Neuberger Berman's Recent Outlook

The following is Neuberger Berman’s (NB) 2^nd quarter 2010 economic outlook.  It is very thorough and well conceived.  In these challenging economic times, it is worth a review:

Neuberger Berman’s MLG Group’s Current Outlook 

THE WORLD IS STILL UPSIDE DOWN

August 18, 2010

Over the last decade, so much has structurally changed on Planet Earth that we believe the only informative perspective from which to view the world is…“upside down.” We first introduced this concept in our third quarter 2009 client letter and, as we think about the investment landscape currently, we believe this “paradigm shift” is underappreciated by investors.

Our team spent much of the second quarter 2010 pursuing an extensive global research effort to determine if this view of the world is still relevant. As you might expect from the title of this letter, our answer is yes!  Our research travels took us to China, Singapore, Indonesia, Mongolia, Australia and Brazil. Below, we share our takeaways from this research, some investable themes we have identified and how we are navigating this volatile and challenging investment environment...

4 Gloomy Scenarios

The US Economy continues to be unhealthy.  A review of various forecasts, suggests either a painfully slow recovery or future declines should be expected. One can never trust various predictions to be accurate, but there were four experienced voices who provided sincere concern.

Here is the first:

"The Hindenburg Omen reared its ugly head late last week, signaling more doom and gloom as stocks plod along amid the dog days of summer."

“Yes Folks, Hindenburg Omen Tripped Again” - Mr. Steven Russolillo

The second:

"The Dow Jones Industrial Average will lose about half of its value over the next couple of years as it follows a Nikkei-like pattern of several sharp rallies in an overall decline, according to Charles Nenner, founder and president of Charles Nenner research."

“Dow Faces Bouncy Ride to 5,000: Strategist” - CNBC.com

The third:

Some have predicted this continued deterioration of the economic climate.  Mr. David Farr, the Chief Executive Officer of the Emerson Electric Co., referenced a number of the circumstances contributing to this poor economy in an opinion piece from 2009.

Mr. Farr's Op-Ed is referenced here:
"An Op-Ed on Federal Spending and Legislation"

And finally the fourth:

Neuberger Berman’s MLB Group's 2nd quarter 2010 Economic Outlook is very thorough and well conceived.  It contributes positively with global investment opportunities as well as a potential Achilles' heel to the recovery. 

In these challenging economic times, it is worth a reading and can be accessed here:
"The World Is Still Upside Down"

China to Surpass USA as World Leader in Manufacturing?

The headline in a June 2010 Financial Times article was bothersome. It chronicled “US Manufacturing Crown Slips”.

In summary, the article reported:

“The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.”

“Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.”

“If the figures are calculated in inflation-adjusted, constant price terms, then….the US will keep its top role in manufacturing…. On an inflation-adjusted basis….China is forecast to take over the number one position in manufacturing….”

In this article, population is a primary factor impacting the prediction. China is four times as large as the USA in terms of population. This size, coupled with a lower wage rate, estimated at one tenth of the average cost in the United States, makes it reasonable to expect China will surpass the USA in manufacturing production.

However, in my opinion, there are sincere problems with this premise. The USA is superior in several manufacturing categories, particularly in the innovative capability to create new products, technologies, and industries. A properly focused, capitalized USA manufacturing industry, can remain the world leader in output.

After having a number of business experiences within China, I now believe the Chinese will not retain the leadership in manufacturing in the world. I predict a pendulum will swing eventually. China will most likely stumble, similar to the historic decline of Japan's edge in business.