Monday, August 27, 2007


The world wide economic boom continues, yes, including in the USA. While it is true that the gradual rise in short term interest rates around the globe have slowed the growth rates in a few countries, the world wide boom is like the Energizer Bunny. Even the USA is humming along nicely.

The housing bust in the USA has gotten a lot of attention and it has caused a lot of bankers, pundits and news sellers to use the word recession. Quite a few prognosticators now put the likelihood of a US recession at better than 50% odds. I disagree. The odds jumped in the weeks leading to the discount rate cut but they have fallen sharply since.

Indeed, the aggregate numbers could not be much better. It appears that the USA is running at close to 4% GDP real growth and it appears that inflation rates are on the way down to less than 1%!!!

The boom in the USA is coming from the business side of the economy and from export growth. Past declines in the US dollar are working their magic. Contrary to popular belief, the USA is still the king of manufacturing and our exports are growing at an annualized rate of around 11%. Business construction is very strong and business equipment sales are strong.

Have you noticed the significant drop in gasoline prices? US refineries are running at lower capacity but producing more fuel. Airlines have increased passengers hauled by several percent and reduced fuel consumption at the same time. China grew its economy 11% this past year while growing its fuel usage by only 5%. The growth in the economy was stronger than most projections and the use of fuel was weaker than most projections. The Chinese are going to great lengths to cut consumption.

Less than 15 years ago, South Korea was a fuel hog. Today, South Korea is about as efficient as the USA.


Ben Bernanke is playing first fiddle in the central bank orchestra. His latest moves have been masterful. The big roller coaster rides of Greenspan are gradually giving way to confidence and stability. By opening the discount window and then using big proxy banks to take away the stigma, Ben was able to pump significant amounts of liquidity into the system without throwing away gains made in reducing inflation. With no change in the fed funds rate, the full court press to keep inflation in check is still in effect. With durable goods orders running at a 5.9% annual growth rate, it is clear that the US economy is still humming along.


Pundits keep talking about the unwinding of the carry trade. While it is true that much of the turmoil in the markets the past month has been related to uncertainty of profitable carry trades, the carry trade is still alive and well. In the old days, the bankers took the risk to borrow short and lend long. Because it is "normal" for short term paper to offer lower rates than long term paper, it is usually very profitable to take in short term money to make long term mortgage loans. In the past few weeks, the US curve has reverted almost back to "normal". Hedge funds and other risk takers are likely to continue to borrow short and to lend long. Because the risk of a stronger Yen has increased, borrowers may require higher rates for long term mortgages but the world is still in a time of disinflation of manufactured goods. Therefore, short rates are likely to remain low relative to long rates.

The fly in the ointment is the massive amounts of capital that will be needed to build coal and nuclear power plants in the coming years. There is definitely a high demand for construction money. Still, the situation is not the same as the last similar cycle during the 1970's. There are only 40 nuclear power plants on the drawing board in China. Think of these as new resources to produce low priced goods. China is growing as fast as it can but is being held back by the lack of electricity. As more electricity comes available, hundreds of millions more peasants will leave the farm and trillions of more dollars worth of goods will be made. The price of manufactured goods will continue to fall!

There are many ways to play this world wide BOOM, BOOM, BOOM. My family has made a significant bet on the airlines. We ask the question, what if international flight demand growth continues at 10% or better and what if significant fuel savings are realized by CAL after it takes delivery on 30 new planes on 2008? Is it possible that revenues will rise by 5% or more while fuel cost will decline by several hundred millions of dollars? We think this scenario is not only possible but is likely.

Three of our better performing stocks so far this year have been Biogen, Cree and Garmin. Those who regularly add money to their accounts continue to hit big winners. Regular monthly deposits is the way to play this game. Many thanks to all who are making my work easy by making regular contributions.