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On this “particular report”, I wish to pose a number of essential “philosophical questions” to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the consequences and implications of our getting old inhabitants on issues akin 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 do not forget 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 old inhabitants firmly on the again of your minds. If you’re like most individuals, you then earn you residing by producing a sure factor – akin 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 positively crucial to us traders/merchants however this “tremendous secular development” of the getting old of the worldwide inhabitants will affect each side of our lives, whether or not it’s shedding 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 power costs – an period which we’ve got principally loved for the final twenty years with out considering of the long-term repercussions. America, with lower than 5 % of the world’s inhabitants, at present eat roughly 25% of the world’s power 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 wish to ask my readers the next query: What sort of investor are you? What investing fashion do you undertake and what investing fashion are you most snug with? Are you able to be a contrarian and purchase when the group is promoting or are you merely a follower who is simply snug if you slot in? These are simple questions – however these are questions that you really want to ask yourselves as a way to really make cash in investing over the long term. If my readers take the trip 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 said: “Assuming that the present degree 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 intense finish, Japan and Spain will see a greater than 100% enhance of their outlays to retirees. Clearly, this isn’t sustainable. Both issues akin to protection or schooling spending will should 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 answer. Slicing 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 shiny, younger, French industrialist and also you have been compelled to pay 60% of your revenue as taxes to help the aged, what would you do? Why, you’ll vote along 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 excellent contribution to the French financial system. The governments of the developed world acknowledge this – however there aren’t any straightforward options.
“This image will get grimmer when one takes observe of a examine that was achieved by the Financial institution Credit score Analyst. In that examine, 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 can be extra populous than Germany in 2050; whereas Iraq can be 30% extra populous than Italy (Iraq is lower than 40% the scale of Italy at this time). Russia’s inhabitants is projected to proceed to lower – at a fee such that the inhabitants of Iran can be even greater 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 individuals. If the developed nations of at this time 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, modern, and inventive. In at this time’s globalized world, this can 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 typically extra optimistic, because the elimination of the language barrier will drastically improve enterprise alternatives and efficiencies, however an individual akin to the typical American employee will loss his or her comparative benefit within the world workforce. The supply of an enormous provide of labor must also drive down wages within the world market – and most likely enhance the maldistribution of wealth in at this time’s developed nations.”
Like I’ve talked about earlier than, there aren’t any straightforward options. If the typical 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 throughout the Roosevelt administration throughout the Nineteen Thirties) with out inserting 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 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 final 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 are actually dismally under the substitute fee of the inhabitants. The state of affairs in the US is just not at present as drastic (given our comparatively lax immigration coverage) however we’re heading in direction of the identical course. Thus to keep up the present lifestyle at retirement, my guess is that the final inhabitants won’t solely must work longer, however work longer hours within the current (and save extra) as effectively.
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 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 preserve tempo of the development will discover his or her job being outsourced – to not point out the typical wage being pushed down by world competitors. I, for one, consider that this persevering with development of globalization will make the world a greater place, as tons of of hundreds of individuals will lastly be empowered as they climb out of absolute poverty (once more, over half of the world’s inhabitants at present reside on lower than two {dollars} a day) – and because the costs of client items are pushed down nonetheless additional. The common American will in all probability disagree, however the development of globalization and “offshoring” won’t cease. The final time the US adopted financial and navy isolationism we had a Nice Melancholy and subsequently, World Struggle II. I sincerely don’t suppose that this was a coincidence.
The development of the final getting old inhabitants and globalization can have a profound affect on all People. Finally, I believe all People will profit – though it is probably not clear to people who find themselves shedding their jobs at this time. For the initiated and nimble, you’ll not solely survive however thrive in these “fascinating new instances.” Think about a market on your product that’s over ten instances the scale of the inhabitants in the US. China and India has traditionally dissatisfied – because the residents of these nations 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 wish to tackle an analogous concern of all People – because the period of low cost power (principally a budget power costs as skilled by People for the final twenty years) involves a detailed. 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 US at this time nonetheless produce sufficient oil to fulfill roughly 40% of complete home demand. America 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 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 throughout the Nineteen Seventies. Right this moment, complete 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 can be no provide issues for the following few many years, 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 complete 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 specialists 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 appropriate, then there may be actually no “plan B” (not like throughout the Nineteen 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 getting old. Most corporations are actually struggling as a way to even keep 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 following ten years to at this time, world oil demand elevated 14 million barrels per day. Right this moment, complete world oil demand is larger than 82 million barrels per day. The power “specialists” who within the early Nineties predicted a flattening of oil demand progress and who wrote off demand progress in growing nations have been useless mistaken.
- No new refineries have been in-built the US for the previous twenty years, whilst 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 growth in refining capability at present 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 this time). Regardless of this growth, nonetheless, home refining capability remains 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 present three components at work which ought to contribute to a continued enhance on this planet oil worth – the maturing of provide, rising demand, and the dearth of a cushion in refining capability and low inventories. The “perpetrator” has often been labeled as China, however it’s fascinating to notice that the US has had just about no home power 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 client, having simply surpassed Japan for the title. Demand for oil in China has greater than doubled during the last 10 years (to at this time’s 6 million barrels per day), and this wonderful enhance is projected to proceed, particularly given the truth that oil demand in China remains 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 fascinating 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. Right this moment, the variety of automobiles in China totaled greater than 7 million – and this quantity may doubtlessly have been a lot greater if not for the Chinese language authorities intervention in limiting the variety of automobiles that may very well be bought and pushed annually. 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 following decade – barring an enormous worldwide financial recession or melancholy.
I consider my readers needs to be made conscious of the present power provide/demand state of affairs. Given the above, what’s the finest plan of action for the typical American? How about the perfect 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 perfect plan of action for a mutual fund supervisor or a commodity fund supervisor? Since there aren’t any straightforward options, there needs to 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 in all probability additional slashing labor prices as their first precedence. An extra enchancment in extraction expertise ought to assist, however the severe growth of different fuels must begin now. I additionally consider that the following severe decline can 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 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 abruptly 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 be taught 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 relating to 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 writer believes that we’re at present in a secular bear market in home frequent shares. Whereas I consider that this present rally nonetheless have extra room to go, I consider {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 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 can be telling you to purchase extra or to carry your frequent shares. The bears and all bearish ideas can be ostracized and frowned upon. This has occurred in each bull market in the whole lot in all human historical past. If you’re 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 can 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 People are simply not disciplined or devoted sufficient to remain in money throughout a secular bear market – to not point out staying in money throughout the entirety of a secular bear market and shopping for and holding frequent shares throughout the entirety of a subsequent secular bull market. The common human psyche is simply not able to doing this. Due to this, I sincerely consider that success within the inventory market (for most individuals) throughout the subsequent 5 to 10 years would contain catching the swings on the proper or near-right instances. For readers who simply can not resist, I’m additionally going to proceed to advocate some frequent shares at opportune instances, 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. If you’re 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’re both already wealthy who haven’t any have to make cash available in the market anyway or you’re a very disciplined and independent-thinking individual. Most People simply can not do this – however I’m right here to assist.