America Is Not Going Broke

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
View on Capitol in Washington DC on dusk

When I speak at investment conferences, like Investment U's annual conference last week in Carlsbad, Calif., I often give an overview of The Oxford Club's investment philosophy, method of analyzing stocks and a few recommendations.

Then the inevitable hand goes up...

"But what difference does all this make when the country is going broke?"

You could easily get this impression listening to the national media or gloomy prognosticators - many of whom have held the same bleak view not just for years but for decades - but the truth is far different.

According to the Federal Reserve, the net worth of U.S. households and nonprofit organizations rose 14% last year to $80.7 trillion. Even adjusting for inflation, this is an all-time high. Thank rising home and stock prices. And, bear in mind, a net worth calculation is assets minus liabilities.

There is great inequality in the distribution of wealth in this country, of course. Many households have few assets or are swimming in debt. But the total net worth of Americans on the whole has never been higher.

Incidentally, at a recent conference a (lone) member of the audience suggested that this inequality was a strong argument for redistribution. Another attendee claimed that if you divided the world's wealth equally among all 7.2 billion people on the planet, you'd have the same mal-distribution in 20 years.

Not one person in the room challenged him as to why. The obvious feeling is that there are those who have ingrained habits of education, hard work, saving and risk-taking and those who do not.

Corporations Are Flush

As for corporate America going broke, forget about it. Corporate profits have never been higher. Corporate profit margins have never been higher. Corporate profits as a percentage of GDP have never been higher. And public companies in the U.S. are sitting on more than $2 trillion in cash. Those wondering why the stock market has hit one new high after another might want to read this paragraph again.

Then, of course, we must turn to Uncle Sam. Here the picture is not nearly so bright. The national debt is a hefty $17.5 trillion.

But as I mentioned in my last column, debt is meaningless except in relation to income and assets. The national debt is roughly equal to the national GDP, similar to a person with $100,000 in income having $100,000 in debts.

But that's just the income side of the equation. Total national assets are $112.2 trillion, a figure that dwarfs the national debt. Of course, we don't want to confiscate private assets to pay down the public debt. But you can't go broke unless your liabilities exceed your assets. National assets - and household net worth - are far greater than the national debt. And the annual deficit as a percentage of GDP is declining, not rising.

Yes, the debt is too large and we have work to do to get our financial house in order. Reforming the runaway entitlement system should be priority one. But the U.S. going broke? It isn't happening - and it won't happen.

As Warren Buffett wrote in his new annual report to Berkshire Hathaway shareholders, "The dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."

Good investing,


P.S. Alex's column from last week is already generating some buzz among readers. To join the conversation or ask Alex a question, post a comment below.

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A Great Company in Any Market

It's been a disappointing year for the markets thus far. The S&P 500 has returned 1.5%, and just can't seem to find traction. Worries abound about the Chinese economy and the age of our current bull market - to say nothing of the general fear, always lurking, that we're approaching some kind of "tipping point" in our own economy.

It's a good thing we buy companies at The Oxford Club, rather than markets. It's important to understand market conditions, of course, but good companies with strong and growing earnings are the ones to own in any market.

One company to put in your cart: Railroad giant Union Pacific Corp. (NYSE: UNP). Since joining The Oxford Club's Trading Portfolio in 2010, Union Pacific has returned more than 165%. And it's been a strong performer this year, too, picking up 10.5% in the first quarter, beating the S&P's performance sevenfold.

Here's what David Fessler told us about Union Pacific in a recent update:

"Listening to Union Pacific's quarterly conference call is a bit like listening to a broken record... but in a good way. It continues to outdo itself every quarter.

"For instance, this quarter the company set four records:

  • Earnings per share (diluted) of $2.37, up 13%.
  • Operating revenue of $5.5 billion, up 5%.
  • Operating income totaled $1.9 billion, up 9%.
  • Operating ratio of 65.7%, up 1.3 points.

"... Union Pacific boasts about 10,000 customers. These include the automotive, agricultural, coal, chemical and industrial industries. Its intermodal hauling business is one of the largest in the country.

"Union Pacific is spending to improve its infrastructure - $18 billion over the last five years. In 2012, the company spent a record $3.7 billion on track upgrades.

"Its 8,400 locomotives move the company's 283,000 railcars faster than ever. Terminal dwell times as measured in hours have dropped 10% over the last four years.

"Union Pacific's nearly 32,000 miles of track blankets 23 states in the Western United States. The company also connects with Canada's rail system. It's the only U.S. railroad that connects to all six of Mexico's rail gateways...

"One of the company's key growth drivers in the years ahead will be Mexico. Why? The Land of the Hot Sun is turning into a hotbed of manufacturing. Rising labor and land costs in China have companies setting up shop in America's southern neighbor.

"Mexico is America's third largest trade partner after Canada and China. In 2012, it accounted for 12.9% of all U.S. trade. According to Forbes, Mexico is the world's fourth largest vehicle maker, up from ninth seven years ago. Last year the country produced 2.9 million cars and trucks. A mere four years from now, Mexico will produce 3.9 million.

"That's all great news for Union Pacific, which transports 66% of all northbound and southbound Mexican rail traffic. Ten percent of its revenue already comes from Mexico.

"Make sure you have a few shares of this best-in-class rail carrier in your portfolio."

- Bob Keaveney with David Fessler

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