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Why I Believe in America

"It's never paid to bet against America. We come through things, but its not always a smooth ride."
 – Warren Buffett

Like the Oracle of Omaha, I have always made money betting on America. In 1982 when the US was still reeling from the kidney stone decade -- the 70’s I watched the US reinvent itself under Ronald Reagan. It was then I began to understand the power of the US system.  By the mid 1980's many thought Tokyo would use Mitsubishi, Sony, Honda Motors and Toyota to conquer America. Japanese firms were gobbling up Hawaiian and Manhattan real estate. Americans were shocked when the Pebble Beach Golf Course was sold to Japanese businessman, Minuro Isutani for price far more than anyone could have imagined.  In the the 1980s the Nikkei stock index rose six fold during the decade.  Still after I visited Tokyo and seeing the price of things, I did not believe this was the end for the USA. In 1990 the real estate bubble burst and the Nikkei lost half of its value in a single year.  In the plunge of 1987 I was long and I was wrong, but I also bought back in a few weeks later to the delight of my wallet. In the 1990 I rode the tech bubble but really made more money on Canadian Oil Sands Trust.  1999 I was getting burned on Microsoft's pull back so I brought some Enron, but I did not get really burned, I sold it weeks later when I did not like the way it was headed. As a bonus that little pinch kept me from jumping on Nortel -- as it also tanked. Believing in the US is not an all or nothing idea. After 911 the tilt in economic power started leaning toward the global commodity bubble -- I was long on Canadian equities making a bundle on Nickel, Coal and Oil but with an eye on America.  In the depths of the crash of 2008 I was waiting to buy the bottom. I did get it wrong a few times in some head fakes. It often was depressing to watch but, when the bottom came, buy I did. I even levered  up to make even more gains.

I have always had a strong belief in the US economy. My faith in America is not for a motherhood and apple-pie reason, but because of some basics of the US economy that give it a natural advantage. That advantage is nearly impossible to screw up, no matter how hard they try in Washington. If you ever doubt that, when someone tells you it is over, you should go back and read this again.  

50 Countries
First off the United States is NOT a country. When people say the UK is joining the US in a joint military operation, or a trade deal with France and the USA is signed -- your mind naturally thinks of these two “nations” as similar things. Nothing could be further from the truth. The United States is really a 50 Nation trading block with a common currency, interstate free trade, interstate disaster relief, a strong central bank, a shared military and a common legal structure. Think of it as the European Union done right.

Here is a map from the Economist magazine, based on IMF data. It renames each state to a name of a nation with a similar GDP.

There was a prior version from 2007 where Texas was alone as strong a Canada, and California was France. The analogy is important because it is the heart of the power of the US economy.

Distributed Wealth
Next on my list is the US consumer. In the Western democracies the money flows to the consumer. The United States has a per-capita GDP of $45,000 (source CIA world fact book) far above any other country. It is common in America to find a person with a salary equal to the GDP number.  China’s GDP is under $10,000 but in fact if you take out the top 7% of the population the "common man" figure is more like $800. Much of that Chinese GDP is in the form of unused buildings and over capacity factories.  China is a command economy, and there is always a tendency for each level of bureaucracy to "fudge the numbers". more on my take on China here

The world map above shows where all the money in the world is. As you can see from the dark blue, the answer is still the west. But it is more than GDP, when you see how GDP trickles down, it gets into the hands of the people in the west but in Asia it remains concentrated in governments, corporations or a few greedy elite. China's Parliament has 83 seats held by billionaires the US house of representives  has none.   In the 1980's I believe this was a big part of Japan's downfall. Japan's big trading companies and the government  failed to share the wealth with the common man and it drove prices to consumers out of reach. 

A Business Culture
There is some economic benefit to culture – I stress that is culture, not race. You can be any color or creed but it is a question of the culture of your upbringing.  The US is primarily an English speaking nation with a large part of it ancestry from German decent. Nations with Japanese, German or English language roots have a culture of hard work and fair play. I am way on a limb here, but it is just my experience doing business in these cultures that leads to firms that are able to act quickly, have clear chain of command, limited corruption and a motivated workforce  It was my accountant who pointed out that he had never visited a nation that spoke Spanish that was not ripe with corruption. When I had a software company only my distributor in Spain ripped me off. Language does effect how people see the world. Also I would say that on a whole all democratic nations with a stable economy are moving toward less corruption. Mexico has come miles in this regard and if it can control the drug wars may be a new economic leader.

The New Normal
Much has been made of the lower rate of employment in the US, and there are a thousand predictions of the demise of the United States. Many people say that nothing is made in the United States anymore or everything is made in China. But that simple is not true. What is happening is that low value-add manufacturing is leaving. Boring jobs building $2 a pack Christmas lights is gone forever. Americans are not the one the world uses to sort through dead computers for scraps of gold plating and some recoverable parts. These jobs will forever be offshore in places that have crushingly cheap labour and are willing to look the other way on dangerous environmental and worker health/safety policies.

One particularly disturbing idea from the “Yes Men” protest group is that modern remote labour is worse than slavery. .  Under this idea, if slavery was NOT abolished in the USA, Nike could not clothe and feed their U.S. based slaves as cheep as it get labour in the third world. In other words in Asia and Africa we have a new kind of super low cost slavery where the slaves are not moved, the work goes to them and these slaves even must feed clothe and house themselves. 

The Swiss have one of the highest standard of living in the world, yet they are a tiny nation. They achieve this by not trying to fill all needs, but instead focusing on high value add products like pharmaceuticals, watches, banking, high-end chocolate and software development.

So ask yourself, do you want a workforce that builds cheap dollars store flashlights, cutting boards and paper hats or do you want good jobs building satellites, robots and medicine? America makes Boeing 737s, Patriot Missiles, Ford Mustangs, Bell Helicopters,  Hughes Drilling tools, Caterpillar earth movers, Colt handguns,  the Dragon Space capsule and Gibson Guitars. However today there are whole new horizons beyond manufacturing from Google search engines to McDonald's  KFC and Hilton franchises, Visa and MasterCard getting a little taste of every sale in the world. The world knows Homer Simpson and Brad Pitt from world wide media distribution. The sun never sets on the Wal-Mart empire, that garners the lion-share of the profits from sweat shop polyester “fat pants” flogged to the new consumer masses around the world.  America even exports the curse of products like Marlboro cigarettes  and Jack Daniels whiskey. Perhaps you are reading these words on HP laptop or an Amazon Kindle using intel chips and electric power generated by GE turbines. Of course the list is endless.  I for one do not cry for the loss of low-end manufacturing.

A Creative Giant
European and North American firms have less rigid education systems that does not score well on comparative testing against other nations, especially in math and science. However they do deliver a more creative workforce that is better able to work independently. That may have more  to do with culture than education. For example many high-tech firms are based in Asia but to a large extent they only perfect and mass-produce designs from the west. Mighty Samsung beat Apple at their own game by building a bigger iPhone with a better screen and Goggle android software. But that is not innovation -- that is evolution. The innovator at he heart of the smart-phone was more likely Blackberry some 10 years ago coupled with Steve Jobs innovative touch screen environment.  I think the film industry is a good example; the US studios are not as creative as their European counterparts, and not as prolific as the Studios of India. 
However Hollywood makes a very high quality product that commands a premium in revenue beyond all competitors. Sony was very quick to make electronics en mass in Japan but kept the US studios they bought in California, where they thrive.

Creative does not just spring from Silicon Valley, Madison Avenue and Hollywood. The USA produces more books, files more patients, designs more buildings, paints more paintings, writes more plays and even creates more new words than any other nation on earth. Americans ingenuity remains a powerful force and a distinct advantage.

A Mighty Force
Next you must understand that, like the money says, God has Blessed America. No I don’t think some omnipotent deity with a halo actually gives dang, but America has many fundamental blessings due to geography. It is very hard to reach by invasion. Separated from the world by two vast oceans, even a modern Ballistic missile takes 20 min to reach US soil from Eurasia. Long ago Abe Lincoln talked of this  in this famous speech;

“All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Buonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.“

What this meant is that today war has crippled the Middle East and Africa and in the past laid waste to the industrial infrastructure of Europe, often using US supplied arms -- while the US has enjoyed steady unhampered industrial production. The US wages war but seldom feels its effects.

America has the worlds largest Military spender. Let look at the next two military powers, combined total for China ($89.8 billion) and Russia ($52.7 billion) comes to $142.5 billion. Consider how puny that $142.5 billion is compared to the US's $1.3 trillion budget. The US accounts for 46% of total spending by the world's 171 governments and territories.

You might enjoy this disturbing video from a few years ago  called 'What Barry Says"  It is not just some British liberal thinkers who have voiced concerns about this -- both Presidents Washington and Eisenhower  (who were both former battle hardened generals) felt America should fear its "military industrial complex". Morality aside, it is clear -- war, the way America plays it today, is good for business. 

Today America can dictate policy to the world as President Bush did in Iraq, but America has created a global market for US built weapons by sponsoring conflicts around the globe.  U.S. Intervention and War is bound to become even more acceptable with the changeover to unmanned  drones and robot warfare.  With no families mourning the dead or the disabled cluttering the streets, there seems to be no reason not to dictate how the world will conduct its business.

Many ethical pundits would argue a drone strike is nothing more than an execution without due process or trial, but clearly the White House does not see it that way.  "We conduct those strikes because they are necessary to mitigate ongoing actual threats, to stop plots, to prevent future attacks and, again, save American lives," said White House spokesman Jay Carney. "These strikes are legal, they are ethical, and they are wise."

And so not only does the USA have a bigger military they have the stealth and unmanned capabilities that make war so much less emotionally/politically costly. As we saw in Iraq, the first blow blinds the radar the next levels the high value targets like airfields and command centers, the rest is simple, invade at will. This technology gives America the high ground to set policy and protect American Interests.

One last little thought, if you are ever worried about the US debt being out of control, the current deficit can be recovered in just 10 years, with no new taxes, by simply shrinking the US military down to the size of Britain's or France's military.

Reserve Currency 
Of course on of the great benefits America enjoys is that it is the worlds reserve currency. The U.S. dollar replaced the British pound sterling as the world's reserve currency circa 1945 with the help of the Bretton Woods agreements.

There has been much talk that China wants to replace the US dollar with the Yaun for this coveted spot. Good luck, until China has free and democratic elections there will never be any global faith in the Yaun. The Euro has gain some acceptance and is held in many national reserves, but the world for the foreseeable future will trade only in US dollars.

Most major economies with flexible or floating exchange rate schemes clear excess supply and demand by purchasing or selling reserve currency. For instance, a country looking to boost the value of its currency can repurchase its national currency with its foreign currency reserves. Up until now, there has been a constantly growing demand for more dollars from the rest of the globe. They have needed dollars to buy oil and to trade with one another.

Oil is priced in US dollars – the term is called Petrodollars. Recognizing that the US, and the rest of the world, was going to need and use more oil, a lot more oil, and that Saudi Arabia wanted to sell the world’s largest economy (by far the US) more oil, Nixon and Saudi Arabia came to an agreement whereby Saudi oil could only be purchased in US dollars. This caused an immediate and strong global demand for US dollars.

"Beginning in the mid-1970’s the American Century system of global economic dominance underwent a dramatic change. The oil price shocks of 1973-1974 and 1979 suddenly created enormous demand for the floating dollar. Oil importing countries from Germany to Argentina to Japan, all were faced with how to acquire export-based dollars to pay their expensive new oil import bills. The rise in the price of oil flooded OPEC with dollars that far exceeded domestic investment needs, and were therefore categorized as “surplus petrodollars.” A major share of these oil dollars came to London and New York banks where the new process of monetary petrodollar recycling was initiated.

In 1974 U.S Assistant Treasury Secretary Jack F. Bennett and David Mulford of the London-based Eurobond firm of White Weld & Co set about the mechanism to handle the surplus OPEC petrodollars. Kissinger, Bennett and Mulford helped orchestrate the secret financial arrangement with the Saudi Arabia Monetary Agency (SAMA) that creatively transformed the high oil prices of 1973-1974 to the direct benefit of the U.S. Federal Reserve banks and the Bank of England.

Despite the financial windfall enjoyed by the U.S./U.K banking and petroleum conglomerates who “managed the recycling of petrodollar flows,” most Americans regard the 1973-74 oil shocks as a particularly painful time period of high inflation and long lines at every gas station. In the Third World these high oil prices created huge loans from the International Monetary Fund – debts to be re-paid entirely in dollars." --William R Clark

By 1975 all OPEC members had agreed to sell their oil only in US dollars.

There are other benefits, the world reserve currency (mostly US dollars) is held in order to support the value of national currencies. For instance, Mexico issues pesos (which are essentially IOUs) to its citizens and repurchases them with U.S. dollars, euros, or other reserve currency around the world held by it

Also since other nations hold the reserve currency, the market for the reserve currency is larger than if it were not the reserve currency. As such, Sovereign Bonds, which pay out in the reserve currency, are in higher demand (than they would be if the issuing country's sovereign currency was not the reserve currency), which drive down the interest rate paid on those bonds, resulting in a lower "Cost of Credit".

What the effect of all this is that the United States prints money, either physically or through fractional reserve loans, that cost it nothing. More interesting is that it does not devalue the over printed currency, because it does  not ever get spent, it sits in the vaults of nations around the world, particularly in the middle east. It also sits in billions of dollars stored in offshore tax havens.  When a few US dollars do come home, it is often used to buy weapon systems and create US employment.

Vast Resources
The US is abundant in natural resources, surrounded by friendly nations and blessed with a climate that does not promote disease or famine. Ask the French who failed to build the Panama Canal, or African development agencies how important health, climate and conditions are to development.

Although it is popular belief that America’s resource are depleted and scarcity is on the rise. The truth of the matter is that across the board Americans are finding new resources and better using old ones right at home.

Look at the modern proven mineral reserves vs what we thought just a few decades ago.

Table 21.1
Proven Reserves of Various Resources, 1950-90
(Million Metric Tons)
Resource19501990Change (%)
Iron Ore19,000145,000663
SOURCE: Kahn, Brown, and Martel, p. 92; U.S. Bureau of Mines,Mineral Commodities Summary, January 1990; Resources for Freedom,Report of the President's Materials Policy Commission, 1952, vol. 2, p. 27; and Energy Statistics Resource Book (New York: PennWell, 1991), pp. 143, 151.
NOTE: Information on proven reserves of coal, magnesium, natural gas, and titanium in 1950 is unavailable.
aBillion barrels.

The disturbing, ongoing pattern of famine and drought in Africa and Asia has added credibility to the argument that the earth is approaching a point at which it will not be able to continue to feed the "teeming masses" of the planet. Yet by any analysis, this is a time of agricultural abundance unprecedented in the history of the world. Economist Thomas De Gregori observes that "if there is hunger in the world-and so there is, in abundance, even in wealthy countries-it is because of maldistribution of food, not insufficient global production. In fact almost all malnutrition is due to supply route being cut by war or natural disaster, preventing aid from reaching the affected.

An examination of 15 representative agricultural commodities (barley, broilers, carrots, cattle, corn, cotton, eggs, milk, oats, oranges, rice, sorghum, soybeans, wheat, and wool) reveals that real prices in the United States dropped by an average of 38 percent from 1980 to 1990. When indexed to wages, the price of those foodstuffs has declined 83 percent since 1950.22 Clearly, if the earth's agricultural productivity were being outpaced by voracious demand for food as a result of the population explosion, agricultural prices would be rising sharply rather than falling dramatically as the data indicate.

Likewise, it is clear that the agricultural output of the planet has increased exponentially over the past several centuries. Since 1960 technological advances in farm equipment, pesticides, fertilizers, irrigation techniques, bioengineering, and soil management have led to a doubling of world food production and 30 percent increases in farmland productivity. 

In fact food and resources are getting cheaper (in real term) not out of shortage but due to surplus. 

Resource Prices Indexed to Wages, 1950-90
(Relative to 1990 Baseline)
Change (%)
SOURCE: Moore, pp. 18-19, 23, 30-31, 40.
aIncludes barley, broilers, carrots, cattle, corn, cotton, eggs, milk, oats, oranges, rice, sorghum, soybeans, wheat and wool.
bIncludes aluminum, antimony, copper, lead, magnesium, manganese, mercury, nickel, platinum, silver, tin, tungsten and zinc.
cIncludes coal, electricity, natural gas and oil.

The United Sates has always been held back by one commodity -- Oil. Billions each year flow out of the US to OPEC nations and it has created most of the Arab  national security issues that America faces today.

However U.S. oil and gas production is evolving so rapidly—and demand is dropping so quickly—that in just five years the U.S. could no longer need to buy oil from any source but Canada, according to Citigroup's global head of commodities research Edward Morse. In a new report, projects a dramatic reshaping of the global energy industry, where the U.S., becomes an exporter of energy, instead of one of the biggest importers.

The shift could sharply reduce the price of oil, and therefore limit the revenues of the producing nations of OPEC, as well as Russia and West Africa. Those nations face new challenges: not only are the U.S. and Canada increasing output, but Iraq increasingly is realizing its potential as an oil producer, adding 600,000 barrels a day of production annually for the next several years.

Crude oil generated the largest single annual increase in liquids production in U.S. history last year, with an increase of 1.16 million barrels per day. Oil production is booming in places like Texas and North Dakota, which has the lowest unemployment in the country at just 3 percent last September, compared to the national rate of 7.8 percent then.

Last year, for example, the U.S. consumed roughly 7 billion barrels of oil at an average price of about $100 a barrel. A 30 percent discount on that oil bill works out to about 1.3 percent of gross domestic product. In an economy growing at roughly 2 percent a year, the impact of that dividend would be substantial.

I believe that the price of Gasoline is like a tax on the American economy, if the price of energy falls and less of that money goes overseas, it could catalyst for the next great leap forward in the US economy.

Global Economic Capital
There are stock exchanges all over the world. But most are microscopic compared with the massive exchanges in the United States. The open outcry pits are almost gone, and the floor of the old New York Stock Exchange has really become a bizarre PR piece with traders quitely walking around the room with little to do beyond making a backdrop for CNBC.  Modern trading really is just a few humming data centers most of which are not even in Manhattan. But where the bits get matched-up is not the point. The dealmakers are still the Goldman Sachs, Bank of New York Mellon and JP Morgans -- know collectively as Wall Street. They employ armies of $400,000 a year investment bankers who all call Manhattan home.

Look to the left on this picture, there is the NYSE the 8 trillion dollar gorilla. More than 4 times the size of London, and nearly bigger than all the rest put together. If you want to make it in this world you need to trade in New York. Even the world's foreign companies do most of their trading on New York.  China Mobile, Samsung, Toyota, Tata motors, Lloyds Bank, BMW and BHP Billiton are all major players at home -- but their shares trade most of their volume on as American Depository Receipts on the big US exchanges.

Even mighty nations, when they need money, must come to America to issue their bonds with Pimco or Cantor Fitzgerald. Many nations even keep their national gold reserves on U.S. soil.

Beyond the stocks and bonds, the U.S. controls the world commodity exchanges such as the CME in Chicago and the NYMEX in New York. What is decided there sets the price of a cup of coffee in Kenya, a loaf of bread in London, a tank of gas in Sydney and the cost of steel to make a simple tuk-tuk in New Delhi.

Without firing a single shot the US government can topple a country or a dictator by freezing assets held in the US. Such is the power of the US financial system.

"Courage is resistance to fear, mastery of fear - not absence of fear. "
- Mark Twain

So one day the Dow Jones Industrial Average dips again, or when some nation rises up on the world stage, be they enemy or ally, summon your faith. Don't forget to buy low and sell high and in a recovery always be quick to bet on America.