Stand a little taller
Is this the new theme song for America's manufacturing sector?
I ventured out of the office this week and attended ISI's US Manufacturing Renaissance conference in NYC. For those of you unfamiliar with ISI (International Strategy & Investment), they are arguably the number one economic strategists on Wall Street. Ed Hyman, Chairman of ISI, and his Vice Chairman Nancy Lazar, presented a very thought provoking analysis of a resurgent US manufacturing sector. In a two hour presentation Nancy and her team laid out their thesis for a US manufacturing renaissance, here are some highlights:
After decades of decline, the US manufacturing sector has some key advantages versus their global competitors, namely - 1) restrained labor costs, 2) huge wage increases in emerging markets, 3) cheap dollar, 4) cheap & abundant natural gas, 5) the rule of law, 6) favorable demographics.
China has been getting wealthier and more expensive to export from. Chinese wages are only about 30% cheaper than the US. China is also hitting a demographic wall.
Wages in Illinois are about half of what they are in Ontario. In Germany, wages and benefits total $46.3/hr, versus $34.7/hr in the US.
US wage growth has been flat for over 30 years.
Cheap Natural Gas is a game changer. Currently US natural gas is $2.50, versus $11 in Mexico, $14 in Germany, and $16 in Japan. Brazil's Santana Textiles is building a plant in Texas instead of Mexico because energy costs are 30% cheaper.
Maserati is manufacturing a car in Michigan. Nissan, Toyota, Honda, Kia, and BMW are all increasing US based manufacturing.
While I was there I also listened to individual company presentations made by; Parker Hannifin, Deere, Oshkosh, Terex, Hubbell, Illinois Tool Works, Caterpillar, and Eaton. All of these companies have their unique differences, but they also have some broad similarities. Over the decades they have become incredibly efficient global competitors. Mean, lean, fighting machines...what doesn't kill you makes you stronger...
Cleveland based Parker Hannifin is a good example; they operate in 47 countries, sales have doubled in the last decade, margins have risen from 11.3% to 14.8%, and return on invested capital has grown from 16% to 23%.
Key Takeaways -
ISI is probably a bit early in calling this a renaissance, but the truth is that PLANTS ARE BEING BUILT IN THE US.
Cheap Natural Gas is a game changer. Coal is in a lasting decline. Petrochemicals are the big winner.
We need to rethink education here in the US. The entire baby boom generation was raised by parents (many mill workers), who wanted nothing more than for their children to go to college. Now we take the $150,000 investment in a college education for granted. We need to seriously rethink what type of future we are training our children for. Is a $150,000 liberal arts graduate working at Starbucks a better career path, versus a company trained high school graduate making $70,000/yr in the natural gas industry? I'm not saying that college is bad, I'm just asking...do we need to send everyone to college when so many manufacturing jobs go begging? Range Resources is looking for field hands here in the Marcellus shale region; hard work, 12 hour days, but untrained 18 yr old high school grads can make $70,000/yr. One of their biggest problems is that 50% of applicants fail their drug test.
Other than finding qualified workers, many of the company managements I talked to worry most about excessive and stupid regulations coming out of Washington. US tax policy is simply not competitive on a global basis. I was told by more than one company, that uncompetitive US tax policies have kept them from investing more in the US.
Most companies are feeling pretty good about the US economic recovery. There is a level of dis-trust over whether or not the recovery is sustainable, but it feels more sustainable than prior years. Big worries are high gasoline prices, a weakening Europe, and Iran. Caterpillar phrased it as, "wading into the pool, not jumping in with both feet."
Greece (Successfully?) becomes the 1st Nation in the Euro to Default-
The big news today is that after two years of trying to prevent Greece from defaulting - Greece defaults. It's a successful default because it was orderly and not chaotic.
What have investors in international bonds learned:
- The bonds that are owned by the ECB are better than your bonds, even though they look identical. The ECB can cut a better deal than you can.
- Sovereigns can do what ever they want. They can change the terms of your bonds retroactively. They can change the law.
- Bureaucrats can't work magic. They said no Euro member would default...they lied.
The new Greek bonds that were swapped for the old Greek bonds at a 75% haircut are already trading at a yield of 22% for 11 years. Does Greece return to solvency? No. Does capital return to Greece? No.
Favorite quote. French Presiden Sarkozy says, "Today the problem is solved." Priceless.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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