Global Middle Class Glimmers in Distance

Recently, I told the story here of Louis Piro, a Mountain View barber who made millions by plowing every dollar he could save into the shares of growing companies that paid generous dividends. Following is another uncharacteristically bullish column that I wrote for the Sunday San Francisco Examiner around that time, in the late 1990s. It ran under the headline “New Global Middle Class Fuels Stocks,” and its thesis is that U.S. multinationals stood to benefit hugely from the rapid rise of an Asian middle class.

This scenario was delayed by the collapse of the Thai baht in 1997 and the severe Pacific Rim recession that followed. It now looks like it will be delayed even longer by a looming :

Second Great Depression in the U.S.  You can judge for yourself whether such optimism is still warranted

Petronas-small3

U.S. stocks have been in a scorching, vertical climb for months, confounding the bears and effortlessly vaulting the immediate expectations of the most ardent bulls. What factors might account for this powerful rally? Could there be forces at work besides the steady earnings growth and low inflation usually cited as key reasons for the longevity of this bull cycle, now well into its seventh year?

U.S. Exporters’ Sweet Spot

I believe so. A more plausible explanation may lie in the relatively recent and rapid emergence of a vast, global middle class, particularly in Asia, Eastern Europe and Latin America. To the extent this trend creates a burgeoning new marketplace for a wide variety of goods and services, U.S. companies stand to benefit the most, since they are indisputably the best in the world at meeting its demands.

The point was driven home to me recently by news reports that the Malaysian government, with public and private outlays of as much as $15 billion, will attempt to replicate the Silicon Valley in the rolling countryside just south of its capital, Kuala Lumpur. The intention is not merely to create some industrial-park-on-steroids where workers can have a crack at the minimum wage by churning out trinkets for export. Rather, it is an all-out effort to catapult Malaysia into the information age, thereby allowing its labor force to compete on an equal footing with some of the highest-paid workers in the world – most notably, the software engineers, chip designers and networks specialists of Silicon Valley.

Indonesia’s ‘Super Corridor’

It is a fantastic undertaking: creating a Buck Rogers city-within-a-city on land that is now producing little besides palm oil. But within 10 years, the tract dubbed the “Multimedia Super Corridor” could easily become the most technologically advanced urban enterprise zone in the world, with schools, hospitals, government and retailers patched into a $2 billion network of fiber-optic cable. There will also be a multimedia university to serve as an intellectual breeder-reactor, much like Stanford. As the corridor develops – and in the space of a single generation – per capita income is expected to quadruple from its present $4,500. Simultaneously, Malaysia would presumably emerge as a global purveyor of computer hardware, software and high-tech services.

To the extent this occurs, incomes in this part of the world, as well as elsewhere, are about to take off on a runway paved by Yankee know-how. The implications for U.S. multinationals are positive, to say the least, and may serve to explain why the U.S. bull market is not as mature as some would speculate.

 Small Firms Benefitted

It is not just the shares of Fortune 500 giants like Pepsi and McDonald’s that we can expect to benefit, either. Indeed, dozens of smaller companies, some publicly listed, played a key role in the construction of the world’s tallest building, the Petronas towers in Kuala Lumpur. U.S. firms did the architectural work, installed the glass, and even helped local contractors circumvent prohibitive tariffs on structural steel by developing a type of concrete four times stronger than anything ever poured in Malaysia.

If Malaysia were the only country gearing up like this, it would surely be good news for the shares of U.S. companies with global reach, not to mention their domestic suppliers. But the fact is, similar leaps are taking place all over Asia, Latin America and Eastern Europe.

No longer does it require the span of a generation for a middle class to evolve in places previously regarded as economic backwaters. Any country with sufficient brain power, private property and stable government can leapfrog the blue-collar stage of industrial development.

There’s Risk

This lends immediacy to a question that Wall Street has always pondered wistfully: What if we could sell a single widget to each and every household in China? That day may not be far off, nor would it preclude opportunities to sell billions of widgets elsewhere. It is reason enough to give pause to those who think this bull market is on its last legs. For my part, I have attempted in previous columns to make clear the considerable risks of owning U.S. stocks at current levels. I will continue to point them out, if for no other reason than to illuminate why, even in a world economy seemingly on the verge of spectacular growth, those risks will neither vanish nor even necessarily diminish. But at the same time, I will refrain from suggesting that anything like underlying growth is surely real, and it could be a long way from reaching its climax.

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  • ben September 9, 2009, 5:09 am

    Wow. How things have changed in the past 10 years. Ships enter US ports laden with goods, and leave the ports empty…I don’t think there is anything but scrap and coal that any country wants form us…and oh yes, those green pieces of paper we print all day.

    Based on data from the NY Fed website….it looks like Fed purchases of Treasuries have, in the past couple weeks, fallen to half of what they were for about the 6 previous months. They’ve gone from a brisk $10 billion a week to under $5 billion. It seems the Fed is running out of that $300 billion authorized to buy long-dated treasuries, although if you add everything up on the NYFed site it look like the $300 billion was exceeded in early August. I don’t think this can be good for treasuries, and interest rates already seem to be edging higher. Perhaps this will be the final straw that breaks the back of this bull run?

    http://newyorkfed.org/markets/pomo/display/index.cfm?showmore=1&opertype=orig

  • DG September 8, 2009, 5:42 pm

    I really don’t see the world lining up to make sure that their potential profits end up in our coffers. What do we have a lock on that others can’t do better? (excepting our expertise in Class Action lawsuits)? Today’s news for example:

    Comac – China’s government-owned planemaker – says its first commercial jet, the 168-seater C919 due out in 2016, will “surely be cheaper” than similar offerings from Boeing (BA) and Airbus, and use 15% less fuel.

    McDonald’s (MCD) loses an eight-year trademark battle against Malaysian restaurant McCurry after a court rules the Golden Arches chain can’t claim an exclusive right to the “Mc” prefix in the country

    To quote Animal House, “Fat, drunk, and stupid is no way to go through life, son.”
    We are so stupid that we spend taxes to ensure that foreign car manufacturers benefit the most from our stimulus (4 of the top 5 cars sold in cash for clunkers were foreign). The world must laugh.

    We gotta get in shape, quit drinking the kool-aid and wise up!

    I think (cerebral) sobriety will only creep into the American psyche when Americans start feeling poorer than the others….that is going to take some time….unless, of course, we get some 6 sigma, “outlier” currency step function…which doesn’t seem probable. Possible.

    &&&&&&

    Sobering thoughts, Mr. Graham, and it’s hard for me to imagine how they might have been presented more persuasively or succinctly than you have presented them.

    Thanks for weighing in. RA

  • Rich September 8, 2009, 4:22 pm

    Aloha All
    My what interesting times we live in.
    We see the LT results of big brother big deficit government, foreign entanglements, political promises of something for nothing, unceasing military actions and technology transfer abroad:
    At least 9 M unemployed Americans on Food Stamps, handouts and thrift stores. Balance sheets, homes and life savings destroyed and foreclosed. Dust bowls and tent cities. Bankruptcies soaring despite “reforms”. Businesses profiting not by growth, but by cost-cutting, curious accounting, defaults and layoffs. Markets propelled not by employment and productivity, but funny money.
    Congress passing borrow and spend pork bills without reading them, legislatures mandating forced vaccinations that may make us sicker and gold, a non-productive asset, again above 1000.
    Truly, we are closer to the edge of abyss than at any time in the history of this once great republic.
    Please forgive me for sticking with SMN above 11.97, EDZ above 8.18, EEV above 14.93, ZSL above 5.52, and DZZ above 18.03…
    Regards*Rich
    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493

  • Ryan September 8, 2009, 2:55 pm

    It’s very optimistic to think that these foreign countries will still hire Americans and buy American goods when they can easily design and build the goods and buildings themselves thanks to the rapid export of knowledge from the US.

    The reason why the stock market is on a tear is because of a) dollar devaluation and b) it needs to make a Fib 38.2% retracement from the last decline. Not a big mystery.

    &&&&&&

    Very optimistic for me, to be sure. Please note that this essay was written nearly 12 years ago, and that nowadays, personally, I would be hard-pressed to imagine what it is that we might export — other than, perhaps, the worst Hollywood movies in the history of the medium. RA

  • mario September 8, 2009, 5:50 am

    Hi Rick, really miss the trading these days…nice to see you warming up to the realities of Asian expansion, of coursed fueled by China. Relevant story: Met a local gent at the bus stop last week, let’s call him Mr. Li, farmer, fisherman, uneducated, probably can’t read Mandarin and definitely does not speak it, only speaks the local island dialect here on the province of Hainan Island. Typical friendly chat “Do you own your apt Mr. Mario?” No, Mr. Li, just sold it, nice profit, renting now, still shopping to buy the next one, and how about your home?” “Oh my family has a 100 sqm river front apt a few blocks down, we paid USD $13,235 for it 6 years ago.”
    Oh gee, congratulations Mr. Li and all the other uneducated NO LONGER POOR people of China. His family’s apt, of which there is surely no mortgage is worth $80,000 today priced at 5000rmb/psqm. China’s country farmers and fishermen are FAR richer than middle class, hard working, university educated Americans!! And this example does not even include the rising Chinese professional middle class sector employed by multinationals. Cheers and welcome to the new reality, Mario, http://www.mariocavolo.com

  • Terry S September 8, 2009, 5:30 am

    Thursday, August 13th, 2009

    A Scenario To Trap Both Bulls and Bears

    We offered an S&P 500 chart here a while back that was intended to show how a very powerful rally over the next 18 months would not change a long-term picture that remains very bearish to this day.

    SIMPLY A BAD CALL!

    &&&&&&

    It wasn’t a “call,” Sasquatch, it was simply a chart that showed how 18 months of hypothetically rising bars would not change the bearish look of the long-term charts. RA

  • billwilson September 8, 2009, 4:19 am

    1. You might want to correct the “Indonesia’s ‘Super Corridor’” heading to Malaysia’s.

    2. You realize that you are suggesting that the Malaysian “government” might actually be capable of pulling off this feat. I would not hold my breath (having done business with them in the past).

    3. I am with you that the scale of opportunities in Asia is massive, and that the speed of change in these economies is mind boggling, but it might take an unpegging of the dollar their currencies to really start the ball rolling – though of course the crash of the dollar may cause a few problems at home.

  • Daman Prakash jain September 8, 2009, 3:19 am

    The photograph erroneously says ” Indonesia”.

    Kaula Lampur is capital of Malaysia and the photograph shows twin towers in Malaysian capital KL built by a Srilankan Tamil now settled in Malaysia.

    &&&&

    Yes, of course — thanks. No chance now that I will miss that question on Jeopardy. RA