LAZAR: U.S. COMEBACK TRANSCRIPT

October 3, 2014

How many times have you heard that China is on its way to surpassing the United States as the main driver of world economic growth? This week’s guest says not so fast – growth dynamics are changing and the widely forecast new world order is returning to the old world order. Top rated economist, Nancy Lazar explains why the U.S. has resumed its role as the driver of global economic growth and China is lagging.

CONSUELO MACK: This week on WealthTrack, a top-rated economist who is turning conventional economic wisdom on its head – Cornerstone Macro’s Nancy Lazar says the U.S. is back as the driver of global growth and China’s influence is waning… Financial Thought Leader Nancy Lazar is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. How many times have you heard and have we reported that China is on its way to surpassing the United States as the main driver of world economic growth? China’s rise seemed to be unavoidable and inexorable. It is the world’s most populous nation with an estimated 1.3 billion people compared to about 320 million in the U.S.

Its coveted middle class is bigger than our entire population…. although its economy has slowed to an enviable estimated 7% plus growth this year, the U.S. economy, still recovering from a serious recession is expanding only at 3%, if that. And in size, China’s economy is second only to the U.S. having surpassed Japan as number two in 2010.

But this week’s guest says not so fast. Growth dynamics are changing and this widely forecast new world order is returning to the old world order with the U.S. rising and China waning. She is Nancy Lazar, a Founding Partner of macro research firm, Cornerstone Macro which she and her partners formed last year. Lazar heads up its economic research team. She has been ranked one of the street’s top economists by Institutional Investor magazine for more than a decade, including being ranked number 2 for the past four years. She is second only to her former business partner, Ed Hyman with whom she founded independent research firm ISI Group in 1991.

Lazar and her team believe that for the first time in more than 20 years the U.S. will be the driver of world economic growth. They shared this chart with WealthTrack showing that for the first time since 2006 Nominal GDP in the U.S., that’s including inflation, may increase more than China’s Nominal GDP next year, by over $170 billion and they say there is much more to this story.

I asked Lazar to give us the big picture of why the U.S. is resuming its role as the dominant economic power.

NANCY LAZAR: Well, the two big powers of the global economy have been the U.S. and China, and up until this year China had been that driver of global growth, but over the past several years China has built up a tremendous amount of excesses, investment credit, corruption, pollution but particularly the investment and the credit, and they are now at the very early stages of unwinding those bubbles, if I can call them that, and as a result growth must slow. The only way they can unwind those bubbles is for growth to slow, and there are plenty of signs indeed that is happening. In contrast in the United States, we’ve dealt with a lot of our excesses, our credit bubble for example burst hard as we now know, in particular taking housing down, but today we have long-term drivers of growth in the United States, making it easier for a sustained period of growth. I’m not suggesting that U.S. GDP growth will be extremely robust, five or six percent. We’re using about three and a half percent GDP, but when you go through the math and you look at how much the U.S. is going to grow this year and how much China is going to grow this year, unbalanced, yes. The U.S. is going to grow faster than China in dollar amounts here in 2014.

CONSUELO MACK: We are going to be going faster than China in dollar terms. Tell me what that means.

NANCY LAZAR: Well, that’s because the dollar value of the U.S. economy is much bigger than China, and so the U.S. doesn’t have to grow seven, eight percent to actually exceed the growth rate of China. So we have China slowing down to about six, six and a half percent this year. This year the U.S. will be about two and a half, but in actual dollar values, you do get a crossover in the dollar increase in GDP in the United States here in 2014.

CONSUELO MACK: So all of that analysis that everyone’s been doing for the last 10 years including us, just kind of forget it. It’s actually going the other way or … ?

NANCY LAZAR: They grew too quickly and, as a result as I mentioned with China, inflation was too rapid. Investment grew too quickly. They now have these excesses and they have to unwind them. Slow down to contain inflation and to slow credit growth. In contrast, here in the United States, we had a very, very severe recession, and as a result we dealt with our credit bubbles, but more importantly there are long- term drivers of growth here in the United States particularly driven by the energy renaissance but coupled with the manufacturing renaissance. Add to that housing. Housing obviously was hit very, very hard. On balance, it looks like capital spending, that would be the buildings of manufacturing facilities or things related to the energy renaissance and housing, which are about 16 percent of GDP, are likely in a three to five-year recovery here in the United States.

CONSUELO MACK: So three to five years starting from now or … ?

NANCY LAZAR: From now, from here. They’ve already been recovering for about three years. We think we have at least another three to five years left in the investment cycle in the United States because we don’t have those excesses. Inflation is still very, very low. Companies are incredibly healthy. I have a basic theme that companies are the backbone of any country. They hire. They spend on cap ex. Our companies are in great shape, and they have the ability and willingness to spend, and the economic conditions and the ease of doing business in this country is much simpler than it has been in China for example. I’m sure you’ve seen the stories about how the government is suggesting many foreign companies in China have been potentially taking advantage of certain situations, raising prices too much, and in turn they’re forcing many companies from technology companies to food companies to healthcare companies just today to actually lower prices, and that’s pulling. Companies are really pulling foreign direct investment out of China.

FDI in China was down 17 percent in July year over year, and it was down another 14 percent in august. So FDI, companies have found it too difficult to do business, so the bigger theme, one we’ve had for a while, is that if you sell it here in the United States, you actually make it here. The economic conditions, ease of doing business today now favor the U.S. over China. So that investment is what we see driving growth.

CONSUELO MACK: So you are seeing these decisions being made by U.S. companies that are based overseas coming back to the U.S. therefore, this is going to be a long-term trend, but is it sustainable, and is it really worth these companies’ while to pull out, to repatriate their factories back here?

NANCY LAZAR: It is a long-term trend, and I like slow. As we saw, if you grow too quickly, be it China or the United States with credit in the last decade, you build up too many excesses and you create problems.

A slow pace of growth is actually much healthier longer term. You don’t build up those excesses. The answer is yes. It is happening, but it is happening so slowly that it’s very difficult to definitively come to the conclusion that it’s making a difference. Let’s look at one industry, though, that it is clearly making a difference, and that’s the chemical industry, and that is tied to two things, one, certainly the energy renaissance. Many chemical companies are driven by low natural gas prices. We are the low-cost producer when it comes to natural gas. So we are building at least seven chemical plants in the United States today.

CONSUELO MACK: And they’re getting permits. They’re able to build in these localities.

NANCY LAZAR: Absolutely. Absolutely, and we have roughly seven chemical plants, but they announced them in 2012, and they’re not done until 2017, so for sure it’s a long cycle. In contrast, if you build a house or a mall, it takes several months to construct those, but they can also be torn down quickly. That’s what’s so important to a long-term health of an economy. Being from Flint, Michigan, growing up with manufacturing, I think it’s important. You see that manufacturing creates a solid base.

CONSUELO MACK: And you actually told me as well in prior interviews that there’s this multiplier effect which a lot of us don’t realize. So if we talk about one plant being relocated, we think, okay, well, that’s one plant, but you say that it actually can reinvigorate an entire community and area.

NANCY LAZAR: Absolutely. There’s roughly for every manufacturing job or every energy job that’s created, there are three to four maybe even more in certain industries other non-manufacturing or energy jobs created. Just think about it. If you put in some sort of manufacturing facility, once it’s done, you need roads, and then you need potentially other buildings to support warehouses. Then eventually you’ll need hotels, restaurants, et cetera, build out airports, and so yes. The multiplier associated with the investment cycle is very, very significant. It’s easy to think about it in housing. Housing is a classic multiplier story. The capital spending multiplier for years has not been talked about in the United States because it’s really been 40 years since we’ve had a capital spending led expansion today.

CONSUELO MACK: How much of an impact are we really going to see from it if you’re looking at jobs for instance and consumer spending?

NANCY LAZAR: So again, going back to the multiplier. For the first time in 30 years we are experiencing a sustained increase in manufacturing employment. The employment base in this country has been getting narrower and narrower. This is the first expansion in about 15 years where actually you’re seeing a very healthy broad-based job cycle from manufacturing to construction. Even state and local jobs which were decimated during the recession are now starting to come back. Those are roughly 30 percent of total employment, those three industries alone, and so the point is it’s going to be easier to get a job today in this economy, and so I think the labor force which has already started to increase will continue to increase, encouraging people to come back into the labor force. So again, the multiplier is it’s good for jobs; therefore, it is good for consumer spending. And so although I think the driver of growth will be investment, consumer spending with a stronger job market will also be just fine, and so it is a broad-based economic recovery just tilted a little bit more towards investment.

CONSUELO MACK: We have had a problem with long-term unemployed and people dropping out of the labor force. Are you seeing that changing now where the labor force is actually really growing, and people who are the long-term unemployed are actually coming back into the labor force?

NANCY LAZAR: We are seeing the labor force actually start to increase again. It had dipped in 2013, and in 2013 when it was going down, people were dropping out of the labor force because it was still at the margin difficult to get a job. It made a lot of news. Now with actual number of people entering the labor force … I’m being very specific here … It’s a sign that indeed people are feeling more confident about getting a job, I would argue, in one of those three areas I mentioned, manufacturing or construction or state and local governments whose budgets are getting a lot better. So the increase we’ve seen in 2014 in labor force has not yet translated into an increase in what the economists call the labor force participation rate. Maybe that’s bottoming. That is, labor force is increasing but not as fast as population, so the participation rate is not increasing, but before you can have the participation rate increase, obviously labor force does. So yes, I’m very encouraged by the increase.

CONSUELO MACK: Nancy, the picture that you’re painting for employment is quite encouraging, but how skilled are the jobs that are being created?

NANCY LAZAR: The jobs, actually you do need skills, but it’s great in that you have to help people get educated, and what’s exciting today, and I attended a lot of conferences this summer, indeed there are programs just starting to increase to encourage be it kids in high school and/or potentially even older, younger people who are looking to change career to actually get a more solid job. We are now for the first time in 30 years encouraging apprenticeship programs. We are now for the first time in 30 years seeing kids join trade schools. We are now for the first time maybe not quite 30 years but for a long time seeing kids enter community colleges for two-year programs. Not everybody needs or wants to work on Wall Street, and so it’s great today that there are indeed more and more opportunities. The problem is, the bad news, is it does take time for this transition. It can’t happen real quickly, but the good news is it is happening, and so I think there is a much brighter future down the road for the employment base in general being varied jobs, being very broad-based, and it’s going to be good for the lower to middle income consumer having a more secure job, that they actually have a trade that they can utilize. It’s exciting.

CONSUELO MACK: No, it is very exciting. Middle America is our favorite emerging market. I remember the last time I talked to you, Cornerstone Macro, that has been a theme of yours.

NANCY LAZAR: It is. It is, and to be sure, the energy renaissance is a big part from North Dakota down to Texas. So that’s part of middle America, but in between you have the Colorado, Oklahoma, Louisiana, and then it’s also spreading into the old industrial belt states including Michigan but also Ohio, Pennsylvania and so you are seeing a lot of exciting activity, but again it’s slow activity where you’re rebuilding industries in these states and, in turn, the multiplier as we’ve talked about before where employment in these states is actually improving. Manufacturing states are indeed driving this economy for the first time probably in 30 years.

CONSUELO MACK: Is the location that you just described, is it largely because of access to cheap energy? Is that what’s driving it or … ?

NANCY LAZAR: These states have three characteristics. One, they indeed do have energy but, two, it is the old rust belt states like in Michigan, Ohio and Wisconsin.

CONSUELO MACK: What’s the appeal?

NANCY LAZAR: Well, the appeal is you’ve got the land in some of those rust belt states. You do have some factories in Ohio. You have some factories. Granted, they gut them and rebuild them, but you have the footprint to put the new facilities and you have the transportation systems, the rails and the highways in a lot of these and water, for example, in Michigan that you wouldn’t have in other states, but there are some other states. If you’re simply a business-friendly state such as a South Carolina or Utah, you’ve also lured a lot of businesses into your states and, therefore, the job markets are pretty strong in those states.

CONSUELO MACK: As far as the consumer is concerned, there’s another theme that you have at Cornerstone Macro, and you’re calling it the “new smart consumer”. Do I have that right?

NANCY LAZAR: Absolutely.

CONSUELO MACK: Who is or what is the “new smart consumer”?

NANCY LAZAR: Well, in the old days the U.S. consumer would use their credit cards that had 12 percent interest rates, and they didn’t care. All they cared about were their monthly payments, and they borrowed. That was definitely a characteristic at least over the past 20 years. Today credit card interest rates are actually down, but the consumers aren’t using their credit cards. They’re using debit cards. There are alternatives.

CONSUELO MACK: They’re paying cash in other words.

NANCY LAZAR: Absolutely.

CONSUELO MACK: They want to pay it then. Don’t take on any debt.

NANCY LAZAR: Absolutely. Debit cards today are much easier to have access to, maybe more so than a credit card, and so that’s definitely a smarter move on the part of the consumer not using their credit card to buy coffee but to use a debit card to buy a cup of coffee or whatever. Secondly, they’re very sensitive to the price of credit which we should be. Last year when mortgage rates actually increased very, very quickly, housing pulled back. The consumer didn’t want to have to pay the higher mortgage rate. In the old days they would borrow more in anticipation of even higher rates. Again, I think a smarter consumer. Now businesses are also smarter. They’re probably being a little bit tighter in providing credit to the consumer, but I would say that’s not bad. That’s good given the problems we just experienced. The third aspect is you have actually the consumers saving.

CONSUELO MACK: No.

NANCY LAZAR: Right. For 30 years, 35 years the consumers never raised their savings rate. It’s not unusual in a recession for the saving rate to go up, but actually in the expansion it’s stayed elevated so far. It’s about five to six percent, and forever the saving rate would go down. Now this is good for the consumer because they’re protecting their pocketbook. They’re holding on to some cash. It will cushion if there potentially is another shock in the system, but it certainly is not good for the retail community.

CONSUELO MACK: No.

NANCY LAZAR: And so the retail community got used to the consumer spending every nickel, borrowing as much as they could, but it’s I think a new era just as it’s a new era for the investment side of the U.S. equation. This country has changed, and I think the consumer is smarter, and I think longer term it’s positive for the duration of the expansion because you don’t build up credit and have credit problems, but it is going to be a headwind for the retail community.

CONSUELO MACK: And of course the retail community has been a huge source of jobs.

NANCY LAZAR: Well, exactly, and so it’s nice we have a transition.

CONSUELO MACK: What negatives are you seeing? And of course, I’m thinking of the Federal Reserve, whether that’s negative or not. What’s your view at Cornerstone Macro of Fed policy?

NANCY LAZAR: A bigger theme that we have is that the U.S. economy is out of the crisis state, and so why do you need to have to Federal Reserve policy that was geared for a crisis? The credit markets are now working. The financial markets in general are working. The Fed was there to protect those. You are now seeing the consumer borrow some, not aggressively but borrow some, and so the economy is already on a more normal track. Therefore, we don’t need emergency fed policy, and so it certainly will cause some anxiety potential anxiety in the financial markets, but we’re not convinced or I should I’m not convinced it’s going to be debilitating to the stock market and/or the economic outlook.

CONSUELO MACK: We do live in a global economy. There are other players out there. You said China for one is slowing tremendously. Europe we continue to think about as kind of a basket case. What’s going on with Europe? What’s going on with Japan? How concerned should we be about their presenting a risk to the U.S. economy?

NANCY LAZAR: So Europe right now had started to recover. I should say Europe in 2013 had started to recover, but then there was the Russia-Ukraine turmoil. There are a lot of business ties between Europe, particularly Germany and Russia. Europe is dependent on Russia for energy needs. So unfortunately, because the recovery in Europe was fragile, not particularly strong or solid, once the Russian turmoil intensified, you did indeed see the European business confidence particularly in Germany get hit very hard, and that obviously increases the odds that employment slows, investment slows, and so it does look like European growth right now is basically stalling. That is a problem for the United States, particularly multinationals. Multinational earnings are about 20 percent in Europe. Europe is one of the single biggest regions for U.S. multinationals, and so European earnings haven’t been very robust to begin with, so it can’t be that big of a headwind, but at the margin they’re probably going to start to decline. In addition, the dollar is now going up, and so multinationals really have two significant headwinds here in the third and possibly into the fourth quarter, particularly when you adjust for dollars, is going to end up being probably weaker than they had anticipated.

Japan also, there was certainly hope with abenomics. The jury is not out yet, but we would argue that it looks like the economy there after a strong increase in the first quarter in front of the consumption tax increase, a huge drop in the second quarter of about seven percent. We’re basically bouncing along the bottom. I think one of the lessons we’re learning from both say a European and a Japanese situation, it’s not at all clear to me that if you ease aggressively, do quantitative easing in a country where there are not long- term drivers of growth, that you indeed end up with a sustained expansion, and I think that’s a big problem not for all of Europe. Spain’s done some encouraging things. Ireland is just doing a great job right now, but for Italy or France where you’ve not done the clear structural reform, quantitative easing doesn’t create long-term growth. It creates a little bit of a pop, and I worry the same thing for Japan. It’s not clear they’ve done enough structural reform … I know they’ve done some … To really encourage business investment, increase on a sustained basis consumer spending. But bottom line is from China to Japan to Europe and other parts of the world, Russia is in a recession, Brazil is in a recession, that the multinational earnings outlook over the next six months at least is going to be very, very challenging, and that’s probably one of the biggest risks.

CONSUELO MACK: Financial impact on the financial markets.

NANCY LAZAR: On balance we think the stock market continues to do well.

CONSUELO MACK: The U.S. stock market.

NANCY LAZAR: The U.S. stock market, particularly domestic-oriented stocks, particularly right now consumer discretionary stocks because the consumer with employment better, inflationary pressures down, we do think we’re setting the stage for a decent holiday selling season, and so even though I say investment is driving the economy, I’m not bearish on the consumer. I think there’s new smarter consumers. They’re going to pick their spots. They’re going to spend when it’s an appropriate time to spend as long as they have the wherewithal, and as of now they do. So we think the stock market is going to continue to do well.

CONSUELO MACK: Tell us what your recommendation would be for a long-term diversified portfolio, your one investment recommendation.

NANCY LAZAR: I think the one maybe easy investment idea today would be to go long the dollar. It’s not necessarily easy for investors to do that, but it’s easier today than it used to be, and that’s because of ETFs. There is a dollar ETF and it’s called U-U-P, Up.

CONSUELO MACK: Up.

NANCY LAZAR: So it’s easy to remember, and it’s already increased a nice amount. It’s up about seven, eight percent, but it’s still clearly below its peak of about 15 years ago, actually its latest peak. It’s still about 30 percent below that peak back in early 2000. So there’s still potentially a lot of upside. Why does it go up? Again, because our Fed’s going to tighten before other central bankers in the world, but there’s also another fundamental reason which is that our budget deficit has improved dramatically. So the combo of the Fed likely to tighten sooner than any other central bank and the just underlying health of the U.S. economy with trade and the budget deficit both improving, classically that would be a very positive environment for the U.S. dollar.

CONSUELO MACK: Excellent. So Nancy Lazar thank you so much for joining us from Cornerstone Macro.

NANCY LAZAR: Thank you.

CONSUELO MACK: It’s great to have you on WealthTrack again.

NANCY LAZAR: Thank you for asking. My pleasure.

CONSUELO MACK: Speaking of UUP, what an upbeat interview that was. For so many reasons elucidated by Nancy Lazar, the U.S. is a very competitive place to do business. The World Bank ranks 189 countries on their ease of doing business, based on qualities like the ease of starting a business, obtaining credit and construction permits, getting electricity, registering property, taxes, investor protections, and contract enforcement. The U.S. is ranked number 4 in the world, China is ranked number 96. This week’s action point is: Pay attention to the business climate of where companies do business. As Lazar points out China has recently taken some unfriendly actions toward foreign firms which is why foreign direct investment there is now falling. The business climate of where a company is located and where it does the bulk of its business can make a big difference in long term stock performance. Next week we are going to talk stocks with one of Nancy Lazar’s partners at Cornerstone Macro. Top ranked strategist Francois Trahan will join us to discuss why he was an early believer in the U.S. stock market and how he feels about it now.

For more of our interview with Nancy Lazar please go to our website WealthTrack.com and click on our EXTRA feature. While you are there visit our WealthTrack WOMEN section for financial advice from award winning women financial advisors.

Have a great weekend and make the week ahead a profitable and a productive one.


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