Monday, September 12, 2005

CHINA TELLS THE WHOLE STORY

China's industrial production is growing at the annualized rate of 16.2%! One might argue that this growth rate simply cannot continue. The problem with the argument is that the growth rate has averaged more than 16% for more than a decade. As recently as May 2004 the growth rate was around 19%.

The above numbers are incredible until compared with the inflation rate. The CPI has been declining for the past year and the annual rate is now around 1.7%! Investors simply do not have benchmarks for comparison purposes. If one asked most investors today if it were possible to have 16% growth for 10 years and 1.7% inflation they would say no; but the numbers are real.

One of the things demonstrated by the numbers is that rapid growth does not equate to high inflation rates. From memory, China has also experienced productivity rates in excess of 17% annually. China has also lost millions of manufacturing jobs as factories have supplanted the "cottage industry" of yesteryear.

The whole story is that the world wide economy is experiencing non inflationary growth; an ideal scenario for stock investors. The intermediate portion of the story is that even China is experiencing a slow down. Again, the numbers show that industrial production growth is slowing and the inflation rate is on the way down.

Another very important thing to understand about China is that it is moving up the energy curve. In 1910 America, 27% of all agriculture was devoted to growing food for the horses used in agriculture and transportation. Yes, more than one fourth of all the cultivated land was used to "feed" the system and electricity existed only on Wall Street and in a few other places. Today, America uses more power from electricity than from any other source. All the cars in America do not produce as much power as do our electrical power plants. The percentage of those employed in agriculture has dropped from 90% to 3%. China will make the same move in fewer years. China is building coal and nuclear power plants.

Many folks have repeated that the US economy is now a service economy. The reality is that we grow more food than ever before and we produce more goods than ever before. We are a manufacturing power house. The US is simply much more efficient than ever before. The Chinese are not nearly as efficient but, again, the country is experiencing productivity gains in excess of 17%.

Moving up the energy curve quickly is allowing the Chinese to quickly adopt electric motors, phones, computers, internet, lasers, microwaves and the many other tools that improve efficiency and standards of living. Having watched family members cook on a wood fired stove and then an electric range for years, I still marvel when I reheat my "dogie bag" leftovers in a minute or two in a microwave. My dinner tonight was leftovers from the Olive Garden and I cooked it myself in a minute and 30 seconds. The Chinese are skipping from biomass stoves to microwaves. They are skipping the building of land line telephones and going straight to cellular and WIFI.

Edison patented the electric light bulb around 1882 and the IGBT was patented in 1982. The electric light offered incredible savings over gas powered lamps. Most of us have no idea (I have a faint idea) of what the IGBT (Insulated Gate Bipolar Transistor)is. The thing I understand best about it is about to change our lives as much as the light bulb did in the last century. There are going to be many applications but the one that has been written about the most is the GM "skateboard" car frame. The key point is that the IGBT makes it possible to put an electric motor the size of a coffee can next to a car wheel that is more powerful than the big block V-8 engines of today. Another point is that in the same way we stopped feeding horses 27% of our agriculture for transportation, we will stop feeding our cars gasoline.

By building nuclear power plants, China will largely skip the generations of gasoline burning cars. Granted, we are probably 10 years away from mass production of the "skateboard". However, the precise and powerful motors are already showing up in manufacturing plants. They are already in hybrid cars, trains, machine tools and robots.

At the same time, that computers are using more and more tiny bits of power to perform trillions of task for us daily, machines are using larger and larger compacted kilowatts of power to perform the heavy lifting tasks we require.

The world economy is enjoying a revolution. It is more than the information revolution that is frequently discussed. The revolution is creating productivity, profits and wealth. It is up to you to get your share.

Invest in stocks. Long-term investors should focus the majority of their funds on stocks. Folks with a short-term view will encourage you to hold bonds for safety. However, those with a 20 year or longer investment horizon are safer in stocks. Certainly investors should own their home and they should keep 3 to 6 months of income available for emergencies. Holding 20 to 30 percent in foreign stocks is not a bad idea but it is not necessary to invest in countries or areas that you do not understand. It would be better to invest 100% in America than to make mistakes in foreign holdings.

Many a writer will tell you that stocks are too high as is evidenced by current PE ratios. However, any stock that has a fast growth rate relative to the inflation rate can support a high PE ratio. Today, we have a strong worldwide growth. The growth had started to push up prices but the recent restraint, which has largely been a restraint of energy supplies, has reduced the risk of an over heated economy. Global inflation rates are trending down, long bonds are reflecting the low inflation and stocks are becoming more and more undervalued. BUY THE BULL!

1 comments:

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