Future of the US - Part 2

Hi, thanks for tuning in again. Let’s continue this week with the second and final instalment on what the next decade or two will behold for the US:

5.  Technological Advancement.  US will continue to lead the world with its impressive prowess in innovation. Fast forward another decade or two, new businesses in forms we never can imagine today will sprout and transform the way we live and interact, just like how the internet, smartphones and Facebook have changed the world. The new smart home of the future will spell an entire new ecosystem of technological and lifestyle products that we can only dream of today. Consequently, new business models will emerge rendering existing business models obsolete, transforming industries, businesses and commerce. US will be central to these pivotal changes.  Medical advances of tomorrow will make serious diseases a thing of the past. Imagine someone diagnosed with cancer could just walk across the street to GNC or Wal-Mart to purchase over the counter cancer pills for treatment and in a week’s time, the cancer is eradicated, just like flu. Breakthrough in genetics, life sciences, pharmaceuticals and medical robotics will remain the domain of US supremacy in the next decade and two. Advancement in industrial engineering, agricultural technology and recycling capabilities will not only lift US economic productivity but will also contribute to sustainable long-term growth for the world as world population expands and continues to demand clean water, food and other resources adding continuous strains to our planet. The world will progress as the US innovates and exports high value-added products and services to the world, in process expanding its own economy. 

6.  Energy and the US dollar. Domestic US oil production will rise from 5.6 million barrels a day to 9.1 million by 2015, bringing about a leap in share of domestic oil production to consumption from 28% to 46% of the total 20 million barrels consumed by the US in a day. An extra 3.5 million barrels per day works out to $134 billion a year at current prices. This will drop US trade deficit by nearly 25% over next 3 years, a hugely positive for the US dollar. Breakthrough in technologies such as “fracking” will potentially help US to recover over 100 years’ of supply of natural gas. This can potentially replace coal and even oil when the technology is perfected in the coming decade. Power plant conversion from coal to natural gas is already accelerating at a dramatic pace, leaving China as remaining coal buyer in time to come. Many drivers will also disappear from gasoline pumps as electric cars become the norm.  Advancement in industrial manufacturing processes and nanotechnology will create new breakthrough in products that are less polluting and require less petrochemicals to make. All these will have a significant impact on oil and coal prices in the coming decade or two as supply increases and demand reduces. As US becomes less dependent on foreign oil, US balance of payments will significantly improve as it switches from a net importer of oil to a net exporter. Eliminating its largest import while adding an important export will be hugely positive for the US dollar. At $100 oil today, it was estimated that 30-40% of that comes from a fear premium that oil supplies are disrupted. A strong US dollar and reduced reliance on foreign oil import will help keep a lid on global runaway inflation in the coming decade. This will be a boon for corporate profits.

7.  Onshoring. Over the recent decades, US companies sought elsewhere to relocate their plants to places with lower wages, where unions and regulations are lacking and where there is a paucity of environmental controls. They opened plants in Singapore, Taiwan, Malaysia and more recently, in Mexico, Thailand and China. An estimate places the number of jobs lost in the US at 25 million from offshoring in the past decade alone. How long will this continue unabated? After 30 years of offshoring and falling real American wages and soaring Chinese wages, offshoring may not be that great a deal anymore for US companies. In 1977, average Chinese labourer earned about $100 a year. Today it is $3,500 and for the trained technicians, it is somewhere near $24,000 per annum, with total compensation rising 20 percent a year. At this rate, US and Chinese wages will reach parity in about 10 years. Offshoring also carries many risks.  Asian countries still lack infrastructure.  Natural disasters like earthquakes, fires, tidal waves can disrupt a highly tuned, incredibly complex manufacturing system. Not to mention political risks in the host countries and occasional hiccups in the relationship between US and China over trade and other issues that may disrupt commerce. Fast forward a decade or two, 20-30% of jobs lost to offshoring could return to the US. This could amount to 8 million jobs, cutting US employment rate by half, at least (by current unemployment numbers). This may add another $60 billion in GDP per year, boosting GDP growth by at least 0.5% per year. Onshoring will then lead to a stronger US dollar, rising stocks and lower bond prices. 

8.  Improving fiscal position. As the US economic engine resumes its growth in the longer-term, the macro backdrop as outlined here will help US reduce its budget deficit. US goods and services such as education continue to be sought after everywhere. Reforms on medi-care and retirement age issues will have taken place then.  As the world hopefully becomes safer through globalisation, it will become cheaper for the US to stay friendly than blowing someone else up. The US may cut its defence spending, triggering a global dis-armament race.  Hundreds of billions saved annually from reduced defence spending will help US to significantly narrow its budget deficit, improving its fiscal position and strength as a world economic superpower.

 

The world continues to move in phases, to the tune of the yin-yang interplay. The difficult times confronting the US today will give way to a more prosperous period ushering in the next golden era in the coming decade or two. The banking system collapse and bailout, deleveraging taking place across individuals and businesses, aging population, industries hollowing out from the country through offshoring, corporate America flushed with cash now but unwilling to invest due to uncertainties, high unemployment rate, huge budget deficit and a weakening US dollar may dominate today’s headlines but will in time fade into distant memory as US moves on to the next boom phase from the current bust.

If US GDP were to reclaim the 4% annual growth rate as seen in the 1990s, stock markets will resume a secular bull trend (by definition, lasting a 20 year period). Dow may climb to 20,000 by 2020. After that, anything like a fourfold increase seen during the Clinton administration, may propel the Dow to 80,000 on the back of a strong US economy and an expanding global economy bolstered by a growing world population.

American capitalism will regain its footing. Americans are positive, its society values innovation and free choices. These are America’s great strengths that make it a resilient and vibrant nation waiting to usher in her next golden era in the coming decades.

Next week, I will share with you some interesting research I have done looking at the oscillating cycles in the financial markets over the last 100 years. The capitalist boom and bust cycles manifest like the cyclic yin-yang. All things and all societies move in phases of growth, maturity and decline and the cycle will eventually repeat. We are in a secular bear market today. When will the next light shine on us?

Remember to tune in next week and find out where we stand in a brief history of time!