On this special report, I need to pose just a few necessary philosophical questions to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the effects and implications of our aging inhabitants on things akin to Social Safety again in a speech [http://information.yahoo.com/information?tmpl=story&u=/ap/20040828/ap_on_bi_ge/greenspan_32] that he made last Friday. Readers might remember that I additionally briefly mentioned this difficulty in my June twenty fourth commentary. I urge you to keep this worldwide phenomenon of the aging inhabitants firmly on the back of your minds. If you are like most people, you then earn you residing by producing a sure thing 聳 comparable to a consumer good, or a service that the lots need. Lets face it 聳 how many people actually struck it rich by being pure traders or funding managers? The stock market and different financial markets are undoubtedly essential to us investors/traders but this super secular trend of the aging of the worldwide population will impression every facet of our lives, whether it’s dropping our relative competitiveness on the world enviornment, increasing pension and healthcare prices, or even a potential fundamental change of our political system.
The second question that I want my readers to think about is the potential end to the era of cheap energy prices 聳 an period which we have principally loved for the final two many years with out considering of the lengthy-term repercussions. The United States, with less than five p.c of the worlds population, at the moment consume approximately 25% of the worlds energy each year. Provide is maturing while demand continues to surge 聳 as exemplified by the surging in demand from China and India. In the meantime, spare energy-producing capacity and stock ranges have been at all-time lows 聳 potential for a perfect storm?
Lastly, I want to ask my readers the next query: What kind of investor are you? What investing fashion do you undertake and what investing style are you most comfortable with? Are you able to be a contrarian and purchase when the crowd is selling or are you merely a follower who is just comfortable if you happen to fit in? These are simple questions 聳 however these are questions that you actually have to ask yourselves so as to really earn a living in investing over the long term. If my readers take the time out to eager about these three questions or points 聳 and in the end have a firm grasp of even just one in all the issues 聳 then you’ll be in a a lot better financial situation than most People 5 to 10 years from now.
To start, what are the potential implications of the aging population phenomenon? Readers my recall that in my June twenty fourth commentary, I stated: Assuming that the present level of benefits remain into the longer term and assuming the level of taxes is not raised, then public benefits to retirees would dramatically improve going forward. On the excessive finish, Japan and Spain will see a greater than 100% increase of their outlays to retirees. ly, this isn’t sustainable. Either things corresponding to protection or education spending will should be lower, or the above nations will want to boost their taxes. Neither of the two scenarios is perfect. Borrowing extra of their funds is not an extended-term resolution. Cutting funding in protection and schooling will comprise a countrys future, and raising taxes will place a huge social and monetary burden on the population of the developed world 聳 the place taxes are already at a traditionally high degree. Suppose about this: For those who were a vibrant, young, French industrialist and also you have been forced to pay 60% of your revenue as taxes to support the elderly, what would you do? Why, you’ll vote together with your feet and relocate to another country that is more tax-pleasant and enterprise-friendly 聳 and so will other great expertise which will have been an ideal contribution to the French economic system. The governments of the developed world recognize this 聳 however there aren’t any straightforward options.
This image gets grimmer when one takes observe of a study that was executed by the Bank Credit Analyst. In that examine, the BCA predicts that by the 12 months 2050, the share share of the developed countries of the worldwide population will drop from over 30% in 1950 to lower than 14% — or about equal to the population of the Islamic nations of the world. Similarly, Yemen will probably be more populous than Germany in 2050; whereas Iraq will likely be 30% more populous than Italy (Iraq is lower than 40% the dimensions of Italy in the present day). Russias population is projected to continue to decrease 聳 at a charge such that the population of Iran can be even greater to that of Russias in 2050. India will likely be the most populous nation in the world, and Pakistan will solely lag the U.S. by roughly 50 million folks. If the developed international locations of in the present day don’t choose to work tougher or grow to be more environment friendly, then they’ll in the end lose their comparative benefit, because the younger population of the world is inherently extra hard-working, energetic, revolutionary, and creative. In todays globalized world, this will likely be a killer for the common worker within the developed international locations 聳 the more so once the language barrier is eradicated (the profitable commercialization of common language translators is projected to happen in ten to fifteen years). I’m usually more optimistic, because the elimination of the language barrier will enormously enhance enterprise opportunities and efficiencies, but an individual such as the common American worker will loss his or her comparative benefit in the global workforce. The availability of a huge supply of labor must also drive down wages in the global marketplace 聳 and likely enhance the maldistribution of wealth in todays developed international locations.
Like I have talked about earlier than, there are no straightforward options. If the average American sees a rise of 10 years in his or her life expectancy, can she or he reasonably or logically retire at the current regular retirement age of 65 (which was decided through the Roosevelt administration in the course of the 1930s) with out placing an undue burden on the system? The reply is likely no. Making use of the same working-years-to-retirement-years ratio to his or her new life expectancy, then the typical American ought to most likely work round 5 to six years extra 聳 thus giving a revised normal retirement age of 70 or so. Moreover, all this evaluation relies on the outdated inhabitants distribution in the type of a pyramid 聳 where the younger and more in a position staff represent a majority of the inhabitants (and where the elderly represents only a small minority of the final population). The pyramid distribution has historically facilitated authorities help of the elderly 聳 as the financial and social burdens have been shouldered by a relatively large youthful population. The current experience of Europe and Japan suggests a extra uniform distribution within the inhabitants of these international locations going forward 聳 because the birthrate in these countries are now dismally under the substitute charge of the inhabitants. The scenario in the United States will not be currently as drastic (given our relatively lax immigration policy) however we’re heading in the direction of the identical path. Thus to take care of the current standard of living at retirement, my guess is that the overall population will not only should work longer, however work longer hours in the current (and save extra) as nicely.
The scenario is extra alarming when one considers that the mixed population of China and India makes up over 1/three of the worlds inhabitants. The variety of unemployed employees in China is larger than your complete labor pressure of the United States. The competitors for relatively unskilled jobs will proceed, and it guarantees to accelerate going ahead. The typical American who does not keep forward of the curve or doesn’t keep tempo of the development will discover his or her job being outsourced 聳 not to say the typical wage being pushed down by world competition. I, for one, imagine that this continuing pattern of globalization will make the world a greater place, as tons of of hundreds of individuals will finally be empowered as they climb out of absolute poverty (again, over half of the worlds inhabitants at the moment dwell on less than two dollars a day) 聳 and as the prices of consumer goods are pushed down nonetheless further. The common American will most likely disagree, but the pattern of globalization and offshoring won’t stop. The last time the United States adopted financial and army isolationism we had a great Depression and subsequently, World Struggle II. I sincerely don’t suppose that this was a coincidence.
The trend of the overall aging inhabitants and globalization could have a profound impression on all Individuals. Ultimately, I feel all Americans will profit 聳 although it might not be to people who are dropping their jobs as we speak. For the initiated and nimble, you will not solely survive however thrive in these interesting new times. Imagine a market to your product that’s over ten times the size of the population in the United States. China and India has historically disappointed 聳 because the citizens of those international locations have historically been too poor to consume a lot U.S. items and providers. Globalization and offshoring will change all these. A world extra equalized economically may even imply a much more safe and less conflictive world.
Now, I would like to address an analogous concern of all Americans 聳 as the era of cheap vitality (mainly a budget power prices as experienced by People for the final twenty years) involves a detailed. While I believe oil prices will decline within the quick-term (i.e. for the next few months), I am longer-term bullish on each oil and pure gas prices (I will only focus on oil on this commentary). Consider the following:
– The world provide of oil is flattening out. Readers could not know this, but the United States at the moment nonetheless produce enough oil to fulfill roughly 40% of complete domestic demand. The United States also had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest on the planet. In response to the Vitality Info Administration (EIA), the United States produced round 7.9 million barrels per day during 2003. This is down sharply from the ten.6 million barrels averaged in 1985. The peak of domestic oil supply occurred someday through the 1970s. At the moment, whole home production is at 50-yr lows 聳 and nonetheless falling.
– Whereas Saudi Arabia (the worlds high exporter and contains 25% of the worlds reported reserves) has claimed that there are and might be no provide issues for the following few decades, they have not been transparent with their reserves information. According to Simmons & Firm Worldwide, 5 to seven key fields in Saudi Arabia produce ninety% to 95% of its complete oil output 聳 all but two fields are extremely previous 聳 with the last major discover reported in 1968. The final publicized reserves data was in 1975 聳 when Saudi Aramco was nonetheless managed by Exxon, Mobil, Chevron and Texaco. In that report, the worlds finest consultants determined that every one the key fields at that time contained 108 billion barrels of oil in recoverable reserves. If this holds true, then the peak of supply in Saudi Arabia will come soon. Furthermore, if the report is appropriate, then there is admittedly no plan B (not like in the course of the 1970s when the middle of energy shifted from the Texas Railroad Commission to OPEC as a result of peaking of provide within the United States) 聳 crude oil costs will soar.
– The last frontier for the production of oil (particularly the North Sea, Siberia, and Alaska) is now aging. Most companies at the moment are struggling with a view to even maintain their current manufacturing ranges.
– World oil demand continues to develop. Oil demand in the early 1990s stayed comparatively flat (at round 66 to 68 million barrels per day) but over the following ten years to right now, world oil demand increased 14 million barrels per day. At the moment, whole world oil demand is higher than eighty two million barrels per day. The power experts who in the early nineties predicted a flattening of oil demand growth and who wrote off demand progress in growing international locations have been useless wrong.
– No new refineries have been constructed within the United States for the previous two many years, whilst refineries have been closing every year throughout that same time interval. Refining capacity from 1981 to the mid nineties also dropped drastically (this author estimates a drop of roughly 6 million barrels per day in refining capability during that time interval). Since 1994, however, an enlargement in refining capability at existing refineries has contributed to an increase in refining capability from 15.Zero million barrels per day to 16.7 million barrels per day (as of at this time). Regardless of this expansion, nevertheless, home refining capability is still stretched to the limit, as utilization at U.S. refineries is now averaging practically ninety% — leaving no cushion room if something unforeseen occurs.
There are at the moment three elements at work which should contribute to a continued enhance in the world oil price 聳 the maturing of provide, rising demand, and the lack of a cushion in refining capability and low inventories. The culprit has usually been labeled as China, but it is fascinating to notice that the United States has had virtually no domestic energy policy (in terms of conservation and encouraging the development of other fuels) for the final twenty-something years. China demand, nonetheless, has soared over the previous couple of years. It is now the second largest oil shopper, having just surpassed Japan for the title. Demand for oil in China has more than doubled during the last 10 years (to todays 6 million barrels per day), and this superb increase is projected to continue, particularly given the truth that oil demand in China continues to be a lowly 2 barrels per individual per year (in comparison with 25 barrels per particular person right here in the United States). Moreover, it is interesting to notice that the number of automobiles in China solely totaled seven hundred,000 as late as 1993 and 1.8 million as late as 2001. At present, the variety of vehicles in China totaled greater than 7 million 聳 and this number could probably have been much higher if not for the Chinese government intervention in limiting the variety of cars that may very well be sold and pushed annually. Now essentially the most scary part: Present oil demand in India is simply 0.7 barrels per individual per year 聳 given this reality, oil demand in India could doubtlessly explode over the following decade 聳 barring an enormous worldwide economic recession or depression.
I believe my readers must be made conscious of the present vitality provide/demand state of affairs. Given the above, what is the best course of action for the typical American? How about the best course of action if you had been the head of a motor firm like GM or an airline pilot employed by a legacy airline like Delta? How about the best course of action for a mutual fund supervisor or a commodity fund supervisor? Since there are not any straightforward options, there should be no easy answers both. Within the short-run (three to five years), Individuals should pay up if we wish to drive gasoline-guzzling SUVs, and legacy airways like Delta should proceed to chop prices by in all probability additional slashing labor costs as their first precedence. A further enchancment in extraction expertise should help, however the severe growth of alternative fuels may have to begin now. I also believe that the subsequent severe decline will be induced by a combination of an oil shock and a rise in interest rates. Readers could recall the relative energy chart that I developed in my August 15th commentary showing the AMEX Oil Index vs. the S&P 500 and the massive potential inverse heads and shoulders pattern in that chart. For now, the relative energy line ought to bounce across the neckline (the road drawn on that chart) 聳 presumably even for a number of years 聳 but once the relative power line convincingly breaks above the neckline, crude oil costs might rise to $80 or even $100 a barrel. I positive hope that my readers wouldn’t be taken by surprise if fuel prices at the pump soars to $four.00 a gallon five to six years from now.
Finally, I need to pose to my readers the following question: Have you taken the time out to learn more about your psychological makeup and the way it has affected your funding or trading choices? What type of particular person are you on the subject of the market? Are you a so-referred to as buy-and-holder, a swing trader, or a day trader? An independent thinker, a contrarian, a momentum investor or merely a follower? I’m asking you these questions because of my following concerns:
– This author believes that we’re at the moment in a secular bear market in home frequent stocks. Whereas I imagine that this current rally still have extra room to go, I believe that a cyclical bear market will emerge in due time 聳 this upcoming cyclical bear market might even take us again or below the lows that we hit throughout October 2002. If that is true, then a purchase-and-hold portfolio would positively not work 聳 until you had been in pure sources or valuable metals mining stocks.
– When this cyclical bull market tops out, all your mates, kinfolk, and the popular media will likely be telling you to buy extra or to carry your widespread stocks. The bears and all bearish ideas can be ostracized and frowned upon. This has happened in every bull market in the whole lot in all human history. In case you are in cash now, would you be in a position to remain in cash when the highest lastly comes or will you be unable to resist and buy in as a result of you are afraid of the train leaving the station with out you, so to talk?
– Most people are inherently not good day traders and even swing traders. 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 all the time will be. My pondering in starting www.marketthoughts.com has at all times been that that if I can get my readers to purchase in now, it will likely be a much simpler determination for them to promote and hold cash as soon as the DJIA reaches eleven,000 or 12,000 or so 聳 as opposed to being in cash and staying out for the remainder of this secular bear market. 99% of Americans are simply not disciplined or devoted sufficient to remain in money throughout a secular bear market 聳 not to mention staying in money throughout the entirety of a secular bear market and buying and holding common stocks during the entirety of a subsequent secular bull market. The common human psyche is simply not able to doing this. Because of this, I sincerely consider that success within the inventory market (for most individuals) during the following 5 to 10 years would involve catching the swings at the proper or close to-proper occasions. For readers who simply cannot resist, I am also going to continue to suggest some common stocks at opportune occasions, however by no means should my readers take my suggestions as gospel and under no circumstances ought to my readers put all their eggs in one basket. If you’re a one who can keep in money for the subsequent ten years and wait until the Dow Industrials has a P/E beneath 10 and a dividend yield of over 5%, then more power to you 聳 you’re either already rich who have no need to earn cash in the market anyway or you might be a really disciplined and independent-thinking individual. Most Americans just cannot do this 聳 however I’m right here to assist.
