THE NEW TWO POWER WORLD · 11/13/2018 · China $ 5.00 U.S. needs more. (BLS statistics for 2012...

�THE NEW TWO POWER

WORLD��

CFA Society – Dayton�November 13, 2018�

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Brian K. Langenberg, CFA��

917.301.3002 �[email protected]�www.langenberg-llc.com�

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BrianK.Langenberg,CFA917.301.3002

BETEDDYBRIGGS

KEYPOINTS

Tectonicplatesareshiftingglobally.


1.   U.S./China ItsaTwoPowerworld.

2.   Taxreform RebuildingtheArsenalofAmericanManufacturing3.   Trade Re-orientingsupplychain4.   Labor That70’sShow5.   Defense WakeUpCall 6.   Energy StructurallyPositive7.   Politics 1890sdynamics,inreverse8.   DebtBomb TheChickensarecominghome9.   RegionsandEndMarkets10.   WhattoSell,WhattoBuy

#1

UNITEDSTATESVERSUSCHINA

ItsaTwoPowerWorld


#1UNITEDSTATESVERSUSCHINA


#1UNITEDSTATESVERSUSCHINA


Chinamilitaryspending(1)intheAsiaPacificregionlikelyexceedstheUnitedStatesandcontinuestorise.

(1)Adjustedforwagerates.

#2TAXREFORM:HowToExplaintheBenefitsofCorporateTaxReformtoANYBODY(1)inlessthantwominutes.


(1)Hasbeen100%effectivetodateincludingmillennials.HasnotbeenattemptedwithSenatorElizabethWarrenweputourprobabilitiesat1/1024thminimum!

#2

CORPORATETAXREFORM

RebuildingtheArsenalofAmericanManufacturing


#2TAXREFORM:ProofinthePudding....NorthernIreland(1993)


§  Rampant“Gang”Warfare§  40%taxrate§  Disillusionedpopulace

VerysimilartopartsofChicago.....

#2TAXREFORMNegotiateaceasefire(1),slashthetaxrateandattractcapitaland...


(1)KudostoGeorgeMitchell

#2TAXREFORM


#3

TRADE

Re-orientingSupplyChain


#3TRADE


#3TRADE


China§  KeyRival§  MadeinChina2025targetsmultiplewesternindustrypositionsGermany§  ItAIN’Taboutthetradeimbalance§  Defense:Stopbeingsissies§  Iran:Whenwesaygetout,getout!

Mexico(andCanada)§  USMCAsurviveswithtweaks.DT+AMLObothlikedeal§  AMLOwildcard(Airportcancellation–opticsonlyorasignofthefuture?)§  MexicomaybenefitfromU.S.inspiteofitself

#3TRADEMadeinChina2025


1.  Newadvancedinformationtechnology (SiliconeValley)2.  Automatedmachinetoolsandrobotics (Japan,Germany)3.  Aerospaceandaeronautical (Boeing,UTX,HON,GE)4.  Maritimeequipmentandhigh-techshipping (Korea,Japan,N.Europe)5.  Modernrailtransportequipment (Alstom,Bombardier)6.  New-energyvehiclesandequipment (Big3,Japan,Cummins)7.  Powerequipment GE,Siemens,others8.  Agriculturalequipment Deere,Agco9.  Newmaterials 3M10. Biopharmaandadvancedmedical --

#3TRADESupplyChainsAreRe-orienting


RockwellAutomationhasalreadyidentifiedandsetmitigationplansfor$90MMChinatariffimpact($0.40pershare)–½price,½buyingelsewhere.Othersarewaitingformid-yeartoseehowitplaysoutbuttheirtonehaschanged.Theywon’tadmitit,buttheylikesomebodystandingupforthemontheIPside.

#4

LABOR

That70’sShow


#4LABORThe40yearflood....


YEAR

POP(Mil.)

1970 750 US.W.Europe,Japan Twosuperpowers,10-20%ofworld.

1972 NixongoestoChina.

1979 +1,400 China Maodead.Gangof4putdown.Dengsays“Playball.”

1989 +300 Central,EasternEurope BerlinWalldown.

1998 +1,200 India NoticeChinagettinglove,stopblamingBritsforeverything.FiberboomenablesITexplosion.

3,650 =nearly400%increase

crushesbargainingpower

2008 AmericanCEOsstillthinkChinaisafreelunch.

2010 JeffImmeltactuallyfiguresoutthatain’tworking

2017 UnitedStates TaxReform

#4LABOR


Whenashortageisn’tashortage....§  Participation§  PublicEducation§  HigherEducationVs.Vocational§  Healthcare§  Immigration

#4LABORMyth: LaborForceParticipationisDecliningowingtoRetirements


#4LABOR

Fact: LaborForceParticipationhasdeclinedowingtoBadParenting!


<<<<-----VeryBadParenting

<<<<-----Divorce,kidscollegedebt,nosavings?<<<<-----Sad.

#4LABOR

Fact: AndPerhapsExcessiveWelfareBenefits


#4LABOR

PublicEducation


#4LABOR

HigherEducation


Last30yearsadministratorsperstudentUp250%intheU.S.TheschoolIteachatshouldhave$3MMofannualoverheadspendnot$11MM.Andtobebluntabout1/3ofthestudentsreallyshouldnotbeincollegebutinatradeprogramwheretheywouldgraduatesooner,learnmore,andhavenoorlittledebt.

#4LABOR

HealthcareImmigration


§  Ongoingissue.§  Weneedcostinnovation,wearen’tgettingit.

§  Companieswanttocherrypick§  Bluecollarwantshigherwagesandrespect§  Administrationwantstomovepeopletoworkfromwelfare§  PoliticalopponentswantclientsLaborPricesWILLcontinuetoriseRequiringautomationandskilldevelopment

#4LABOR


HigherwagesrequirehigherlevelsofautomationGermany $43.76Japan $31.99Denmark $45.48U.S. $34.74China $5.00U.S.needsmore.(BLSstatisticsfor2012exChinawhichisanL&Cestimate)

#5

DEFENSE

WakeUpCall


#5DEFENSE


ItisallaboutChina...UnitedStatesVersusChina:$600billionversus$215billion-  NormalizeChinamilitarywagestoUSbase=7x=$130billion.-  Operations:U.S.musttravel5-10Kmilesjusttogettotheparty.-  Maintenance:Chinawages~$10K/year.U.S.averagebluecollar$31K.-  ChinaspendsprimarilyinAsia/Pacific,possiblyoutspendingU.S.onanadjusted

basis.

#5DEFENSE


#5DEFENSE


EuropeUnderspending2%commitmentby$100billionperyear.UnderspendingColdWar(1988)by$232billionperyear.DefenseMinistersofNorway,Sweden,GermanyandNetherlands

PutinThebestfightsdon’thappenbecausethebullyisdeterred.DoesPutinlookworriedaboutEuropeandefensecapability?

#5DEFENSE


U.S.needstoboostdefensespendbyatleast$100billionperyear.Europeaswell,butisn’t.Byrightsitshouldbehigher.Japangovernmentisraisingspendingwithinconstitutionalconstraintsandlimitedpublicsupport.

#6

ENERGY

StructurallyPositive


#6ENERGY


1.   Globalgrowth(evenifslower)2.   Venezuelaisashambles3.   Mexicomustrecapitalizeitsenergyassets4.   Iransanctions

#7

POLITICS

1890’sDynamics,InReverse


#7Politics1890’sDynamics,InReverse


1.   U.S.(1890’sinreverse)–socialistshave(most)leversofpower,populistswantlessgovernment.Mid-termsbroadlyasexpected.

2.   Germany–Merkelgoingdown,AfDatpeakifcentristscantakeback

CDU.3.   France–Macron’sstarfallingbacktoearth.4.   UK–remainsashambles.Theresa,Boris,Nigel,Jeremy.5.   Mexico–staytuned.6.   Canada-youknow,eh,itsCanada.

#8

DEBTBOMB

TheChickensAreComingHometoRoost


#8DEBTBOMB


20161.24%

Current3%

LTInfl.4%

19888%

FederalDebt(rounded) $21,000,000,000,000 $260.4B $630B $840B $1,680B

Population 330,000,000

Householdswithincome>$30K(2014)

88,923

=DebtPerPerson $63,636 $789 $1,909 $2,539 $5,078

=Debtperhousehold>$30K

$236,160 $2,928 $7,084 $9,446 $18,893

#8DEBTBOMB


#8DEBTBOMB


$630billion,or60-65%canbeexplainedbyincreasedwelfarespendingasa%ofGDP.Povertytiestosingleparenthoodandlackofeducation.WhatworksforMurphyBrowndoesNOTworkforYolanda.

#8DEBTBOMB


Idonotanticipateanymassiveinstantculturalshiftbuttherearethingswecandoovertime,including...(*=pipedream)§  CloseDepartmentofEducation(saves$100Bperannum).*§  Meanstestingofsocialsecurity.(Thiswillhappenin2028becausethatiswhen

Brianturns65).§  Greateremphasisonhealthcareinnovationtowardefficiencies(comeon,Jeff

Bezos!).§  Vocationalversuscollegestartinginhighschoolforthe50%whodon’tneed

college(orcollegedebt).Companiesgettingoffthe“degreeplusexperience”potwhichdoesn’twork.Seeingsignsalready.

#9Regions&EndMarkets


RegionalUS– YouCanStillRockinAmerica.LatAm–waitandseeonMexico,constructiveonBrazil.Europe–2%growthatbest.Chinaslowdown,MerkelgoingdownisunsettlingforGermany.China–U.S.tradeaggressivenessishavinganimpact.Capitalwantsout,badly.

EndMarketsPower– goodactivityforsuppliers(exGEwhichisashambles).Energy–oilpricepullback,talkofendingOPEChasspookedmany.Realityisthatlargeprojectsarestillneeded.Mining–strong.Construction–benefittingfromO&G,commercialactivityandmining.Infrastructurebillishighlyunlikely.Truck,Vehicle–Class8+,Auto=/-.EVforreal.Agriculture–Aviation–Defensestrengthwillcontinue.Commercialisstrong+busjetfinallykickingin.HVAC–steadybutunspectaculargrowthlikely.Automation–EMR,ROKtwoofthemostoptimisticcompanieswefollow.AlsoHON(theAmazonplay).

#10WhattoSell,WhattoBuy


Fightingsomeheadwinds.WeakEMcurrencies,slowingChina,risinginterestratesandvaluationsarefairtofull.

CurrentPrice

Target/FairValue

Ametek AME $74.45 $80 Endmarketsarestrong.Cashmachine.Gonutsbelow$70,fadeat$80.

Honeywell HON $150.32 $160 “Metoo”buy.Highgrowth(+7corein3Q)owingtoIntelligrated(Amazon)leverage.Loadupat$140.

UnitedTechnologies UTX $130.71 $150 Executingagainstmultipleheadwinds–Otispricing,GTFramp.RiskofCOLdealbeingdinged.

Emerson EMR $68.49 $80 Aggressiveat/below$70.Strongprocess,risingbacklogs,solidcashflowandstrongbalancesheet.

GeneralElectric GE $8.59 Review TrustinLarryCulp...hewillfigureitout.

Caterpillar CAT $126.91 $90-110 25%oflast3yearscashflowisunderspendingoncapexversusdepreciation.

DoverCorporation DOV $86.42 $90 Couldretestrecent$90highbutcostcuttingina4%GDPeconomydoesn’tseemright.

3M MMM $201.10 $200 Fairlyvaluedafterrecenthiccup.FX,ERP,RoofingandDrugDelivery.

RockwellAutomation ROK $169.27 $175 Grab’embelow$160.

?


THE NEW TWO POWER WORLD · 11/13/2018 · China $ 5.00 U.S. needs more. (BLS statistics for 2012...

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