What’s happening to the US?

Insightful Insights, Investing Education, Market Valuation | Comments (79)

What’s happening to the US?

As a young child growing up, the United States was the world’s policeman and Australia was a friend. Part of that picture will change in the lifetime of my children. The US no longer seems to command the authority it once did.

Its waning imperialism is at least partly reflected by last weeks visit to China by Pakistani Prime Minister Yousef Gilani. He described Beijing as Islamabad’s “best and most trusted friend”. Meanwhile, a petition in Pakistan’s High Court has called for the expulsion of the US ambassador.

Its waning imperialism is also reflected in recent news that major Australian miners are taking an interest in China’s promotion of its local currency, the Yuan, for trade settlement.

These are the first furtive steps towards a switch away from the US Dollar. Global reserve currency is moving towards the Chinese Yuan. Once hedging is made easier, the floodgates will be open and the Yuan’s appreciation will ensure the tide cannot be stopped.

China will continue to leverage its massive foreign reserves – reflecting fiscal power – and its military might, whenever old ties between the US and others flounder. As regime change in the Middle East continues, new leaders look to China rather than the superpower that funded and abetted their old foes.

India’s PM (and a US ally) recently visited Afghanistan, offering half a billion dollars for development while simultaneously saying “India is not like the United States”.

We are witnessing history. Sure there will be speed bumps and set backs, but the die has been cast.

In the absence of a World War, the US influence and more worryingly, its role as global cop and providore of reserve currency, appears now to have commenced a drawn-out death spiral.

As Jim Roger’s noted; “the 19th century was the era of the British Empire, the 20th belonged to the US Empire but the 21st will be the era of the Chinese Empire.”

The impact of this shift cannot be overstated.

Meanwhile, back at the ranch…

Last year Lakshman Achuthan explained his Economic Cycle Research Institute’s view that A) a US slowdown is already a done deal and B) the US faces the unfortunate prospect of more frequent recessions over the next decade.

Evidence of a slowdown is now emerging and Achutan was recently interviewed on the subject here and here.

Let me say at the outset, I am not an economist. And don’t worry, I’m not turning into one. Indeed, even if I was, it still may not help me invest any better than I can following the Value.able methodology.

I have, however, been trying to find a reason to expect to find value sometime soon.

And thanks to Lakshman Achuthan, I have found a reason to become a little optimistic, if not about the economy, then about the prospect of finding value, soon.

Longer-term, Achuthan thinks more frequent US recessions are a given.

In economics, a recession is a business cycle contraction or a general slowdown in economic activity. During recessions, economic indicators such as production – as measured by Gross Domestic Product (GDP) – employment, investment spending, capacity utilisation, household incomes, business profits and inflation all tend to fall. Conversely, unemployment tends to rise, along with the number of employers no longer able to afford them.

In a 1975 New York Times article, economic statistician Julius Shiskin suggested a definition for a recession. In Australia we seem to have adopted it; two quarters of negative growth and a recession is in place.

Because of the stigma for a political party associated with a recession, not to mention the economic hardship associated with one, recessions are something best avoided.

The two ways to do it are to either to raise the trend rate of growth, such that the dips in the business cycle never fall into the area of growth below zero, or lessen the peaks and troughs of the business cycle itself.

Raising the trend rate of growth, however, does not appear to be an option (for the US at least) because the trend rate of growth in employment, GDP, personal income and industrial production has been down since the end of World War II.  As the trend rate of growth declines, and heads closer to zero, the dips in the business cycle need not be very severe to dip below zero.

Reducing the peaks and troughs of the business cycle such that the dips never result in an economic ‘backward step’ has been claimed as a new norm by economic managers who believe the use of monetary policy has been perfected, and also by those who have put their faith in economic globalisation. Monetary policy however is a rather blunt tool and its success in helping us avoid recessions may just be blind luck.

With trend growth declining for 50 years, each dip in the business cycle gets closer to regularly falling below zero. And with luck largely determining the success of policies attempting to smooth out the business cycle, its likely luck will run out, just as the globalisation of the supply chain causes the business cycle to whip even more violently than ever before.

Governments usually respond to recessions by adopting expansionary macroeconomic policies. They can increase the money supply, increase government spending and decrease taxation. But with a flood of US dollars that only Noah could survive, and government deficits already at historic extremes, these measures would only make the situation worse.

If you are investing in equities, the message is simple. Only buy the best quality businesses. And only when large discounts to your estimate of their Value.able intrinsic value are present.

The Value.able recipe is simple and it works. And you don’t need to be an economist to make it work. Whether the idea of more frequent recessions is right or not, the dearth of value suggests one should applaud the fact that markets may react to the risk of more frequent recessions, offering the best stocks for prices less than they’re worth in the process.

Posted by Roger Montgomery, author and fund manager, 1 June 2011.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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79 Comments

  2. Carolyn M
    :

    Even if I don’t do all the calculations for IV’s etc, because I find some of them confusing, I do now follow Roger’s principles in the book.
    His conservative advice and common sense approach has given me more confidence as an investor.

  4. Paul Stokes
    :

    Roger,

    I have just ordered a copy of your book.
    I have also just set up my SMSF. I only have $50k to start with but where do I find out about the ‘six that are trading at a discount of more than 20%’ from your earlier blog ‘Where to next’:

    “What I do know, is that of approximately 1849 listed entities, 1175 made no money last year. Of the remainder, 56 are A1s and of those, just 13 are trading at a discount to our estimate of intrinsic value. Six are trading at a discount of more than 20 per cent and of those six, The Montgomery [Private] Fund owns two. We have been decidedly slothful in buying and, as a result, while the market has been falling, the Fund’s value hasn’t.”

    • Ash Little
      :

      Hi Paul,

      This is meant to be a critique of what you have done so please don’t be offended.

      Unless you have set up a SMSF with the view of putting substantial money into your SMSF with the next 12 months then you have done yourself a disservice.

      If you set up fund with the view of having control and allowing direct access to equities then what you have done is very expensive. I will not name them but there are numerous platforms that will give you control and access to direct equities at a fraction of the cost of a SMSF with only $50K in it.

      Roger always says seek and take professional advice and I know that it is difficult to find but I think what you have done is less than efficient. I have no respect for the industry but I am sure at least 7 out of 10 authored advisers would have given you different advise and saved you lots of money.

      • Frank B
        :

        Actually this was a question I wanted to ask for a while. I would like to select my own shares for my superfund – because I believe I can do a much better job than the industry can – but I understand if you don’t have at least 100k and some say even more it is not worth setting up your own self managed SF. Is there a superfund that allows you to select your own shares? I’m sure alot of bloggers here have their own self managed SF but for those of us just starting (and until we can start our own DIY SF) a superfund that allows the selection of shares would suffice. Thanks.

      • Ash Little
        :

        Hi Frank,

        There are a few that allow this but I think you should get some advice. Some fund don’t let you transfer your shares when you set up your own SMSF without crystalizing a CGT event while others do with no cgt comsequences. It is a bit complicated and I would hate to see you in the wrong product. I know there is not many of them but a half decent fee for service financial planner should point you in the right direction.

        Cheers

      • Dave
        :

        Ash Little, , please do not be offended, but i started my smsf with 50K & do not intend to put substantial money into it in the near term as i’m in my 30’s with a mortgage, i have run it for 4 years in joint with the wife & our net return every year after all expenses has been higher than industry or managed super. So in conclusion more than efficient & more profitable if you have the time & inclination to manage your own money, their is no magic number to start a smsf

        good on you paul stokes, Lots of ways to cut down of fees present everything how the accountants/auditors need it., there are companies that will manage the audit tax etc some are extremely overpriced some are more cost effective, i use my accountant
        Only problem know is your in charge , no excuses enjoy, greatest thing i ever did

      • Roger Montgomery
        :

        I think it is safer for Ash (as a professional) to suggest a higher starting amount. On balance it is probably right that most investors with $50k will not generate the returns they need or sniff out the very cheapest prices to set up and maintain their SMSF, to justify doing it. Of course many here, could start with $50k or less and still do better as you have demonstrated Dave. Well done.

  5. Richie
    :

    Roger, is it reasonable to assume that the large mos that we crave are mostly thrown up in a confirmed ‘bear market’? And if so, given the fact that we’ve been trading sideways for 18 months with no euphoric ‘spike’ in values, we could see a rally that could take us to September or so (given how little investment opportunities exist outside the stockmarket at the moment besides cash). Should we be looking at none to a small mos given that we still have a reluctant bull market on our hands??

    There are opportuniys galore if this is the case

    • Roger Montgomery
      :

      Hi Richie,

      Yes it is true that a lot of value exists in a bear market. But its also true that a lot of value pops up when companies suffer temporary setbacks that the market treats as permanent. There is also a lot of value during periods of extreme innefficiency such as reporting season. You can follow your suggested approach and over time I believe its enough to beat the market but be prepared for higher ‘beta’. You know, as a previous post of mine revealed, you may just be able to beat the index, by creating your own ‘index’ comprising only A1s and A2s. An index of the highest quality companies should beat another index that also includes junk. And such an index might completely ignore intrinsic value.

  6. kingsley
    :

    I see others have already pointed out the Chinese economy’s hideous reliance on fixed investment. I’d encourage everyone who hasn’t already done so to google and youtube

    “Jim chanos China”

    and

    “64 million empty apartments China”

    Also try and watch the Dateline episode on the property bubble in china.

    I take Rogers point about growth needs to drop a lot in China to go negative but as Roger also pointed out when so much of it is (70%) in fixed asset investment and there appears to be an enormous surplus of it already there is the possiblity as always is the case with discretionary capex for this number to collapse.

    That raises an interesting point that if people like Congressman Ryan and others can get the USA’s finances fixed and that China’s GDP could in fact be only about half what we currently think it is and likewise it’s growth rate, the ascendancy of China probably will happen but it could be much much further off than we think.

    On the investment front it could have serious implications for such shares as FGE. That’s the inherent danger sitting inside contractors who are so exposed to the capex cycle.

    The hard part of this is as to when or if any collapse happens is beyond anyone’s ability to predict so we continue to buy companies whose earnings are very resilient under all circumstances with deep MoS to protect us.

  7. Scott W
    :

    Roger and all the other graduates. I am about to head to China for a few weeks to investigate the business landscape in the middle of the country, away from the ‘hot’ markets of the East Coast. I am doing this as a precursor to establishing my own private company exporting some Australian high value product into these markets. Anyway I will report back on my observations when I return and perhaps I might have some food for thought for the rest of the class.

    What I can tell you from the last 7 years involved in export trade as well as a stint in Austrade is that the Chinese economy is rapidly becoming a much bigger consumer of higher value finished goods. The potential success for brands like Oroton is a great example, and only a few years ago it could not happen. If you want evidence go down to the CBD of an Australian city and observe the Chinese tourists shopping for $5K+ goods such as Swiss watches.
    Given the example I am working with, wine, just a few years ago the Chinese buyers wanted great wine and only wanted to pay $2 a bottle, these days they could easily be the best market for the top end and they consume the stuff straight away, hardly any of the Grange they buy goes into a cellar, they drink it and buy another.

    They are heavy on the infrastructure and they are way ahead of themselves in terms of real estate speculation. But empty apartments may only be a temporary issue after a price collapse and rapid sell down quickly fills up all of those homes. There is certainly more than enough demand from their massive shift of urbanisation to fill every last one. Unlike the USA, who built houses they could not fill, and unlike the ‘housing shortage’ in Australia where the ABS (not the real estates own (dis)information sources) report that around 10% of properties here are vacant, and we really do not have a ‘homeless due to lack of housing’ problem.
    In terms of other infrastructure their massive growth in rail networks is already starting to satisfy their own massive demand for people movement and it is better that they go down that path ahead of time rather than all be car dependant like us. Reports from the Chinese New Year crush in 2011 is that is was much lighter than before, more rail, and high speed rail helped hundreds of millions of people get home in time. Chinese New Year is the largest human migration on the planet, and it happens annually, they NEED infrastructure.

    In terms of investment I am still frustrated that most of my own investments in Asia still need to be held in $USD, eroding the handy gains I had been making, but as ‘no one goes broke taking a profit’, I might exit them soon.

    • Steve I
      :

      Scott,

      Thanks for sharing your views.

      Too many people are focused solely on the excess housing construction and forget about everything else.

  8. David
    :

    Hi Roger, what is your view on Atlas Iron (AGO). If I remember correctly at one point in time you did own them. I have owned them for 6 months or so now & would be interested to know your (or anyone else’s) IV for them for 2012 and their MQR. I personally have them valued inexcess of $4.50 but would like to measure that against other valutions. Obviously they are very much tied to the Iron Ore price and the overall story in China but they are debt free, generate good ROE and seem to have strong cashflows. Is there something about them I am missing as they havent been mentioned too many times on this blog. Thanks in advance.

    • ron shamgar
      :

      hi David, make sure you factor in the recent acquisition and share issue. you will be unpleasantly surprised. cheers

      • Steve
        :

        I remember Roger appearing on YMYC a couple of months ago when Atlas was up around $3.70 – $3.80. At that point Roger said it was trading at close to a 20% discount. Did your valuation drop recently Roger (as your post above suggests)? Could this relate to the acquisition/share issue Ron mentioned above?

      • Roger Montgomery
        :

        Shares on issue rises from 473 million to 824 million. As I have often warned, my valuations change and my valuations are updated daily but I am not obligated to keep updating.

      • Darren
        :

        Hi Steve, you might like to look into Mount Gibson (MGX) if you like the iron ore stoty out of china and the japan rebuild etc. From their half year 2k11 i have an IV of around $2.50 and good cash flow as well as broker forecast of over 300 mil NPAT for 2k11 and even larger for 2k12 although you may want to research the rather interesting board structure of the company (check out asx anoucements around late last year) to see if the stock is for you………just my opinion and seek advice before doing anything

  9. Russell Robinson
    :

    The US economy is nearly 3 times larger than it’s nearest rival. Currently that’s China, but it was Japan not so long ago.

    2-3 times is a big difference.

    And if you read Michael Feller’s recent article in Eureka Report, not only does China have a lot of major issues to confront, its growth is “smoke and mirrors” to some degree.

    Our Aussie resource boom is probably going to end due to these issue – but who knows when?

    Until it is a democracy with a proper rule of law, I will be very careful of investing any of my hard earned in Chinese companies.

    How can you possible calculate IV for a Chinese company?

    Any numbers are imaginary edicts by the Politburo.

    • Ilya
      :

      US economy is only that much bigger than China’s because Chinese choose to peg Yaun to $US. Now imagine Chinese cut the peg with the $US and let Yuan appreciate. The gap will close very rapidly.

  10. David V
    :

    Hi All,

    Another indicator you may wish to look at of US recessions is the oil price. It has recently gone through a spike. Each oil spike has historically been followed by a recession.

    • Ilya
      :

      And what causes spikes in commodity prices? Inflation i.e. money printing (read stimulus, quantitative easing) or massive credit expansion (read artificially low interest rates). You are correct, but you are confusing a symptom with the cause. Oil price is the symptom, inflation is the cause.

      There is a similar theory that uses skyscrapers as predictors of recessions. Deep recessions tend to occur not long after the world’s newest tallest building is constructed. Different symptom, same cause – inflation.

  11. William
    :

    Further Over half of China’s GDP is produced from building empty buildings that is not sustainable is it?

  12. William
    :

    Word is an Amero currency will be introduced at some time in the future for the North American Union (Canada, Mexico, USA).
    What effect will this have on the world”?

      • Lloyd
        :

        Just what’s needed! Hitch a couple of dog currencies/economies to a strong commodity based one and voila… the whole is greater than sum of the parts. Export drugs and cheap labor from the south, energy and minerals from the north to sustain the entitlement mentality of the increasingly indolent middle. Worthy of Goldman Sachs that thinking!

      • Ash Little
        :

        Hi William I have a firm view that currency unions can’t possible work.

        Countries need to have control of their own currencies and interest rates to enable reserve banks to perform effectively.

        I just can’t imagine the US trying to peg their currency to the Canadian dollar with all the money printing that is going on. But all this seems easy when you try to work out how serial defaulter Mexico fits into the picture.

        I remember very vividly when Soros busted the UK pound out of the European currency peg because I was living in the UK at the time.

        These things just can’t work over time

  13. Steve I
    :

    I find it very typical for many value Investors to be resistant to change. I applaud you Roger for writing about these sorts of issues because I think they are vitally important when you are thinking about investing into the future.

    From my perspective, accepting change is one of the most important components to investing. I think that the mantra of ‘this time it’s different’ sometimes makes people assume that substantial change won’t happen as it is used so frequently on a range of topics. This times it’s different applies to speculative bubbles and change is not a bubble.

    Saying that China is a bubble is silly because they have the manufacturing base that the US had earlier this century and they have achieved massive technological transfer.

    This is not all about US and China. It is about the fact that the world balance of power and monetary systems are fundamentally changing.

    The US has the ability to reinvent itself. But it first needs to purge it’s whole system. The British have done well this century after the US took over power so it’s not all downhill over the long term.

    • Roger Montgomery
      :

      China may be at the same point on its path to prominence that the US was at the beginning of the last century. And its important to remember that the US experienced depressions and recessions along its road to global superpower.

    • Louis N
      :

      Hi steve,
      As a chinese myself, saying china is a bubble is not silly at all.
      If you’re living in china east coast,many manufacturing base business is not profitable as they used to be. The ROI you get from manufacture base company probably is around 10 -20%.
      In china real estate, you can easily get ROI 60-100% with one or two year period.
      A lot of manufacturing company choose “easy way” and switch to real estate sector.
      This sounds like Japan real estate bubble in 1990’s for me.

      However, no doubt China will become another super power. But it just won’t happen within this 10 years in my humble opinion.

  14. Brad
    :

    Don’t forget GWBush inherited a $400bn budget surplus from Clinton but was elected in 2000 (or was he!) on a platform of increasing spending and cutting taxes.

    After 9/11 he embarked upon two wars but kept the tax cuts and Dick Cheney famously said in about 2006, “deficits don’t matter”.

    A lot of these policies were from a combination of populist Karl Rove style policies and right wing republicans, “coalition for a new american century”

    Notwithstanding the causes, the issue is whether america choses austerity, cutting spending and increasing taxes or inflation to pay down the debt.

    Buffett is right though, you can’t bet against America and win, the place is constantly reinventing itself.

    • Steve I
      :

      The US budget deficits and the mantra of deficits don’t matter have been institutionalized for decades now and they consistently run a deficit for a very long time. This is not a new thing, but it is accelerating rapidly. This is why it is so intractable.

  15. OED
    :

    I’m not an economist either, but the idea of the Yuan becoming the reserve currency is extremely premature. Let China float the RMB first. Then we’ll see.

  16. Ilya
    :

    Great post, Roger. What we are seeing in the US is the the consequence of almost a century of bad economic policy. Starting from the 1930s each successive administration did their best damage and kicked the proverbial can down the road. Now they are at the end of the road and there is nowhere left to kick.

    I actually think the game is up for most Western welfare states whose largesse was only possible because they offloaded their defence spending to the US. What will the world be like once it is clear US can no longer defend Europe, South Korea, Australia? We do live in interesting times.

    BTW. I think the rise of Yuan is a huge positive for Australia. The wealth centre of the world is moving to Asia. Once Chinese can afford the stuff they make themselves instead of sending it over to the West, we will see an explosion in economic growth and consumption on an unimaginable scale. It will make our current mining boom look like a picnic. Hopefully Australia is still competitive enough to take advantage, since our pollies never tire of looking for ways to kill a goose that lays golden eggs.

  17. Ash Little
    :

    Hi Roger & All
    Great Post,
    Recessions are the friend of a value investor so bring them on. The more the merrier for me.
    During recessions analyst forecasts are very gloomy (a factor of projecting the recent past as permanent for the future.) However, the best part about a recession is that they end at some stage. This is something I would bet my life savings on. They always have in the past and they will continue to do so. It is never different this time.
    I have been following Lakshman for awhile now and think what he says is not too bad and I am cheering for more frequent recessions in the USA.(I know I am a heartless heathen)
    What excites me the most is a China recession. Now don’t get me wrong, I am a bull in a china shop, but like boom recessions are inevitable in China. It’s going to happen I just don’t know when.(After all it always has in the past and human nature does not change.
    Recessions are in fact a good thing. They clean things out and transfer assets from the inefficient to the efficient creating brighter future prospects. In my view they should be embrace by the government not avoided
    When the inevitable happens the groceries will be cheap and we should dine out on what is on offer.
    Just my View

    • Roger Montgomery
      :

      Hi Ash,

      A slowdown in CHina is inevitable but for a recession, the trough of the business cycle has to drop a very very long way. Pausing to reflect on that…its not impossible.

    • Ron shamgar
      :

      I agree ash.

      I would add that in order to capitalize on these opportunities, you need to be cashed up. It will be no good selling ur shares at that point as they will tank with everything else.

      So unless ur a fund manager (which enjoys constant new flows of fresh funds), or u win the lotto just as markets fall, the simple investor must either:

      Keep always lots of cash around.
      Know when to take profits.

      The smart or lucky ones will do both!

      Good luck.

    • Ilya
      :

      Ash, apart from value investing, even from purely economic standpoint recessions are actually good. This is how economies re-address imbalances and renew themselves. USA actually needs a big recession very badly but politicians and the Fed won’t let that happen. They are trying to paper over the problem with bailouts and easy money to postpone the inevitable. This will only ensure that when the inevitable finally happens it will be very bad if not catastrophic.

      The US economic situation is akin to a junkie high on drugs. Once the economic junkie starts sobering up and slipping into recession the Fed juices him up with stimulus. But as with any junkie the new hit needs to be bigger and bigger, and every time the high is not as good as before, with every subsequent round of stimulus buying less and less economic growth.

      As for China, they will have their own share of setbacks but overall the future looks very bright.

      I like Peter Schiff’s analogy about the US relationship with the global economy. Schiff says “US is not the economic engine of the world it’s a caboose. And when you decouple the caboose the rest of the train moves faster”.

    • Michael
      :

      Hi Ash,

      I know a few months ago you were hoping your stocks fell 20-30% so you could buy more. Mr Market came along and granted this wish. The question is – did you buy more, or did the price falls make you worry something might be wrong with the companies you invested in?

      What we think we would do in certain situations, and what we actually do is not always the same.

  18. David King
    :

    Thanks Roger. As usual, a great and guiding analysis. Interestingly, the carked-out bald eagle shown in your illustration, is in fact increasing in numbers, and doing jes’ fine, thank you . Looks like he’ll be around to give pleasure as a beautiful creature long after he ceases to be a symbol of U S power. Sort of reminds one of the eagle used as a symbol by (a) ancient Rome and (b) Nazi Germany. Maybe he’s plain bad luck. C’mon the kangaroo!

  19. Lloyd
    :

    Roger,

    The US is and will remain for some time the largest consumer of oil, and energy generally, on the planet. The recently published Post Carbon Institute report ‘Will Natural Gas Fuel America in the 21st Century’ (available at the following link) provides some interesting quantified insights on the role, the scope and the challenges associated with hydrocarbon energy source replacement in the US (and by implication the rest of the world). Those followers of unconventional gas and proponents of gas as a transitional fuel to a renewables based energy infrastructure should pay particular attention.

    http://www.postcarbon.org/reports/PCI-report-nat-gas-future.pdf

    Without continuing access to abundant cheap energy the US economic decline will be more rapid than some envisage. The Post Carbon Institute report highlights the problems and risks associated with current thinking in the US.

    Suffice for me to say, it is not going to be plain sailing, or a gentle decline into economic senescence.

    Regards
    Lloyd

  20. fred
    :

    Hi Roger,

    People may believe in the China story and they might be correct but I have too “disagree”. This is why! The main reason for China’s growth is America’s purchase of China’s goods. China in same way shape or form give America cash so that they can purchase goods back from China so the real growth is next to zero. America needs to hand ball some of the World’s problems to China since they are so mighty and work on some internal issues and they will be back. I like China but China is NO America.

    Better the devil you know is what Pakistan might consider in the near future when it come to there relationship with America.

    Just a couple of thoughts

    • Roger Montgomery
      :

      It may even be worse than you describe Fred,

      Seventy percent of China’s growth is tied to fixed asset investment – roads, bridges, buildings, freeways. Not sustainable.

      • Lloyd
        :

        Another reason China cannot save us:

        The US is 25% of world GDP and the biggest market for the land fill produced by China Inc.

        China on the other hand is 9% of global GDP.

        A slow down of consequence as has already occurred (and continues) in 25% of the global economy cannot be offset by manufactured growth (mandated Government investment) in 9% of the global economy.

        The maths just not stack up to what the China Inc snake oil salesmen peddle.

        And all this is before we consider the impact of Europe on global GDP!

    • Steve I
      :

      China has used the export driven model to acquire the manufacturing base from the US (and world?). They started with cheap low technology items and gradually moved up the chain to higher margin high technology items. Through this method they have gained power through productive and technological capacity. China is now the significant creditor and the US is the significant debtor. Power lies in the creditors hands and history repeats itself as was the transfer of power from the British to the Americans.

      China has definitely gained what was otherwise not possible and the US has distinctly lost.

      Regardless of how successful the Chinese are with their power, it has and is happening. If they are unsuccessful in whatever new paradigm we have, I’m sure India won’t mind giving them a run for their money. This competition is likely to help keep the Chinese on track as did USSR for the US.

    • Ilya
      :

      Fred, once Chinese stop propping up the US dollar, the Yuan will appreciate and Chinese will be able to buy their own produce themselves instead of shipping it to United States. Sure this will create some winners and looser and Chinese economy will need to restructure for greater internal demand but overall Chinese will benefit tremendously.

      Think about it. Countries need exports to pay for imports. So far Chinese have been sending their goods to the West and getting paper money in return. But what good is money without the goods? The West was able to enjoy the goods and all Chinese have to show for it is paper of diminishing value? Chinese are much better off enjoying their own production and the standard of living that properly reflects their industrial might and wealth of capital savings.

    • Christopher
      :

      Hi Fred,

      I have to disagree about there being next to zero real growth in China. They only need sell goods to the US until their domestic market is big enough to sustain growth on its own. This isn’t very far away, with China tipped to become the largest consumer market in the near future.

      I think the real question is what becomes of those fixed asset investments Roger describes. With a nearly unlimited pool of funds, it isn’t difficult to make massive infrastructure investments. It may still be very difficult, however, to make prudent ones. What returns will these assets generate? Which bridges and roads are they building – Alaskan bridges to nowhere, or the kind of infrastructure which will help sustain a generation of real growth?

  21. Brad J
    :

    Thanks for this Roger,

    I mean no disrespect, but who are we meant to believe you and Jim Rogers or Warren Buffett who is much more bullish on the US. You all have a great track but I agree that it is best just buy at big discounts to IV.

    The best ideas generally and the biggest companies still come out of the US. Just some examples are Microsoft, Apple, PayPal, Facebook etc, not to mention all the traditional brand names/companies like Coke, Gillette which will always benefit from a growing world population as they are global brands.

    Even if the US is not a dominant force in the future, can you still go wrong investing in some of their great companies which have proven to be great performers over many decades.

    Now if the currency drops but the company is earning income all over the world then its profits will increase in US dollars for its overseas operations. This will then be reflected in higher profits in US dollars and a higher share price to reflect value. Is this too simplistic?

      • ben
        :

        “there is no question that the momentum of this economy, leaving out the oil price issue, leaving out Euro problems that have emerged, and very specifically leaving out the budget problems, this economy is really beginning to pick up momentum… The fascinating issue for forecasters is, how do you factor in all the negatives?” – Alan Greenspan

    • Steve I
      :

      Brad,

      Can you explain why Buffett has been focusing so much on international companies when he previously did not? It is also questionable whether the companies you mentioned are still US companies and not multinationals who see their business growth outside the US. These companies are listed on US exchanges but really, they could be listed anywhere. In fact, Coke is currently considering listing in China! Does that say anything to you about a significant change?

      You say who are we to believe. I wouldn’t believe Warren Buffett. He is a great investor who has an exceptional history during a period of constant US growth, supremacy and credit expansion. Buffett has not proven to be knowledgable on these issues at all (based on public comments – he might think differently in private). He has recently said that the US doesn’t have a debt problem. He invested in 2009 in to the US banks on the basis of government bailouts which has lead us to where we are today – he even encouraged it (a was disgusted with his actions here and Mungers comments for the average person to ‘suck it up’ with regards to massive moral hazard.

      Unfortunately I have no respect for Buffett when it comes to these issues.

      With no disrespect to Buffett, he is used to the old world of US supremacy. Nothing lasts forever.

      • Steve I
        :

        Just realized there could be some misinterpretation. Of my comments. With regards to the statement that I hold no respect for Buffett with these issues is on the basis of his support of the government bailouts and ability to provide realistic commentary on the world we face going forward.

        The comments about no disrespect is in relation to his past and the environment in which he was so successful.

        I really shouldn’t post on my iPhone!

      • Brad J
        :

        Hi Steve,

        Great points but to be honest with you none of this has any impact on us as investors and this is the point I am trying to get across.
        If I invest in Coke with the belief that it has enormously bright prospects and will capitalise on the China and Indian boom, then it would make no difference if this company is listed in the US or China. If the US currency is devalued, which it will be, then the share price in US dollars will be higher as a result simply due to conversion.

        A great investment in a company which is able to grow profitably will always be the best hedge against inflation. Buffet may or may not have been right in some areas but his investment techniques will always work.

        Now, I am probably wrong here and it doesn’t matter if I am from an investment stand point, but I do believe in the US. It has nothing to do with numbers or dept levels but more importantly it has to do with attitude and entrapreneurship. The US best days are ahead of it in my opinion, but maybe most of their income will be from overseas and they won’t be just relying on their ability to dig stuff out of the ground. For me Coke is a much better investment long term than BHP will ever be.

      • Steve I
        :

        Brad,

        I agree with your conclusions about Coke. But these points which we have covered do matter. If Coke was only able to sell its products to the US then it would be a completely different company.

        Given the fact that it is accepted internationally and has huge market potential (large populations), it can continue to work wonders. I think the big picture stuff matters because if Coke wasn’t able to integrate into other countries then it would be severely hampered in the ability to grow its intrinsic value.

      • Brad J
        :

        Steve,

        I totally agree and if there wasn’t the opportunity overseas I wouldn’t own it.

    • Matt
      :

      To me, the corporate US attitude was always “take over the world”. I don’t know about Chinese capitalism in this regard..

      Who knows, these US symbols we’ve grown up with may gradually be replaced by asian alternatives and our kids will think we’re old fogies (as if they don’t already) for drinking coca-cola and not some ginseng-etc-etc-sport drink.

    • Ilya
      :

      Brad, follow the money. No country has ever been in so much debt at the US with no way of paying it back while China is one of the biggest creditor nations. Who would you rather be – the one with all the money or the one with all the debts? Who has better prospects?

      As for Buffett, no disrespect to the world greatest investor, but his recent judgement on this subject seems to be poor. Read his earlier writings about Squanderville and Triftville and see how it squares up with his latest pronouncements. Unfortunately for Buffett he is letting his ego get in the way. I think he sees himself as the poster boy for the US economy and feels that it is his responsibility to talk it up (most of us would probably feel the same way if our words could turn markets). He is also a long-standing Democrat supporter which could be clouding his judgement. Then there is a question of some of his companies being beneficiaries of the bailout money.

      • Ash Little
        :

        I agree IIya

        Only thing to add is I am not sure how confident china is in the promissory note they have from the US. viz a vie. US T Bills.

  22. darrin
    :

    HI Roger

    What numerical figure would you consider to be large discounts to the estimate of valu.able Intrinsic value to signal a buy. Also what is the equation of how to find the MOS which is most commonly mentioned.
    If everyone was to calculate the valu.able intrinsic value of a stock shouldn’t we all get similar valuations. If we don’t then what have you found to be most common error made.

    cheers

    darrin

    • Rob
      :

      Hi Darrin,
      Your first question has been answered by Roger and others on this blog. As an example, Ash has stated at least 50% where I think others have said a minimum of 20% to 30%.

      As to your second question, Darrin, we spent a lot of time trying to get you close to Roger’s valuation on TRS and in the process you discovered a lot of reasons why the IVs aren’t the same. We did get you close.

      For future IVs, because you are making more assumptions it’s even less likely you’ll get a similar figure.

      Darrin, when this happens try to remember that even Warren and Charlie don’t get their calculations to match and if they did, I suspect they would wonder why.

      You really do need to move on to the rest of the book. As long as you’re stuck on IVs, you are missing out on some really value.able stuff.

      Cheers
      Rob

      • Andrew
        :

        Hi Darrin,

        Agree with Rob, you would be better spent focusing on the finding quality companys rather than worrying about what others do in regards to working out their IV’s and margins of safety. It is not hard to come up with your own rules that you can be happy with and make investment decisions.

        However, just to give you some other examples of how people do it. My minimum margin of safety differs from company to company. My margins of safety differ based on the risk profile and other factors. Mostly it is somewhere between 20% and 30% with my forecast iv’s on a higher margin of safety of around an extra 5-10%.

        But listen to what Rob says, he has given you some very constructive feedback which i think if you listen to and take on board you will become a much better investor.

        The IV calculation chapter is the least important, the more you practice what the other chapters teach and preach the better you will become at the whole process. You will then be able to come up with your own system and criteria for working out which companies are worth investing in and that is where the money is to be made, not being able to value companys like Roger.

        The IV chapter help you work out a value based on one valuation method, the rest of the book will set you free and help your Investment IQ to where you can and will be able to form your own opinions on investing and not feel like you need to follow others advice.

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