Global Market Comments
May 29, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY, JULY 10 BUDAPEST, HUNGARY STRATEGY LUNCHEON)
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),
(KISS THAT UNION JOB GOODBYE),
Posts
Have you tried to hire a sewing machine operator lately?
I haven’t, but I have friends running major apparel companies who have (where do you think I get all those tight-fitting jeans?).
Guess what? There aren’t any to be had.
Since 1990, some 77% of the American textile workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is, at last, coming home, the race is on to find the workers to man it.
Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events.
There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low-cost producer which have killed thousands.
Today’s young consumers want to look cool but have a clean conscience as well. That doesn’t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well-off are willingly paying top dollar for a well-made “Made in America” label.
Look no further than 7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all-American manufacturer.
As a result, wages for cut-and-sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for the industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers.
They advertise in languages with high proportions of blue-collar workers, such as Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying U.S. factories.
But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today’s fast-paced, high-turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades.
It has also been blamed for losses of U.S. jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no-brainer.
Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began filing overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines.
After the U.S. normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn’t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000, and $26,000 for trained technicians, with total compensation still rising 20% a year. At this rate, U.S. and Chinese wages will reach parity in about 10 years.
But wages won’t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks.
Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters such as earthquakes, fires, and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a highly tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the U.S. fleet and the Chinese military playing an endless game of chicken off the coast, we are one midair collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the U.S., whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxconn factory by Apple’s CEO Tim Cook was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the U.S. all the faster. The Chinese press was ripe with speculation that Apple-induced reforms might spread to the rest of the country like wildfire.
The late General Motors (GM) CEO Dan Adkerson once told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the U.S. economy would be huge. Some economists estimate that as many as 10% to 30% of the jobs lost to offshoring could return.
At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20 billion to $60 billion in GDP per year or up to 0.4% in economic growth per year.
It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ½ years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low-wage jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
So How Does This Thing Work?
Global Market Comments
June 15, 2018
Fiat Lux
Featured Trade:
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),
(KISS THAT UNION JOB GOODBYE),
(TESTIMONIAL)
Have you tried to hire a sewing machine operator lately?
I haven?t, but I have friends running major apparel companies who have (guess where I get all those tight fitting jeans?).
Guess what? There aren?t any to be had.
Since, 1990, some 77% of the American textiles workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is at last coming home, the race is on to find the workers to man it. Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events. There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low cost producer, which have killed thousands.
Today?s young consumers want to look cool, but have a clean conscience as well. That doesn?t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well off are willingly paying top dollar for a well-made ?Made in America? label.
Look no further than?7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all American manufacturer (click here for their website).
As a result, wages for cut and sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers. They advertise in languages with high proportions of blue-collar workers, like Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying US factories. But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today?s fast paced, high turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no brainer.? Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began flying overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn?t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000 and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.
But wages won?t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters like earthquakes, fires and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a finely tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the coast, we are one mid air collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxcon factory by Apple?s CEO, Tim Cook, was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the US all the faster. The Chinese press was ripe with speculation that Apple induced reforms might spread to the rest of the country like wildfire.
Former General Motors (GM) CEO, Dan Akerson, told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20-60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ? years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low waged jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
So How Does This Thing Work?
I have fond memories traveling around northern Mexico during the 1950?s. My grandfather used to drive us across the border into Baja in his pickup truck, the back loaded with camping equipment, water, fishing poles, rifles, and shotguns. There was no border control.
To eat, we only had to wait for the tide to go out on the Sea of Cortez, uncovering a banquet of fresh mussels, oysters, and abalone. Eventually, my Spanish got pretty good, especially when it came to fixing cars. When we encountered rare collections of palm frond huts we would lounge around on the beach eating all the tacos we wanted for 5 cents each.
There wasn?t a hotel on the entire peninsula; and the desert was frequented with armed banditos. If any stranger approached, we fired a shot over their heads, at a considerable distance, to convince them to seek easier pickings elsewhere. It was still the Wild West down there, and we didn?t go there to socialize.
As much I loved the land of Montezuma and Pancho Villa, I have never invested a penny in the country. Oil has been the bread and butter for the land south of the border for nearly a century, accounting for the largest share of the government?s revenues. But its main Cantarell field is nearly tapped out, suffering from declining production for years.
There was a decade long drug war in which 40,000 died. It seemed, for a while, that the narco terrorists would win. Mexico City became the kidnapping capital of the world. In the emerging market space, there always seemed to be better opportunities elsewhere. On top of that, the country has a long history of expropriating the property of gringos. So for decades I limited my interest in Mexico to beer, tequila, and tacos.
However, in recent months, the jungle telegraph in the hedge fund community has been buzzing about this once unloved country. I thought I?d take a closer look. It turns out that a few things have changed over the last 60 years.
First, oil. Yes, Cantarell is just about done. But much of Mexico?s subterranean geology is similar to that of the US. That means that the fracking boom, whereby untold quantities of cheap natural gas have suddenly become available, is spilling over into Mexico as well. It helps a lot that Mexico is allowing foreign investment in the industry for the first time in 70 years.
And guess what? They don?t face the environmental backlash or the permitting restrictions that American drillers must endure. As a result, Mexican energy production is taking off once again, with exports to Asia a major target. Energy infrastructure investment will become a significant economic driver in the decades to come. This is hugely positive for both the Mexican economy and the peso.
When China first burst on the international scene during the early nineties, using its cheap labor to replace much of the world?s manufacturing capacity, it was Mexico that took the big hit. Much of their low-end production, such as in textiles, decamped for the Middle Kingdom, leaving hundreds of thousands jobless.
The new ?onshoring? trend that is creating a blue-collar jobs renaissance in the US is gaining speed in Mexico too. While Chinese wages have been skyrocketing at a 20% annual rate, they have been relatively stable in Mexico.
You see this first and foremost with goods that pose logistical challenges, such as anything involving significant transportation costs. You probably don?t know this, but that big screen high definition TV dominating your living room, which used to be assembled near Shenzhen, is now put together a couple of miles inside the Mexican border with Texas. From there, they can be easily and cheaply shipped by rail or truck to any point in the US.
Mexico?s $1.18 trillion GDP ranked 14th in the world in 2012. It stood 11th in population with 112 million. Its per capita income of $10,247 comes in at 66th. The energy boom is likely to boost economic growth from the current 4% annual rate. A strong peso should cause its inflation rate to fall from the present 3.6%. I don?t have to tell you that this is a dream come true scenario for investors. Many analysts expect Mexico to join the world?s top ten economies by 2020.
The one problem Mexico has is that it is tarred with the emerging market brush (EEM), the world?s poorest performing asset classes this year. You may have to wait for the Chinese tide to lift all boats for this unloved sector to move back into the spotlight. That said, emerging markets could be the great rotation play sometime in 2014.
There are a number of American Depository Receipts (ADR?s) issued by Mexican multinationals listed on the NYSE, such as those for Grupo Financiero Santander (BSMX), one of the country?s largest banks.
If you are really brave, you can open a peso denominated account with a broker in Mexico City and invest in stocks there directly. The easiest way to put money into the country is through the Mexico iShares ETF (EWW). Or you can trade the leveraged long ETF, the ProShares Ultra MSCI Mexico Investable Market ETF (UMX).
I went down to Cabo San Lucas a few years ago for some Marlin fishing and to see what had changed. A ten-mile string of hotels lined the beach with names like the Trump Tower and the Four Seasons. The price of tacos had risen from 5 cents to $2. Free spending European tourists crowded bars like the Cabo Wabo, where they strung you up by your feet to see if you could drink tequila shots upside down.
Rather than dine at one of the many overpriced and crowded restaurants, I got in the car and drove north. I stopped at a small out of the way cove, and as the tide went out, I ate my fill of shellfish. Grandpa would have been proud.
US Dollar to the Mexican
Gotta Love Those Mexican Shares
I have fond memories traveling around northern Mexico during the 1950?s. My grandfather used to drive us across the border into Baja in his pickup truck, the back loaded with camping equipment, water, fishing poles, rifles, and shotguns. There was no border control.
To eat, we only had to wait for the tide to go out on the Sea of Cortez, uncovering a banquet of fresh mussels, oysters, and abalone. Eventually, my Spanish got pretty good, especially when it came to fixing cars. When we encountered rare collections of palm frond huts we would lounge around on the beach eating all the tacos we wanted for 5 cents each.
There wasn?t a hotel on the entire peninsula; and the desert was frequented with armed banditos. If any stranger approached, we fired a shot over their heads, at a considerable distance, to convince them to seek easier pickings elsewhere. It was still the Wild West down there, and we didn?t go there to socialize.
As much I loved the land of Montezuma and Pancho Villa, I have never invested a penny in the country. Oil has been the bread and butter for the land south of the border for nearly a century, accounting for the largest share of the government?s revenues. But its main Cantarell field is nearly tapped out, suffering from declining production for years.
There was a decade long drug war in which 40,000 died. It seemed, for a while, that the narcoterrorists would win. Mexico City became the kidnapping capital of the world. In the emerging market space, there always seemed to be better opportunities elsewhere. On top of that, the country has a long history of expropriating the property of gringos. So for decades I limited my interest in Mexico to beer, tequila, and tacos.
However, in recent months, the jungle telegraph in the hedge fund community has been buzzing about this once unloved country. I thought I?d take a closer look. It turns out that a few things have changed over the last 60 years.
First, oil. Yes, Cantarell is just about done. But much of Mexico?s subterranean geology is similar to that of the US. That means that the fracking boom, whereby untold quantities of cheap natural gas have suddenly become available, is spilling over into Mexico as well.
And guess what? They don?t face the environmental backlash or the permitting restrictions that American drillers must endure. As a result, Mexican energy production is taking off once again, with exports to Asia a major target. Energy infrastructure investment will become a significant economic driver in the decades to come. This is hugely positive for both the Mexican economy and the peso.
When China first burst on the international scene during the early nineties, using its cheap labor to replace much of he world?s manufacturing capacity, it was Mexico that took the big hit. Much of their low-end production, such as in textiles, decamped for the Middle Kingdom, leaving hundreds of thousands jobless.
The new ?onshoring? trend that is creating a blue collar jobs renaissance in the US is gaining speed in Mexico too. While Chinese wages have been skyrocketing at a 20% annual rate, they have been relatively stable in Mexico.
You see this first and foremost with goods that pose logistical challenges, such as anything involving significant transportation costs. You probably don?t know this, but that big screen high definition TV dominating your living room, which used to be assembled near Shenzhen, is now put together a couple of miles inside the border with Texas. From there, they can be easily and cheaply shipped by rail or truck to any point in the US.
Mexico?s $1.18 trillion GDP ranked 14th in the world in 2012. It stood 11th in population with 112 million. Its per capita income of $10,247 comes in at 66th. The energy boom is likely to boost economic growth from the current 4% annual rate. A strong peso should cause its inflation rate to fall from the present 3.6%. I don?t have to tell you that this is a dream come true scenario for investors. Many analysts expect Mexico to join the world?s top ten economies by 2020.
The one problem Mexico has is that it is tarred with the emerging market brush (EEM), one of the world?s poorest performing asset classes this year. At least Mexico has flat lined instead of crashed, as others have. You may have to wait for the Chinese tide to lift all boats for this unloved sector to move back into the spotlight. That said, emerging markets could be the great rotation play in the last quarter of 2013.
There are a number of American Depository Receipts (ADR?s) issued by Mexican multinationals listed on the NYSE, such as those for Grupo Financiero Santander (BSMX), one of the country?s largest banks. If you are really brave, you can open a peso denominated account with a broker in Mexico City and invest in stocks there directly. The easiest way to put money into the country is through the Mexico iShares ETF (EWW). Or you can trade the leveraged long ETF, the ProShares Ultra MSCI Mexico Investable Market ETF (UMX).
I went down to Cabo San Lucas a few years ago for some Marlin fishing and to see what had changed. A ten-mile string of hotels lined the beach with names like the Trump Tower and the Four Seasons. The price of tacos had risen from 5 cents to $2. Free spending European tourists crowded bars like the Cabo Wabo, where they strung you up by your feet to see if you could drink tequila shots upside down.
Rather than dine at one of the many overpriced and crowded restaurants, I got in the car and drove north. I stopped at a small out of the way cove, and as the tide went out, I ate my fill of shellfish. Grandpa would have been proud.
Mexican Pesos to the Dollar
Gotta Love Those Mexican Shares