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Schwab’s Sonders: Middle America Is My Favorite Emerging Market

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Attention market bears: Liz Ann Sonders is bullish on America.

Charles Schwab & Co.’s chief investment strategist has been telling investors lately that the U.S. is truly undergoing a manufacturing and energy renaissance, particularly in recently depressed Midwestern states such as North Dakota, Sonders said in a keynote address on Tuesday before the Financial Planning Association’s New York chapter.

“Someone asked me in a Q&A, ‘What’s your favorite emerging market?’ and ‘Middle America’ was what came out of my mouth,” said Sonders at FPA-New York’s annual summit. “Now when I’m asked what’s my favorite emerging market, I answer Middle America.”

Thanks to this renaissance, U.S. is “not just paper wealth” anymore, she said, predicting that U.S. household net worth would hit an all-time high in 2013.

For every 100 jobs created in petroleum refining, another 1,190 additional related jobs are created, Sonders noted. Further, she recalled a recent trip to China, where several representatives of the American Chamber of Commerce in China told her: “We think over the next 10 years, we’ll be bringing our business back to the U.S.”

The Boston Consulting Group has been at the forefront of predicting this trend, Sonders said, with its publication of “Made in America, Again: Why Manufacturing Will Return to the U.S.” two years ago. Boston Consulting believes that China’s once-overwhelming manufacturing-cost advantage over the United States is eroding fast.

U.S. strengths include a high rate of productivity, the rule of law, relatively cheap real estate, low transport costs and low-cost energy, and restrained labor costs versus emerging-market wage increases, Sonders noted. “It’s an unbelievably powerful trend,” she said.

Even though U.S. wage increases are weak, consumer spending is up 3.5%, at 71% of GDP, because households have been deleveraging over the last five years, Sonders said. Americans can afford to spend again, she said, adding that the bull market in U.S. stocks also has been going on for the last five years.

“It is shocking that four years into a bull market we still have massive outflows out of equity. I’m amazed at how much skepticism I’m still met with after four years,” Sonders said. “I’m not a permabull, but I’m optimistic. At conferences, almost all the questions are bearish. I love that because I’m a contrarian.”

Obviously, the U.S. is still dealing with issues like public debt, the deficit, housing and jobs, she acknowledged. But as government deleveraging continues to be a drag on the economy, the only thing that’s holding back housing is low inventory, Sonders said.

“Builders’ concerns are lack of supply and lack of skilled workers,” she said. “Weak home sales numbers in every case is lack of inventory. Plus, household formations now exceed home completions” with young people and immigrants doubling household formations in 2012,

As for jobs, she said, unemployment rates are typically high as recoveries begin and low as recessions begin. Recoveries come first and then ultimately bring down the unemployment rate, Sonders said, noting that the unemployment rate was above 9% in 2008 and has been coming down since.

“We’ll get to a 6.5% unemployment rate in less than a year,” she predicted.

During the Q&A, one speaker called Sonders “a breath of fresh air,” and another thanked her for an “info-rich session.”

“She was disciplined in her presentation of the data, backing up her points in a coherent theme,” said certified financial planner Luisamaria Ruiz Carlile of New York-based Veris Wealth Planners during a break. “She had an observably clear point, which is that the economy has a lot of strengths. It’s good to be optimistic, but I want the intellectual rigor behind it.”

Read We’re in an Extended Bull Market, So Get Used to It: Tiburon CEO Summit at AdvisorOne.


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