I have been known to make occasional predictions about our economy, and this quiet time between Christmas and New Years leads me to venture once again into these waters.
In general I feel that the incessant Chicken Little “sky is falling” rhetoric coming out of the media is creating opportunities in the American stock market. When Apple is selling at a P/E of 14 and I can buy Chevron at a P/E of 8 with a 3% yield, good quality companies are selling cheaper than I can remember. Europe may have a financial crisis, but remember after 2008 the ECB did relatively little to shore up their banks. The stress tests were pathetic compared to the ones forced on the U.S. banks. Germany and France are rich enough to fix this problem and since they have both benefited from the Euro, I doubt they will let it crash. The temporary problems of European banks does however provide an opportunity for U.S. Multinationals to raise their game. Procter and Gamble competes with Unilever all over the world to sell shampoo and detergent. Unilever depends on European banks for lines of credit and my guess is that P & G’s cost of capital is cheap compared to Unilever.
Speaking of cost of capital. Despite the hand wringing from Republicans, the U.S. Treasury’s cost of capital is at an all time low. What does that tell you? That the rest of the world sees the U.S. as the best bet for the future. Part of this Republican meme about the “decline of America” is based on 19th Century notions of measuring trade. In David Ricardo’s time, the fact that England was a manufacturing powerhouse that exported to high value goods to Portugal and Portugal was a rural country that exported wine to England gave them each a comparative advantage in their sector. But when Apple assembles an I Pad in China and imports it into the United States it adds $500 to our trade deficit. But where is the great value captured in the product? By Apple shareholders, because the Chinese labor component is a tiny fraction of the selling cost? So traditional economics is totally distorting our real strength in the world economy.
This is not to say that there isn’t a job crisis in America as our less educated workers are caught in a global labor price arbitrage with Korean and Chinese workers. But this too will sort itself out in the next ten years as huge numbers of Baby Boomers retire. Even now, many companies are trying to hold on to Boomers with hard to replace skills past their retirement age. I’m well aware that there are a few Thirty-somethings who troll this blog that are totally frightened that they will never live as well as their parents. It is kind of pathetic because rather than adopting the obvious solutions to shore up their retirement prospects like removing the cap on Medicare and Social Security payroll deductions on high earners and drastically cutting back the defense budget, they are trying to start a generational war by scapegoating my generation and stealing their pensions.
I try to teach my students that one of America’s great understandings is the link between art and science. Hold up your I Phone and you intuitively get that. I’m pretty confident we can continue to excel as long as we somehow get our politics straightened out. That of course will be the task in front of us for 2012.