…there had to be a point where the value of the Wall St economy surpassed the value of the Main St economy… Part I Here
We now look forward, and consider the question: How would the multinational underwriters, the multinational financial systems, reset all transactional tables (the bookkeeping systems underneath the valuation) if the U.S. stock market was ever forced to re-value economic nationalism over multinational globalism?
To first answer the “how” question, we must visit the “why” question. Why would the multinational financial underwriters want to reset their valuations?
Obviously, the global financial system does not act altruistically. What would motivate the global wealth valuation authority (various market investment indexes) to want, or need, a reset.
The answer to the “why” question might not be as challenging as it appears.
First, there has been a seismic shift in how the world looks at the economic exploitation of multinational systems, or globalism. See Bernie Sanders? See those yellow vests in France? See what happened with the U.K. Brexit referendum? See the shrinking EU influence? See the open/public confrontation and push-back against China? See Trump? All examples are consequences of the rise of economic nationalism.
Secondly, the original Wall Street corporate motive (during decades of mergers and acquisitions) to shift product manufacturing to Southeast Asia (ASEAN nations) was driven by a lower cost of overall business, higher profit margins and greed.
As a direct outcome economic wealth was shifted from the U.S. to ASEAN nations, and particularly China. Low wages, low regulation, cheap operational costs, incentives and subsidies from Asia equals cheap TV’s, sneakers, furniture and durable goods.
Even with high fuel prices and overseas shipping costs, there was a big difference between U.S. and ASEAN manufacturing costs. As hundreds of U.S. Wall Street multinationals chased profits the rust-belt was created.
However, over time (three decades) the outflow of U.S. wealth resulted in a higher wealth level in the ASEAN nations. Over time Asian workers receive higher wages and their standard of living increased.
With 30 years of stagnate wage growth in the U.S, and with rising wages and standards in southeast Asia, the difference in labor costs starts to narrow. Simultaneously, the internal economy in China, Vietnam, S-Korea etc. all started to increase.
The ASEAN workers are now buying stuff they couldn’t afford before.
Instead of a reliance on the U.S. consumer, the internal economy (local demand on a generational scale) starts driving a need in Asia for the same products. As a result, more U.S. and global multinationals expanded operations in those ASEAN nations because new consumers were created.
However, the multinationals were also taking advantage of (exploiting) prior trade constructs like NAFTA. Ex. U.S. multinationals used Canada and Mexico to assemble Chinese products for distribution into the U.S.
Along comes Donald Trump who has watched all of this and he wants to change it.
President Trump starts initiating policies that specifically benefit Main Street by speeding up the process of narrowing the cost difference between the U.S. and SE Asia.
President Trump calls these policies “America First”.
Trump lowers the corporate tax rate to offset the ASEAN benefit of Chinese subsidies. A tax policy that also makes corporate tax inversion less likely.
Trump further narrows production costs by lowering U.S. energy costs. A policy to unleash all facets of energy development (ex. pipeline approvals and ANWR opening). Again, lower energy costs in the U.S. narrows the cost difference for manufacturing.
Trump deregulates various industries, again closing the gap between the U.S. and ASEAN nations. Part of this deregulation allows for expanded (easier) raw material development.
With the initial framework established, President Trump starts getting serious.
President Trump puts a big wrench into the cost dynamic with tariffs on imported goods from China and Asia. Trump then eliminates the three-decade-old NAFTA loopholes that allowed manufacturers to work around origination rules.
The USMCA has more strict origination rules that require parts to originate in North America. The tax/tariff for violating the origination rule(s) are not particularly high, but they are a disincentive. Again, that narrows the cost difference.
All of these policies, lower corp taxes, deregulation, lower energy costs, access to abundant raw materials; closed NAFTA loopholes; and the looming threat of easy to apply tariffs; work together to narrow the cost difference between production in ASEAN nations and production in the U.S.
Then when you factor-in shipping costs & new trade rules, well, the difference is minimal.
So there’s the “why” answer.
♦ The multinational systems (Wall St. valuation underwriters) are now open to a reset in the current global evaluation indexes, because the landscape has completely changed.
A 72″ flat screen TV can be made in the U.S. for the same price as the TV in Vietnam.
However, there’s still another problem… For that, we need a metaphor… so we’ll stick with a fictional TV corporation.
A U.S. electronic multinational has a stock market evaluation based, in part, on their TV assembly operations overseas. Assume that division of the parent company is 20% of the total company valuation. If that company wants to return the TV division to the U.S. the exit cost of the move is not worth 20% of their total valuation.
The physical land (leased or owned), physical factory (leased or owned), and physical machinery are worth pennies on the original investment dollar.
It is the operation, and the preceding financial result, that carried the Wall Street valuation. If the TV division is going to relocate into the U.S, Mexico or, less likely Canada, that division is going to have to invest in the move and only recapture a few dollars from the sale of land, factory or equipment they leave behind.
How do they pay for the costs to return to North America?…
…and, more importantly…
How do the multinational underwriters who assigned the divisional valuation, and the investors who subsequently inflated the valuation, lower the divisional valuation to reset for an entirely new landscape and growth/profit opportunity?
In essence what this “TV” example shows is a corporation detaching their valuation from globalism, and reattaching their valuation to economic nationalism, Main Street USA, again.
That’s the opportunity behind Coronavirus….