Monday, November 25, 2013

The rise of the US Dollar

Gary writes, "Internationally, money-especially today when it can be transferred anywhere in a split second-wants to be where the action is. That requires not only a powerful and large economy but also deep and broad markets in which to invest. Today, the U.S. Treasury market trumps all others in size and, in the eyes of investors…, in safety as witnessed by the mad rush into Treasury bonds in times of recent global trouble."

Similarly, Gary Shilling states, "American stock market capitalization is four times that of China, Japan or the U.K. and is over three times the Eurozone's…Almost 50% of Treasuries are held by foreigners but only 9.1% of Japan's government net debt is owned by non-Japanese. According to the IMF, 62% of the world's currency reserves are in dollars. The 24% in euros is down from 29% four years ago. Foreigners so love investing in the U.S. that at the end of 2012, it exceeded U.S. investment abroad by $4.4 trillion, up from $4 trillion a year earlier."

"Investors want to go where it's free and open; they don't like China. China periodically freezes their currency. They did that for example during the Great Recession. They had let it float up but then they froze it when they got worried. They're now letting it float a bit, but they turn it on, they turn it off. Other currencies are much less free to people moving out. They typically manipulate currencies in a lot of places. The Swiss, for example…froze their currency 1.2 to the Euro when everybody wanted to be in the Swiss Franc because they worried that a strong currency would kill their exports to the Eurozone, which is their major trading partner."

"Things can change over time but one statistic that I think is very important is global forex trading. Now, there's two sides to this so the numbers add up to 200%, not 100%, because for every sale there's a buy. But if you look at the trading, in 2001, the U.S. dollar accounted for 90% of all the daily trading in currencies. In 2013, it's down from 90% to 87%. But if you think of all that's happened in that time, the euro currency had come in, China has gotten stronger, etc. But it still has only declined 3 percentage points and it's way ahead of anything else. The second one today is the euro at 33% versus [the USD at] 87%, the yen 23%, sterling 12%-in other words, this is the currency that people transact."

"The sixth characteristic is credibility. And that's the only one where you can say there's been any questioning of the dollar. And it is true that last year that Standard & Poor's did downgrade the U.S. from triple AAA to AA+, but that hasn't really hurt. You might remember that when they did that, Treasuries actually rallied…and it has not changed the willingness of foreigners to put money into dollar denominated assets. So, the credibility issue is the only one that is not absolutely triple-A, but it hasn't had any decided effects so far."

Wednesday, November 20, 2013

U.S. Manufacturing Only Has Jobs for the Skilled Few

Even with the recent strength in the U.S. manufacturing sector, labor-intensive industries won’t return to the U.S. as long as the huge labor compensation gaps persist with Asian and other developing countries. Sure, there will be niches created when quick delivery, changes in fashion and other developments require production to be close by.

The majority of what could be rapid growth in U.S. manufacturing will probably come from capital-intensive, robotics-intensive production that doesn’t require many people. Those employed in this area will need considerable skills. Furthermore, these are the industries that show rapid productivity growth as new technologies are introduced. But when productivity growth is robust, output will rise substantially without much increase in employment.

There are concerns about the lack of engineers and other professionals who make sophisticated manufacturing possible, especially as highly skilled members of the postwar generation reach retirement age. In 2008, the latest available data, 4 percent of bachelor’s degrees in the U.S. were in engineering, compared with 17 percent in all of Asia and 34 percent in China. That means that more H-1B visas allowing foreign professionals to work in the U.S. will be awarded. A Senate-passed immigration measure increases the number of these visas to 110,000 a year, from 65,000 now.

One of the most exciting new technologies is additive manufacturing, popularly known as 3-D printing, which uses layers of materials ranging from wood pulp to cobalt to human tissue to make three-dimensional objects of almost any shape from a digital model. Machines have been developed that can print more than 1,000 materials, and the layers can be mixed to embed sensors and circuitry such as those used for hearing aids and motion-sensing gloves.

Another form of additive manufacturing is cold spraying, in which metallic particles are blasted at high speeds and fuse into the desired shapes.

Industrial robots can operate 24 hours a day with no coffee breaks. Their cost compared with human labor has fallen 50 percent since 1990. Thanks to high-technology manufacturing, Boston Consulting Group estimated that 30 percent of Chinese exports to the U.S. could be economically produced domestically by 2020.

The U.S. won’t enjoy much of an advantage from lower energy costs. Crude oil prices are reasonably uniform throughout the world. The U.S. benchmark is West Texas Intermediate; Brent is the standard elsewhere, but the two move pretty much together. There have been differences, specifically the recent discount of WTI because leaping U.S. output was bottled up at Cushing, Oklahoma, until pipelines could be reversed to let it flow to the Gulf of Mexico. Then the gap closed.

Sunday, November 17, 2013

Shilling: Fed to keep interest rates near zero

Gary Shilling expects the Fed to keep interest rates near zero until the unemployment rate falls below 6.5%. He notes that the decline in the labor force participation rate has made the unemployment rate appear lower than it really is.

Tuesday, November 5, 2013

Gary Shilling: South Korean equities looking attractive

South Korea has emerged as one of the few relatively solid rocks amidst a sea of leaky emerging market barges.

Investors of late have been rushing into South Korean equities amidst the Fed's recent discussion of tapering its $85 billion per month in security purchases, as we'll discuss later.

As of the end of October, the KOSPI index was down only 1% from the October 2007 peak. In contrast, the MSCI World index is off 4% since then and the MSCI Asia Pacific Index has dropped 14%."