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On this “particular report”, I wish to pose a number of necessary “philosophical questions” to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the results and implications of our growing old inhabitants on issues comparable to 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 concern in my June 24th commentary. I urge you to maintain this worldwide phenomenon of the growing old inhabitants firmly on the again of your minds. If you’re like most individuals, then you definitely earn you residing by producing a sure factor – comparable to a shopper 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 essential to us traders/merchants however this “tremendous secular development” of the growing old of the worldwide inhabitants will influence each facet of our lives, whether or not it’s dropping our relative competitiveness on the world area, rising pension and healthcare prices, or perhaps a potential basic change of our political system.
The second query that I need my readers to consider is the potential finish to the period of low-cost vitality costs – an period which now we have principally loved for the final 20 years with out considering of the long-term repercussions. America, with lower than 5 % of the world’s inhabitants, at the moment devour roughly 25% of the world’s vitality every year. 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 wish 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 snug with? Are you able to be a contrarian and purchase when the gang is promoting or are you merely a follower who is simply snug if you slot in? These are easy questions – however these are questions that you really want to ask yourselves so as to actually generate profits in investing over the long term. If my readers take the trip to interested by these three questions or points – and in the end have a agency grasp of even simply one of many points – then you’ll be in a a lot better financial scenario than most Individuals 5 to 10 years from now.
To start, what are the potential implications of the “growing old inhabitants” phenomenon? Readers my recall that in my June twenty fourth commentary, I said: “Assuming that the present stage of advantages stay into the long run and assuming the extent of taxes is just not 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 comparable to protection or schooling spending will have to be minimize, or the above nations might want to increase their taxes. Neither of the 2 eventualities is perfect. Borrowing extra of their funds is just not a long-term resolution. Chopping funding in protection and schooling 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 case you have been a brilliant, younger, French industrialist and also you have been pressured to pay 60% of your earnings as taxes to help the aged, what would you do? Why, you’d vote together with your toes and relocate to a different nation that’s extra tax-friendly and business-friendly – and so will different nice expertise which will have been a fantastic contribution to the French economic system. The governments of the developed world acknowledge this – however there are not any simple options.
“This image will get grimmer when one takes notice of a research that was completed by the Financial institution Credit score Analyst. In that research, the BCA predicts that by the yr 2050, the share share of the developed nations 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 shall be extra populous than Germany in 2050; whereas Iraq shall be 30% extra populous than Italy (Iraq is lower than 40% the dimensions of Italy at the moment). Russia’s inhabitants is projected to proceed to lower – at a price such that the inhabitants of Iran shall be even increased 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 nations of at the moment don’t select to work tougher or change into extra environment friendly, then they are going to in the end lose their comparative benefit, because the youthful inhabitants of the world is inherently extra hard-working, energetic, revolutionary, and inventive. In at the moment’s globalized world, this shall be a killer for the typical employee within the developed nations – 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 usually extra optimistic, because the elimination of the language barrier will drastically improve enterprise alternatives and efficiencies, however an individual comparable to the typical American employee will loss his or her comparative benefit within the international workforce. The supply of an enormous provide of labor must also drive down wages within the international market – and likely enhance the maldistribution of wealth in at the moment’s developed nations.”
Like I’ve talked about earlier than, there are not any simple options. If the typical 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 through the Roosevelt administration through the Nineteen Thirties) with out inserting an undue burden on the system? The reply is likely “no.” Making use of the identical working-years-to-retirement-years ratio to his or her new life expectancy, then the typical 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 characterize 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 help of the aged – because the financial and social burdens have been shouldered by a comparatively giant youthful inhabitants. The present expertise of Europe and Japan suggests a extra uniform distribution within the inhabitants of these nations going ahead – because the birthrate in these nations at the moment are dismally beneath the substitute price of the inhabitants. The scenario in the US is just not at the moment as drastic (given our comparatively lax immigration coverage) however we’re heading in 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 must work longer, however work longer hours within the current (and save extra) as effectively.
The scenario 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 bigger than your complete labor pressure of the US. The competitors for comparatively unskilled jobs will proceed, and it guarantees to speed up going ahead. The common American who doesn’t keep forward of the curve or doesn’t hold tempo of the development will discover his or her job being outsourced – to not point out the typical wage being pushed down by international competitors. I, for one, imagine that this persevering with development of globalization will make the world a greater place, as a whole lot 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 at the moment reside on lower than two {dollars} a day) – and because the costs of shopper items are pushed down nonetheless additional. The common American will in all probability disagree, however the development of globalization and “offshoring” is not going to cease. The final time the US adopted financial and navy isolationism we had a Nice Despair and subsequently, World Struggle II. I sincerely don’t assume that this was a coincidence.
The development of the overall growing old inhabitants and globalization may have a profound influence on all Individuals. Finally, I believe all Individuals will profit – though it will not be clear to people who find themselves dropping their jobs at the moment. For the initiated and nimble, you’ll not solely survive however thrive in these “attention-grabbing new occasions.” Think about a market on your product that’s over ten occasions the dimensions of the inhabitants in the US. China and India has traditionally dissatisfied – because the residents of these nations have traditionally been too poor to devour a lot U.S. items and providers. Globalization and offshoring will change all these. A world extra equalized economically can even imply a way more safe and fewer conflictive world.
Now, I wish to handle an identical 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 a detailed. Whereas I believe 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 fuel 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 the US at the moment nonetheless produce sufficient oil to fulfill roughly 40% of whole home demand. America additionally had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest on the earth. In line with the Vitality Info Administration (EIA), the US 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 through the Seventies. Immediately, whole home manufacturing is at 50-year lows – and nonetheless falling.
- Whereas Saudi Arabia (the world’s high exporter and comprises 25% of the world’s reported reserves) has claimed that there are and shall be no provide issues for the subsequent few a long time, they haven’t been clear with their reserves information. In line 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 previous – 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 each 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 right, then there’s actually no “plan B” (not like through the Seventies when the middle of energy shifted from the Texas Railroad Fee to OPEC because of the peaking of provide in the US) – crude oil costs will soar.
- The “final frontier” for the manufacturing of oil (particularly the North Sea, Siberia, and Alaska) is now growing old. Most corporations at the moment are struggling so as 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 at the moment, world oil demand elevated 14 million barrels per day. Immediately, whole world oil demand is bigger 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 growing nations have been useless unsuitable.
- No new refineries have been inbuilt the US for the previous 20 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 creator 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 at the 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 practically 90% — leaving no cushion room if one thing unexpected occurs.
There are at the moment three elements 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 often been labeled as China, however it’s attention-grabbing to notice that the US has had just about 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 couple of years. It’s now the second largest oil shopper, having simply surpassed Japan for the title. Demand for oil in China has greater than doubled over the past 10 years (to at the moment’s 6 million barrels per day), and this wonderful enhance is projected to proceed, particularly given the truth that oil demand in China continues to be a lowly 2 barrels per individual per yr (in comparison with 25 barrels per individual right here in the US). 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. Immediately, the variety of automobiles in China totaled greater than 7 million – and this quantity may doubtlessly have been a lot increased if not for the Chinese language authorities intervention in limiting the variety of automobiles that might be bought and pushed every year. Now probably the most scary half: Present oil demand in India is simply 0.7 barrels per individual per yr – given this reality, oil demand in India may doubtlessly explode over the subsequent decade – barring an enormous worldwide financial recession or melancholy.
I imagine my readers ought to be made conscious of the present vitality provide/demand scenario. Given the above, what’s the finest plan of action for the typical American? How about the most effective plan of action in the event you have been the pinnacle of a motor firm like GM or an airline pilot employed by a legacy airline like Delta? How about the most effective plan of action for a mutual fund supervisor or a commodity fund supervisor? Since there are not any simple options, there ought to be no simple solutions both. Within the short-run (three to 5 years), Individuals should pay up if we wish to drive gas-guzzling SUVs, and legacy airways like Delta should proceed to chop prices by in all probability additional slashing labor prices as their first precedence. An additional enchancment in extraction know-how ought to assist, however the severe improvement of different fuels should begin now. I additionally imagine that the subsequent severe decline shall be induced by a mix of an “oil shock” and an increase in rates of interest. Readers could recall the relative power chart that I developed in my August 15th commentary displaying 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 power line ought to bounce across the neckline (the road drawn on that chart) – presumably even for a number of years – however as soon as the relative power line convincingly breaks above the neckline, crude oil costs may rise to $80 and even $100 a barrel. I positive hope that my readers wouldn’t be taken without warning if fuel costs on the pump soars to $4.00 a gallon 5 to 6 years from now.
Lastly, I wish to pose to my readers the next query: Have you ever taken the trip to study extra about your psychological make-up and the way it has affected your funding or buying and selling selections? What kind of individual are you in relation to the market? Are you a so-called buy-and-holder, a swing dealer, or a day dealer? An impartial thinker, a contrarian, a momentum investor or merely a follower? I’m asking you these questions due to my following issues:
- This creator believes that we’re at the moment in a secular bear market in home frequent 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 assets or treasured metals mining shares.
- When this cyclical bull market tops out, all your mates, family members, and the favored media shall be telling you to purchase extra or to carry your frequent shares. The bears and all bearish ideas shall be ostracized and frowned upon. This has occurred in each bull market in every thing in all human historical past. If you’re in money now, would you have the ability 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 prepare 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 at all times been dominated by feelings and at all times shall be. My considering in beginning www.marketthoughts.com has at all times been that that if I can get my readers to purchase in now, it is going to be a a lot simpler resolution 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 through the entirety of a secular bear market and shopping for and holding frequent shares through the entirety of a subsequent secular bull market. The common human psyche is simply not able to doing this. Due to this, I sincerely imagine that success within the inventory market (for most individuals) through the subsequent 5 to 10 years would contain catching the swings on the proper or near-right occasions. For readers who simply can not resist, I’m additionally going to proceed to suggest some frequent shares at opportune occasions, however by no means ought to my readers take my suggestions as gospel and by no means ought to my readers put all their eggs in a single basket. If you’re 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’re both already wealthy who don’t have any must generate profits available in the market anyway or you’re a very disciplined and independent-thinking individual. Most Individuals simply can not do this – however I’m right here to assist.