some very interesting insights. Thanks guys!
Joshua Stinson’s Theory on American Manufacturing:
Ok folks, I want to jump in here. With all the taxes you paid funding my college education, maybe I have something to contribute.
I honestly think that American manufacturing will return. Most of you at this point are thinking “This guy is an idiot”.
Lets take a journey:
Part 1: What country(s) has taken so many of our manufacturing jobs in automotive, household goods, cheap toys, etc?
Answer: China and to a lesser extent Japan
Part 2: What two countries buy up more US securities (Bonds, T-bills, etc) that any other countries in the world?
Answer: Japan 1st and China 2nd
Part 3: What country has a $1,000,000,000 surplus of foreign currency and is just itching to spend it?
Answer: China
Jumping quickly back to part 2. Why do these countries buy US securities? Because they are keeping the dollar strong! Thats right, these countries need the US dollar to remain strong because that is thier income basis for all the good they export to the US. If you don’t understand why Japan and China buying up US Securities keeps the dollar strong, in a nut shell it is supply and demand. They soak up the supply of US Securities. Because the supply is small it keeps the value of the US’s currency higher.
Why do they need to keep the US dollar strong?
A) China has 1 trillion dollars and if they want the spending power of that chunk of money to remain high (remember it is foreign currency ~ a lot of US) they have to keep the dollar strong.
B) If the dollar gets weak against the Chinease and Japanese currency, then thier imports become more expensive in the US. Think about it. If 1 US dollar buys 5 Chinease denominations, then if they can produce an item for 1 Chinease denomination, then it costs .20 cents in US dollars. However, if the dollar gets weak against the Chinease denomination, lets say 1 to 3, then that same Chinease good in the US now costs .33 cents a piece.
Ah Ha we all say:
So if the dollar gets weaker, then chinease goods won’t be as cheap as they are now and then what happens: MANUFACTURING RETURNS TO THE US because there isnt’ a huge cost differential between US and Chinease goods. Certainly some of that manufacturing will go south of the border, but a bulk of our manufacturing happens in China.
So what is the current situation in China? They are BOOMING. Thier growth rate is unbelievable. Inevitably, thier currency is going to get stronger and stronger compared to the dollar. Thier weak currency against the dollar that allowed them to produce cheap goods and get rich off the US ironically is what is making them rich and will stregthen thier dollar against the US dollar.
Since the US likes to spend itself deeper and deeper into the hole (Almost 8 trillion in debt) our currency is going to weaken, especially once China and Japan stop sucking up our securities.
If you have managed to follow my rambling all the way through this post, then you have seen that I have painted a picture in which manufacturing will return to the US over time because it will be the same cost to buy a US manufactured item as an item made in China.
This essay falls right in with the discussion about Detroit. As that new Toyota Tundra loses its “price gap” with US manufactured vehicles, and Ford catches up in styling, people will buy US again.
I am not saying this “flip-flop” will happen overnight or soon, or that we won’t find some other developing 3rd world country (India) to manufacture goods cheaply, but I am saying that I think jobs will come back stateside as the US dollar weakens against worldwide currency.
This is my personal opinion and theory and I might be entirely wrong, so please correct my line of reasoning if you disagree. Thanks for reading and I hope someone benefited from this finger exercise (typing) on my part!
Night all,
~joshua
PS The next time some redneck starts talking about “going to war with China” remember what you read here tonight and if you can manage to get him to understand all of this, then you can show him why we won’t go to war with them.
Josh,
Great insight.
I’ve been around awhile and have made enough mistakes to at least HOPE I’ve learned from them. What your excellent comments come down to is that everything is a giant circle. And I mean EVERYTHING.
I was lucky enough when I was younger to have a cousin in the investment world. He managed about $500 million dollars for a private bank. I use to pick his brain any chance I had. He liked my interest in his profession and I learned a ton. I’ll never forget some advice he gave me. The scenerio was as follows. It was early in President Clintons first term, he had unleashed Hillary to CHANGE HEALTH CARE! I watched as Merck stock got literally hammered into the ground on the theory that the goverment would put price controls on big PHARMA. (Now where did I just hear something about this AGAIN) Anyway, The Repubs contolled congress and after awhile Clinton admits it’s dead.
Now I remember this like it was yesterday. I got home from work and on the front page of the paper it said…
“PRESIDENT ADMITS HEALTHCARE REFORM IS DEAD”
I called my cousin and asked him how many shares of Merck he had bought today? And this was his answer…
I can’t buy that stock.
What??? Do we have a bad connection here?
I can’t buy it because it’s not on a list of APPROVED stocks.
HOLY ****!! You have got to be kidding me?
Nope, the bank pays big money for the research department to recommend stocks, this way in the event of a lawsuit (remember this is a private bank) we can show in court why we picked these stocks.
I could not believe what I was hearing, I thought these guys were like wizards. Nope, wrong more like wimps. (no offense, it does make sense)
He told me that I was absolutely right in my theory that these stocks would come back. and, I should buy some. I did. A lot of it. That stock went from $20/ share to $80/ share in 2 years.
Lesson learned: BUY WHAT NO ONE ELSE WANTS. As long as you have an understanding of why these businesses are down and how they can turn it around. (See previous post)
I own a ton of GM and Ford right now. We shall see.