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Rising Wages in China Good for Glocals, But Few Jobs Coming Back

Although some economists have predicted that steeply rising wages in China would bring some jobs back to the United States, the biggest winners will be the large multinational companies operating in China.

Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%.

And with an eye toward booting domestic consumption, the government plans to keep the raises coming – on average 20% a year through 2015.

That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China – such as McDonald's Corp. (NYSE: MCD) – but is dramatically raising costs for Chinese manufacturers.

Between the wage increases and slumping global demand, the Federation of Hong Kong Industries warned on Tuesday that as many as one-third of Hong Kong's 50,000 factories could downsize or close by the end of the year.

As China's competitive advantage in wages erodes, some analysts have predicted a wave of jobs returning to the United States from China. A recent study by the Boston Consulting Group (BCG) forecast a return of 2 million to 3 million jobs by 2020.

But Money Morning Chief Investment Strategist Keith Fitz-Gerald doubts any repatriation of jobs will be quite so massive.

"Wishful Thinking'

"That's wishful thinking on the part of Westerners," said Fitz-Gerald, who operates The New China Trader service for the Money Map Press, who noted that "labor rates are still very, very low" in China.

Although Fitz-Gerald said a few "industries with little value-added" could see the return of some jobs to the United States as a result of China's rising wages, other factors will restrain a mass migration of jobs across the Pacific.

Despite reports of major labor shortages in the eastern coastal parts of China, Fitz-Gerald said there remains "vast undeveloped low-wage areas ripe for industrial expansion" in the western provinces of China.

"They have a 50-year initiative called the "Go-West' program that is designed to push labor from the eastern regions to the western ones," Fitz-Gerald said. "If the jobs are pushed west, there will be no great exodus of jobs from China."

The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico.

"That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep."

With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping.

"They could become even more competitive than they are now," Fitz-Gerald said.

Second-Quarter Earnings Prove "Glocal" Companies are the Best Investments

The second-quarter earnings season has delivered some healthy activity, but the true standouts are the big U.S. companies that have learned to profit from emerging markets.

These are what Money Morning Chief Investment Strategist Keith Fitz-Gerald refers to as "glocal" companies – firms that have a global and local presence. And they offer investors a way to profit from emerging-market growth, while also safeguarding against turbulence at home.

Indeed, as U.S. debt issues continue to weaken the U.S. dollar, "glocal" companies are profiting from increased exports, selling to markets like China and India and their growing middle class.

So, let's look at some of the most promising prospects.

Earnings Season Shows Boost in Profit from Emerging Markets

So far this season, earnings at companies in the Standard & Poor's 500 Index are the highest they've been in four years, according to S&P analyst Howard Silverblatt. About 75% of companies that have reported have exceeded analysts' expectations, and many raised earnings' forecasts for the rest of the year.

Earnings per share are up 19% from a year earlier for the 122 S&P companies that reported earnings as of July 22. And much of the increase is from companies with strong exposure to emerging markets.

Investment Strategies: Why Dividends, Inverse Funds, "Glocal" Stocks, Commodities and Emerging Economies Are the Places to Be

After a wild first quarter that included unrest in Egypt, Libya and Saudi Arabia, a spike in oil and gasoline prices, an apparent acceleration of inflation and continued global debt fears, investors need to embrace investment strategies and investment choices that will provide returns even as they manage risk, says Money Morning Chief Investment Strategist Keith Fitz-Gerald.

"In many ways, we are truly entering uncharted territory," Fitz-Gerald said.Money Morning Quarterly Report

In a wide-ranging interview with Executive Editor William Patalon III that represents the latest installment of Money Morning's "Quarterly Report" series for the 2011 second quarter, Fitz-Gerald talked about the first quarter and provided a detailed look at what he sees ahead. For instance, Fitz-Gerald said that:

  • Despite the bull market in U.S. stocks, the U.S. economy and accompanying financial system isn't as strong as it looks, noting that "there are still massive cracks in the system."
  • Investors should make sure to watch the U.S. Federal Reserve, since its decision to continue or to end its current monetary-policy strategies could determine where U.S. stock prices go from here.
  • Prices will continue their general upward trajectory, which is why he ultimately sees oil at $150 a barrel, gold at $2,500 an ounce and silver crossing the $50-an-ounce threshold.

Fitz-Gerald also detailed some of the investment strategies investors needed to consider, including the use of "inverse funds," dividend-paying stocks, and so-called "glocal" stock plays. "Glocal" stocks are the term Fitz-Gerald uses to describe large, U.S.-based multinational corporations whose global operations include a local presence – especially in the crucial markets of China and Greater Asia. Most of these companies are publicly traded, and have their shares listed on the Standard & Poor's 500 Index today.

What follows is an edited transcript of the question-and-answer session that Patalon hosted with Fitz-Gerald.

U.S. Economy

Three Charts Obama Hopes You'll Never See

Today I'm going to show you three charts Obama hoped you'd never see.

Brace yourself.

You're about to get a very different view of the "recovery" picture that the administration keeps painting for us.

This one, for starters, is accurate.

It also explains why incoming Fed Chair Janet Yellen can't cut stimulus, which is one of the reasons you have an opportunity to make some money here… especially if you follow my "mid-December plan." More on that in a minute.

Let's start with the charts…

Investing Tips

Avoid These 4 Common Investing Mistakes

It's been a great year for investors who stayed in the market, and stayed disciplined. The S&P 500 is up more than 25% on the year, and the Dow Jones Industrial Average has gained 21%.

But making money isn't just about finding stocks/investments that will increase in price. It also involves avoiding the common investing mistakes that prevent retail investors from enjoying record-high markets.

Hot Stocks

Best Stocks to Buy Now: A Money Morning Weekly Recap

The stock markets have been going up so far and for so long that many analysts predict a correction is in store. The S&P 500 hit a record high today (Wednesday) to trade above its record high hit last week, and the Dow Jones Industrial Average hit record highs Monday and Friday.

While the Twitter IPO dominated headlines last week, we aren't fans of the stock. There are much better places to put your money to profit from these record market highs, as we've detailed below.

Hot Stocks

Dow Chemical (NYSE: DOW) Has the Right Formula

When looking for stocks to buy that match Money Morning Chief Investment Strategist Keith Fitz-Gerald's concept of "glocals," I couldn't do any better than the Dow Chemical Company (NYSE: DOW).

Keith often recommends "glocal" stocks to buy to Money Morning readers because they have fortress-like balance sheets, experienced management, and globally recognized brands backed up with highly localized product offerings. Many pay above average income too, which is always nice.

The Fed

Keith Fitz-Gerald Nails It on Today's FOMC Meeting

Almost every major news outlet predicted a taper coming out of today's FOMC meeting, but Money Morning's Chief Investment Strategist Keith Fitz-Gerald went on the record months ago correctly predicting there would be no taper.

The major news outlets were wrong, and Fitz-Gerald nailed it…

Investing Tips

The Only "Crash Talk" Worth Trading

You've no doubt heard the "crash talk" intensifying after two triple-digit down days. But after reviewing more than 100 commentaries, there are exactly two and a half I take seriously.

The one we'll start with can not only help you now – as in today. It can also give you a permanent edge, because most people will never know how it works.

That's a shame.

The indicator you're about to see has predicted every major market inflection point since 1985.

And that's why I need to show you its current "readings" while there's something you can do about it all. We'll look at four moves, in fact. Taking an initial stake in the shares below – or adding to your position – is just one of them…

First, here's the indicator that can give you as much as a 30-day "heads up"…

U.S. Economy

The "Part Time-ification" of America: How We've Been Conned Again

By now, you've had a few days to digest the "wonderful" jobs numbers reported from Washington last Friday.

Well, don't get too excited about the economy. We've been conned again.

First off, 59% of all jobs created this year are in 3 sectors: Leisure/Hospitality, Retail Trade and Administrative/Waste Services. Wages in those sectors have fallen by 0.7%. These jobs pay an average of $15.80 per hour versus the $23.98 average hourly wage. Which means "jobs creation" just equals cheaper labor.

The American jobs participation rate is at 34-year lows and falling, as people give up and leave the workforce.

Underemployment is between 14% and 15% and rising.