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The Old Normal Is Never Coming Back

Posted July 19, 2022

On March 5, 1946, Winston Churchill famously declared, “From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the continent.”

In the following years, the communist government of East Germany built an actual wall of concrete and barbed wire, an Antifaschistsischer Shutzwall, between East and West Berlin. Thus did the Cold War begin in earnest, framing the geopolitical landscape for half a century.

On November 9, 1989, the Berlin Wall fell.

East Germans rushed through the checkpoints to drink Champagne and party in the West. Thus ended the Cold War, the Soviet Union, and its failed attempt to cover the world in communism. 

As the Soviet Union disintegrated, hope for the future abounded. 

The End of History

In 1992, Francis Fukuyama wrote a New York Times bestseller called The End of History and the Last Man. It postulates that with the victory of Western liberal democracy, humanity has reached "not just... the passing of a particular period of post-war history but the end of history as such: That is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government.”

It seems like Fukuyama was right for a few years, anyway. The end of the Soviet Union caused a boom in global commerce. Formerly communist markets opened up and bought Western goods. New capitalist ideas meant people could work for themselves and that hard work was rewarded.

Back in 2013, The Economist published an article noting that over 1 billion people had been pulled out of extreme poverty in the 20 years since the fall of the Berlin Wall.

That’s an incredible statistic that no one talks about.

The U.S. Navy, with its 13 carrier strike groups, ensured that the sea lanes were kept open. Companies in the United States realized that they could use cheap foreign labor and low bunker fuel prices to build products in China and ship them back to the U.S. to increase profit margins. The political will and resources of the U.S. Navy mean this is less likely in the future.

Indeed, in the future, we will be less reliant on global sea lanes.

In 1990, Chinese GDP per capita was $318. Today, it is $12,556. That global supply chain now makes less sense. GDP per capita in Mexico is $9,926. It is now cheaper to source from Mexico than China. 

If it weren't for the sunk cost, fewer companies would be building in China today.

 

According to North American Production Sharing (NAPS):

Mexico’s manufacturing industry offers superior worker productivity. In 2014, the unit labor costs (which [are] equivalent to the wages adjusted for productivity) in China were equal to those in Mexico. By 2019, the manufacturing wages in certain industries were up to 20% lower in Mexico than they were in China, meaning greater efficiency at a lower price. While Chinese output remained marginally higher than in Mexico, the unit labor costs remain lower.

Furthermore, energy is cheaper in Mexico. China has to pay 50%–170% more for natural gas. And, of course, Mexico is much closer, which shrinks supply chains. In 2018, shipping a 53-foot container from China to Los Angeles cost close to $5,000. The same container from Tijuana, Mexico, to Los Angeles cost about $600. 

America's largest trading partners are, in order, Canada, Mexico, China, and Japan.

The Chinese yuan is pinned to the U.S. dollar. The Mexican peso is not.

The peso loses about 3% a year versus the dollar. This means if you build a plant in Mexico, your production costs will drop.

The point of all of this isn’t that Mexico will be the next China. It is to point out that COVID has marked a turning point and accelerated the next multi-decade trend.

Much like the End of History years, this new trend of deglobalization will be the dominant geopolitical investment theme of the next 16 years.

Foreign direct investment climbed from around $150 billion in 2020 to $333.6 billion in 2021.

Furthermore, Financial Times reports that S&P 500 companies have increased capex in the U.S. by 20% despite recession fears in order to make up for global supply chain failures.

Onshoring is costly and will take years to accomplish, but it's a trend you have to follow as an investor.

There are several ways to play it, including infrastructure REITS, commodity companies that produce or will produce in North America, and utility plays.

I’ve found a small computer chip company that is producing in the United States and has been certified by the Department of Defense. You can learn more about that here. I’ve also discovered another company that will be the only one to produce magnesium in the United States. That report will be out shortly.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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