The change between “then” and “now” … more signs of deglobalization … finding the silver lining … preparing your portfolio for a new investing climate

 

You’re investing at a historic disadvantage.

As we’ve detailed in recent Digests, the economic and investment conditions that helped your parents and grandparents generate wealth are fading.

In the days of yesteryear, “buy-and-hold” in quality blue chips was a near certain way to build wealth. That’s because buy-and-hold benefited from four decades of extraordinary bullishness.

Yes, there were bear market and recessions along the way, but on the whole, “buy the dip” never failed. Our parents and grandparents – in the right place, at the right time – benefited just by not quitting the market.

One famous investor who knows this is the “Bond King” Bill Gross, co-founder of PIMCO. From Gross back in 2013:

All of us, even the old guys like [Warren] Buffett, [George] Soros, [Dan] Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.”

Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch…

We are no longer in that epoch.

One example of today’s new epoch that we’ve written about at length in recent weeks here in the Digest is the reversal of the 10-year Treasury. After bottoming in 2020 after four decades of declines, the yield has begun a new ascent.

As I write Tuesday morning, the 10-year yield has surged to 4.83% in the wake of blistering hot retail sales data that came in more than double the Dow Jones estimate (sales rose 0.7% versus the estimate of 0.3%). The two-year Treasury is up to 5.15%.

This is an enormous new headwind for stocks as we profiled here in our October 5th Digest.

But it’s not just in the Treasury market where we’re seeing evidence of this new epoch

There are other massive changes – one has been on the radar of our macro investing expert Eric Fry for two years.

Here’s Eric to introduce it:

It’s been 40 years since economist Theodore Levitt first used the term “globalization” in a 1983 Harvard Business Review article. He argued that changes in consumer behavior and technology would allow companies to sell the same products around the world.

He was right, and in the decades since, the world became one big marketplace. Globalization resulted in cheaper and more convenient goods and raw materials for the world. It also resulted in dangerous overdependence on other nations for critical goods.

Well, the days of globalization are fading.

In the wake of the pandemic, the Russia/Ukraine war, and growing iciness between Washington and Beijing, we’re now seeing a shift away from a unified world. In the same way that the 10-year Treasury yield has now reversed, so too has this multi-decade tailwind to trade and supply chains.

Unfortunately, the shift away from globalization back to deglobalization means less efficiency, greater supply chain costs, reduced sharing of technologies that accelerate breakthroughs, and frankly, less corporate profit.

Here RBC Wealth Management:

Globalization boosted economic growth, corporate earnings, and stock prices for decades. But in recent years globalization has stalled out. It seems at risk of breaking down into deglobalization as geopolitical tensions persist.

Saudi Arabia and other Middle Eastern countries no longer view the U.S. as their principal ally. They have forged close, formal strategic partnerships with China.

The U.S.-China relationship has become mired in mistrust, security concerns, and disputes related to Taiwan.

Speaking of mistrust, security concerns, and China, let’s jump back to Eric:

I identified the beginnings of this (deglobalization) trend over two years ago, when we were living in the heart of the COVID-19 pandemic.

As supply chains around the world were disrupted, it became frighteningly clear how dependent the U.S. was on other nations for critical goods and materials – specifically China.

And now, to show you a specific manifestation of this growing deglobalization, let’s go to Bloomberg from yesterday:

The US plans to tighten sweeping measures to restrict China’s access to advanced semiconductors and chipmaking gear, seeking to prevent its geopolitical rival from obtaining cutting-edge technologies that could give it a military edge…

The US will also impose additional checks on Chinese firms attempting to evade export restrictions by routing shipments through other nations, and add Chinese chip design firms to a trade restriction list, requiring overseas manufacturers to gain a US license to fill orders from those companies.

The negative and positive implications of this shift to deglobalization

There will be winners and losers with deglobalization. On a broad, macro level (think global trade), the primary impact is clearly negative. Here’s research from the European Central Bank:

The deglobalising effects of reshoring can also reduce international trade and cross-border investment, while making it harder to transfer productivity gains from one country to another.

All this can reduce prosperity, especially in the small, open economies that benefit most from international trade.

Transferring production back from overseas can eliminate previous gains from international comparative advantages and increase domestic production costs.

But macro downside can result in enormous micro upside for specific companies and sectors that can capitalize on this shift. In fact, it’s leading to a new “Made in America 2.0” with interesting investment implications:

Back to Eric:

The era of unfettered globalization is over, and it’s now reversing course towards something less global.

This reversal is called deglobalization.

Gone are the days when “Made in China” or “Made in Somewhere Else” is stamped on almost everything we purchase…

“Made in America” is making a comeback.

Eric writes that last year, a UBS survey questioned U.S. manufacturing executives about their future production plans.

More than 90% of the respondents said they either were in the process of moving production out of China or had plans to do so. And about 80% said they were considering bringing some portion of it back to the U.S.

To illustrate, here’s Eric with his research on Ford’s reshoring efforts:

The automaker has broken ground on the largest, most advanced production complex in its 120-year history. This new project is also the first major factory Ford has constructed since the 1960s.

The company is calling the new complex BlueOval City (named after the shape and color of its logo) and it is building it in Stanton, Tennessee – not far from Memphis.

This $5.6 billion project will feature both an EV factory to make “an all-new, revolutionary electric truck” and a lithium-ion battery cell gigafactory (43 GWh annually).

Besides the new Tennessee plant, Ford and a South Korean partner, SK On, are investing about $5.8 billion in the BlueOvalSK Battery Park in Kentucky to build two additional 43 GWh gigafactories.

And here’s Eric with what Intel has been doing:

Part of Intel’s future includes a comprehensive technology partnership with Ford itself, as well as with Volkswagen AG and several other auto manufacturers.

To prepare for this future, Intel is spending tens of billions of dollars to build new semiconductor production facilities in the U.S. Already, the company has broken ground on two new factories in Arizona. The $20 billion plants – dubbed Fab 52 and Fab 62 – will bring the total number of Intel factories at its campus in Chandler, Arizona, to six.

Meanwhile, the chip-making giant is spending an additional $20 billion to establish a “Silicon Heartland” by building a massive new fab in Licking County, Ohio…

But as Eric points out below, Ford and Intel are just the beginning:

If we pull back from these individual examples to a 30,000-foot perspective, the picture that comes into view is unmistakable; the Made-in-America trend is catching fire.

And as it gains momentum, it will produce a massive new wave of technological innovation… and provide a new generation of Made-in-America investment opportunities.

Coming full circle, recognize this shift toward deglobalization for what it is…

Another headwind for our economic and investment markets.

Times have changed. A new epoch has begun.

We have soaring treasury yields… deglobalization… “higher for longer” interest rates… deleveraging instead of leveraging up… unsustainable sovereign debt… rampant currency debasement…

In many ways, it’s a complete reversal of the macro bullish traits of the period from 1980 through 2020. We’re in upside-down world.

This doesn’t mean we can’t generate investment wealth. But it does mean we need to accurately define today’s economic/investment climate and adapt accordingly.

Have a good evening,

Jeff Remsburg