MULTIPLY, MULTIPLY, MULTIPLY

The power of dollars invested in capital goods is not to be underestimated. These dollars multiply, multiply and multiply again. Take advantage and you will see your investment account multiply, multiply and multiply again.

It is interesting that the understanding of the business cycle was developed so long ago and yet is only recently being tamed. Smart people have been trying to corral this bucking bronco for at least 150 years. It was a French Doctor by the name of Clement Juglar who got took the first serious whack at taming the bronco. In 1862, when Clement was 43 years old, he wrote Des Crisis Commercials et leur periodique en France, en Anleterre, et Aux Etats-Unis. While the US was in the middle of civil war, Clement was studying the business cycle.


Clement observed that the business cycle lasted 7 to 11 years. Years later, in 1923, Kitchin stressed the 3 to 4 year inventory cycle that most people focus on to this day. Schumpter observed the 40 month cycle. Van Duijn was the "long wave" proponent who saw three Jular cycles of about 9 years each from 1948 to 1957, 1957 to 1966 and from 1966 to 1973. Since that time, I have observed three more Jular's from 1973 to 1982, 1982 to 1991 and from 1991 to 2001. It appears that we are currently in a Juglar that will last from 2001 to about 2011. The "official story" is that there were many more cycles, from 1945 to now and that only one of the first 6 lasted more than 39 months. The "official story" is that the peace time record was set from 1975 to 1979 and then broken wide open by the record cycle from 1991 to 2001.

Why is the official record wrong?

The reason is in the definition of the cycle. If the mid-cycle correction is large, then the "official records" will show that one cycle ended and another began but the two are really one Juglar cycle.

The numbers reported by the government this morning tell the story. The talking TV Heads reported with glee or with sadness on their face, depending on if these numbers support their prior biased reporting, that construction spending slowed .4% last month. This decline was not a great number for the bulls or for the bears. The bears wanted blood. Since they believe the US economy is headed for recession, then surely the decline in construction spending was greater than four tenths of one percent! The bulls wanted a positive number so they could say, "I told you so".

The numbers hide the whole story. The reality is that the .4% decline was a decline from all time record levels! In the US, in the last year, 1.7 Trillion Dollars were spent on construction!!!

The big thing to know is that these 1.7 Trillion Dollars are the multiplying kind. The four guys holding shovels and the two holding flags at the construction sites are making the most money they have made in their lives. The machine operators might be making 5 times as much!

Old man Says was the economist who realized that supply creates its own demand. This is counter intuitive like so many economic and stock market rules. Follow through the process and it makes all the sense in the world. If a government or a company says it is time to build something, it will spend big dollars. One example that is highly leveraged is road construction. It takes very little personnel to "operate" an interstate highway but it takes a lot of money to build one. In business, a common situation is to hire 3,000 people to expand an oil refinery, spend $6> Billion dollars on the process to create 45 new permanent jobs when the> project is complete.

Knut Wicksell, a brokers son from Stockholm, 1951-1926, refined Says law. He noted that Says placed limits on the process by requiring savings to occur before the investment could take place. As we have all learned well over the past 60 years or so, one does not have to have savings to spend money. Knut noted a "cumulative process". The borrowing and spending by one party might influence the next to borrow and spend.

During an economic recovery, like the one we just went through, there is relatively little need for capital spending because old facilities can produce enough to fill the needs up until the past peak of production was reached. Once old peak levels are reached, more capacity must be built. Because the building of new capacity is largely done with high powered leveraged dollars which are spent again and again and again, there is a serious risk of a "stampede". Like the sand piles put along the sides of mountain roads so that run away trucks have a way to stop, the current economy has gradually made it to the top of the mountain and if "Big Ben" is not careful, he knows this truck is going to burn through his brakes and "run away".

If you appreciate that an uneducated flagman will make and spend big money during these times of expansion and if you appreciate that the money he spends is spent again and again as it makes its way to the grocery store clerk, the bar maid, the bank teller and all the many others who will benefit from this "extra money in the local economy" then you can appreciate what the numbers show.

I feel it is worthwhile to give the number again, construction spending in the USA is running at the annual rate of 1.7 Trillion Dollars. What you hear on the news day after day is that the housing market rolled over in the summer of 2005 and construction is dropping like a rock. This is another one of those "true reports" that is misleading the average American investor, who is negative on the economy and the market right now. Housing construction accounts for about 4.8% of the US GDP. Housing construction will fall by about 9% this year, a big drop no doubt. 9% of 4.8% is only .04% (a that tip to Brian Wesbury). So, the economy that just grew by better than 4% and which is projected to grow 3% in the next quarter would be even stronger if it were not for the housing slowdown. In the grand scheme of life, the difference in a quarterly growth rate of 3% instead of 3.4% is not a big deal. The more important point is that total construction is still very strong.

YES, we live in a service economy. The numbers are amazing. Health Care construction is up 18% year over year! Amusements and recreation up 12%! Public Safety up 12%! Education up 10%! Religious buildings up 10%! The common belief is that all the factories are being moved to China but even that is not true. Manufacturing construction is up 6% year over year! If the other numbers were not so huge, we would be very pleased to have manufacturing growing at 6%! Besides, the huge sums being spent to build in China also have a multiplier effect for us all. The unsophisticated and selfish response of many is to be jealous of the growth in China (of of immigrants getting wealthy in America) but the reality is that this is a plus, plus, plus game. The more wealth created in China, the more money available to be spent buying from Americans. Export growth from America is growing at an annual rate of 11% and personal income is growing at around 6.5%! Do you see a recession around the corner when the income of the> average American is growing by 6.5% per year???

We all know that the 18% growth Health Care construction is not sustainable. People come from all around the world to the US to get the best of health care but the nominal growth in China GNP is ONLY 15%! We all know that the Fed must keep leaning against the wind to help tame this 18% growth in construction. We all know that if the economic train gets to moving too fast, the risk of a wreck up ahead is great.

Again, it was Knut Wicksell who arrived at the "where the rubber meets the road argument". He said that as long as the money rate is less than the natural rate of interest then the rational company will borrow and spend and borrow and spend some more. Like Grandpa said, "you have to make hay while the sun is shining".

Yes, I still put make the odds slightly in favor of an interest rate cut buy "Big Ben" but I certainly would not be totally surprised if he continued to resist the urge. Who amount us wants the operator of a roller coaster to keep his foot on the brake? Those who enjoy the big dips and turns want all the speed they can get. The problem is that more and more big heavy weight companies will jump aboard this train if Ben does not provide Wicksellian restraint.

Australia's central bank and the ECB both seem prepared to delay planned increases in short rates. Europe has been directly effected by the collapse of the sub prime paper market. Australia has not been hit. Australian rates are higher than US rates already. This resource rich country has been a direct beneficiary of the growth explosion in China.

FORGET ABOUT THE SHORT TERM INTEREST RATE QUESTION!

I go through the current mania in order to show that it is only that. The correct posture is to not worry about weather the FOMC will cut rates or not. Your doctor is not the key person when it comes to your health. If you have good genes, eating habits and exercise habits, you will be healthy no matter what the doctor says. If you commit 100% of your investment dollars to stocks right now, you will look back a year or two or three from now and be thankful. What happens at the September 18 FOMC meeting will not> be a big event in your life.

BUY, BUY, BUY, BUY, BUY, BUY!

The money being invested in every thing from interstate highways all across China to heath care facilities all across America is "HOT MONEY". IT MULTIPLIES! IT IS CREATED OUT OF THIN AIR WHEN BANKS LEND FOR CONSTRUCTION AND IT IS SPENT TIME AND TIME AGAIN. THE FIRST HALF OF THE BUSINESS CYCLE IS OVER! HOME BUILDING WILL BE SLOW FOR A FEW YEARS BUT CONSTRUCTION SPENDING WILL REMAIN STRONG! CAPACITY CONSTRUCTION IS UNDERWAY. 40 NUCLEAR POWER PLANTS IN CHINA, 9 IN AMERICA AND MANY MORE AROUND THE GLOBE! BIG MONEY THAT WILL FIND ITS WAY TO CONSUMERS WHO WILL ENJOY THE BOOM TIMES!