Business

Hot Dogs, Political Fireworks, and 4th Of Julry – Markets Edition

The 4th of July has arrived once again as we celebrate our country’s 241st birthday of independence. Besides being a time to binge on hot dogs, apple pie, fireworks, and baseball, this national holiday allows Americans to also reflect on the greatness created by our nation’s separation from the British Empire.

As our Founding Fathers fought for freedom and believed in a more prosperous future, I’m not sure if the signers of our Declaration of Independence (Below [left to right]: Roger Sherman, Benjamin Franklin, Thomas Jefferson, John Adams, and Robert Livingston) envisioned a world with tweeting Presidents, driverless Uber taxis, internet dating, biotechnology medical breakthroughs, cloud storage, and countless other innovations that have raised the standard of living for billions of people around the world.

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(These Founding Fathers may use different pictures for their Facebook profile, if they were alive today.)

I tend to agree with the wealthiest billionaire investor on the planet, Warren Buffett, that being born in the United States is the equivalent of winning the “Ovarian Lottery.” The opportunities for finding success are exponentially higher, if you were born in America vs. Bangladesh, for example. Surprisingly, the U.S. only accounts for about 4% of the global population (325 million out of 7.5 billion world total). However, even though we Americans make up such a small portion of the of the people on the planet, we still manage to generate over $18 trillion in goods and services, which makes us the world’s largest economy. As the #1 economy, we account for almost 25% of the world’s total economic output (see table & graphic below).

RankCountryGDP (Nominal, 2015)Share of Global Economy (%)
#1United States$18.0 trillion24.3%
#2China$11.0 trillion14.8%
#3Japan$4.4 trillion5.9%
#4Germany$3.4 trillion4.5%
#5United Kingdom$2.9 trillion3.9%

Source: Visual Capitalist

How do we create six times the output of our population (i.e., 4% of world’s population producing 25% of the world’s output)? Despite the nasty, imperfect, mudslinging politics we live through daily, the U.S. has perfected the art of capitalism, which has landed us on top of the economic Mt. Everest. Although, there is always room for improvement, culturally, the winning “entrepreneurial” strain is born into our American DNA. The recent merger announcement between Amazon.com Inc. (AMZN) and Whole Foods (WFM), the leading natural and organic foods supermarket, is evidence of this entrepreneurial strain. Amazon has come a long way and gained significant steam since its founding in July 1994 by CEO Jeff Bezos. Consequently, the momentum of this internet giant has it steamrolling the entire retail industry, which has led to a flood of store closings, including department store chains, Macy’s, J.C. Penney, Sears and Kmart. The Amazon-Whole Foods merger announcement was not a huge surprise to my family because we actually order more than half of our groceries from AmazonFresh (Amazon’s food delivery program). What’s more, since I despise shopping, I continually find myself taking advantage of Amazon’s “Prime Now” 2-hour delivery option to my office, which is free to all Prime subscribers. It won’t be long before Amazon’s multi-channel strategy will allow me to make same-day orders for groceries, electronics, and general merchandise from my office, then pick up those items on my way home from work at the local Whole Foods store.

Leading the Pack

Replicating this competitive advantage around the world is a challenge for competing countries, and our nation remains leap years ahead of others, regardless of their efforts. However, the United States does not have a monopoly on capitalism. We are slowly exporting our entrepreneurial secret sauce abroad with the help of technology and globalization. Just consider these three Chinese companies alone are valued at almost $1 trillion (Alibaba Group $360B [BABA]; Tencent Holdings $340B [TCEHY]; and China Mobile $220B [CHL]), and the largest expected IPO (Initial Public Offering) in the world could be a Saudi Arabian company valued at $2 trillion (Saudi Aramco). When 96% of the world’s population lies outside of the U.S., this reality helps explain why exporting our advancements should not be considered a bad thing. In fact, a growing international pie means more American jobs and more dollars will flow back to the U.S., as we export more value-added products and services abroad.

Even if other countries are narrowing the entrepreneurial competitive gap with the United States, we still remain a beacon of light for others to follow. Despite what you may read in the newspaper or hear on the TV, Americans are dramatically better off financially over the last 20 years. Not only has net worth increased spectacularly, but consumers have also responsibly reduced debt leverage ratios (see chart below).

Source: Calafia Beach Pundit

If you were a bright CEO working for an innovative new start-up company, would you choose to launch your company in a closed, censored society like China? How about a fractured Britain that is pushing to break away from the European Union? Better yet, how about Japan with its exploding debt levels, a declining population, and a stock market that is about half the level it peaked at 28 years ago? Do emerging markets like Brazil with widespread corruption scandals blanketing a new president (after a recently impeached president) seem like the best location for a hot new venture? The answer to all these questions is a resounding “no”, even when compared to the warts and flaws that come with our durable democracy.

Political Pyrotechnics

Besides the bombs bursting in air during the 4th of July celebration, there were plenty of political fireworks blasting in our nation’s capital last month. No matter what side of the political fence you stand on, last month was explosive. Consider ousted FBI Director Jim Comey’s impassioned testimony relating to his firing by President Donald Trump; the contentious Attorney General Jeff Sessions Senate Intelligence Committee interview; the politically driven Republican baseball shooting; and the Special Counsel leader Robert Mueller’s investigation into Russian interference and potential Trump administration collusion into the 2016 elections.

Despite the combative atmosphere in Washington D.C., the stock market managed to notch another record high last month, with the Dow Jones Industrial Average index advancing another 340.98 points (+1.6%) for the month, and +8.0% for the first half of 2017. As I have written numerous times, the scary headlines accumulating since 2009 have prevented investors, strategists, economists, and even professionals from adequately participating in the almost quadrupling in stock prices since early 2009. Unfortunately, to the detriment of many, large swaths of investors who were burned by the 2008-2009 Financial Crisis have been scarred to almost permanent risk aversion. The fact of the matter is stock prices care more about economic factors than political / news headlines (see Moving on Beyond Politics).

The bitter, vitriolic political discourse is unlikely to disappear anytime soon, so do yourself a favor, and focus on the more important factors driving financial markets to new record highs – mainly corporate profits, interest rates, valuations, and sentiment (see Don’t Be a Fool). During this year’s 4th of July, partaking in hot dogs, apple pie, fireworks, and baseball are wholly encouraged, but please also take the time to celebrate and acknowledge the magnitude of our country’s greatness. That’s a birthday wish, I think we can all agree upon.