Wednesday, December 03, 2008

Abundant and Great Investment Opportunities

Rare investment opportunities are available every where one looks. The invisible hand of Adam Smith and the heavy hand of Ben Bernanke are powerful. While Big Ben has pumped about 1 Trillion Dollars into the US economy, it is the invisible hand that is most powerful. The invisible hand has brought long term Treasury Bonds to a 60 year low yield of 3.19%! The willingness of "savers" to lock-in 3.19% for 30 years on Trillions of Dollars of assets is powerful economic medicine. The US population continues to grow and households continue to form and grow. The demand for housing is growing faster than the available supply of housing is growing. Low interest rates offer incredible investment opportunities. Today, an investor only needs to believe that the combination of rental income and capital appreciation on real estate will exceed an average of 3.19% to convince himself to buy aggressively.

The US economy today is being compared with the Japanese economy of 1989 and to the US economy of the great depression. These comparisons are way off the mark. The monetary policy of Hoover was the opposite of the Ben Bernanke policy and Roosevelt raised every tax he could find. Marginal tax rates went from something like 20% to 74% during the great depression. Japan's biggest problem has been a declining population. The US population continues to grow.

Two great friends and frequent blog readers have put in to adopt a child from Bulgaria. Adopting a child is an act of love if there ever was one. In recent years, there has been a dramatically adoption change in that Asian children, like domestic children, are in scarce supply. The odds of successfully adopting a US baby are slim to none and it will take my friends about 18 months to adopt a child from Bulgaria. The wait for a Chinese baby has increased to 4 years. The scarcity of children to adopt is great news for children. The treatment of children is improved as a result of relative scarcity. Economically, the thousands of adopted children in America are adding to economic growth here.

Adam Smith, an Oxford University professor of "moral philosophy", was the father of modern economic theory. The science of economics is about cold hard numbers but it is also about doing what is right. The game of politics, which should be to find the moral and economic answers to public issues, is, unfortunately, the game of satisfying the irrational expectations of voters.


When a dumb bridge is built, the effect is the same as when one of Henry Haslett's windows are broken. Henry noted that you can stimulate an economy by breaking shop keepers windows. Back in the days of riots in the Watts section of Los Angeles, it was reported and ultimately true that the local economy would be stimulated by the burning down of homes and stores. The nationwide economy would have been stimulated if the burning had not taken place. When government money was used to rebuild Los Angeles neighborhoods, money was taken from other deserving areas.

Yesterday, at a governors meeting, Obama pledged to assist republican and democratic governors to stimulate their local economies by supporting a massive bridge building scheme. The political timing is correct but the action is wrong; let the people decide what to build! Let them cast economic votes for what is best.

Is it not ironic that just after the largest decline in auto driving in history that the US government would borrow heavily to build more roads and bridges! Where roads and bridges are needed, they should be built but a massive road building project is not the moral and economic answer to the current economic downturn; one that will be over by the time construction starts.

To pay for these roads and bridges, taxes will have to be raised to pay for the interest on the borrowed money, even if the principle debt is never repaid. Talk is of a $600 Billion Dollar Stimulus Bill. About $2,000 per person, man, women and child. How would your family like to spend your share? I doubt that you would volunteer to spend your share to bailout California, where the government has spent itself into the poor house. Four hundred million dollars to build a bridge in California should be a local decision; the public has thousands of opportunities that 400 million dollars would satisfy. The US economy is already being stimulated, is our first priority more bridges?

In spite of the current economic recession, we live in the best of times. In a Google-tech-talk video, a nuclear engineer points out that each American has the equivalent of 58 slaves working for them full time. The average American uses electricity that corresponds to the work produced by 58 hard workers. Daily, we decide how to use that electricity and much of it is wasted. Governments are more wasteful than individuals. We do not get rid of waste by combining our resources to waste them in bigger chunks.

I am not opposed to building bridges, but bridges should be built based on economic need, not on political whim. As Governor Sanford of South Carolina pointed out in an Wall Street Journal article yesterday, we face the risk of becoming a politically driven economy instead of a market based economy. The example of Russia shows how that might work out.

Just because a board of directors has the votes, it does not make it morally or economically correct to pay a CEO $50,000,000 per year. Just because democrats have the votes does not make it morally or economically correct to spend $600,000,000,000 on California bridges and other political favors. Just because a particular congressional representative opposes this "California bailout" should not mean that his district gets punished in the final bill. Today, we have the technology to constantly "meter" highway traffic and to allocate fuel tax dollars to where they are economically needed. The rebuttal that the bailout dollars will be fairly allocated is bunk. You cannot fairly allocate federal dollars that should have been spent on other uses. It is not fair to force a shopkeeper to send money he planed to use to repair a broken window to a state government to build bridges. Why should the tax payer in any other state subsidize California roads?


The good news is that even another government $600 Billion Boondoggle is small compared to what is going on in the "real economy". Real estate prices, as estimated by Doug Katz, have been lowered by 18 Trillion Dollars. If the government wanted to get a high return on a $600 Billion Dollar investment, it could buy homes at the lowest real prices seen in years.

The average price of oil in 2008 will be about $105. The current price is about $45. If the price were to average $45 in 2009, US consumers would save about $450 Billion Dollars. The savings from other lower prices, everything from corn syrup to batteries, will be 6 times as great as the savings on oil. Americans will save more than 2.5 Trillion Dollars in 2009. It will be a shame if our government spends $600 Billion of our 2.5 Trillion Savings on bridges but even if it does, the net savings will still be massive.


On the biggest shopping day of the year, traffic was up 7% over last year. In the midst of gloom and doom, Americans are living well. The gloom and doom press locates pockets of trouble and ignores the broad based benefits reaching consumers everywhere. The process is the inverse of government spending where relatively small amounts are confiscated from lots of people to focus spending on a relatively few major projects. Well before the economic recovery is fully underway, consumer stocks will soar.

Last night I reviewed the IBM annual list of 5 disruptive technologies. The third item on the list, computers that talk, should be first on the list. Your life is going to change when you are able to ask your constant companion for information. In some cases, this information will be "scheduled releases", such as reminders of calendar events. Some of it will be in response to events triggered by other people, such as the movement of a spouse from a car to a grocery store. Much of it will be "spontaneous conversation". A user might say, "Hal, help me remember to stop for milk on the way home." The later in the day response might be, "Dave, no need to stop for milk, your wife purchased a gallon at Wal-Mart". "Hal, it is my birthday, what else did she buy?" "Sorry, Dave, she put a block on that information". "Hal, check the bank account to see how much she spent". "Dave, apparently the purchase was made on her 'private' account".

One item, left off IBM's list this year, was social networks. A tremendous amount of productivity is being achieved through the use of social networks. Like everything new, there is a learning curve. It takes time to sort out the productive uses from the wasteful uses. Those who have "played around" with FaceBook know that lots of time can be wasted, however, the power of networks is huge. The value grows exponentially as "nodes" are added. If only a few friends and a few business associates are linked to you, you don't accomplish a great feat when you make a change to your profile, such as a change in your cell phone number, however, if all of your friends, family and associates are linked to your profile, then one minor change is the equivalent to a tsunami of information. Change your cell phone number in one place and the whole world "knows". Have you ever wondered how much business has been lost due to out dated phone numbers?

Like everyone else, IBM has overstated the effects of solar power. IBM has solar power first on its list. Continued progress on thin film technology keeps lowering the cost of photo voltaic power cells. The entire glass sides of buildings might be built with photo cells "printed" on the glass. The IBM list was probably developed before the price of oil dropped from $147 to $45. Solar power has a great future but much more cost savings must be achieved to make the technology competitive. Furthermore, even IBM seems to have missed the order of magnitude of energy use. In 2006 there were 97.1 Quads of energy produced on planet earth. A Quad is 10 to the 15th power BTUs. One BTU is equal to 1054 Joules of Energy. The numbers are mind boggling. Forty percent of this energy is produced from oil.

Currently, only a very tiny fraction, .04% as I recall, of our electricity is produced by solar panels. That number will rise but thorium power plants will likely be the rage long before solar energy gains a major market share. Thorium is a cheap and abundant natural resource that can be used to build efficient nuclear power plants without producing the plutonium that is used in nuclear bombs. The USA owns about 25% of the known thorium reserves. India is rich in thorium and poor in uranium. India is leading the charge to build thorium plants that burn 100% of the fuel, compared to current nuclear plants that burn only 4 to 6% of their fuel. Thorium the size of a softball packs the same amount of power as about 200 freight train loads of coal. The marginal cost of producing electricity is likely to fall in real terms by 40% over then next 10 years. Japan and the USA, heavy users of electricity will be among the major beneficiaries. If you don't believe me look at the jump in the value of the Yen and the Dollar in recent weeks.

The second item on the IBM list is a game changer. Low priced DNA mapping will soon allow people to dramatically lengthen their lives. Disease will be cured before they arrive! Science fiction is no longer fiction. We see through a mirror dimly but we know that dramatic change is on the way. There is a reasonable chance that you will be around 100 years from now when we will know much more than we know now.

Very deep recessions in countries such as Argentina and Venezuela are also game changers. The see-saw effect is real. When one economy goes down, another rises. Venezuela is a fine example of spending ones 7 years of surplus. The next 7 years of drought is going to force major changes in Venezuela. Chavez has gone from King of the World to frighting for his political life.

It is not a gloat but a fact that the average citizen in the USA enjoys a purchasing power income of $44,000 per year. Millions of Chinese who went from a purchasing power income of $300 per year to $2,000 per year are at risk of going back to $300. To avoid such disaster, export prices are being cut to the bone. People in Viet Nam live off an average of about $3,000 per year, up from around $1,000 just a decade ago. They too are anxious to replace lost work. Export prices are being cut to the bone. Marginal producers are going out of business and the flight to quality (including the flight to the USA) continues. US consumers are seeing the benefits.

Take a look at the specs on the new Nokia "super phone" that is coming on the market soon. This $600 device ($200 with a two year $70 per month phone and broadband Internet contract) is many times more powerful than the average desktop computer in service today. This year, people will carry in their pockets computing power that would not have fit in an 18 wheel tractor trailer rig about 10 years ago.

A lot of $600 phones will not be bought because the government will use "phone money" to build bridges in California and Illinois (most favored state status has switched from the home of Bush (Texas) to the home of Obama (Illinois)). Even so, before 10% of the construction has been done, these $600 phones will have been replaced by $300 phones that are twice as powerful. These phones will listen and they will talk back! Current computer speech skills are poor but they will rapidly get better.

Yes, we are living during a time when we should be and are finding ways to reduce the amount of driving that is done. Yes, we are living during a time when our government will use federal dollars to build more local roads and bridges. Yes, this policy is misguided. No, it will not prevent the US economy from a full and dramatic recovery.

This whole crisis was "engineered" with the chief engineer being Hank Paulson. The FOMC is finally doing what it should have done long before the bailouts started. Trillions of dollars of assets have changed hands at low prices due to the actions of Hank. You should go out of your way to pick up as many of these assets as you can. The next opportunity as big as this one is likely to be more than 30 years from now!