VALUE: After Hours (S07 E45): Re-Industrialization, Friend-Shoring, and the Anti-China Shift

During their recent episode, Taylor, Carlisle, and Russell Napier discussed Re-Industrialization, Friend-Shoring, and the Anti-China Shift. Here’s an excerpt from the episode:

Russell: Well, I think they will be pretty successful. We’ve already got the Koreans putting more capacity in the Philadelphia shipbuilding. Yesterday, we had the Koreans announcing a big zinc and base metal smelter coming. I can’t remember where that’s going to be in the United States of America. So, it works. It works, and every nation in the world will be–

I think Canada is the best example. So, we, here in Europe, we’re talking about becoming free or reducing our reliance on China. That’s been underway for a while, much like America. But none of here in Canada. You want to reduce your reliance on China and America. Can you imagine how much investment Canada might have to do that? So, this is not a phenomenon of the United States of America.

But why the National Security Strategy document is so interesting, is that America is not seeking to bring all productive capacity back to America. It is very happy, if you read that document, to align with its allies, to see that productive capacity move to its allies. So, the Vietnam deal perhaps being the best and most interesting deal. As long as Vietnam is aligned against China, it can keep producing stuff and selling it to America. Mexico, in the last couple of days, has moved to put significant tariffs on China. Therefore, plenty of production will still be done in Mexico.

The stuff that comes back to the United States of America is more of the strategic in nature stuff. So, what the Trump administration is trying to do, and I think relatively successful, is to realign the world to be an ex-China world. So, this is really, really negative for China. I think it’s really, really positive for Korea, Japan, Taiwan, Thailand, Malaysia, and potentially Latin America. Latin America has a history of opposing US presidents. Maybe let’s call it some volatility along the way in the relationship with Latin America.

So, yeah, there’s lots of beneficiaries of these. But it’s not an American reindustrialization. It is really happening. It’s anti-China industrialization. Therefore, it can happen in lots of places. Therefore, in terms of the stocks you own, they could be absolutely anywhere. They could just as easily be in Japan as America as anywhere else.

Jake: Friend-shoring.

Russell: Friend-shoring was Janet Yellen. Janet Yellen couldn’t bear to say de-globalization.

Jake: [laughs] Yeah.

Russell: That’s the one thing about politicians. If they change their minds and do exactly the opposite of what they told you were going to do, they’ll have the good grace to give it a different name. So, friend-shoring it is, but it’s accelerated friend-shoring.

Jake: Is that inherently inflationary though? I imagine the cost structures of all of these productive capacity has to be higher than– When we went to China and saw some of the things there, it’s like, “Geez, we have nothing like this here.”

Russell: It’s inherently inflationary. Depending how quickly it happens, is potentially the biggest supply shock since 1914, certainly a bigger supply shock since the 1939. So, you’ve got your supply shock coming in, and then if I’m right and we’re using lots of bank credit to fund this, that’s high growth in bank credit means high growth in broad money, which if you’re of my bent, inflation is everywhere at all times a monetary phenomenon, then you add a little bit of monetary inflation to that. So, yeah, very inflationary.

The politicians will want to assure that that shows up in wage inflation. If you listen to the American Secretary of the treasury– You’ll hear a lot about that, about blue-collar America industrialization and blue-collar this and blue-collar that. And so, yeah, it’s going to have to show up in wages. But it is inherently inflationary if we start to reverse China’s great emergence into the world.

There are many, many people who don’t want to believe this. I could be wrong, let’s put it that way. But most people don’t want to believe that, because the whole structure of the global monetary system, global supply chains, return on equity, everything is– It’s a world turned upside down. If the Trump administration achieves this, packed against China. But it’s a world of massive opportunity. I guess we should then get to value investing. A lot of the stocks that have been depressed in this long, long period– I should have used about five longs there really [Jake laughs] shouldn’t– long-long period, are those who’ve had to suffer Chinese competition.

And of course, actually, if you’ve survived it, you’re probably a pretty good company to have survived, or you’re getting big public subsidies. I mean, one of the two. So, if you lift the yoke of Chinese competition, there are so many opportunities. And of course, there are basically all of them I would expect outside the S&P 500, because these are pretty small companies, whether they’re American or whether– Whatever you look, pick an index anywhere in the world, the companies that benefit from this are probably not in that index.

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