an important distinction
In an increasingly globalized world, it’s crucial for investors to keep a basic distinction in mind. It’s the difference between who owns a business and where the money-making activities are located.
for Wall Street
For a stock market investor, the more important issue is whether the company whose stock he holds is making profit gains, not whether the factory whose sales produce these increases is in the US or China. In fact–something I think Wall Street. with its fixation on domestic economic statistics, is only beginning to grasp–half the revenues, and likely a larger share of profits and profit growth, of the S&P 500 come from outside the US.
In the longer run, of course, there will be negative consequences for the stock market in the US if unemployment remains at 9%. Why? This is a social problem that Washington will try to “fix”. The Fed is already attempting to do so, with the further monetary easing dubbed QE II. Not that any US citizen needs to be reminded, but Washington also “helped” the country by bringing us from budget surplus to deficit during the past decade, committing us to wars in Iraq and Afghanistan and creating the Fannie Mae and Freddie Mac messes. It’s also kept corporate taxes high enough that most multinationals don’t repatriate their foreign cash, making that money unavailable for reinvestment in the US or payment of dividends to shareholders.
for Main Street
For a political policymaker, on the other hand, especially with 9%+ of the workforce unemployed, I would have thought that having new jobs located in the US is far more important than trying to make sure the employer is a domestic company. After all, the fact that all the BMW X3s in the world are made in the US (I found this out in a Super Bowl commercial) is good for domestic employment, even if the company is incorporated in Germany. Look, too, at the strong growth of the social networking business in the US, due in good part to investments from DST Global (Russia), Tencent (China), and DeNA and Gree (Japan). The jobs being created are in the United States, even though the backers are abroad.
That’s not the view form the Potomac, however.
the Obama speech
Yesterday, President Obama made a speech on encouraging economic growth to the US Chamber of Commerce (full text from the Huffington Post). \ As a statement of purpose, the address could easily have been taken from an economics textbook from the 1960s. Unfortunately for government policy, the world has changed radically since then.
What was the speech missing? Well, it did allude to the fact that high tax rates were hurting the balance of payments by stopping the flow back home of profits earned abroad by US companies. And it did mention trying to encourage exports.
But it assumed that an export-oriented economic strategy still makes sense. Logistics issues aside, it ignored the fact that in today’s world, companies entering a big new foreign market may want their production base closer to their customers. Host countries definitely want that, too, to get the maximum benefit of technology transfer. Tax benefits may also come into play.
It also skipped over the fact that creating advanced manufacturing jobs in the US does nothing for the huge number of structurally unemployed, which is the pressing political/social issue of the day. And it assumed that the US has a lot to teach the rest of the world, but has nothing to learn in return. In other words, the idea the the US could benefit from technology transfer appears never to have entered Mr. Obama’s mind.
...a big deal?
Is this a big deal? Right now, no. The only real evidence of “protectionist” tendencies in Washington that I can see is last year’s congressional action to up the visa fees that Indian IT outsourcing companies have to pay to bring workers into the US. Yes, the US will lose tax revenues, domestic IT costs will rise and the Indian firms’ (few) US workers will lose the chance to acquire skills they might use to launch competitor companies. This is very small potatoes compared with congressional action during the 1980s. One might also argue that such actions are no longer possible since the Democrats lost of control of the House.
On the other hand, the chances seem slim that Washington will do something constructive on the jobs front using a severely outdated picture of the way economies work. It certainly won’t make it easy for foreign companies to set up shop here, so that US workers can be trained in new skills.
While this is not a stock market worry for today or tomorrow, someday this closed-mind attitude may catch up with us. So it’s something to keep in the back of your mind.