Click Here to Get Your FREE Video Training Now!
Twitter
LinkedIn
YouTube
RSS
Facebook

About Profitable Investing Tips

Profitable Investing Tips has been a member since April 20th 2008, and has created 339 posts from scratch.

Profitable Investing Tips's Bio

Profitable Investing Tips's Websites

This Author's Website is

Profitable Investing Tips's Recent Articles

How Bad Will Inflation Become for Your Investments?

Depending on whether or not you include food and fuel in the consumer price index, prices in 2021 went up 5.5% without fuel and food or 7% if you include them. This is the highest level of price inflation since 1982 at which time inflation was coming down from its 1979 peak of 15%. Everyone is feeling the pinch at the grocery store and gas station but our concern today is how bad will inflation become for your investments? Do the tech giants have it in them to sustain the market’s ability to keep creating and increasing wealth?

How Inflation Affects Interest Rate Investments

How inflation affects investments depends on what your investments are. The investments that are traditionally the safest are US Treasuries, AAA bonds, and CDs. Bank deposits are insured by the FDIC, AAA bonds (Microsoft and Johnson & Johnson) are very secure, and US Treasuries are backed by the US government. So, your dollar amount is secure with these investments. Unfortunately, inflation reduces the purchasing power of every dollar. Thus the real earnings yield on these investments is negative in terms of purchasing power when inflation is high.

How Bad Will Inflation Become For Your Investments

How Inflation Affects Stocks

The effect of inflation on stocks is mixed. Inflation typically comes with a strong economy so many companies will be earning more money and their stock prices and dividends will go up. But, companies that have high labor and raw material costs due to inflation will often suffer instead of benefit as costs go up. In our current era of a seemingly unending pandemic, companies in the travel and hospitality sectors especially will typically be hurt more than helped by inflation. The big tech companies that prospered during the pandemic are, perhaps, the best equipped to weather the storm of higher consumer and production prices.

How Bad Will Inflation Become for Your Investments - Price of Gold

How Inflation Affects Alternative Investments

During the rampant inflation of the 1970s gold and other precious metals were seen as a refuge from the effects of inflation. When Nixon took the USA off of the gold standard for the dollar, gold was $32 an ounce. It peaked briefly in late 1979 at over $800 an ounce and then settled into the $400 per ounce range for the next 15 years. Today’s young investors are not in love with gold like their parents were but have fixated on today’s investment fad, cryptocurrencies. As bitcoin and the rest have no fundamental value it is unlikely that they will function as a hedge against inflation like gold did in the 1970s. Rather one will be betting on another flurry of activity in that market. The key word is betting.

How Long Will Inflation Last?

The consensus of most economists as well as the Federal Reserve was that we would see a brief inflationary surge as the economy emerged from the Covid Pandemic. It turns out that with a new variant or two we are still in the pandemic and the world supply chain is still bogged down. The cost of labor is going up and companies are raising prices. We will be seeing a move toward reshoring manufacturing to the USA which will need more skilled labor than factories in the old days. This will likely be an inflationary issue. However, as is often said, you can’t fight the Fed. And, the Fed is taping out of its stimulus program to be done in March. They will be lowering their balance sheet. And, we can expect at least two and probably more interest rate increases in 2022. They will be able to bring inflation down but the price of taming inflation could be a recession and years or higher unemployment. How long inflation lasts and the degree of success the Fed has in taming it will determine how bad inflation will become in affecting your investments.

Reshoring and Investments in America

American companies have been offshoring much of their manufacturing for decades. It seemed like a good idea to take advantage of cheap labor in places like China especially. But, the end results have been the decline of American industrial might and the rise of China as the world’s premier industrial power as well as a threat to US economic and military security. The Covid-induced supply chain nightmare has shut down production lines for lack of the computer chips needed to make cars these days and served as another wakeup call to American businesses to bring production capabilities back onshore. This has begun to happen and reshoring and investments in America will provide new opportunities.

Will Textile Mills Return to the American South?

According to the USDA the United States produces about 20 million bales of cotton a year and leads the world in providing 35% of all world cotton exports. The US South used to have textile mills where clothing and other cotton fabrics were produced but virtually all of that has gone away. As part of reshoring and investments in America, textile manufacturing may be coming back to the USA. The New York Times published an article about supply chain woes and efforts to revive US factories. They take a close look at America Knits in Swainsboro, Ga who make high-quality t-shirts for the likes of J. Crew. They also note that General Motors will spend $4 billion in Michigan to expand battery and electric vehicle production. Toyota is investing $2.3 billion to make batteries in North Carolina. And, Samsung plans to invest $17 billion on a semiconductor facility in Texas.

Reshoring and Investments in America

Domestic Advanced Manufacturing

A primary reason for offshoring manufacturing years ago was that labor was cheap and most of the tasks involved low-skill workers. Over the years manufacturing has become increasingly automated and requires more and more skilled workers. Newmark highlights this fact in an article about U.S. manufacturing reshoring.

U.S. manufacturing reshoring, foreign direct investment (FDI), and domestic expansion are all accelerating. The domestic advanced manufacturing sector is the primary beneficiary of this growth as the number of firms and jobs in this sector proliferate; 60.5% of all new domestic manufacturing establishments to emerge between 4Q 2019 (pre-pandemic) and 1Q 2021 were in advanced manufacturing industries.

There is a pivot in manufacturing from “just in time” to “just in case.” As transportation costs go up and supply chains become suspect we can expect to see more and more foreign direct investment in the USA by foreign companies in order to be close to their North American customer base. A second feature of this move will be near-shoring to production facilities in Northern Mexico.

What Is Advanced Manufacturing?

Advanced manufacturing as defined by the US government is “the use of innovative technologies to create existing products and the creation of new products, including production activities that depend on information, automation, computation, software, sensing, and networking”. It is easier to understand what advanced manufacturing is by comparing it to traditional manufacturing. As noted in an information piece by Thomas, here is how advanced manufacturing compares to the traditional variety.

Traditional manufacturing needs a large supply of labor, most of it semi-skilled or unskilled. It works best for mass production of simple items. Workers are trained on the job and organization is top to bottom.

Advanced manufacturing features customer-focused customization with semi-skilled and technical workers. Workers typically have technical degrees from technical schools, colleges, or universities. In advanced manufacturing eighty percent of workers have high skill sets and the other twenty percent are semi-skilled.

While traditional manufacturing jobs include molding, casting, brazing, machining, and welding, advanced manufacturing includes 3-D printing, material deposition, powder bed, and additive and rapid manufacturing. Advanced manufacturing depends more on R&D and these businesses re-invest profits heavily into technological improvements.

Reshoring, Investments in America, Infrastructure

The Biden infrastructure plan passed by congress will also focus on “made in America.” Invest in American businesses as reshoring happens and invest for the future. As tensions ramp up with China both the USA and China have risks. China’s relative power will start to wane by the end of this decade. American reshoring of manufacturing will hasten this.

Ten Year Risk from China to Your Investing – China’s Goals and Risks

Fifty years ago China was an agrarian society and today it is the largest industrial power in the world. Fifty years ago China was preoccupied with walling itself off from the world and today it is seeking influence and power across the length and breadth of the world. The problem as seen from the viewpoints of many countries is that China seeks to dominate and control instead of working with other nations. The ten year risk from China to your investing has to do with China’s power peaking and the possibility that its aging leader, Xi Jinping, will believe that he is running out of time and will push too hard, causing an armed conflict as a worst case scenario or a total economic rupture as another devastating scenario. Less intense scenarios include the supply chain nightmare caused by outsourcing so much manufacturing to China and China’s control of so much of the world’s raw materials. We look at China’s goals and risks in regard to your ten year risk from China to your investing.

What Does China Want?

The Chinese Communist Party runs things in China and would just as soon run as many things in the world as it can. This includes, as noted in an article in The Atlantic, its wish to rule the world by controlling the rules.  The rules developed by the US and its allies after World War II were sufficient to prevent another world war. It is not clear that rules devised by China strictly for its own benefit would have the same degree of success. China does not work under sets of laws but rather uses laws to control their population and sustain the Communist Party in power. The bottom line for China is that it wants to dominate and control forever. The concern is that they will cross a line at some point that leads to global conflict and total disruption of the economic system taking your investments with them. Meanwhile they have come to dominate critical raw materials and manufacturing like lithium batteries and many strategic minerals.

Global Control Through Debt

China pursues a two-track approach to building global infrastructure. It lends money to poor nations to pay for large projects like railroads, ports, and mining operations which are built by Chinese workers. China then benefits by getting the raw materials mined and using the infrastructure to complete goals like its belt and road initiative linking Chinese factories to markets across Asia and Europe. Meanwhile these nations sink into debt and increases vulnerability to Chinese dominance. A BBC article highlights the issue of unsustainable debt to China in poor nations with debt to China surpassing debt to the IMF, Paris Club government, and World Bank by 2017.

Ten Year Risk from China to Your Investing - Debt Owed to China

Limited Time for Chinese Global Dominance

At the end of the 1980s Japan seemed poised to dominate the world technologically and financially. Then the hidden debt that had helped finance Japan’s rise came back to bite them and Japan sank into a deflationary cycle from which it has never really recovered. While China exerts control through debt over poor nations across the world China faces a looming debt crisis of which we are seeing the first wave with the real estate sector crisis whose poster child is Evergreen.

Magnitude of Chinese Debt Problems

While the amount of debt owed to China by poor nations paying for infrastructure projects is approaching a trillion dollars the debt owed by China’s government comes closer to $7 Trillion (CN¥ 46 trillion) which is about 45% of their GNP. Chinese household debt runs at about $4.3 Trillion, of which most is mortgage debt. The problem with this debt is that should the Chinese real estate market collapse, like in the US with the Financial Crisis, the number of households “upside down” on their mortgages could run to many more than in the US a decade or more ago. But, Chinese corporate debt dwarfs both the government and household debt China coming in at $27 Trillion.

en Year Risk from China to Your Investing - indebted corporate sector in china


The possibility of China following Japan’s example from economic success to near-collapse is not lost on the Chinese government. Thus, Chinese leaders must confront the fact that their power is peaking this decade as other nations adopt an “anywhere but China” approach to manufacturing and build military alliances specifically to confront China.

Investing Fallout in Regard to China

How could all of this affect the average investor? Chinese stocks listed on US exchanges could disappear in a pivot away from Wall Street. A Chinese financial collapse due to their huge debts would send the entire world economy into a recession on top of the permanent Covid crisis. Investing in the US and especially in companies that will benefit from coming infrastructure spending stands out as the first defense of investors against the ten year risk from China to your investing.

Ten Year Risk from China to Your Investing – How China Got Where It Is

Over the coming decade China will pose a risk to Taiwan, neighboring countries in the South China Sea and the USA and its allies like South Korea, Japan, Australia, and India. An article in Foreign Policy describes the coming years as a dangerous decade of peaking Chinese power. In this regard, we see a ten year risk from China to your investing. How did this come about, what are the possible outcomes, and how can you adjust your investing to survive and profit.

How China Developed As an Economic and Military Power

China was largely isolated from the world when President Nixon visited China in 1972. Nixon’s strategy was to re-open relations with China after 25 years in order to gain advantage over the USSR which, at that time, was the “other” global power. Opening China to foreign influence was another goal as businesses looked at China’s huge population as both a source of cheap labor and an emerging market that would buy goods from abroad. Parts of this worked out for the West and parts did not.

Ten Year Risk from China to Your Investing - Nixon in China

Introducing Modified Capitalism in China

Premier Deng Xiaoping in the 1980s introduced market economy reforms in China. This provided incentives that previously did not exist. The Chinese economy moved from an agricultural base to a manufacturing base over the next decades. China passed other nations in manufacturing capacity one by one and the USA in 2010. China achieved this success by emulating parts of what Great Britain did to start the Industrial Revolution.

China’s Recipe for Economic Growth

The St. Louis Federal Reserve published an informative article about how China went from an agrarian society to an industrial powerhouse in only 35 years. In 1978 when he came to power after the death of Chairman Mao, Deng Xiaoping laid out a plan for a Chinese industrial revolution, the fourth try by China since the 19th century. Learning from past mistakes he set up these steps as detailed in the St. Louis Fed article.

  1. Maintain political stability at all costs;
  2. Focus on the grassroots, bottom-up reforms (starting in agriculture instead of in the financial sector);
  3. Promote rural industries despite their primitive technologies;
  4. Use manufactured goods (instead of only natural resources) to exchange for machinery;
  5. Provide enormous government support for infrastructure buildup;
  6. Follow a dual-track system of government/private ownership instead of wholesale privatization; and
  7. Move up the industrial ladder, from light to heavy industries, from labor- to capital-intensive production, from manufacturing to financial capitalism, and from a high-saving state to a consumeristic welfare state.

He ignored advice of Western economists (unlike Russia in the 1990s) and started very gradually, adjusting the approach as results dictated.

China’s Access to Foreign Markets

China’s biggest trading partner by the 1980s was the USA. Its cheap labor attracted foreign businesses that set up manufacturing in China and then exported back to the rest of the world. China studiously copied what these businesses did, insisted on trade secrets for the “right” to work in China and then developed their own businesses. Entry into the World Trade Organization in 2001 was a key step in China’s rise to economic power as it gave access to previously closed markets.

Ten Year Risk to Your Investing From China

China has not risen to its current stage of power without costs. China has a huge amount of debt to deal with as evidenced by the problems in its real estate sector. The one couple one child policy has now left China with a demographic disaster as workers are retiring and there are not enough to replace them. Meanwhile, they have gotten more aggressive in terms of maintaining political stability (first rule in their plan) and asserting control over adjacent areas like Taiwan and the South China Sea. Their power is peaking this decade and will taper off as more and more nations follow an anywhere but China approach to their supply chains. This situation, as we will explore further, is fraught with risk for investors in the USA and everywhere.

Ten Year Risk from China to Your Investing - Chinese Aircraft Carrier

Electric Vehicle Battery Issues

The supply chain nightmare has been a wakeup call for many companies. Add to this the increasing tensions between the USA and China and what should a temporary problem caused by Covid could result in permanent issues for American and European companies. Electric vehicle battery issues came to mind as we read a recent article in The New York Times about Tesla’s efforts to secure a supply of nickel for its batteries. Nickel is added to lithium batteries to enhance performance at lower cost according to the Nickel Institute.

China’s Dominance of the Lithium Battery Supply Chain

China produces 80% of all lithium batteries. They also dominate in raw materials, both from mining in China and buying up mines across the world. So, even as Western companies develop their own sources of raw materials (lithium, nickel, cobalt) for electric vehicle batteries, they end up sending the ore to China for manufacture of batteries. The USA and Europe are scrambling to secure raw materials and to ramp up non-Chinese manufacturing. We have written about sourcing raw materials from Greenland and Bolivia. And now we see that Tesla is working to secure its nickel supply chain with a share of a mine in the South Pacific. From an American perspective, it is reassuring that Australia is the second largest producer of lithium after China.

Manufacturing Lithium Batteries Anywhere but in China

As Western companies rush to build up supply chains for nickel, cobalt, and lithium that do not depend on China they are also working to ramp up manufacturing in the USA. The current leaders in US lithium battery manufacturing are Tesla, Panasonic, LG Chemical, Duracell, and Samsung. From the US perspective it is good news that South Korea is the second leading lithium battery manufacturer and the US has moved up to fourth place. The US Department of Energy, under marching orders from President Biden, is leading the charge in efforts in increase lithium battery manufacturing capacity in the USA.

National Security, Essential Minerals, and Batteries

The Allied Powers won WWII largely because of America’s industrial and agricultural capacity. Food from the heartland fed soldiers fighting in the Pacific and European theaters as well as Russian soldiers on that front. The USA,  with its industrial heartland safe from German and Japanese bombing out produced the Japanese and Germans putting more ships, tanks, and planes to work while destroying production capacity in those countries. A third world war would likely to be short and extremely intense with the ability to resupply with troops and materials a critical factor in who wins. The fact that the West has outsourced so much manufacturing offshore and particularly to China has worried US strategic planners for years. The Covid crisis helped act as a wakeup call. Thus the Biden administration pushed through the infrastructure package and is helping lead the efforts to beef up US industrial capacity across the board and especially for the raw materials and manufacturing of items critical to continued economic and military dominance which, in the end, is what has helped avoid the next world war.

Electric Vehicle Battery Issues


Home Privacy Policy Terms Of Use Contact Us Affiliate Disclosure DMCA Earnings Disclaimer