Wednesday, July 24, 2013

America is back

America is back and the revival is going to be enormous. It will change the world as we know it.

It may still be the Asian century but I suspect that the next couple of decades will belong to the US rather than Australia's main customer base, Asia.

That means that Australian stocks with major interests in the US are going to be among our best performers. This week we saw James Hardie revise upwards its estimates of US growth from the American housing industry. In time Boral should do likewise. Incitec Pivot is planning a major gas driven fertiliser expansion in the US.

So what is driving the US, which is not propelling other countries? On the surface it's Quantitative Easing (i.e. money printing) but the underlying drivers of the US will enable Quantitative Easing to slow around September/October and in the months that follow.

That slowing may cause a decline in share markets but will not alter the American underlying thrust because the US boom is based on a unique combination of circumstances.

The first and biggest propellant is the amazing US oil and gas discoveries. Yesterday I explained how what is happening in the US is in stark contrast to Australia (Australia is behind in the energy wars, July 22).

America has virtually doubled the world's oil reserves. This duplicates what happened in 1938 when the great Saudi discoveries were made. On top of that there are vast quantities of US gas.

The Saudi discoveries were isolated from industrial centres. The US discoveries come via technology unlocking the energy in shale and are in the middle of the world's most industrialised country.

The US will no longer need to spend money on Middle Eastern wars because by the end of the decade it will not need their oil.

The initial US prosperity from the oil and gas developments will be in Southern states, some of which were among the worst affected by the US housing debacle, which created the global financial crisis.

The second big US driver is housing. The US median house price has sky rocketed by around 30 per cent, including 15 per cent in the year to May. It's probably only 10 per cent below the peak set around 2005-06. It's the housing decline that so crippled US consumer confidence and it is the housing rise that will restore it.

US housing prices are, of course, being driven by low interest rates but any country that comes across the next Saudi Arabia is going to see a boost in house prices.

America has other advantages including abundant low-cost labour and a strong technology base.

In other words, it has the lot. Now, the US does have a huge budgetary deficit but the world seems happy to fund it, particularly as the US dollar is rising. But the American decades will not be a straight line upwards and there will be months where the data will show declines because as well as the looming QE3 easing the government is cutting back outlays.

As well, bad management and the slump has left many US cities and districts technically insolvent. Detroit is a good example. That city may solve some of its financial problems via the harsh formal bankruptcy process but the looming US boom will lessen the number of cities that must go through that process.

Australians have not woken up to what is happening, which is why yesterday's commentary was so important.

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