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On this “particular report”, I wish to pose a number of vital “philosophical questions” to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the results and implications of our getting old inhabitants on issues similar 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 might keep in mind that I additionally briefly talked about this situation in my June twenty fourth commentary. I urge you to maintain this worldwide phenomenon of the getting old 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 – similar to 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 undoubtedly essential to us buyers/merchants however this “tremendous secular pattern” of the getting old of the worldwide inhabitants will affect each side of our lives, whether or not it’s dropping our relative competitiveness on the world enviornment, rising pension and healthcare prices, or perhaps a potential elementary 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 twenty years with out pondering of the long-term repercussions. The US, with lower than 5 p.c of the world’s inhabitants, presently eat 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 type do you undertake and what investing type 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 simply comfy if you slot in? These are easy questions – however these are questions that you really want to ask yourselves with a view to really earn money in investing over the long term. If my readers take the outing to occupied with these three questions or points – and finally have a agency grasp of even simply one of many points – then you’ll be in a a lot better financial state of affairs than most People 5 to 10 years from now.
To start, what are the potential implications of the “getting old inhabitants” phenomenon? Readers my recall that in my June twenty fourth commentary, I acknowledged: “Assuming that the present degree of advantages stay into the longer term and assuming the extent of taxes just isn’t raised, then public advantages to retirees would dramatically improve going ahead. On the acute finish, Japan and Spain will see a greater than 100% improve of their outlays to retirees. Clearly, this isn’t sustainable. Both issues similar to protection or schooling spending will must be minimize, or the above nations might want to increase their taxes. Neither of the 2 eventualities is perfect. Borrowing extra of their funds just isn’t a long-term answer. Reducing 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 degree. Take into consideration this: When you have been a brilliant, younger, French industrialist and also you have been compelled to pay 60% of your revenue as taxes to assist the aged, what would you do? Why, you’d vote along with your toes and relocate to a different nation that’s extra tax-friendly and business-friendly – and so will different nice expertise that will have been an important contribution to the French economic system. The governments of the developed world acknowledge this – however there are not any straightforward options.
“This image will get grimmer when one takes be aware of a research that was performed by the Financial institution Credit score Analyst. In that research, the BCA predicts that by the yr 2050, the proportion 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 scale of Italy right this moment). Russia’s inhabitants is projected to proceed to lower – at a fee such that the inhabitants of Iran shall be even larger to that of Russia’s in 2050. India would be the most populous nation on this planet, and Pakistan will solely lag the U.S. by roughly 50 million folks. If the developed nations of right this moment don’t select to work more durable or turn 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, revolutionary, and artistic. In right this moment’s globalized world, this shall be a killer for the common 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 typically extra optimistic, because the elimination of the language barrier will significantly improve enterprise alternatives and efficiencies, however an individual similar to the common American employee will loss his or her comparative benefit within the international workforce. The provision of an enormous provide of labor also needs to drive down wages within the international market – and likely improve the maldistribution of wealth in right this moment’s developed nations.”
Like I’ve talked about earlier than, there are not any straightforward options. If the common American sees a rise of 10 years in his or her life expectancy, can she or he moderately 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 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 most likely 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 in a position employees 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 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 nations going ahead – because the birthrate in these nations at the moment are dismally under the substitute fee of the inhabitants. The state of affairs in the USA just isn’t presently as drastic (given our comparatively lax immigration coverage) however we’re heading in direction of the identical route. Thus to take care of the present way of life at retirement, my guess is that the overall inhabitants is not going to solely should 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 employees in China is larger than the complete labor power of the USA. 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 maintain 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 a whole lot of hundreds of individuals will lastly be empowered as they climb out of absolute poverty (once more, over half of the world’s inhabitants presently reside on lower than two {dollars} a day) – and because the costs of client items are pushed down nonetheless additional. The typical American will most likely disagree, however the pattern of globalization and “offshoring” is not going to cease. The final time the USA adopted financial and navy isolationism we had a Nice Despair and subsequently, World Conflict II. I sincerely don’t suppose that this was a coincidence.
The pattern of the overall getting old inhabitants and globalization may have a profound affect on all People. In the end, I believe all People will profit – though it will 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 “fascinating new occasions.” Think about a market on your product that’s over ten occasions the scale of the inhabitants in the USA. China and India has traditionally disillusioned – because the residents of these nations have traditionally been too poor to eat a lot U.S. items and companies. 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 wish to handle an identical concern of all People – because the period of low cost vitality (principally a budget vitality costs as skilled by People for the final twenty years) involves an in depth. Whereas I believe oil costs will decline within the short-term (i.e. for the following 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 might not know this, however the USA right this moment nonetheless produce sufficient oil to fulfill roughly 40% of complete home demand. The US additionally had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest on this planet. In line with the Power Data Administration (EIA), the USA 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. At this time, complete home manufacturing is at 50-year lows – and nonetheless falling.
- Whereas Saudi Arabia (the world’s high exporter and accommodates 25% of the world’s reported reserves) has claimed that there are and shall be no provide issues for the following few a long time, they haven’t been clear with their reserves knowledge. In line with Simmons & Firm Worldwide, 5 to seven key fields in Saudi Arabia produce 90% to 95% of its complete oil output – all however two fields are extraordinarily previous – with the final main discover reported in 1968. The final publicized reserves knowledge was in 1975 – when Saudi Aramco was nonetheless managed by Exxon, Mobil, Chevron and Texaco. In that report, the world’s greatest 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 right, 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 the USA) – crude oil costs will soar.
- The “final frontier” for the manufacturing of oil (specifically the North Sea, Siberia, and Alaska) is now getting old. Most firms at the moment are struggling with a view to even keep their present manufacturing ranges.
- World oil demand continues to develop. Oil demand within the early Nineteen Nineties stayed comparatively flat (at round 66 to 68 million barrels per day) however over the following ten years to right this moment, world oil demand elevated 14 million barrels per day. At this time, complete world oil demand is larger than 82 million barrels per day. The vitality “consultants” who within the early Nineteen Nineties predicted a flattening of oil demand development and who wrote off demand development in growing nations have been useless incorrect.
- No new refineries have been in-built the USA 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 Nineteen 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 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 practically 90% — leaving no cushion room if one thing unexpected occurs.
There are presently three elements at work which ought to contribute to a continued improve on this planet oil worth – the maturing of provide, rising demand, and the shortage of a cushion in refining capability and low inventories. The “offender” has often been labeled as China, however it’s fascinating to notice that the USA has had nearly no home vitality coverage (when it comes to conservation and inspiring the event of other 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 improve is projected to proceed, particularly given the truth that oil demand in China continues to be a lowly 2 barrels per particular person per yr (in comparison with 25 barrels per particular person right here in the USA). Moreover, it’s fascinating to notice that the variety of vehicles in China solely totaled 700,000 as late as 1993 and 1.8 million as late as 2001. At this time, the variety of vehicles in China totaled greater than 7 million – and this quantity might probably have been a lot larger if not for the Chinese language authorities intervention in limiting the variety of vehicles 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 particular person per yr – given this reality, oil demand in India might probably explode over the following decade – barring an enormous worldwide financial recession or despair.
I imagine my readers must be made conscious of the present vitality provide/demand state of affairs. Given the above, what’s the greatest plan of action for the common American? How about the most effective plan of action in case 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 straightforward options, there must be no straightforward solutions both. Within the short-run (three to 5 years), People must pay up if we wish to drive gas-guzzling SUVs, and legacy airways like Delta must proceed to chop prices by most likely additional slashing labor prices as their first precedence. An additional enchancment in extraction know-how ought to assist, however the severe growth of other fuels must begin now. I additionally imagine that the following severe decline shall be induced by a mix of an “oil shock” and an increase in rates of interest. Readers might recall the relative power chart that I developed in my August fifteenth commentary displaying the AMEX Oil Index vs. the S&P 500 and the large 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) – probably even for a number of years – however as soon as the relative power 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 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 outing to study extra about your psychological make-up and the way it has affected your funding or buying and selling selections? 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 issues:
- This creator believes that we’re presently 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 might even take us again or under the lows that we hit throughout October 2002. If that is true, then a buy-and-hold portfolio would undoubtedly not work – until you have been in pure sources or valuable metals mining shares.
- When this cyclical bull market tops out, all your pals, relations, 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 little thing in all human historical past. In case you are 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 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 shall be. My pondering 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 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 People 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 frequent 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 frequent shares at opportune occasions, however on no account ought to my readers take my suggestions as gospel and on no account 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 following ten years and wait till the Dow Industrials has a P/E under 10 and a dividend yield of over 5%, then extra energy to you – you might be both already wealthy who don’t have any must earn money available in the market anyway or you’re a very disciplined and independent-thinking particular person. Most People simply can’t try this – however I’m right here to assist.