Value & Strategy

Reshoring: Manufacturing and Services are moving back to Mature Markets

In the economist’s edition of this week, you can find a special report on outsourcing and offshoring, including two interesting articles on Manufacturing and Services. Thinking about the earlier posts on the Demise of Manufacturing this is yet another interesting development as mutual reinforcing multipliers (manufacturing attracts services and vice versa) previously discussed can stimulate job growth now in mature markets.

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Source: McKinsey Global Institute

Services and Production Move Back to Mature Markets

The oversupply of qualified workers in mature markets in distress has a depressing impact on their salary expectations and governments are moving to make labor more flexible, countries like Portugal and Spain are becoming more attractive. Portugal for example is turning into a service hub for Brazil’s firms (it’s already a services provider, production hub and export portal to the booming markets of Angola and Mozambique). As Chinese and Brazilian laborers demand higher pay, this development could accelerate.

Services – The next big thing – Developed countries are beginning to take back service-industry jobs too

Production: Minimizing Supply Chain Risk and Vicinity to End Markets

However the labor cost arbitrage is becoming a less important driver for outsourcing decisions. Manufacturers want to be close to their end markets and minimize supply chain risks. New less expensive technology will make this increasingly possible.

Think of the decreasing costs of robots and 3D printing, which will further improve the labor costs per product and make local production more feasible. A German car manufacturer went from 75.000 assembly workers in the 90s to 25.000 nowadays, making labor costs per product lower than in Portugal for example, even though salaries are around 25% of German salaries.

On the long run, 3D printing will inevitably lead to even less labor intensive production processes and more local production. So despite business activity moving back to mature markets,  political challenges of keeping unemployment low won’t go away.

Reshoring manufacturing – Coming home – A growing number of American companies are moving their manufacturing back to the United States

Charlie Munger on the Psychology of Human Misjudgements

This is an audio recording of the often referred to speech by Charlie Munger on the psychology of human misjudgement given to an audience at Harvard University circa Jun 1995. Mr. Munger speaks about the framework for decision making and the factors contributing to misjudgements. c. Jun 1, 1995 Enjoy this nestor of succesful investing thanks … Continue reading

Kyle Bass’ Analysis of the Macro Environment

I appreciate his fact-based thinking. Take the time to listen to his analysis, it’s worth it.

Some quotes:

  • Debt has grown with CAGR of 11% over the last 10 yrs.
  • We sit today at the largest accumulation of peacetime debt in world history
  • You know how this ends right?…..This ends through war…I don’t know between who and who…
  • War is just is just economic intrepid playing out to its logical conclusion….
  • Southern Europe and Japan is going to restructure
  • Social fabric of the world is going to be stretched or thorn within 2-3 yrs
  • But there is a general reluctance to admit we’ll have to go through this

On Germany…

  • The country is much riskier than perceived…
  • Germany defaulted twice last century
  • They have on-balance sheet sovereign debt of 82% of GDP
  • Their banks are 340% of GDP…


  • There’s no chance Japan can ever repay its debt
  • Xenofobe society
  • Social security funding debt is the cancer on their income statement
  • more adult diapers sold than kids diapers
  • In the next 2-3 yrs they cannot hang on
  • the 10th finance minister in the last 6 yrs
  • from the Japanese budget plan: the pensions will be financed through future radical reform (!!)
  • they don’t know what to do and don’t know where to go…
  • retail ownership decreases from 5% to 3.5% because population is dissaving..
  • this it how it all ends

Macro Scenario: The Demise of Manufacturing Is the Real Problem of the World Economy

Enjoy and learn from this discussion between Prof. Bruce Greenwald and Richard Koo at the CIGI conference: The Great Recession: Structural and Cyclical Causes While Richard Koo is sure weak balance sheets are the issue, Greenwald disagrees and further elaborates on his thesis, the underlying problem is the demise of manufacturing. I am always interested … Continue reading

Bloomberg’s Game Changers: Warren Buffett

I found this video on Warren Buffett’s background.

From the same Bloomberg series: Sergey Brin & Larry Page Google Full Story

Interview with Jean-Marie Eveillard, Senior Adviser, First Eagle Funds

According to Jean-Marie Eveillard, Senior Adviser, First Eagle Fund, after 2008 Value Investors should ask themselves if their bottom-up approach should be complemented with a top-down analysis of the macro environment.

This interview gives you a fresh insight on current macro environment and how investors should deal with it. I have made a limited (incomplete) summary of the topics he discusses.

Austrian School Best Analytical Tool to Perceive Current Environment

  • For top-down analysis, according to JME, the best analytical tool is the Austrian School to see through the neo- Keynesian measures taken by governments.
    • JME expects these measures to be discredited in the future
    • Inflation to the Austrians is not the increase of the CPI or asset prices it is the creation of too much money and too much credit.
    • Money is not supposed to be free and this situation will cause significant distortions.

Gold is the Currency of Last Reserve

  • Gold is a protection against extreme outcomes. It is the currency of last resort. Warren Buffett does not seem to get this. We see it as a substitute currency to hold cash in. We don’t see any of the printed currencies as reliable.

Graham vs. Buffett

  • He discusses the difference between Graham’s quantitative and Buffett’s qualitative intrinsic value measurement and describes the struggle of value investors on determining the right moment to sell their investments. At the static quantitative intrinsic value of Graham or the qualitative moat based intrinsic value of Buffett.
  • He describes he was twice illuminated by Graham’s Intelligent Investor and Buffett’s Shareholder Letters

Fund Performance Management

  • About his performance targets when was fund manager of first eagle funds.
    • His absolute target: perform better over time than money market funds.
      • In hindsight he would’ve set the absolute performance target in real terms
    • His relative objective: perform better over time than an adequate benchmark.
  • He mentions the reasons for having so little value investors around are psychological. As Grantham recently spelled out, it is career risk. Nobody wants to diverge too much from the benchmark. Job safety is too important.
  • He notices, now an advisor, value investing on personal account is much easier than doing it on behalve of clients
  • Successful value investing is highly depending on the clients chosen (he mentions Klarman has chosen his clients well)

Bonds are riskier than perceived

  • JME calls the run on bonds a big mistake
    • People working in the bond markets under 55 have never seen a bear market, so are overconfident in safety of bonds.
    • He thinks this is one of the reasons so many institutions move from equities to bonds these days.


  • Europe has a real problem, the Euro is created for political reasons not for economic reasons
    • Full integration of Germany into Europe requires the Euro
    • National governments kept fiscal power
    • The flaw became obvious from by the
    • Correct the mistake and have a European government
    • Giving up sovereignity is unpalatable
    • Everybody is buying time
    • Most European companies do business beyond Europe
    • Some of these companies are worth looking at right now


  • JME’s take on Japan
    • JME sees parallels with investing in French undervalued Small Caps in the 80s, patience is key.
    • On bicycle producer Shimano
    • Cultural issues


  • Accounting issues between countries – conservatism vs. aggressiveness
  • Political Risk Premia

The interviewers (brothers Mihaljevic) have made a great compilation of investing wisdom and other investors in the Manual of Ideas.

Bruce Greenwald: Germany and the Netherlands should leave the Euro; The Global Demise of Manufacturing is the Real Economic Problem

Professor of Bruce C. Greenwald, Robert Heilbrunn Professor of Finance and Asset Management at Columbia Business School gave some very interesting interviews recently.

Prof. Greenwald is generally known for his value investing expertise, however in these interviews he offers us an different macro view on the euro-zone and the causes for the continuing world economy’s crises. I have made a limited transcript of the interviews.

International Trade Imbalances Are a Bigger Problem

Today there are some real problems in the world economy that have nothing to do with the financial crisis or unhealthy balance sheets.

The trade imbalances are at the heart of the economic decline and this is not a new phenomenon:

  • Japan: for 50 years a net exporter, managing their currency
  • China: grows through exports by keeping the Yuan at bay
  • Germany: stays in the euro-zone keeping its exports too cheap
  • Indonesia, Thailand, Malaysia and South Korea are since the Asian currency crisis (’97) running surpluses through a currency reduction of 50%

Adding up the surpluses of the oil exporters, there should be also various countries running deficits as all global trade accounts balance to 0.

A Short History of Deficits

Who runs these deficits then? Well after ’97 when Indonesia, Thailand, Malaysia and South Korea went from deficit to surplus, the deficits went to Mexico, Argentina, Brazil, Russia and we remember what happened to them around the turn of the century. They collapsed! Since then, they have all run surpluses.

During the 2000s the deficit running countries became the US and to a lesser extent the UK and the euro-zone. Financed by households living beyond their means, saving 0% and eating away household equity produced by the housing bubbles. Now the housing bubbles have deflated or stabilized and households are saving again, while demand has collapsed and everybody is adjusting.

The Difficulty in The Euro-Zone

Competitive Germany and the Netherlands are tied into the euro area with less competitive countries (Portugal, Spain, Italy, France etc.)

  1. When countries have significant deficits, it is extremely difficult to sustain full employment.
  2. Germany is in effect exporting any job problem it might have to less competitive countries in the euro area.
  3. These countries cannot protect themselves, because they cannot depreciate their currency

As long as Germany keeps running account surpluses, less competitive countries won’t have healthy demand growth. And as they cannot depreciate their currency they will have to make another fundamental change: lower real wages.

And Germany is not going to give away its economic power so easily. It has a very powerful manufacturing sector growing productivity at 5-7%. As domestic demand just grows 1% and globally it grows just 2-3%, they have to export. Otherwise manufacturing dies.

The Underlying Problem is The Decline of Manufacturing

The same goes for China, Japan, South-Korea etc. transmitting deflationary pressures overseas.

The underlying problem of global imbalances is the demise of manufacturing and the enormous vested interests in this economic sector. Governments try their best to protect manufacturing jobs by stimulating exports similar to the protection of agriculture in the depression years. However manufacturers are increasing productivity at a higher speed than global demand, leading to a significant deflationary pressure.

As long as the net exporters don’t find jobs in the service sector for their displaced manufacturing workers, there will be no solution for this crisis.

The other part of the problem is the dependency of deficit countries on external financing, where these countries are at the mercy of their external creditors. Living beyond their means becomes virtually impossible as long as they run a deficit and they have to become surplus countries without being able to depreciate their currencies.

So essentially, what is required from countries like Italy and Spain, is becoming more competitive than Germany through productivity gains. This is extremely difficult and probably not going to happen. The other painful way out is a decline in real wage rates which is a very difficult path, because households will feel real pain, losing their purchasing power.

The only way out is currency depreciation. This can be done the easy way or the hard way:

The easy way out:

  • Germany, the Netherlands and Denmark (maybe France) leave the euro and appreciate their currency.
  • The euro will fall, which will fix the problem for the uncompetitive countries.
  • As the debt of these countries is denominated in euros, the burden becomes more bearable.
  • Of course this scenario leads economic shocks for the leavers as exports will fall and their investments in euro will decline.

However prof. Greenwald sees this solution as the least painful and more orderly way to solve the problem as exits by the weaker countries will lead to defaults, serious recessions and even larger problems for German manufacturing.

Greenwald on Italy in Specific

Greenwald on the future of the US economy (But this could easily apply to Europe’s economy as well)