This post is dedicated to all those no longer with us who taught us how to love unconditionally and continue to make a positive impact on our lives.

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Back to the Good Old Days

Growing up I used to spend my summers with my grandparents in Upper Michigan. My grandmother was a stay-at-home mom who is still in my eyes the best chef this world has ever seen; despite her always saying otherwise. My grandfather was a blue-collar worker that spent most of his career in the automobile industry working on the assembly lines and was quite the storyteller.

After so many years together, I can’t even quantify how many times he must have told the same stories over and over again. While the repetition would drive my grandmother crazy, his stories never got old to me. He was notorious for forgetting what he needed to pick up at the grocery store but somehow, he would never miss a detail when recollecting about the good old days. He would tell stories of what it was like growing up on the Prairie River in Wisconsin (apparently the water was so clean you could drink it) and how he dumped his “steady” girlfriend the moment he laid eyes on my grandmother. What I would do to listen to those stories and have a homecooked meal with them just one more time.

Nostalgia has a powerful way of connecting us emotionally to the past. It also presents a potential cognitive bias as people tend to remember things in the past more fondly than they truly were. My grandfather was often guilty of this. He would reminisce about the times when things were much simpler, and products, like automobiles, were built to last. Occasionally, my grandmother would remind him that the “good old days” weren’t always so good. She would interject occasionally by making comments like, “walking outside in the cold to get water from the well to handwash clothes really wasn’t so great.” Thinking back, both were probably right in some form or fashion.

Credit Where Credit is Due

The change my grandparents’ generation lived through was nothing short of dramatic. They grew up in a time when blocks of ice were delivered to every household to keep food from spoiling. Today it’s common in San Francisco to see passengers get picked up by autonomous vehicles. My grandfather used to marvel at how cell phones worked with no cord. I can only imagine what he would say if he saw a car driving itself. Despite my futile arguments that new technology made for a better society, he would always refer back to the “Golden Age,” referring to the post war period between 1948 and 1973, when the U.S. reigned supreme, American manufacturing flourished, and the middle class truly prospered.

While I still believe that the quality of life is better now than it was back then, his general thesis was more spot on than I ever gave him credit for. According to the Pew Research Center, from 1971 to 2021 the middleclass has shrunk from 61% of U.S. households to just 50%. This statistic supports my grandfather’s point. More people are indeed less well off, relatively, than they once were. Various factors contributed to this unfortunate trend with inflation, recurring recessions, and the emergence of global competition playing important roles leading up to the early 2000’s. Relevant to current events, China’s rapid development, which led to manufacturing jobs leaving the U.S., has been specifically cited for more recent struggles.

The WTO, China & Globalization: Policy has Long Term Effects

In 2001, President Clinton signed legislation allowing China to join the World Trade Organization (WTO), a move that opened up new opportunities for trade and investment between China and other countries. The entry of China into the WTO had a significant impact on the U.S. manufacturing sector and inflation. This policy decision effectively set the stage for globalization to flourish. While the effects of China's entry into the WTO were complex and multifaceted, the impact on U.S. manufacturing and inflation can be traced to a few key factors.

One of the most significant effects of China's entry into the WTO on the U.S. manufacturing sector was increased competition from Chinese imports. With China's entry into the WTO, tariffs and other trade barriers were lowered, making it easier for Chinese goods to enter the U.S. market. This led to a flood of cheap Chinese imports, which often competed directly with U.S.-made products. The increased competition from Chinese imports put pressure on U.S. manufacturers to lower their prices and improve their efficiency to remain competitive. As a result, many U.S. manufacturing jobs were outsourced to China and other countries with lower labor costs. In addition to increased competition, China's entry into the WTO also had an impact on inflation in the U.S. The influx of cheap Chinese imports put downward pressure on prices for many consumer goods, including clothing, electronics, and toys. This helped to keep inflation low in the U.S., which was beneficial for consumers but also contributed to a broader trend of deflation in certain sectors of the U.S. economy. Until recently, the Federal Reserve had been actively targeting higher U.S. inflation than what was being produced.  

There are many other occurrences that helped shape the current macroeconomic environment, but China’s entry into the WTO is a prime example of how policy decisions can have varying effects in both the short and long run. Lingering pandemic era issues, particularly related to geopolitical tensions and supply chains, may be remembered in history as a marquee reason for what could be a transformational shift that reverberates across the global economy.

De-Globalization: Made in America

If globalization was a key factor to stubbornly low inflation over the past couple decades, it seems reasonable to consider that de-globalization may produce the opposite result. This is one reason why we believe the Federal Reserve’s inflation target of 2% could be challenging to achieve. De-globalization refers to a trend in which countries are increasingly focused on their domestic markets and reducing their reliance on global supply chains. This trend could have significant implications for supply chains and manufacturing, potentially leading to the reshoring of some manufacturing back to the U.S. and North America. Interestingly, well respected economist Nancy Lazar has deemed Middle America her favorite “Emerging Market” for several years. A U.S. Manufacturing Renaissance has been brewing for some time due to rising labor costs in other countries and a desire to bring jobs back to the U.S. The likelihood of reshoring increased following President Trump’s election, in part due to his "America First" foreign policy. Shortly after taking office, he promptly slapped tariffs on imports from foreign countries like China. Many of the Trump Era tariffs remain in place, highlighting at least some alignment amongst politicians on the issue.  

With countries and corporations becoming more focused on the risks associated with supply chain disruptions, there has been renewed interest in producing goods locally and sourcing materials and components from within the country or region. Recent legislation in the U.S. highlights just that. The CHIPS Act provides necessary incentives for semi-conductors to be manufactured in the U.S. Recent guidance issued for Electric Vehicle (EV) tax credits from the Inflation Reduction Act reduced the number of eligible EVs due to manufacturing, assembly, and source of critical minerals requirements focused primarily within the North American region. Of course, government subsidies alone won’t transform the global order, but the trend is becoming much more apparent.

The reshoring of manufacturing will not happen overnight, and there are significant challenges and costs associated with rebuilding a robust domestic manufacturing sector. Companies will need to invest in new facilities, train workers, and navigate regulatory hurdles, among other challenges. Even though it took decades to get here, continuing geopolitical conflict, growing nationalistic support, and new technology are just a few reasons why we are focused on this opportunity now. However, adoption of advanced modern technology is the primary reason why the potential next manufacturing resurgence may not look anything like the good old days my grandfather remembered so fondly.  

Disruptive Innovation: AI in Manufacturing & Other Technological Advances

The average lifespan of an S&P 500 company in the 1950’s was 60 years. Today it is estimated to be under 20 years. Technological innovation has contributed to this phenomenon but is in no way the only factor. The tremendous growth in company size may also play a role. Nearly any company that has managed to remain dominant over a long period of time looks nothing like how they started out. This is one reason why strong company management is such a critical piece of analysis for long-term investors. Rapid innovation has forced companies to adapt or die out. Shifting focus is challenging for a small company. For a mega-cap firm with billions at stake, it’s a massive undertaking. Sometimes it’s better to tear down an old house and build a new one but it’s much more common to make improvements by renovating. For U.S. manufacturing to truly make a comeback, paying U.S. salaries and sourcing more expensive raw materials closer to home are major obstacles to overcome. Corporations will need to leverage modern technology with an eye on long-term efficiency as they build new facilities to produce homegrown products.

The recent hype around technology like generative artificial intelligence (AI) systems like Chat GPT seems to have become mainstream out of nowhere. The reality is this technology has been around for quite some time. It was introduced in the 1960’s but it needed the push of modern machine learning algorithms to take off. We see a similar situation in the manufacturing sector, where the rapid advancement of robotics, AI, and technology could lead to accelerated adoption as new facilities are built. According to a study by the McKinsey Global Institute, it is estimated that the adoption of these technologies in manufacturing could add $1.2-2.3 trillion to global manufacturing output by 2025.

One real example of the impact of these technologies can be seen in the automotive industry, where the use of robots and automation has led to significant improvements in efficiency and quality. For example, at the Ford Motor Company's manufacturing facility in Louisville, Kentucky, robots are used to perform a variety of tasks, from welding to painting to assembling components. As a result, the plant can produce a new vehicle every minute, with a defect rate of just 1 per 100 vehicles. Needless to say, my grandfather’s job on the auto assembly line barely exists anymore. While concerns about job displacement are legitimate, these technologies also have the potential to create new, high-skilled jobs in areas such as programming, engineering, and data analysis. However, the transitional period will likely be uncomfortable for many and the effects on the shrinking middle class are unknown.

Conclusion: Stay Focused on the Long-Term

A resurgence of domestic manufacturing, rerouting global supply chains, and adoption of new technologies have significant implications for investors. Change led by innovation nearly always disrupts the old guard, while creating amazing opportunities for investors. Given the current state of the world, markets have favored safety and certainty over long term growth and innovation. While it is natural to focus on what is right in front of us (i.e., the timing of the next recession), a far better use of time for long-term investors is to identify companies, industries, and geographies that are positioned to thrive 5-10 years in the future. While the good old days may reemerge in some ways that resemble the past, investors will be rewarded based on how well they anticipate the future.