Wednesday, November 30, 2011

Why I am convinced of a United States Recovery

In my opinion, the apparent complete lack of economic coordination in Europe, and the lack of currency adjustment in China, has led many great investors (Warren Buffett and Seth Klarman to name a couple) to become bullish on the United States. When you look at world GDP, it was approximately $63.04T USD. Of this, the Eurozone represents $12.17T (both figures according to the World Bank). China is currently at $5.88T, and facing a hard landing on its economy, and Japan has a GDP of $5.50T, and embarking on its rebuilding efforts following the earthquake and tsunami this year. Finally, there is the United States ($14.58T), with a long history of capitalism, ebbs and flows, recessions, reactions and recoveries, watching everything unfold with no issues of lack of economic coordination, a three year head start on recovering from its own housing downturn, no major natural disasters from which to recover, and a fairly free moving currency that makes the country look more and more attractive everyday versus China.

While I have not seen consensus, the last forcast I have is for a 3.2% increase in global GDP (World Bank website). that would mean that we should expect a growth of $2.02B in GDP globally. Excluding Japan, Eurozone, and the United States, the rest of the world has a combined GDP of $30.79T. Assuming a very aggressive 5% growth rate for these areas (note that I have not excluded Canada, U.K. from the list, which are among the top ten largest economies in the world), the emerging markets should provide $1.54T of the growth. From the remaining three economic zones, we should therefore presume that we will see $0.5T of growth. If the Eurozone continues to falter, investment will be pushed to one of China, Japan or the United States, I would anticipate. Let's look at a scenario where the Eurozone simply stagnates and produces a GDP growth rate of 0% (I believe they will be in recession next year).

In China, we are in a scenario, where the country is importing inflation as a result of pegging its currency. Therefore, labour and commodity prices are rising for the same finished products. This is then sold out to Europe and the United States (predominantly), where in many cases the prices remain fairly stagnant (due to the economic situation of high unemployment). The scenario lowers margins for many companies, so it would be safe to say that China may not experience supernormalized returns from its current 9-11% GDP growth rates. So this really leaves the future investment to the US and Japan. With Japan facing a rebuilding and an already aging population, it would be safe to also suggest Japan will not experience more than a couple of tenths of a percent of growth in the coming years. This leaves us with the United States. I would presume that much of the European slack would come from the United States, due to its similarity in industrial output, primary economic drivers, and labour force. This projection, even with many of its flaws, would mean the US would grow 3.2%, far higher than the new OECD expectation of 2%. With government cutting back on investments, this would mean more than 100% of the growth would come from the United States. This would bolster growth, and improve financial metrics of US public companies.

Just my thoughts. I may be wrong, but I'll still bet on the U.S. over Europe.

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