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On this “particular report”, I need to pose just a few vital “philosophical questions” to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the results and implications of our getting older inhabitants on issues resembling Social Safety once more in a speech [http://news.yahoo.com/news?tmpl=story&u=/ap/20040828/ap_on_bi_ge/greenspan_32] that he made final Friday. Readers could keep in mind that I additionally briefly talked about this difficulty in my June twenty fourth commentary. I urge you to maintain this worldwide phenomenon of the getting older inhabitants firmly on the again of your minds. In case you are like most individuals, then you definately earn you dwelling by producing a sure factor – resembling a client good, or a service that the plenty need. Let’s face it – how many individuals actually “struck it wealthy” by being pure merchants or funding managers? The inventory market and different monetary markets are positively crucial to us buyers/merchants however this “tremendous secular pattern” of the getting older of the worldwide inhabitants will affect each facet of our lives, whether or not it’s dropping our relative competitiveness on the world enviornment, growing pension and healthcare prices, or perhaps a potential elementary change of our political system.
The second query that I would like my readers to consider is the potential finish to the period of low cost vitality costs – an period which we now have principally loved for the final twenty years with out considering of the long-term repercussions. The USA, with lower than 5 % of the world’s inhabitants, presently eat roughly 25% of the world’s vitality annually. Provide is maturing whereas demand continues to surge – as exemplified by the surging in demand from China and India. Within the meantime, spare energy-producing capability and stock ranges have been at all-time lows – potential for an ideal storm?
Lastly, I need to ask my readers the next query: What sort of investor are you? What investing model do you undertake and what investing model are you most comfy with? Are you able to be a contrarian and purchase when the group is promoting or are you merely a follower who is just comfy if you slot in? These are simple questions – however these are questions that you actually need to ask yourselves with the intention to actually earn a living in investing over the long term. If my readers take the trip to desirous about these three questions or points – and finally have a agency grasp of even simply one of many points – then you may be in a significantly better financial state of affairs than most Individuals 5 to 10 years from now.
To start, what are the potential implications of the “getting older inhabitants” phenomenon? Readers my recall that in my June twenty fourth commentary, I said: “Assuming that the present stage of advantages stay into the longer term and assuming the extent of taxes will not be raised, then public advantages to retirees would dramatically enhance going ahead. On the acute finish, Japan and Spain will see a greater than 100% enhance of their outlays to retirees. Clearly, this isn’t sustainable. Both issues resembling protection or training spending will should be lower, or the above international locations might want to increase their taxes. Neither of the 2 situations is perfect. Borrowing extra of their funds will not be a long-term answer. Chopping funding in protection and training will comprise a rustic’s future, and elevating taxes will place an enormous social and monetary burden on the inhabitants of the developed world – the place taxes are already at a traditionally excessive stage. Take into consideration this: In the event you have been a brilliant, younger, French industrialist and also you have been pressured to pay 60% of your earnings as taxes to assist the aged, what would you do? Why, you’ll vote together with your ft and relocate to a different nation that’s extra tax-friendly and business-friendly – and so will different nice expertise which will have been an ideal contribution to the French economic system. The governments of the developed world acknowledge this – however there aren’t any straightforward options.
“This image will get grimmer when one takes notice of a examine that was executed by the Financial institution Credit score Analyst. In that examine, the BCA predicts that by the 12 months 2050, the proportion share of the developed international locations of the worldwide inhabitants will drop from over 30% in 1950 to lower than 14% — or about equal to the inhabitants of the Islamic nations of the world. Equally, Yemen will likely be extra populous than Germany in 2050; whereas Iraq will likely be 30% extra populous than Italy (Iraq is lower than 40% the dimensions of Italy right this moment). Russia’s inhabitants is projected to proceed to lower – at a fee such that the inhabitants of Iran will likely be even greater to that of Russia’s in 2050. India would be the most populous nation on the earth, and Pakistan will solely lag the U.S. by roughly 50 million individuals. If the developed international locations of right this moment don’t select to work tougher or change into extra environment friendly, then they’ll finally lose their comparative benefit, because the youthful inhabitants of the world is inherently extra hard-working, energetic, progressive, and inventive. In right this moment’s globalized world, this will likely be a killer for the common employee within the developed international locations – the extra so as soon as the language barrier is eradicated (the profitable commercialization of common language translators is projected to occur in ten to fifteen years). I’m typically extra optimistic, because the elimination of the language barrier will drastically improve enterprise alternatives and efficiencies, however an individual resembling the common American employee will loss his or her comparative benefit within the international workforce. The provision of an enormous provide of labor must also drive down wages within the international market – and most likely enhance the maldistribution of wealth in right this moment’s developed international locations.”
Like I’ve talked about earlier than, there aren’t any straightforward options. If the common American sees a rise of 10 years in his or her life expectancy, can she or he fairly or logically retire on the present regular retirement age of 65 (which was decided in the course of the Roosevelt administration in the course of the Nineteen Thirties) with out putting an undue burden on the system? The reply is most likely “no.” Making use of the identical working-years-to-retirement-years ratio to his or her new life expectancy, then the common American ought to in all probability work round 5 to 6 years extra – thus giving a revised regular retirement age of 70 or so. Furthermore, all this evaluation relies on the outdated inhabitants distribution within the type of a pyramid – the place the youthful and extra ready staff symbolize a majority of the inhabitants (and the place the aged represents solely a small minority of the overall inhabitants). The pyramid distribution has traditionally facilitated authorities assist of the aged – because the financial and social burdens have been shouldered by a comparatively massive youthful inhabitants. The present expertise of Europe and Japan suggests a extra uniform distribution within the inhabitants of these international locations going ahead – because the birthrate in these international locations are actually dismally beneath the alternative fee of the inhabitants. The state of affairs in america will not be presently as drastic (given our comparatively lax immigration coverage) however we’re heading in the direction of the identical course. Thus to keep up the present way of life at retirement, my guess is that the overall inhabitants is not going to solely need to work longer, however work longer hours within the current (and save extra) as nicely.
The state of affairs is extra alarming when one considers that the mixed inhabitants of China and India makes up over 1/3 of the world’s inhabitants. The variety of unemployed staff in China is larger than your complete labor drive of america. The competitors for comparatively unskilled jobs will proceed, and it guarantees to speed up going ahead. The typical American who doesn’t keep forward of the curve or doesn’t preserve tempo of the pattern will discover his or her job being outsourced – to not point out the common wage being pushed down by international competitors. I, for one, imagine that this persevering with pattern of globalization will make the world a greater place, as lots of of 1000’s of individuals will lastly be empowered as they climb out of absolute poverty (once more, over half of the world’s inhabitants presently dwell on lower than two {dollars} a day) – and because the costs of client items are pushed down nonetheless additional. The typical American will in all probability disagree, however the pattern of globalization and “offshoring” is not going to cease. The final time america adopted financial and navy isolationism we had a Nice Despair and subsequently, World Struggle II. I sincerely don’t suppose that this was a coincidence.
The pattern of the overall getting older inhabitants and globalization may have a profound affect on all Individuals. In the end, I feel all Individuals will profit – though it might not be clear to people who find themselves dropping their jobs right this moment. For the initiated and nimble, you’ll not solely survive however thrive in these “attention-grabbing new occasions.” Think about a market to your product that’s over ten occasions the dimensions of the inhabitants in america. China and India has traditionally dissatisfied – because the residents of these international locations have traditionally been too poor to eat a lot U.S. items and providers. Globalization and offshoring will change all these. A world extra equalized economically may also imply a way more safe and fewer conflictive world.
Now, I need to deal with the same concern of all Individuals – because the period of low cost vitality (principally a budget vitality costs as skilled by Individuals for the final twenty years) involves an in depth. Whereas I feel oil costs will decline within the short-term (i.e. for the subsequent few months), I’m longer-term bullish on each oil and pure gasoline costs (I’ll solely talk about oil on this commentary). Think about the next:
- The world provide of oil is flattening out. Readers could not know this, however america right this moment nonetheless produce sufficient oil to fulfill roughly 40% of whole home demand. The USA additionally had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest on the earth. In accordance with the Vitality Data Administration (EIA), america produced round 7.9 million barrels per day throughout 2003. That is down sharply from the ten.6 million barrels averaged in 1985. The height of home oil provide occurred someday in the course of the Nineteen Seventies. As we speak, whole home manufacturing is at 50-year lows – and nonetheless falling.
- Whereas Saudi Arabia (the world’s prime exporter and comprises 25% of the world’s reported reserves) has claimed that there are and will likely be no provide issues for the subsequent few a long time, they haven’t been clear with their reserves information. In accordance with Simmons & Firm Worldwide, 5 to seven key fields in Saudi Arabia produce 90% to 95% of its whole oil output – all however two fields are extraordinarily outdated – with the final main discover reported in 1968. The final publicized reserves information was in 1975 – when Saudi Aramco was nonetheless managed by Exxon, Mobil, Chevron and Texaco. In that report, the world’s finest consultants decided that every one the important thing fields at the moment contained 108 billion barrels of oil in recoverable reserves. If this holds true, then the height of provide in Saudi Arabia will come quickly. Furthermore, if the report is appropriate, then there may be actually no “plan B” (not like in the course of the Nineteen Seventies when the middle of energy shifted from the Texas Railroad Fee to OPEC because of the peaking of provide in america) – crude oil costs will soar.
- The “final frontier” for the manufacturing of oil (specifically the North Sea, Siberia, and Alaska) is now getting older. Most firms are actually struggling with the intention to even preserve their present manufacturing ranges.
- World oil demand continues to develop. Oil demand within the early Nineties stayed comparatively flat (at round 66 to 68 million barrels per day) however over the subsequent ten years to right this moment, world oil demand elevated 14 million barrels per day. As we speak, whole world oil demand is larger than 82 million barrels per day. The vitality “consultants” who within the early Nineties predicted a flattening of oil demand development and who wrote off demand development in creating international locations have been lifeless fallacious.
- No new refineries have been inbuilt america for the previous twenty years, at the same time as refineries have been closing yearly throughout that very same time interval. Refining capability from 1981 to the mid Nineties additionally dropped drastically (this writer estimates a drop of roughly 6 million barrels per day in refining capability throughout that point interval). Since 1994, nonetheless, an enlargement in refining capability at current refineries has contributed to a rise in refining capability from 15.0 million barrels per day to 16.7 million barrels per day (as of right this moment). Regardless of this enlargement, nonetheless, home refining capability continues to be stretched to the restrict, as utilization at U.S. refineries is now averaging almost 90% — leaving no cushion room if one thing unexpected occurs.
There are presently three components at work which ought to contribute to a continued enhance on the earth oil worth – the maturing of provide, rising demand, and the dearth of a cushion in refining capability and low inventories. The “offender” has normally been labeled as China, however it’s attention-grabbing to notice that america has had nearly no home vitality coverage (by way of conservation and inspiring the event of different fuels) for the final twenty-something years. China demand, nonetheless, has soared over the previous few years. It’s now the second greatest oil client, having simply surpassed Japan for the title. Demand for oil in China has greater than doubled during the last 10 years (to right this moment’s 6 million barrels per day), and this superb enhance is projected to proceed, particularly given the truth that oil demand in China continues to be a lowly 2 barrels per particular person per 12 months (in comparison with 25 barrels per particular person right here in america). Moreover, it’s attention-grabbing to notice that the variety of automobiles in China solely totaled 700,000 as late as 1993 and 1.8 million as late as 2001. As we speak, the variety of automobiles in China totaled greater than 7 million – and this quantity might doubtlessly have been a lot greater if not for the Chinese language authorities intervention in limiting the variety of automobiles that might be bought and pushed annually. Now essentially the most scary half: Present oil demand in India is just 0.7 barrels per particular person per 12 months – given this reality, oil demand in India might doubtlessly explode over the subsequent decade – barring an enormous worldwide financial recession or despair.
I imagine my readers ought to be made conscious of the present vitality provide/demand state of affairs. Given the above, what’s the finest plan of action for the common American? How about the very best plan of action if you happen to have been the top of a motor firm like GM or an airline pilot employed by a legacy airline like Delta? How about the very best plan of action for a mutual fund supervisor or a commodity fund supervisor? Since there aren’t any straightforward options, there ought to be no straightforward solutions both. Within the short-run (three to 5 years), Individuals must pay up if we need to drive gas-guzzling SUVs, and legacy airways like Delta must proceed to chop prices by in all probability additional slashing labor prices as their first precedence. An extra enchancment in extraction know-how ought to assist, however the critical growth of different fuels must begin now. I additionally imagine that the subsequent critical decline will likely be induced by a mix of an “oil shock” and an increase in rates of interest. Readers could recall the relative energy chart that I developed in my August fifteenth commentary exhibiting the AMEX Oil Index vs. the S&P 500 and the massive potential inverse heads and shoulders sample in that chart. For now, the relative energy line ought to bounce across the neckline (the road drawn on that chart) – presumably even for just a few years – however as soon as the relative energy line convincingly breaks above the neckline, crude oil costs might rise to $80 and even $100 a barrel. I positive hope that my readers wouldn’t be taken abruptly if gasoline costs on the pump soars to $4.00 a gallon 5 to 6 years from now.
Lastly, I need to pose to my readers the next query: Have you ever taken the trip to be taught extra about your psychological make-up and the way it has affected your funding or buying and selling choices? What sort of particular person are you in terms of the market? Are you a so-called buy-and-holder, a swing dealer, or a day dealer? An unbiased thinker, a contrarian, a momentum investor or merely a follower? I’m asking you these questions due to my following concerns:
- This writer believes that we’re presently in a secular bear market in home widespread shares. Whereas I imagine that this present rally nonetheless have extra room to go, I imagine {that a} cyclical bear market will emerge in due time – this upcoming cyclical bear market could even take us again or beneath the lows that we hit throughout October 2002. If that is true, then a buy-and-hold portfolio would positively not work – except you have been in pure sources or valuable metals mining shares.
- When this cyclical bull market tops out, all your folks, family, and the favored media will likely be telling you to purchase extra or to carry your widespread shares. The bears and all bearish ideas will likely be ostracized and frowned upon. This has occurred in each bull market in all the things in all human historical past. In case you are in money now, would you be capable to stay in money when the highest lastly comes or will you be unable to withstand and purchase in since you are afraid of “the practice leaving the station with out you,” so to talk?
- Most individuals are inherently not good day merchants and even swing merchants. To be good in even the latter, you want an enormous quantity of dedication and self-discipline.
Investing or buying and selling has all the time been dominated by feelings and all the time will likely be. My considering in beginning www.marketthoughts.com has all the time been that that if I can get my readers to purchase in now, it is going to be a a lot simpler determination for them to promote and maintain money as soon as the DJIA reaches 11,000 or 12,000 or so – versus being in money and staying out for the remainder of this secular bear market. 99% of Individuals are simply not disciplined or devoted sufficient to remain in money throughout a secular bear market – to not point out staying in money in the course of the entirety of a secular bear market and shopping for and holding widespread shares in the course of the entirety of a subsequent secular bull market. The typical human psyche is simply not able to doing this. Due to this, I sincerely imagine that success within the inventory market (for most individuals) in the course of the subsequent 5 to 10 years would contain catching the swings on the proper or near-right occasions. For readers who simply can’t resist, I’m additionally going to proceed to suggest some widespread shares at opportune occasions, however under no circumstances ought to my readers take my suggestions as gospel and under no circumstances ought to my readers put all their eggs in a single basket. In case you are an individual who can keep in money for the subsequent ten years and wait till the Dow Industrials has a P/E beneath 10 and a dividend yield of over 5%, then extra energy to you – you might be both already wealthy who haven’t any have to earn a living available in the market anyway or you’re a very disciplined and independent-thinking particular person. Most Individuals simply can’t do this – however I’m right here to assist.