North America’s supply chains present challenges for investors, but also opportunities

Recenty, we’ve talked about three of the fears that investors are facing right now: Artificial Intelligence, Putin’s war against Ukraine, and China.

But there’s a fourth: Supply chain issues worry investors for a couple of reasons. They fear the change will disrupt the North American economy and their standard of living. They also worry that it will bring record-breaking bursts of inflation and rising interest rates, along with supply-chain related goods shortages.

However, rather than think of the process as tinkering with longstanding supply lines, you might view it as the renovation of a frail, brittle industrial complex that needs to take advantage of today’s technology and processes.

Keep in mind that the supply lines that grew up to service globalization were initially slapped together after World War II, mainly to serve and take advantage of U.S. military/defence purposes.

At the end of World War II, the U.S. was the richest and most powerful country on the planet by far. It ruled the seas—the U.S. Navy was said to be more powerful than all the other navies of the world combined.

The U.S. was determined to avoid fighting another great war. It had a great navy to protect it at sea, but it worried that the Soviet Union would launch a new land war. The Soviet Union, though devastated by the war, still had a huge army plus imperial ambitions to match.

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Globalization started when the U.S. launched a program to head off the risk of a new world war. The U.S. made an irresistible offer to non-Communist countries:

“If you agree to ally yourselves with us in any future war against the Soviets, we’ll use our U.S. Navy, the biggest in the world, to patrol the world’s sea lanes and protect your trade shipments to anywhere in the world. We will also open our U.S. markets to your exports.”

Some call it a self-serving offer. The U.S. wanted to avoid a land war with the Soviets. However, the U.S. also wanted to help the rest of the world get back on its feet, instead of taking advantage of its weakness.

Over the next few decades, western countries outsourced much of their manufacturing to lower-income countries in the east, and world trade ballooned. The coming of containerized shipping brought unimaginable economies of scale, global trade growth and uneven but record-breaking levels of prosperity.

All great deals have to end

It’s natural for businesses and consumers to lament the breakdown of the world-spanning global supply chain. After all, it cuts costs for businesses, and cuts prices for consumers.

The big advantage of trading with China was that it let multinational businesses shift production from high-paid, unionized labour at home to low-paid Chinese workers who were grateful just to have a job.

It also gave western political leaders a reason to believe they could transform Communist China into a western-style trading partner who would follow western rules.

Now the labour-cost differential has shrunk. More important, it’s clear that China’s supposed shift from communism to upcoming democracy was a ruse.

Globalization has been on its way out since the 1990s. After all, the U.S. sparked the rise of globalization to avoid the risk of a land war with the Soviet Union. That risk ended in the early 1990s, after the Soviet Union collapsed, leaving the stripped-down Russian Federation in its place.

Meanwhile, other nations re-built their navies. The U.S. Navy was still the most powerful in the world, but globalized trade had vastly out-grown it. It was no longer possible for the U.S. Navy to patrol all the world’s sea lanes.

This leaves greater risks than supply-chain failures. Without the U.S. Navy to patrol the seas there’s no “sheriff in town.” Today’s massive ocean shipping vessels need huge insurance policies to offset the risk of piracy. A few pirated ships could push insurance rates to unbearable heights.

The new supply chains will be rebuilt with smaller vessels and shorter routes. They will be shortened as well as modernized and made more dependable.

Thanks to the United States-Mexico-Canada Agreement, in force since July 1, 2020, production facilities may move from southeast Asia to Northern Mexico, or further south. The U.S. has a free-trade agreement with Colombia, and trade agreements with Chile, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Peru.

Ecuador and El Salvador both use the U.S. dollar as their official currency. The U.S. dollar is also legal tender in five more countries: the Marshall Islands, Micronesia, Palau, East Timor and Zimbabwe.

The new supply chains may spur more countries to “dollarize”—switch to the U.S. dollar as their official currency. This would tend to export some of the inflation that investors fear for this decade. The dollarized countries won’t mind if the extra inflation also brings faster growth.

This supply chain shift will of course disrupt growth intermittently over the rest of the decade, just like the building of a new highway system. It probably will spark periods of high inflation and high interest rates. That’s the cost of industrial progress on a massive scale.

The great burst of economic growth it brings will make it all worthwhile, as businesses eliminate the distances and other weaknesses built into the old system, and profit from the new.

These new supply chains will leave behind the period when cutting costs was everything. They’ll go on to a new world that will take full advantage of the newest new technology, Artificial Intelligence.

We’ll continue talking about fears investors are facing, but you for the best result regardless use our three-part Successful Investor approach:

1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
3. Downplay or avoid stocks in the broker/media limelight.

What are your thoughts on this? Leave a comment below.