As an ex died-in-the-wool monetarist, I have been shocked by the fact that no amount of monetary excess by central banks has brought about global inflation. While I wouldn’t argue with the fact that big debt overhangs from the Great Recession of 2008 have inhibited spending and hence aggregate demand, I believe the fundamental deflationary factor has been the ongoing technological supply side revolution that has been underway for the last two hundred years and has been accelerating in recent decades.
People often speak of technology and globalization as separate deflationary factors. But globalization is actually part of the technological acceleration and is made possible and inevitable by this acceleration. Low priced Asian labor has driven down costs for so many tradable goods. But Asian goods didn’t get to America on sampans. Just as in the nineteenth century American wheat and beef didn’t get from the prairies to Europe on covered wagons and sailing ships. No, a new technology called the railroad opened the West to be accompanied by screw propeller steamships, and refrigeration. Global communication leapt forward thanks to the telegraph. The twentieth century followed up with the telephone, the jet plane, the container revolution, fiber optic cables, computer technologies, the internet – the list goes on.
But What About Trump?
I believe that the march of technology and its globalization product is unstoppable. Investors should ignore some of Trump’s poorly thought out tweets and stump speeches that suggest he is going to shut down international trade and make war on globalization. It’s a war he would lose if he tried. Anyone having any doubts about the benefits of trade to the US should read FedEx ( FDX) CEO and founder Fred Smith’s recent strong speech on this subject, including a defense of NAFTA and TPP.
In my opinion, investors should focus on Trump’s promises to roll back regulations and lower taxes. The current rally in the stock market suggests that investors are doing exactly that. In so many areas – energy, farming, banking and housing finance just to name a few—American enterprise has been held back by irrational and excessive regulations. Trump may wind up giving the ongoing technological supply side revolution an extra boost. Historically, the acceleration of technology has occurred mainly in nations that have favored free markets, property rights and the relative absence of government meddling and regulations.
Of particular concern are all the regulations and subsidies pertaining to the environment. All Americans want cleaner air and water. But over the last forty years, the environmental movement (I admit to having been at one time a card-carrying member of the Sierra Club and Friends of the Earth) has degenerated into the Environmental Religion which is anti-capitalist, anti-science and un-democratic in nature. This religion has infiltrated the unelected corridors of bureaucratic power in Washington. A myriad of edicts have been handed down by the Environmental Protection Agency without Congressional review. Rationality and roll backs are needed here.
So Which Companies Are the Winners and Losers Under Trump?
In the winners category are virtually all companies that don’t depend on government subsidies. (Almost) all companies benefit from lower taxes including the tech companies with their billions trapped abroad. Companies that have been heavily impacted by the EPA look to be potential winners.
One potential loser is Tesla (TSLA), the poster vehicle of the Environmental Religion. Purchasers of expensive Tesla electric cars get government subsidies, which look to be vulnerable. (You have to ask why the government is saving the environment by subsidizing wealthy people to buy luxury cars.) Tesla also benefits by selling the Zero Emission Vehicle credits it earns and doesn’t need because its cars are electric. (No matter that Tesla batteries have to be charged by power plants that are still largely fossil fueled). And then there is the subsidy dependent, recently acquired, Solar City.
The case of Fannie Mae (FNMA) and Freddie Mac (FMCC) is more complicated. Both have a trove of deferred losses that get dramatically reduced in value by a significantly lower tax rate. Details perhaps. But why not just phase out Fannie and Freddie? Other countries don’t rely on these types of institutions for mortgage finance. Unlike great American companies like McDonalds, Boeing or Facebook that have built their franchises and brands by innovation, these two companies derived their franchises from an implied government guarantee. Crony capitalism at its worst. I completely disagree with Treasury and Commerce nominees Steve Mnuchin and Wilbur Ross who have been quoted as advocating Fannie and Freddie’s privatization. Without an implied government guarantee, these companies won’t survive. With that implied guarantee, they will return to their old status as undiversified and risky mortgage lenders always needing to curry government favor to retain their government-derived franchise.
Robots to the Rescue
President-elect Trump wants to bring back manufacturing to the United States. The only way so many American companies manufacturing in the US can compete with cheap Asian hands is to bring on more automation and robots. This is a very exciting area that is going to attract investor attention in the future. For starters, there’s a few things investors and policy makers should know about robots.
First, while the leading edge of robotic research takes place in the United States, the actual manufacturers of industrial robots – the kind of robots that uncomplainingly toil 24×7 in factories – are not American. The leading manufacturer of industrial robots is Fanuc (FANUY) from Japan followed by ABB (ABB) from Switzerland and Yaskawa (2354:JP) also from Japan. Japan and Germany have been strong in industrial robotics. Interestingly, Kuka (KU2:DE), a leading German industrial robotics manufacturer, is being acquired by a Chinese company called Midea.
Second, a revolution is now underway among the robots. Up until recently the typical industrial robot operated in factories usually in the auto and electronic industries. This robot was preprogramed to do certain repetitive and heavy tasks and was kept caged off for human worker safety. This robot wasn’t remotely like the sultry androids in the movies that people have sex with. But now as the result of progress in things like sensors, computers and networking, a transformation is underway. New industrial robots will not be caged off and are called collaborative robots or cobots. Not only that, AI is entering the picture. Fanuc for example has entered collaborative agreements with a Japanese AI startup called Preferred Networks and has also announced an agreement with the American Nvidia (NVDA). Some factories may come back to America but the factory employment numbers will not. Mr. President-elect – as the Chinese say– be careful you get what you wish for!
Third, China – the land of the global sweatshop—is actively promoting automation and robots in its factories. It seems that Chinese wages are rising and its workforce is starting to shrink thanks to its one-child policy. No hand wringing in China about robots creating unemployment.