The U.S. has a debt clock that is perpetually moving in an upward direction. I don’t wish to take a political stance on the U.S. debt or conflate it’s meaning other than to acknowledge that it exists and it is moving in one direction, consistently.
Since post World War 2, the U.S. has enjoyed the advantage of it’s military and economic supremacy. One of the most frequently cited principals of power has been our naval supremacy. We can move aircraft carriers anywhere in the world and launch military campaigns from the safety of the seas. This has also created a system of universal recognition of U.S leadership called Pax Americana, creating stability and peace amongst world powers that we have all enjoyed as a result.
If we look at quotes by Sun Tzu, however, there are many ways in which the U.S. has slowly started to erode its power and supremacy by forgetting how we humbly and intelligently rose to power in the first place, which was not with the impressive display of trillion dollar aircraft carriers. It was by harnessing the power of the human spirit in pursuit of the individuals dreams. When individuals are self-motivated, your running the ball downhill. Individual self-starters, and entrepreneurship has always been Americas bread and butter, but where we lost ourselves was continuing to prioritize financial markets at the expense of the American innovation.
We all know the feeling when things are going successfully and we are completely aligned mind, body and spiritually with the experience. There is even a psychological term coined for this experience called “Flow State.” It is a mental state where someone is fully engaged with a feeling of being energized by a process or activity. It is when pure consciousness merges with actionable and successful outcomes. Flow state is when an athlete is in the “Zone.” The state of peak experience and performance.
Since 2008, the American economy feels like it lost “Flow State,” like we are pushing a rock up a hill. Most corporations since the 1980s have invested the best manufacturing technology and newest manufacturing plants in China and India due to the cheap labor costs while manufacturing facilities in the U.S. remained under invested and outdated. As supply chains struggle through transportation and manufacturing restrictions, we are experiencing the shortcomings of this investment strategy. As a result, the battle is only being won by brute force, cost cutting, and metric setting. It feels like there is less guidance on how we plan to win long term as political lines are becoming increasingly disparate. We may not be aware of it yet, but as we struggle internally, other nations will begin to look at us less and less for leadership and Pax Americana will begin to erode as a result. Foreign creditors will reduce investments, and high skilled employees will seek opportunities elsewhere.
As unemployment skyrockets with 36 million Americans unemployed and the stock market near all time highs, we are also experiencing a financial dichotomy unlike any other experienced in American history but it explains the situation perfectly: Credit is not being created or loaned to manufacture goods (as it should), but to support existing credit markets. This is how the economy can continue to separate and diverge from the financial industry as finances continue to service finances.
Corporations are creating debt by issuing corporate bonds at the same time they have record cash balance sheets, and simultaneously purchasing their own stock back. No where in this new cycle of debt is job creation, or shareholder value enhanced through innovation, patent development, and R&D: America’s bread and butter. Partly to blame is the FED stimulus programs which have historically no lending requirements, simply cheap credit issuance. The FED sees itself as a lender of last resort an does not interject itself to challenge the interest of the banks. This is a good thing as the FED maintains its independence, but we are also experiencing some of the drawbacks.
The largest corporation currently in focus is Boeing with over $43 billion dollars in share buy-backs over the last decade, and they are now seeking a bailout after a disastrous year of safety concerns with the 737 Max and business impact from COVID-19.
“All the forces in the world are not so powerful as an idea whose time has come.” – Victor Hugo
Right now, COVID-19 is forcing consumers to decide what are essential businesses, what we can do with and can’t do without. As a result, we may be finally be ready to let go of the idea of “too big to fail,” as an economic prerogative.
What will make the U.S. better and stronger in the future is a financial system that supports innovation, patent development, and R&D. This means that credit needs to chase ideas, not existing credit.
Risk avoidance eventually creates risk. Lehman Brothers and Bear Stearns lending appetites prior to the 2008 housing bubble were fueled by the arrogant perspective that housing was unstoppable asset class as all risk was collateralized by the properties themselves (something tangible) not an idea, technology, or patent. The smartest financial engineers told Boeing to spend their money on share buy backs as they developed the 737 Max, an aircraft that failed and was put on hold for months as regulators questioned safety concerns. Warren Buffett invested billions in airline companies due to low risk preferences and stability of the industry. The airlines also offered dividends and share buy backs to increase shareholder value but prices collapsed anyway, as the financials were exposed against underlying market fundamentals.
Black Swan events are forces of nature. They are unpredictable. They have happened and will continue to happen. How humans survive, and more importantly how Americans lead is by standing at the tip of the spear, developing the innovative treatments, cures, patents, and technologies that make our world better, stronger and safer. Once these products and services are developed the U.S. debt clock may begin to see itself reverse as the world becomes consumers of American made products. Exports will increase, and simultaneously foreign debts will decrease. Jobs creation will result in increased tax revenue that will allow our government to better subsidize public services and investments. R&D investment will create a positive feedback loop of even more investible assets, and manufacturing efficiencies. How is this not a vision every American could get on board with? How do we not all benefit as a result?
In 1962, President John F. Kennedy was touring the NASA headquarters for the first time. He introduced himself to a janitor who was mopping the floors and Kennedy asked him what he was doing at NASA. The janitor famously replied, “I’m helping to put a man on the moon.” This statement includes such obvious resolve that it speaks volumes to the confidence an employee can have in the face of adversity when they are completely aligned with a sense of mission and purpose. There is an inherent sense of unity and self-sacrifice that is required to achieve objectives and when the individual is completely aligned, problems are no longer sufferable challenges.
We have to accept that risk is an inherent process to a healthy financial system. Part of the acceptance of that risk is that failures eventually occur. Warren Buffett was 14 years old when the Bretton Woods agreement was reached in 1944 that established the U.S. dollar as the world reserve currency. From that point forward and for most of his life he has been comforted by the stability enjoyed by the U.S. as the worlds foremost economic superpower. From that stability, he has developed investing principals that focus on stable companies that yield long term financial returns. But this may not, and does not have to last forever. For the better part of 20 years Warren Buffett did not invest in Amazon, one of the five (5) most valuable companies in the world that has yielded a 12,000% return since IPO. Obviously, not every company is going to be Amazon, but should you not question the risk/rewards for Amazon in 2012, 2015, 2018 rather than an investment in Coca-Cola? Warren Buffett is the greatest American investor of all time and I do not want to take anything away from that. But the truth is we do not have to continue to invest like Warren Buffett forever.
From 2008 on, most millennials have heard discussions on China eclipsing the U.S. as the worlds largest economy and we have survived through two (2) great economic bubbles (2000 Tech Bubble and 2008 Financial Crisis). From the perspective of a millennial, the risk is obvious and investing in U.S. equities has at times appeared more like a casino that must be periodically bailed out than a system of shareholder value. Due to this perspective, I would personally rather invest in small tech start up companies whose mission and objectives I align with than seek stable returns from a company like Coca-Cola. Currently, the financial services industry does not offer ways to achieve these goals outside of buying into a venture capital firm, or private equity firm, but maybe creative products will eventually be created for the average 401k, or private investment account.
If I am not alone with this perspective, then some future alignment of mind, body, spirit could create a “Flow State” within the financial services, manufacturing, and public sector that creates an investment system that is more consistent with the millennial experience. Risk would be distributed and owned across the entire financial service sector for researching, developing, and patenting new and innovative products rather than a small subset of people who have bought in private equity firms. Appetites for these products is obvious, as a large percentage of IPOs within the past several years cycle through phases of extreme euphoric valuations followed by an eventual rebalancing. Demand is there, so why not?
Most importantly the U.S. needs to re-establish a connection with its bread and butter by maintaining and advancing its status as the world leader in development and manufacturing of new technologies to strengthen our supply chains and increase our ability to export goods to other countries. The longer we continue to manufacture goods in China, the easier it is for them to infringe on our patents and technologies. We need strengthen our economic position in the world and that starts with investing in manufacturing facilities right here in this country.