Summary: Bears worry an impending recession lies ahead, driven by overleveraged consumers burned by a collapse in home prices, and a huge current-account deficit that bespeaks our lust for consuming more than we produce and spending more than we save. But according to GaveKal, an international research boutique and respected advisor to some of the world's largest companies, the consumer is healthy, the U.S. economy stable, a housing crash improbable, and U.S. stocks are dramatically underpriced despite their current levels. The global economy, it asserts, is on the threshold of a decades-long deflationary boom that will lift America and much of the world to unprecedented prosperity. Its optimism stems from a theory that profound economic changes have and are taking place that have been ignored by most commentators -- specifically a business model it calls the "platform company." Its characteristics:
The platform company outsources low-return, volatile portions of its operations to low-cost manufacturers at home and abroad, focusing its resources instead on value-adding ventures such as R&D. This model seems to be behind the current surge in U.S. corporate profitability: Platform companies have reduced capital-spending needs, which also allows them to slash their debt-service burdens.
For platform companies R&D now dwarfs capital spending: This year the U.S. will spend about $330b on research and development, versus China's $136b. This global change is an "unalloyed good" according to GaveKal: productivity is enhanced, and intellectual property/knowledge is pursued to earn the higher returns that accompany breakthrough products and technologies.
GaveKal is not moved by America's growing account deficit, currently 7% of its GDP: U.S. household net worth stands at $54 trillion and growing at about $3t a year -- far larger and far faster than the $2.5 trillion it owes the rest of the world. Furthermore, trade statistics measure dollars, not profits per sale: The sale in the U.S. of a $700 computer might generate a negative trade balance of $450, because of components from Asian vendors shipped for assembly in the U.S. But the transaction might generate only a $30 profit for the Asian vendors, while high-margin American beneficiaries -- say a Dell system, with Microsoft software and an Intel microprocessor -- might realize a profit of about $250; the U.S. comes out a big winner even though the trade balance says it lost.
It's little wonder that foreigners are willing to finance our trade deficit: America boasts cutting-edge technology, high-margin companies, enviable productivity growth, liquid markets, political stability and strong private-property protection.
A housing market collapse is unlikely; real housing price growth in Ireland, the U.K., Spain, Sweden, France, Australia and the Netherlands have all outpaced that of the U.S. over the past 8 years, and seem none the worse. Barron's: "Optimism is often a tougher sell than bearishness. But based on the trends of the past half-century, GaveKal's argument looks like one worth buying."Highlighted companies: The following companies are cited in the article as being platform companies: Apple Computer Inc. (NASDAQ:
AAPL -
News), Motorola Inc. (NYSE:
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HPQ -
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DELL -
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BDK -
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IBM -
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DHR -
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-SeekingAlpha
Labels: AAPL, ADI, Barron's, BDK, DELL, DHR, HPQ, IBM, MOT
