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Have We Reached Peak Wall Street?

An argument its dominance is in decline
Monday, March 31, 2014, 7:14 PM

Though the mainstream financial media and the blogosphere differ radically on their forecasts—the MFM sees near-zero systemic risk while the alternative media sees a critical confluence of it—they agree on one thing: the Federal Reserve and the “too big to fail” (TBTF) Wall Street banks have their hands on the political and financial tiller of the nation, and nothing will dislodge their dominance.

But what id Wall Street’s power has peaked and is about to be challenged by forces that it has never faced before? Put another way,what if the power of Wall Street has reached a systemic extreme where a decline or reversal is inevitable? » Read more

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The Consequences of American Autarky

A contrarian view that may be the U.S.'s best future bet
Wednesday, January 15, 2014, 4:13 PM

Executive Summary

  • Will profit-chasing bring corporate capital back to the U.S.?
  • China's dwindling T-bill leverage
  • The decline of dependence on Mid-East oil
  • Autarky may be the best investment for the U.S. (and similar nations)

If you have not yet read Part I: What If Nations Were Less Dependent on Another? available free to all readers, please click here to read it first.

In Part I, we sketched out a framework for evaluating the trade-offs implicit in autarky; i.e., national self-sufficiency.  In Part II, we’ll explore a few potential ramifications of America’s declining consumption of energy and increasing ability to replace foreign-supplied capital, resources, energy, and expertise with domestic sources.

The core issue of autarky boils down to: What are the risks and costs of exposing the nation to the vulnerabilities of dependence for the convenience and profitability of remaining dependent on foreign providers?

Of the potential consequences, let’s focus on several high-visibility possibilities:

  1. China’s ownership of U.S. Treasury bonds possibly giving it leverage that amounts to blackmail-type veto power over U.S. policies.
     
  2. The dependence of U.S. corporations on foreign sales and the weak dollar for profits
     
  3. The decline of oil imports changing the calculation of U.S. interests in the Middle East and other oil-exporting regions

Profits as Priority

As I have often noted, the stupendous profitability of U.S.-based corporations is largely the result of non-U.S. sales and the profits reaped from a weak U.S. dollar.  When the euro was at parity to the dollar a decade ago (1 euro = $1), U.S. corporations reaped $1 of profit on every euro of profit gained from sales in the European Union. Now the same one euro in profit generates an additional 35% in dollar-denominated profits due to the exchange rate.

I have also noted that the enormous importation of goods made in China has generated remarkable profit margins for U.S. corporations such as Apple, while the Chinese suppliers are eking out net profits in the 1% to 2% range for the privilege of manufacturing goods that generate gross margins of 50% to 60% for U.S. corporations.

In other words, the Chinese did not impose this trade on U.S. companies the U.S.-based corporations extracted maximum yield on capital invested by moving production to China, not just in terms of lowering manufacturing costs but also in the enhanced proximity to the world’s great consumer-profit opportunities in developing Asian nations.

In other words, while other nations may focus on self-sufficiency, the American priority is profitability and maximizing return on capital invested. If and when profitability is threatened, capital pulls up stakes and relocates to whatever locale makes the best financial sense.

That the locale that makes the best financial sense is the U.S. is a new thought for many... » Read more