Sunday, January 20, 2008

Dear Foreign Investors- We're on Sale!

In today's NY Times there is a great article-- Overseas Investors Buy Aggressively in U.S.
    For much of the world, the United States is now on sale at discount prices. With credit tight, unemployment growing and worries mounting about a potential recession, American business and government leaders are courting foreign money to keep the economy growing. Foreign investors are buying aggressively, taking advantage of American duress and a weak dollar to snap up what many see as bargains, while making inroads to the world’s largest market.

We're talking huge sums here, last year alone was $414 billion, or a quarter of "all announced deals". Frankly, I think it's globalizations karmic retribution that's kicking us in the pants right now, and thank god because clearly our economy needs money from somewhere. After years of American companies snapping up factories, labor, and land in currency depressed nations, the world is returning the favor. And in economic irony- NAFTA, that trade agreement that allowed the US to bum rush Canadian and Mexican markets with it's big bad dollar and superpower-like economy, is now luring foreign investors into our market. If they own our companies, they enjoy the same open trade borders.

I wrote about sovereign welath funds a while ago, and certainly there is a ton of this foreign government investment vehicle in the mix, but it is not the majority of the money. The article refers to it as a trickle. Still, the nationality of foreign investors can ruffle some Buy American feathers. In an attached multi media graphic, the top spenders in announced mergers and acquisitions last year were (in descending order) Canada, Britain, Australia, Spain, Germany. The UAE follows, then Saudi Arabia, with China ranked 14- all of whom invested significantly less than the top three. The bruhaha about these three countries may be that in 2000 they were not even on the charts.

For many, it is a complicated pill to swallow.

    Five million Americans now work for foreign companies set up in the United States, Mr. Kimmitt said, and those jobs pay 30 percent more than similar work at domestic companies. Nearly a third of such jobs are in manufacturing, which explains why Rust Belt states have been wooing foreign investment.

    “We’ve lost 400,000 manufacturing jobs,” said Michigan’s governor, Jennifer M. Granholm, a Democrat, who has traveled three times to Europe and twice to Japan in pursuit of investment since taking office in 2003. “I’ve got to get jobs for our people.”

    Some labor unions see the acceleration of foreign takeovers as the latest indignity wrought by globalization.

    “It’s the culmination of a series of fool’s errands,” said Leo W. Gerard, international president of the United Steelworkers. “We’ve hollowed out our industrial base and run up this massive trade deficit, and now the countries that have built the deficits are coming back to buy up our assets. It’s like spitting in your face.”

Given the state of our economy, this level of foreign investment will only rise. The fact is, we need the money, and it's a prudent long term investment for them. They're buying blue chip companies in a blue chip market at a seriously steep discount. And honestly, it doesn't bother me. What does bother me are the economic and political forces that tanked our economy to begin with. And for that, the US has nobody to blame but itself.


Ms. M&P said...

Great post! I'm really struggling to wrap my brain around everything that's happening in our global economy and your posts are helping to edumacate me.

So what are the economic and political forces that you think got us into the recession? Lack of regulation and oversight? just curious.

And this is sort of an aside, but should we be broadening our portfolios to bring in more international companies or is that the worst idea ever? I'm just thinking that if the US is tanking, then should we look elsewhere? I know that's the opposite of what this post is about, but I've been mulling it over...

PiggyBankBlues said...

thanks m&p :)

well, political forces is the easy one-- banking friendly administration or consumer rights friendly admnistration?

then there's the war. whether one is for or against the war in iraq, the simple matter is that there is less money to spend elsewhere. currently the war is costing us $487 BILLION! to put that into perspective, that's nearly four times bush's recently proposed economic stimulous package. and while i think it is too simplistic to say, well we could build 45 million elementary schools or grant 75 million college scholarships with that money (because congress and the president would never approve such spending), the bottom line is that it has serious consequences on our opportunities at home. so the war will cost us now an estimated $1 to 2 TRILLION, which the NY Times recently broke down quite nicely here. so that's the first thing.

the second you hit the nail on the head. lack of regulation and oversight. the bond rating agencies get paid MORE money to give a better grade to bad debt- talk about a conflict of interest. this means that comercial banks were buying sub prime loans (b/c banks buy each other's debt multiple times over, they make their money this way- this is the interest rate the fed is famous for) on faulty info, because good ratings on bad debt were given out that were undeserved. so then people like barclay's, citibank, merrill make so much freakin money on every single time the money changes hands that they also had no incentive to look for faults.

mortgages need to be regulated, credit card fees need to be re-capped and regulated, credit card interest needs to be regulated, loans need to be transparent and understandable, and companies need to be held accountable for mis-information to no information. the average US consumer does not stand a chance. and sub prime mortgages have lost everyone from the bank's bank to the lender a lot of money. i would really wonder if we would be in a recession if it weren't for the sub prime mess. we wouldn't be flying high, but a recession?

regarding US companies, most huge US companies are multi-nationals in essence. hollywood makes more money abroad than it does in north america, for example. also- you are young enough to safely buy US companies low and sell much much higher. that said, everyone should diversify, and international stocks are definitely important. the easiest way is with a target retirement fund, which i wrote about a while back here.

sorry for the long post, i could go on and on :)

Mrs. Micah said...

I'm trying to come to a sort of non-attachment (in the Buddhist sense) with the idea of living either in a thriving country or in one that's going into a Great Depression kind of thing. It's not that I'm anticipating either, but I'm trying to prepare myself for anything...

PiggyBankBlues said...

LOL, being zen about the economy is a good idea, especially now. but really, mrs. micah, i don't think we're headed for a GREAT DEPRESSION! i'd venture to say we're not even headed into a Great Recession, not that i would know.. but it's nice to see you are prepared. we'll be calling on you when the sky falls :)

Ms. M&P said...

I'd like to sit down with some virtual beers and talk economy with you ;) Thanks for the thorough answer. I agree that the subprime problem was industry driven and the war deficit helped put us in the situation we're in now--both things that I would have happily seen changed. I think the housing bubble would have happened anyway--we followed in the footsteps of Europe, but agree that a downturn was probably written on the wall. Regarding mortgages, credit cards, and loans, I could not agree more! It makes me furious to see what can be done (and is done) to consumers. And what bothers me even more is that when Congress tries to change anything, their lobbyist somehow smack it down. It's amazing. PhrMA gets a bad wrap (deservedly so), but the credit card lobbyist are just as "good" at their job. If only they good use their powers for good!

PiggyBankBlues said...

that is a good idea, i need to open up a virtual bar...