Why Buffett Will Never Bet Against America

by Nicholas Vardy
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"For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs. America's social security promises will be honored and perhaps made more generous. And, yes, America's kids will live far better than their parents did."

- Warren Buffett, 2016

Some might think that America is in a sad state.

The difference between the "haves" and the "have-nots" has rarely been greater.

Federal government debt has exploded to more than $20 trillion.

And President Trump's undignified tweets have taken political vitriol to new heights.

Whatever your political stripes, U.S. democracy is a noisy, full-contact sport.

It takes the wisdom and perspective of a man like Warren Buffett to challenge the conventional wisdom that America is on the path of inevitable decline.

Top of the Global Economic Pecking Order

Here is one antidote to the false notion that America has lost its economic mojo...

Since 2007, I've regularly examined where the U.S. economy stands compared with other countries' economies.

Just as in 2007, today the United States remains by far the world's wealthiest nation, as measured by gross domestic product (GDP) - the broadest measure of economic wealth.

No other country in the world even comes close.

U.S. GDP hit $19.7 trillion in the fourth quarter of 2017 - and likely surpassed $20 trillion this month.

Today, the U.S. economy is as large as the next three largest economies - China, Japan and Germany - combined.

In 2003, Earl Fry, a professor of political science at Brigham Young University, created a map that replaced the name of each U.S. state with a country whose GDP approximately equaled that state's gross product.

Others have regularly updated the project since...

A glance below at the most recent map from 2016 leads to some fascinating - and unexpected - comparisons.

If it were a stand-alone country, California's $2.5 trillion economy would be the sixth largest in the world, approximately equal to the size of the United Kingdom's.

Texas' $1.6 trillion economy is similar to Canada's - and on its own would be the 10th largest.

New York boasts a $1.5 trillion economy, which ranks it just behind Texas but ahead of No. 12 South Korea ($1.4 trillion), No. 13 Russia ($1.28 trillion) and No. 14 Australia ($1.26 trillion).

With a combined economy of $5.74 trillion, those three U.S. states together would be the third-largest economy on the planet.

Two Caveats

There are two important caveats to the U.S. economic map.

First, dynamic changes in the global economy are hidden when looking at the map frozen at a point in time.

When I first wrote about this map in 2007, both Germany and China - at the time ranked as largest economies No. 3 and No. 4, respectively - were smaller than the economies of Texas and California combined.

Today, while Germany is still smaller, China's economy is more than twice as big.

In 2007, India's $800 billion economy was on par with Florida's.

Today, it's three times larger than the Sunshine State's.

Both China and India have made great leaps forward.

Second, the U.S. economic map does not adjust for population growth.

Here's why that's important...

California and Texas have a combined population of 67 million. China's population is 1.38 billion.

Assume China becomes the largest economy in the world over the next 10 years.

Even if - and that's a big "IF"- China continues to grow at its current pace...

By 2050, its citizens will only be 50% as wealthy as United States citizens on a per capita basis.

Why Buffett Is Bullish

During the past decade, there's been a lot of jockeying for position among the world's global economies.

Conventional wisdom has it that this has happened at a great cost to the United States.

The facts state otherwise...

In 2016, the United States produced 24.7% of the world's GDP...

With only about 4.5% of the world's population.

That's roughly the same percentage of global production as in 2007 - the year before the global financial crisis.

It's also the same proportion as it was in 1980 - the year Ronald Reagan was elected.

So yes, the U.S. economy has its challenges - exploding government debt, a stagnant middle class and a broken healthcare system.

As a long-term investor, Warren Buffett understands that today's political and economic noise is just that. He rightly cautions against the mistake of betting against America.

And the U.S. economic map provides a vivid reminder of just where we stand on the global stage.

Good investing,

Nicholas

Thoughts on this article? Leave a comment below.

Greetings From Kazakhstan!

In the U.S. economic map Nicholas referred to above, Kazakhstan's economy is roughly equivalent to Nevada's. Not too shabby, considering Kazakhstan was the last of the Soviet republics to declare independence when the Soviet Union fell apart less than 30 years ago.

On December 5, Macro Strategist Eric Fry shared an announcement from the tiny nation that would directly impact Canadian-based Cameco Corp. (NYSE: CCJ), the largest publically traded uranium producer. With operations in Kazakhstan, here's why Cameco Corp. is a top recommendation in Fry's Pinnacle Portfolio...

Kazakhstan's state-owned uranium producer, Kazatomprom, announced that it would be slashing its production of uranium by 20% and would maintain those cuts for three years. After this surprising announcement, the uranium price soared 15% to a 10-month high of $26.40 a pound.

The shares of Cameco Corp. (NYSE: CCJ), the largest publicly traded uranium producer, followed suit by gaining 13% on the day. Our Cameco $10 call options of January 2019 fared even better by soaring more than 50%.

Kazatomprom's production cut follows close on the heels of a similar move Cameco made last month, when the company announced it would be shuttering its largest uranium mine for about one year.

While both of these production cuts were unexpected, they were not entirely surprising. The uranium market has been in a deep funk for six years, ever since the Fukushima disaster caused Japan to shut down its entire fleet of 54 nuclear reactors.

Since these reactors represented more than 10% of the global fleet, shutting them down removed a large source of uranium demand. The price of uranium started falling almost immediately. From a high of more than $70 in 2011, the price tumbled to a low of $18 in late 2016.

As a result, uranium companies have been suffering mightily. Cameco, for example, booked an annual profit of $1.15 a share in 2011 but reported a loss of $0.55 for the most recent 12 months.

But even before the December announcement, signs of a new dawn in the uranium market had been appearing for several months. Demand growth had been soaring, while supply growth had been stagnant. And yet, the uranium price refused to budge from the $20 level... until now.

The large production cuts from Kazatomprom and Cameco are likely to give the uranium price the nudge that it needs to move significantly higher.

For perspective, Kazakhstan is sometimes called the "Saudi Arabia of uranium." That's because it's the world's largest miner of this energy source. So the announced cut will eliminate about 7.5% of total global uranium production.

Or to put this cut in terms of the oil market, Kazatomprom's production cut would be about the same as Saudi Arabia shutting down half of its entire oil production for three years.

The uranium market was already on track to deliver large and growing supply deficits over the next few years. So the new supply reductions should accelerate and amplify that trend.

Accordingly, the uranium price should continue rising steadily higher over the next several months and power a new wave of profitability growth for Cameco.

In fact, I expect the company's per-share earnings to recover quickly and return to the $1.00 level within the next two years.

- Donna DiVenuto-Ball with Eric Fry

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