragraph above is that the US economic system is very competitive. Moreover, it has increased its competitive advantage in recent years, pulling ahead of leading competitors Germany and Japan in many fields.

There are three central reasons for the USA's lead, which I have often mentioned:

1) The accelerating rate of technological innovation, to which the US is the leading contributor.

2) The USA's competitive energy costs among industrialised nations, thanks mainly to one big technological innovation - fracking.

3) The corporate Autonomies such as Nike and Apple, mentioned by Bernard above, which the US has in abundance.

In contrast, China is an economic powerhouse and has a more competitive manpower workforce than the USA, not least because it is cheaper. However, technology will steadily make this advantage less relevant. Meanwhile, China's authoritarian political and economic system is very effective at organising human labour but it is impeding China's rate of technological innovation. China has competed by copying but that dependency means it is always at least a step behind the more inventive and entrepreneurial economies. China has bought fracking companies to learn the technology but its shortage of water remains an obstacle. Lastly, China's authoritarian approach has impeded its development of Chinese Autonomies. India, a chaotic democracy with a much less developed economy, has more global brands than China.

Returning to the two US Autonomies mentioned by Bernard Tan above, Nike still has one of the more consistent overall chart patterns in this volatile environment, but it is also somewhat expensive with an estimated p/e of 21.1 and a yield of only 1.3%. Apple, in contrast, was one of the first Autonomies to become excessively overextended relative to its 200-day MA, which represents the approximate medium to longer-term trend mean. While it advanced more than the others from its 2009 lows, its subsequent reaction is an exaggerated template for what so many other overextended Autonomies are now facing. It has also bottomed for at least the medium term and has competitive valuations with an estimated p/e of 12.6 and yield of 2.5%. So Apple looks more attractive than Nike today, although over the considerably longer term, I think Nike will prove to be the better investment. For Apple, it is far from proven that the company can replace Steve Job's genius. Additionally, the technology field, while very exciting, is evolving faster than any other sector. One serious misstep or lack of vision as we have seen with many technology companies over the last 10 to 15 years, can be catastrophic. Meanwhile, as a sports and fashion trend leader, I believe Nike will sell its products to billions of people.

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