We know a few things about the State of the Union Address: One, that it is mandated in the Constitution and secondly, that it is a report the President and his advisors work on for months. Most importantly, in an election year, it is a strong indication of where an administration’s heart is and what they will base their campaign on. In a country full of anxious folks looking for any discernible sign as to where we are headed, let us take a look at what we can learn from Barack Obama’s speech and its aftermath.

America’s competitiveness in the new Economy:

The President sounded downright protectionist as he spoke about bringing back jobs that went overseas. In fact he made a number of very strong statements, like this one:

“We’ve brought trade cases against China at nearly twice the rate as the last administration—and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more. It’s not right when another country lets our movies, music, and software be pirated. It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized.”

Those are definitely fighting words! While we do not believe that Obama wants tension with one of our largest trade partners (and holders of Treasury debt), we do subscribe to the notion that he is staking his claim to bringing jobs back home. Given the underemployment crisis this will be a centerpiece to his economic policies over the next four years. Look for this administration to create strong fiscal and tax incentives for businesses to bring back employment that is now outsourced. Companies that have realized efficiencies by embracing overseas labor will see their profit spread erode as the government imposes taxes on overseas based operations. In turn, they will transfer that monetary gain to those that build at home. Again, let’s go to the tape:

“We need to put a new emphasis on American manufacturing. That means refocusing our corporate tax structure to reward businesses who work to keep jobs in the United States, and end tax incentives for corporations that outsource. That means getting tough on trade enforcement and rebuilding American infrastructure.”

An ancillary effect to this policy will be a lessening of trade surplus with some of the emerging markets, as less dollars flow to those sectors. Ultimately, we should see a relatively dramatic lowering of our high unemployment rate as U.S. citizens welcome these new jobs in parts of the country where employment is getting scarce. Much like the rebuilding of a war-torn country, Midwest rust belt regions that have suffered will transform into outsourcing and low to mid tech manufacturing centers. Since housing stock is available and inexpensive in these areas, you may see a true resurgence if this strategy is executed properly. Of course, the government needs to commit funding and direction to these efforts.

The Retraining and Reeducation of America:

You need two factors in order to educate people: a system capable of meeting their needs, and willing students. There is a vast part of our populace that is tired of possessing outdated skills, especially in an economic environment that is in hyper change. Witness the transformation of the financial sector from a 25-year period of growth and innovation to one of retrenchment and gloom. More distressing are the many small towns in this country which exist on nothing more than public service and big-box retail employment. This administration correctly perceives the confluence of a need to retrain and citizens that are eager for it. As Obama said to Congress:

“Now you need to give more community colleges the resources they need to become community career centers—places that teach people skills that local businesses are looking for right now, from data management to high-tech manufacturing.

“And I want to cut through the maze of confusing training programs, so that from now on, people like Jackie have one program, one website, and one place to go for all the information and help they need. It’s time to turn our unemployment system into a reemployment system that puts people to work.”

Anticipate significant funding to flow to local and regional community colleges and on line programs. These platforms will be able to reach parts of the country that have been overlooked. What you will eventually see is high tech intellectual creation that exists outside of the coasts. While places such as Alabama may not ultimately be as prolific as Palo Alto, they can effect innovation that applies to regional needs. Areas such as energy management or automated production are what comes to mind. An apt analogy would be the transformation that occurred on television. While the big networks are still relevant, the myriad cable stations manage to find their own niche locally.

Finally, through the magic of the internet and online lectures, access to the worlds’ outstanding professors and teachers will be made available to the masses. The hunger for knowledge will be satiated by some of our brightest thinkers, as their thoughts will be available to more than just a few thousand students. The head of a major university’s technology center recently commented to us that at the best schools, it comes down to 15% of the classes taught makes the difference in the quality of the education. The rest is basically the same everywhere else. That 15% may soon be available to aggressive students living in neighborhoods far away from Cambridge and New Haven. That would not only be an egalitarian strategy—it would be plain smart.

Clean Energy:

Obama is rightly concerned about our dependence on oil, who isn’t? While there will definitely be a continued focus on natural sources of energy, such as solar and wind, we still need to work with today’s needs and infrastructure. There will be a push for the increased use and production of natural gas. Ultimately, this will keep the price of natural gas at low levels while keeping oil prices in relative check as we shift away from their current usage. This is the most direct, current path to lessening our dependence on the Middle East. In his own words:

“We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. And I’m requiring all companies that drill for gas on public lands to disclose the chemicals they use. America will develop this resource without putting the health and safety of our citizens at risk.

“The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. And by the way, it was public research dollars, over the course of 30 years that helped develop the technologies to extract all this natural gas out of shale rock—reminding us that government support is critical in helping businesses get new energy ideas off the ground.”

What we have highlighted are areas where we can envision a significant new thrust that will have profound change in how we do business as a country. Of course, the president re-emphasized topics such as a strong interest in solving the housing crisis, correcting financial market abuses and increased construction spending. This rhetoric should come as no surprise as these are pressing issues that will need to be dealt with by any candidate. Of course, Obama needs to actually win the election which, right now, seems quite possible. He then has to be creative enough to enact his policies, with an opposition legislative branch, which is also likely. One thing we can be sure of however, is at least four more years of horse trading over these critical subjects.

“Arbitrage” – The Movie?

It continues to amaze me how fascinated people are with all things financial. The black hats of the westerns and gangster movies have now been replaced by hedge fund managers. When I first entered the business, arbitrage was something you needed to explain to people. Now, it is frequently used as part of our lexicon. On that note, we preview Sundance film festival standout “Arbitrage”, starring Richard Gere. Gere portrays a billionaire hedge funder facing ruin over accounting chicanery. While not giving too much of this morality tale away, Gere falls into a “Bonfire of the Vanities” type trap and seeks help from an unusual source. There is already Oscar buzz surrounding Gere’s performance. Nate Parker is also excellent and believable, and the production has been well received by critics. The film is the directorial debut of 25 year old Nicholas Jarecki who also wrote the screenplay. “Arbitrage” does not have a release date as yet.

From State of the Union to Sundance, it’s all entertainment.

Until next time,
The Thoughtful Arbitrageur

Edward Strafaci is not an investment adviser. Nothing he writes should be construed as investment advice or an endorsement of any particular security. From time to time, a family trust with which he is associated may have positions in the securities he writes about. When it does, he will tell you. What he writes is meant to inform and in some cases to entertain and amuse. HedgeWorld’s Alternative Reality is not an investment advisory site. As a general rule you should not take investment advice from blogs, anyway. Consult a financial professional for investment advice, not a blog.

This entry was posted on Monday, February 6th, 2012 at 2:07 pm and is filed under The Thoughtful Arbitrageur. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.