Monday, December 17, 2007

WHEN IT RAINS? IT POURS!

No, I am not talking about Morton Salt today. The value of the US dollar has reached the level where money is being poured into the USA. Indeed, the dollar has actually bounced off the bottom. For example, it currently sits at a 7 week high against the Euro. Meanwhile, Euroland is sitting on the lowest economic output it has experienced in 2 years. If there is going to be a recession, it will likely start in Euroland.

It used to be that we talked about Western Europe and Eastern Europe. Now, many of the old Western European countries outsource their labor intensive jobs to former Eastern European countries. A number of Eastern European countries are now members of NATO and they share the common Euro currency. As a result of the tremendous growth in the poorest of the eastern countries, Euroland has enjoyed above average world growth and the Euro has climbed a price mountain. It has reached the peak and started to descend the other side.


My guess is that President Bush's State of the Union address in January, he will propose corporate tax cuts to bring the US economy back into competition with Euroland tax rates. Since the consumer pays the majority of corporate taxes, in the form of higher prices, lower corporate taxes would be a welcome relief to shareholders and consumers alike.

Many Americans do not know that the USA is the "big manufacturer of capital goods". The public has been beaten over the head with story after story about jobs going over seas to the point that Americans now believe that we are only a service economy nation. As always, a story with an element of truth is an easy story to "sell". The growth of GDP in America and around the world is the service economy. Developed nations have gone through 4 different stages. The US was almost 90% and agricultural economy, way back when. Then we became the manufacturer to the world and most jobs were manufacturing jobs. That phase ended by 1950. By 1950, more people worked in non-manufacturing jobs than not, in America. For the next 35 years, it was the service business that grew the fastest.

During this stage of development, the story was sold that "service jobs are low paid jobs, such as hamburger flippers at McDonald's". Again, an element of truth was exaggerated and the public was mislead into thinking that moving to a service economy was a bad thing. The truth is that the highest pay is in service work. Doctors, lawyers, professors, securities analyst, sales professionals, baseball players, computer programmers, physicians assistance, chiropractors, psychologist, surgeons, dentist and the list goes on and on, are among the highest paid people.

THE AGE OF KNOWLEDGE

In recent years, the growth in the US economy has moved toward a subsection of service that is best described as the knowledge sector. There is now a whole industry at work for the purpose of acquiring knowledge and selling the results. For the past few years, I have focused on the computer tech side of this industry but I see a time coming when the bio tech side of this revolution is going to be the exciting play.

WHEN WILL THE DRIZZLE TURN INTO A FLOOD?

As a result of the cheap dollar, we have been seeing some small drizzly storms turn into floods. For example, even though the growth in the USA has been in other areas for a very long time, we are still a manufacturing titan. In particular, we are the leading capital goods producer. Capital goods, as the name implies, require "big money financing". The USA has a comparative advantage in the manufacturing of capital goods. Of all the manufacturing jobs, capital goods jobs are the highest paid but still the cost of labor is not a big portion of the final cost of these products. Indeed, in many cases, industrial robots are often used to cut the manufacturing cost of capital goods products.

The biggest sector of exports of goods from America is capital goods. In the past year, capital goods exports have soared at the rate of better than 27%! The drizzle of dollars coming back to America is starting to look like a flood.

WILL POOR PEOPLE BUY BILLIONS OF DRUGS?

What will be the next major health care break through? Can we even imagine what it will be? When it comes, how much will billions of people pay for this life changing product? One possible example is a new memory drug. For many years, researchers have made progress on understanding the memory process. Years ago, fruit flies and snails were helped to achieve "photographic memories". These creatures are too small and too simple to remember a lot but the ones with improved memories did not need to see something twice.

Now, you many think that the memory drugs being developed are primarily for those who have developed Alzheimer's disease but this is not the real target audience. Suppose you could take a daily pill and never again forget someones name, would you buy the pills?

The answer to the question above, Will poor people buy billions of drugs?, is that poor people will buy trillions and trillions and wealthy people will buy zillions.

PROSPERITY PHASE

I posted a few diagrams on my Facebook page, including one showing the prosperity phase. We are moving into a time when "the little guy makes extra money". When everyone has a job, the life of the "little guy" is sweet. He can stay in the job he has and get nice raises or he can trade up to higher paying jobs. The extra dollars received are high powered dollars. They are discretionary dollars without a home. At first, a few of these dollars might be added to savings but when the future starts to look extra bright, why save for a rainy day. As the cycle progresses, consumers with extra dollars start to jump on all the "cool stuff". This is not your run of the mill extra stuff. It is not just new toys but every thing from tummy tucks to home theaters.

DEMOGRAPHIC MADNESS

In the major developed nations, including the USA, most of Euroland and Japan, the average population age is rising. In country after country, large groups of people are in the baby boom category. Many of these folk are currently in a hunker down mode trying to build up their retirement reserves. When it becomes clear that "prosperity is here", look for billions of wealthy people to be ready to buy what they "need".

The bio tech area has been largely dead money for a number of years. The public went so crazy over this sector, during the mid 1990's that the hangover still hurts. The public has sold stocks and sold stocks in this area. I see a turn coming.

TURN, TURN, TURN

The daily financial news talk is all about the financial sector. One talking head after another tells about how Citi has dropped x percent from its peak. The financial "news" anchors ask one professional after another if it is time to buy financials. The answer does not really matter. The point is that the best investments are not into what is being talked about. For example, the best time to buy the oil stocks was in 1999 or 2000 when no one was concerned about the price of oil.

BJORN LOMBORG

Bjorn Lomborg has given the global warming crowd a poke in the eye. He keeps coming back to give them a kick in the behind. Bjorn, the founder of the Copenhagen Consensus and the author of "The Skeptical Environmentalist" does not deny global warming. However, he suggest that we should do spend our money where it will do the most good for the most people. Given the facts, group after group, has compared the cost-benefit ratio of the Kyoto agreement to thousands of other problems and the consistent finding is that the global warming problem is a "bad problem" on which to spend time, effort and energy.

In the coming years, private industry will discover a number of great medicines. The world is changing fast. Did you know that many experts believe that a baby born today will live 135 years?

This will happen because "good drugs" will be discovered. As one who has always struggled to remember names, I would pay a tidy sum for a "brain Viagra drug". What new medicine would you like to see? It is estimated that 28 million HIV carriers could be saved for 27 Billion Dollars. Should we spend two trillion dollars trying to prevent the earth from warming a degree or should we save 28 million people and then use the remaining 1 trillion nine hundred and seventy two billion dollars left to attack other problems? Even if the earth warms a degree over the next 100 years, the damage in today's dollars will be small relative to the 28 million HIV carriers that could be saved now. With only 13 billion dollars, it is estimated that half of all the malaria cases in the world could be prevented within 3 years.

AGE OF INNOVATION

Innovation thrives on wealth. If there had been no wealth to buy it, the Apple IPhone would never have made it to market. The world is awash in wealth like never before and this is at the start of the prosperity phase of the business cycle. You are likely to live to see some things that you currently believe to be impossible. You have already lived to see the records of Babe Ruth fall. When the juiced youth of today grow up, Barry Bonds record will be a joke. While I do not condone the use of steroids, I do not believe that improving physical capabilities is a bad thing. One might argue that God did not intend for man to live 135 years or to have the capacity to smack a thousand home runs but one can also argue that longevity and ability are gifts from God.

FREE TRADE

High on the Bjorn Lomborg list of problems that have attractive cost benefit payoffs is the problem or lack of free trade. In the USA we constantly shoot ourselves in the foot in regard to free trade. We are the bread basket of the world but we subsidize our farmers which makes their products not eligible for the world market. In the long run, everyone wins from free trade.

Last night I viewed an online video called "Milton Friedman's Pencil". I hope you will take the time to find it and view it. The bottom line of the story is that the cooperation and coordination of thousands of people is required to make a pencil. These activities are directed by the free hand of Adam Smith.

The point of bringing up free trade today is to emphasize again that we live in global age where even the poorest of people are acquiring wealth to spend. Good health is a priority even for the poorest of the poor. Give them a few extra bucks and invent a pill or procedure that will solve a health problem and the money will flow.

It is time to buy, buy, buy the companies that will soon bring to market health care innovations. A lot of people are at the jump off point to old age. They will buy everything from new eye lenses to new knees to new memory pills.

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