Thursday, August 14, 2008


The projected date for white people to be in the minority in the USA is 2042. The combination of immigration and higher birth rates make Hispanics the fastest growing race in the USA. While population growth rates have slowed throughout the developed world (negative growth in Japan and some European countries), one can look at the current "shortage of resources" and conclude that too many people are being born. Looking at population purely from an economic viewpoint, one must conclude that there are too many people and not enough robots!

In 2007, there were 118,000 new industrial robots and the number of working industrial robots topped 1 million. About half of the new robots replaced older models. The net growth was about 5%, more than double the worlds population growth rate, but there are still 6,500 people per industrial robot. That ratio is going to decline. The day when entire factories are staffed by robots is coming.

In 2007, the USA added 16,800 industrial robots to achieve a 12% growth rate. China has fewer working units, but its growth rate in 2007 was 14%. At those rates, the USA will double the working units in 6 years and China will double them in a little more than 5 years. Before long, we will have about all the robots we need to produce all the products we need. When this happens, we will use our money to buy services that have not even been invented yet. The situation is akin to what happened to the growth in farm tractors. The number of tractors needed has declined as a result of the higher number of acres that can be plowed per tractor.

I don't have the data handy but industrial robots will soon be vastly outnumbered. We already have surgical robots that are cutting hospital recovery times by up to 100% and saving money and lives. The work of F-16's is currently being replaced by remotely controlled robots that consume a tiny fraction of the fuel. All sorts of dangerous work, such as sniffing out sea mines and land mines is being done by true robots and by remotely controlled robots. Within 5 years, demonstration cities will go on line with robotic cars. The total number of cars needed will fall dramatically when one can "cell phone" a car for just pennies of use per mile. Instead of sitting in garages, cars will be on the move most of the day. If you want to see a neat representation of future robots, go see "Iron Man".

Ironically, the economic slowdown lessens the reason to automate. The spending on robots for the year or two is likely to level-off a little.


On the extreme left, a few people want to take us back to the days of the draft horse. People yearn for the simple times when farmers produced most of the goods they needed. The problem is that draft horses and people consume far more energy per unit of work than do machines; robots use much less fuel than machines. From the energy use point of view, robots are hard to beat. Detroit lost jobs to Brazil and other places because unions were unwilling to work in the most automated of factories. Some of the jobs could have stayed in Detroit. A couple of farmers can maintain GPS guided tractors to do the work that once required thousands of people and animals. We no longer need farm families with ten kids and half a dozen mules. Our cost of living is extremely low compared to years past because we produce more with less energy.

If we stopped using oil as a transportation fuel, the USA would still need 5 million barrels per day to make rubber, plastic, asphalt, etc. Those who have been indoctrinated that fossil fuels are bad, are not going to get around the use of oil. We should not attempt to go back to the days of making products like Vaseline out of whale blubber. When the grocery bagger asks the question, Paper or Plastic? we should choose plastic. Alarmist will happily jump my bones and tell how they haul their groceries in a cloth bag, but plastic is the way to go. The environmental damage done to produce paper bags is several times the damage done by very thin plastic bags that actually bio-degrade over time. The most important indicator of which is best, ignored by extremist, is the cost. Plastic bags cost much less, which means less valuable resources are used to produce them. If we all start doing the smallest of things to save a .0001 cent plastic bag, we are going to kill the time we could use to "save the planet". By the way, trite criticisms of plastic, such as the example of the duck with a beer ring around his neck, is a problem of proper disposal. Almost every product is a very bad product if it is used the wrong way.

There is craziness in this world. Many people take the time to sort their rubbish. A huge amount of time is spent by individuals because it makes them feel like they are accomplishing something. Throw all of that trash into one can and let the market sort it out. Machines or trained people can sort through trash in a tiny fraction of the collective time spent by consumers. One of the richest business woman in China made her money by buying US garbage. Save enough .00001 cent plastic bags and you have a resource, not a problem.

Why do municipal authorities promote trash sorting? Don Boudreaux, Chairman of Economics, George Mason University has the answer. He says that "problem mongering is the surest path to power". The two political parties in the USA are primarily separated by the belief in the freedom of the individual and the power of the state. Nancy Pelosi wants to decide if an owner of land can drill on it. Pelosi is only trying to achieve utopia. She has a clear vision of what utopia would be. Her vision is unique. Her vision requires others to forgo their wants and needs to satisfy hers. Obama wants to tax the most productive assets in America, in order to achieve more equality of results. My paraphrase of F.A. Hayek, the great Australian Economist, is "Freedom's purpose is to allow inequality of results". We should all be allowed to choose not to sort our garbage if we believe our time can be better spent. Put a fair price on sorted an unsorted garbage and few would do the sorting themselves. Without inequality of results, motivation has been shown to wither. Socialist societies tend to waste hug quantities of assets before they implode.


Both political parties are pumping out populist rhetoric. This means they are saying what is popular, not necessarily what they believe. One of the favorite populist ploys is to offer income tax incentives for having children. Population is increasing faster than needed because our government pays people to have kids. Please do not throw rotten food at me! I love kids as much as anybody. The joy of my life is my 2.5 year old grand daughter. My love for her does not change the fact that her parents get income tax deductions and credits for having her. The majority of families will not alter the size of their family based on tax breaks, but at the margin many will.

The phony trap that I have fallen into on occasion is to believe that we need more young people to "Save Social Security". The interesting thing is that healthy people like to work, even 100 year old healthy people. We will not need young people to support us if we are working at jobs we want to do when we are 110 years old. Also, the wealthier the people, the less dependent they are on Social Security; families with fewer children tend to be wealthier families. Instead of waiting for retirement to take the trip around the world, people will travel long before they cease working. High paying service jobs are the ones that offer the most flexible schedules.

I am not opposed to tax breaks for families, but I would like for us to use our resources wisely. For example, instead of granting tax breaks to build ever larger college endowments and monstrous mausoleums for the great donors of old, I would love to see this money diverted to paying kids to go to school; not enough money for a totally free ride but enough to give anyone who wants to go the resources needed. Professor James Gwartney is a proponent of a similar plan. By allowing consumers to choose the "product", money would be spent on the "best product". Suddenly colleges would be in the business of selling the "best" education to the students. One of the things that would disappear would be 500 seat lecture halls. Curriculum would change. Excitement would return to learning. College kids would buy the latest technology and use it in ways that would temporarily baffle their teachers.


Everyday there is more evidence that the economic turn has been made. Huge discoveries of natural gas in New Brunswick, North Dakota, Louisiana, Tobago, etc. have kept the price of natural gas at about half the price of fuel oil. In New England, the wait for conversion from oil furnaces to natural gas furnaces is up to 4 to 6 months. In a single season, homeowners are saving more than $1,200. At the same time, sales of fire wood have doubled in only a year (drilling would reduce pollution). In the USA, the average car sold in 2007 gets 25.7 miles to the gallon and, so far, in 2008 the average car sold gets 26.8 miles to the gallon. The law of substitution is hard at work.

In Canada, job growth just fell off the chart. It went from a couple of percent growth to a 3% decline lickity split. In England, Sterling has hit an 11.5 year low and the BOE is talking about fighting recession rather than inflation.

Last month, the gold ratio hit a low not seen in more than 40 years. When gold was at $900 and oil at $140 the ratio was about 6.2. As recently as 1999, the ratio was almost 5 times the size! Both gold and oil have fallen but, once again, we should not let a movement in the same direction disguise the relative size of the movements. The ratio is going to climb as a result of sharply lower oil. Instead of spending their money on oil, consumers are going to buy technology. Companies like INTC will sell many more chips at the same time that the cost of the input metals drop.

This morning the 10-year note is down to 3.9% yield. In a "normal economic cycle", a short time after commodity prices begin their long march down, bond rates begin to fall. At some point along the way, the net value of leveraged real estate soars. If a $101,000 house is saddled with a $100,000 6% mortgage, the net equity in the home is approximately $1,000. If long rates fall such that the loan rate can be reduced to 5%, the monthly payment falls from $599 to $536. At 5%, a payment of $599 would support a mortgage of $111,000. The value of houses goes as high as the price that can be afforded. The equity in this instance would quickly jump from $1,000 to more than $12,000, a 1,200% return on invested capital.

Just a few days ago, the 10-year rate was 4.11%. Banks are holding trillions of dollars of highly leveraged paper. The decline from 4.11% to 3.9% looks small but a 5% savings on trillions of dollars is significant. Some of you will get caught in the argument that lower energy prices will boost the economy and thus cause the FOMC to boost short term rates. The answer to this concern is Hallelujah! A stronger economy will further boost the value of homes, some of which are currently "under financial water". Furthermore, an increase in short rates will be accompanied by further strength in the US Dollar, further declines in inflation and further decreases in bond yields. The flatter yield curve would take away some opportunities for banks but now-a-days, most loans are based on a spread. Banks do not do much of the old time borrowing short to lend long. Did I mention that in now takes only $1.48 to buy a Euro, down from $1.57 a few days ago?


Yet another bad guy has bitten the dust. There are now 147 terrorist training camps in Pakistan. The good news is that US intelligence is at its highest level in years. Hardly a week goes by without the raining down of Hellfire from the sky. The latest commander to bite the dust was Abdul Reham. al-Yazid was hardly cold in his grave before Abdul's met the devil.

Americans can be temporarily shielded from terror, but if allowed to grow, it will bite us hard. The world is at relative peace today. Even so, there are numerous potential conflicts awaiting. For example, no one knows where Pakistan ends and India begins. The boundaries between Kosovo and Serbia unclear. One area is claimed by China, India and Pakistan. Similarly, there is a corner of Sudan, Kenya and Ethiopia in dispute. Most Americans are suddenly aware of the separation of South Ossetia from Georgia. Russia is once again playing the role of the big bear. Most Americans are not aware of the border disputes between the US, Russia and Canada. North Korea claims land inside China but they are not likely to get it back anytime soon. Did you know that there are many more people of Lebanese dissent, living in North America than in Lebanon? Four times as many more live in South America! We live in a great place. The biggest problem we face is being brainwashed into pessimism.


Americans are living longer while working less. We are healthier while consuming more. We keep benefiting from innovation after innovation.

American soldiers in Iraq are carrying "translator iPods". Soldiers can look up a common phrase and push the play button. Just one more little trick that has saved lives.

Computers are being made without bulky, noisy, cooling fans. A new plastic is offering the promise to do the job better. Run an electrical current through this plastic and it cools a few degrees; objects next to it or enclosed in it also cool. One of these days we will plug-in our undies. We will plug in our clothes to power the computers that are built-in to them and plug in our undies to small powerful batteries to war or cool.

Speaking of cool, this year, there are half a million more acres of artic sea ice than last year. The flood is not coming, but the US Dollar is melting up! $1.48 per Euro!

BUY BANKS, BUY REAL ESTATE, BUY CONSUMER CYCLICALS, BUY TECHNOLOGY, BUY COMPUTER CHIPS, BUY WALL MART AND WATCH CHINA CLOSELY. The internal bottom in the US market was seven months ago, India and China will ultimately benefit from lower energy prices. China is building power plants (more than 1 per week) and buying robots (14% growth in 2007), the Chinese market has been slammed about 50%. Don't jump into China too early but be prepared to catch a great run.