America: The Future is Still Bright
Authored By: Michael J. Firestone, CFA
Let’s tell it how it is. America has fallen ill — mentally and physically. The pandemic has directly or indirectly touched nearly every single person on the planet. In some ways we are all going through this together. In others, we are uniquely alone.
The outlook over the short term is far from inspiring. With asset valuations at historic levels and Covid-19 cases accelerating across the country, investors are hoping that Congress and the Federal Reserve will do whatever it takes to support the markets. Pushing stock prices higher has seemingly become the unspoken stimulus tool of choice. It is hard to say for sure, but it’s likely that the general mood would be much different if markets resembled anything like they did in late March.
Despite the troubling times, let’s take a moment to remind ourselves why the future is still bright for investors in the land of opportunity.
“An investment in knowledge pays the best interest” — Benjamin Franklin
The American education system is far from perfect. Teachers need more support, training, and pay. The lack of innovation within the general curriculum is also cause for concern. Given these issues, it has become generally accepted that the U.S. public education system has fallen behind that of many European and Asian countries.
While that may be true in general, the United States still boasts the top universities in the world bar none. Any published list that ranks unversities is always littered with U.S. based schools at the top. This is true across the board for nearly every major discipline; medicine, engineering, computer science and business (with your Fire Capital team proudly representing two of the top business schools in the world). The implications of having the best higher education institutions right in our backyard go far beyond ensuring that our children obtain a well-paying job. Universities are a breeding ground for collaboration and entrepreneurship. The combination of great ideas, a nothing to lose mindest, and cheap beer seems to be a wonderful recipe for innovation.
Given this backdrop, it should come as no surprise that the world’s brightest students want to come to the U.S. for their studies. It is also quite telling that many of world’s elite favor U.S. universities. Current president of China, Xi Jingping, sent his only child to study at Harvard. World leaders such as Shinzo Abe (University of Southen California) and Benjamin Netanyahu (MIT & Harvard) were once students in the U.S. While it is true that the pandemic has likely sped up the trend to more remote-learning, the in-person experience provided by some of the top programs is not replicable online. High quality education is a valuable asset, and the U.S. will continue to hold an important strategic advantage in this regard.
“Necessity is the mother of invention” — Plato
Similar to the global university rankings, U.S. based companies continue to dominate lists that compile the world’s most innovative companies. This is good news because innovation and technological advancement help drive economic growth. What is most encouraging is that so many of these innovative companies don’t just exist in the U.S. — they are born here.
Entrepreneurship is a special trait that is distinctly connected to American culture. It has the uncanny ability to create new markets and generate fresh wealth. In a recent interview, Elon Musk, CEO of Tesla and SpaceX, offered this comment: “There is definitely no other country where I could have done this — immigrant or not.” While clearly not the, “easy” route, the necessary conditions — stable financial markets, established venture capital, a mature legal system, etc.) — are all there if someone wants to pursue a good idea and is willing to take a risk on themselves.
Risk, however, may be why entrepreneurship is way down compared to previous generations. Young people (Millenials and Gen Z) are once again getting hit the hardest by the current recession. This has contributed to an estimated 10% of the adult population to move back home, according to Zillow.com. Put a different way, the American Dream has eluded nearly half of the working population in the U.S. Given the economic challenges that young people have consistently faced throughout their lives, it should come as no surprise that risk aversion is quite high when it comes to personal finances. Perhaps current circumstances will force people to reinvent themselves and start new businesses.
“Nothing can stop America when you get right down to it. Never bet against America,” — Warren Buffet
A variation of the quote from the previous section is, “It may be freedom rather than necessity that is the mother of invention.” If that is indeed true, it should naturally bode well for the “Land of the Free.”
The reality is that the American system is a core reason why the U.S. continues to be the most dominant economy in the world. With GDP just over $20T in 2019, China’s $13T economy is the only other that is somewhat close. Meanwhile, the U.S. stock market is approximately fives times that of China’s stock market. Market valuations aside, the world’s largest companies strive to be listed on American stock exchanges. The long and prosperous history of the major U.S. stock markets indicate that fully functioning financial markets are a complimentary and important ingredient to long-term economic growth.
Clearly the future is uncertain, but America is still in the driver’s seat. An underappreciated reason why is because the U.S. dollar is the de-facto reserve currency of the world. According to the IMF, the U.S. Dollar accounts for more than 61% of all foreign bank reserves. If money is power, then the U.S. is the most powerful country in the world without a doubt. The dollar’s status creates a circular loop where foreign countries are essentially forced to buy U.S. Treasury securities. This allows the U.S. to deficit spend unlike any other nation. Concerns about deficit spending are certainly valid, but if there was ever a time to unload the rainy-day fund, it is almost certainly now.
“In the middle of a difficulty lies opportunity.” — Albert Einstein
Despite the extraordinary circumstances we are all living through, it is not unreasonable to see future innovation as a potential silver lining from the pandemic. Anecdotally, Sir Isaac Newton discovered gravity during the Great Plague of 1666 when he was forced to work from home. The 1918 Spanish Flu Pandemic ushered in a new approach to public health care that refocused treatment to the underlying cause of illness, which eventually led to the first ever flu vaccine. The innovation that will come from the Great Pandemic of 2020 is yet to be seen. However, given the level of resources and ingenuity in the U.S., our bet is that we see meaningful American made advances in medicine and technology as a result.
The challenges ahead are real. There are many complex issues that need to be addressed. With that said, we are quite certain there will continue to be incredible opportunties to take advantage of. Our promise is that we will stay laser focused on finding them. Attitude is everything and the glass half full mindset eventually prevails. Cheers to a better second half of the year.
Disclaimer
The information in this report was prepared by Fire Capital Management. Any views, ideas or forecasts expressed in this report are solely the opinion of Fire Capital Management, unless specifically stated otherwise. The information, data, and statements of fact as of the date of this report are for general purposes only and are believed to be accurate from reliable sources, but no representation or guarantee is made as to their completeness or accuracy. Market conditions can change very quickly. Fire Capital Management reserves the right to alter opinions and/or forecasts as of the date of this report without notice.
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