Monday, February 28, 2005


Harry S. Dent, Jr. has written a new book, The Next Great Bubble Boom, How to Profit from the Greatest Boom in History: 2005-2009. This is a quick and worthwhile read. It is an update to: The Great Boom Ahead, Your Guide to Personal and Business Profit in the New Era of Prosperity written in 1992. In 1992, Harry correctly called for a stock market BOOM through the end of the decade. Now, he predicts a BOOM from 2005-2009 that will be bigger than the internet bubble of the 1990's!

As many of you know, my investment strategy is built around long-term market cycles. For example, I purchased long-term treasury bonds near the bottom in the early 1980's when brokerage firms called for higher inflation and lower bond values. I purchased real estate near the bottom of the real estate recession in 1991 only because I had confidence in my read of long-term cycles. Harry's book speaks to me because he presents interesting facets of the long-term cycles.

My way is the simple way. I do not want to fix what works but I constantly adjust for new information. Harry, using information age technology, has input much data to reach more precise levels of output than my simple approach can achieve. The good news is that he presents the outputs in simple formats that will help all who take the time to read the results. It is neat to learn more about the reasons my cycle investment strategies work. New knowledge gained should help me tweak my methods for even better results.

Predictions of the future are not precise, but we make good use of forecasts every day. Harry uses the science of Demographics to improve the accuracy of his forecasts. If one knows that over the next 5 years a record number of US citizens will reach 18 years of age, then it is not a stretch to predict that college enrollment is about to increase. If one knows the bell curve peak of marriage occurs at the age of 26 and that large numbers of citizens are currently 26 years of age, then it is not a stretch to predict a lot of first time homes will be purchased in the next 5 years. If one knows that record numbers of "Baby Boomers" are sitting on an empty nest, it is not a stretch to predict that more meals will be eaten out, that more second homes will be purchased or that the Social Security Trust Fund surpluses will start declining in about 8 years. Those who have not studied these cycles may wonder at the length of a real estate boom; those who have may wonder how high prices will be at the peak. Harry presents a number of ideas that can help us all make money.

Harry combines Demographics with the study of product life cycles. The product life cycle is not a new concept. In the late 1960's, my marketing professor, a former Hanes Hosiery (Sara Lee) executive, went over and over the necessity of and methods required to re-invigorate the life of a product. He very much believed in taking an old product like Tide detergent, adding a fresh lemon scent and spending huge sums to let every housewife in America now about the "New Fresh Lemon Scent". Same old detergent but it smelled better. Done properly, the product goes through another "S-Curve" of rapid growth.

The professor was particularly proud of the incredible new cycle created when Hanes packaged their hosiery in plastic eggs. A whole new cycle of growth happened because of this new "innovation". The hosiery were basically the same before and after the new packaging but the idea worked and sales zoomed. Re-inventing an old product does not always work out so well. When Coke's new Coke failed, they had to bring back the old Coke as Classic Coca-Cola. Harry notes an 80 year cycle of truly life altering inventions.

The comparison Harry makes of the invention and adoption of the automobile and the invention and adoption of the digital information age is priceless. Those who understand where we are in the product cycle of the internet can do well indeed. Before getting to the details, it is fascinating to consider that innovations are successful only when there are large numbers of folks reaching their peak spending years (the peak of the curve is around 48 years of age). Again, not a new thought but a powerful concept--when folks have money to spend, someone will invent a new way to spend it!

The comparison of the auto "S-Curve" and the information "S-Curve" is striking. In 1900, cars were owned only by one tenth of one percent of the population; a toy for the wealthy. By the time the Model-T was designed in 1907, ownership was up to 1%. The Model-T was affordable by many and by the time of the next innovation, the assembly line, ownership was up to 10%. It had taken more than 14 years of production to reach a 10% adoption rate. Over the next 14 years, ownership went from 10% of all families up to 90% of all families! From 1928 forward, the auto business has been "mature". There have been many small innovations and much consolidation since but the adoption of the new technology and the large fortunes were made from 1914 to 1929.

Near the midpoint of the growth phase, in 1921, another innovation occurred; installment financing. If the auto was so great, why was another innovation needed? Because there typically is a "shake-out" time in the life of any new product. Psychologically, about half of any population is relatively ready to jump on board when a life changing improvement comes along. The other half always needs to be convinced. "Why should I pay $900 for a car when a good horse and buggy cost only $190?" "Glass windows in moving vehicles are simply too dangerous to ever gain wide acceptance."

Henry Ford got a jump start by offering a good product at the best price. When he was able to offer even lower prices after he invented the assembly line, sales exploded. Ford won big and 24% of all car companies went out of business between 1917 and 1922. General Motors had struggled to reach a 12% market share. Halfway through the growth phase, it was time to shift into a new gear. Ford kept making more of the same. General Motors won the second half of the growth phase by offering to take back the "old Chevy" in trade for a new Buick or Oldsmobile. The real kicker was GM offered to finance the balance. Who wanted a black Ford when one could afford a beautiful Buick.

Overlay the chart of GM from Feb 1912 to Feb 1922 with the chart of INTC from July 1992 to July of 2002 and you get a very close match. But the point to note is that the big money was yet to be made in 1922. We have all heard about the roaring 20's. The pattern continues to follow the trend. The stock market bubble of 1920 hit bottom by the start of 1922 but the fellow who bought GM in 1919 made 2,200% by 1929.

Harry Dent demonstrates where we are in the new "GM's" of today. Internet adoption hit 10% in 1996, 50% in 2001 and is projected to reach 90% in 2006. We are still in an internet boom! The mobile phone reached 10% in 1994, 50% in 2001 and is forecast to hit 90% by 2008, we are still in the mobile phone boom! Broadband adoption reached 10% in 2001 will hit 50% this year and is projected to reach 90% by 2009. VoIP phone service has reached only 2% of the population but is set to explode onto the scene.

The wide adoption of the auto was disruptive for many an industry as is the internet. Quite a few blacksmiths were forced to learn to become mechanics or gas station attendants. Modern motorized freight companies were started, sending draft horses to slaughter. Businesses that adjusted to the new technology and embraced it boomed and those that didn't burst.

The stock market that boomed from 1913 to 1919 had to adjust to the new realities. The bust from late 1919 to late 1921 was painful to those who held onto their wagon works stocks in the hopes that the auto was only a rich man's toy. Also some of the auto companies and auto related companies, had grown too fast, all the cash was gone and they had to merge or close. Does the auto story parallel the boom and bust of the internet bubble? Many who had made a fortune on GM 1919 lost 75% in the next couple of years, similar to the NASDAQ drop of 77% after the internet bubble. The big money made in GM was from 1922 to 1929.

The information age boom has a long way to go. Perhaps the biggest innovation yet is the advent of super fast search capacities in combination with contextual advertisement. Yes, I am writing about Google and Yahoo again. Overture invented the concept of paid search. Google made it fly. Yahoo bought Overture (as an Overture shareholder I thought Yahoo bought it cheap) and Yahoo has built a highly profitable internet model. One part of Yahoo I use frequently is the finance section.

I love the Yahoo model but I cannot get over the beauty of the Google system. Google invites one and all to become financial partners with Google. Google offers all comers sweet deals. The deals are simple; it is hard to turn down a Google deal.

To the advertiser, Google says we will send many high quality leads for your product or service in exchange for a very small fee per lead. The fee will be determined by the market but you can pay little or much. If you pay little, you will get a few leads. If you pay much, you will get many leads. In any event, your cost per quality lead will be lower than ever before.

To the content provider, Google says we will to do all the work and give you 80% of the revenue if you will provide advertising space. In many cases, Google provides the space for the content and the adds free! The advertisement is promised to be relevant to the content of the space. Is it any wonder that growing millions are offering Google advertising space.

To the consumer, Google says we will give you free services. Use all you want and by the way, there are relevant non-obtrusive advertisements posted off to the side. The list of services offered and consumed is growing quickly. I don't have the numbers but it is my impression that the number of businesses yet to adopt contextual advertisement is very large. Google is way out in front in this market and it is a very large market. The worldwide savings and productivity enhancement will be very large and it will take 10 years or more to reach the 90% stage.

Many competitors are going after a piece of this very large pie. Many firms have done well by specializing on any one of many areas for "matching" a "buyer" and a "seller". Many of these "match makers" charge substantial fees. Many would do well to be the first in their specialized area to re-construct their systems in order to partner with Google. Many of us have learned that if you want to find something, search on Google. Google is generating huge volumes of leads at low relative costs to millions of businesses. I doubt if the 10% level has been reached in regard to contextual ad placement.

This Bull Market will be big. This economic Boom is still young. I have done sampling and find that many folks want nothing to do with the stock market; once burned twice shy. My sampling includes a number of wealthy small business owners, professionals and employees of major corporations. The data show that the level of liquid assets to disposable income is at record levels in America. Many will capitulate when it seems that all their friends are getting rich. When the capitulation comes, the stock market Bubble will be huge. The Bust to follow will be tough on all. The key is to buy early and to sell early. Make the big middle profit and let the Bubble go as high as it will.

Innovations are coming so hard and fast this boom may be bigger and longer than the industrial revolution. The industrial revolution included numerous boom and bust cycles. More than 100 years passed between the invention of the water power frame and the invention of the steam engine. The cottage industry (manufacturing in the home) was virtually wiped out in the early 1700's in England. Most inhabitants of 21st century America have little understanding of how well off we are.

The information age, gives our fiscal and monetary leaders tools they have never had before. The productivity enhancements embedded in the new technologies are real. Our society is producing record levels of goods and services while lowering the costs of production. Productivity and wealth are synonymous; you can't have one without the other. The past ten years have been years of record productivity growth. Productivity growth typically slows when the expansion phase of the economic cycle begins. The past two economic troughs were roughly 9 years apart. 1981-82 to 1991 to 2000-01. If the pattern were to hold, the next recession would begin in 2010. Harry suggest that the stock market will peak around 2009 to 2010.

We can hope the next peak "will be different". This has been the normal pattern at all prior peaks. At least some of the population are always able to explain why the next recession does not need to come. There were several articles, including one in the Wall Street Journal, in 190 that suggested Greenspan was going to pull-off a "soft landing". Harry presents a cute chart showing the consensus opinion as the top is reached, rolls over and then his bottom. The thought goes from "We won't have recessions anymore" to "It's going to be a soft landing" to "Things are so bad they well never improve".

When I find myself thinking, "maybe this time will be different", I try to remember my Boy Scout training. Even better, I try to re-read the story of the dream of Joseph and the 7 fat cows. Because Joseph understood that 7 years of famine were coming, he prepared. He produced extra grain and stored it for the tough times ahead. He saved himself, his family and thousands of others by taking advantage of the "good times".

The best way to avoid getting hurt badly in the Bust is to do well during the Bull and the Boom. If you do well during the Bull and the Boom, you may even ride the Bubble with some part of your assets; just be sure and put a substantial part in safe keeping.

The Bull Market and the economic Boom are already here. Consumers will buy radio-TV-internet equipped cell phones in the next several years and $29 per month local only home phones will go the way of the horse and buggy. Smart newspaper publishers are buying into internet publishing. Right now maybe less than one percent of the public has dropped their newspaper subscription because of information access over the internet. RSS feeds and other technologies will soon quicken the pace. RSS just one of many more new technologies in the early adoption phase.

The Bull, the Boom, the Bubble and the Bust are just ahead; play these moves well and make a fortune!