Investing in Areas With Rapid Growth Potential

Dow up 80…oil still below $100…gold still below $1,500….

Oil has a long way to get back to its 2008 high. But it’s still 3 times what it was in 2005 and 5 times its price in 2001.

In the battle between inflation and deflation, it’s not clear to us who’s winning. Prices are rising, but in the context of a general deflationary funk. Try as they might, the feds just can’t shake the Great Correction. It leaves them struggling to loosen monetary policy to free-up the economy…and succeeding only in tightening the noose around the consumer’s neck. Here’s the AP report:

NEW YORK (AP) – High gas prices are driving a wider wedge between the wealthy and everybody else.

The rich are back to pre-recession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items like $5,000 Hermes handbags and $700 Jimmy Choo shoes, and purchasing at full price.

“The average shopper isn’t in the game, except for necessities,” said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, “Luxury products are selling like bread.”

J.C. Penney, Wal-Mart and home-improvement retailer Lowe’s Cos. all said they’re noticing their customers are consolidating shopping trips to save money on gas as the average price hovers at $4 a gallon.

More than a half-dozen corporate earnings reports this week show that for the affluent, rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.

Of course, this has the obvious nasty feedback loop. The middle and lower classes have less to spend. The economy sinks along with them.

But we’re not going to worry about them. We warned them!

Instead, let’s turn to another subject.

Yesterday, The Daily Reckoning set off a bombshell…or at least a stink bomb. We wondered aloud if real growth rates in the developed countries – particularly in England and America – hadn’t returned to their pre-Industrial Revolution rates. Is it possible that real growth regresses to the very low levels of the middle ages or before?

Why would that happen?

It’s not a matter of Fed policy. Or of tax rates. Or even of debt. It’s deeper than that. More basic. More important.

Each time humans make a breakthrough, their rate of growth speeds up. They then take advantage of it. They fill up the economic niche it opens for them…as fully as their new technology allows. And then what? Growth then goes back to ‘normal.’ But what’s normal? Apparently, normal is very low or negligible rates of growth; that’s what we had before the Industrial Revolution began.

Which, of course, only gives rise to a whole group of questions.

First, is it true? Is human history a long spell of stagnation or low levels of growth…punctuated by sudden bursts of above-trend growth?

If it is true, is it also true that the developed economies have reached the limit of the ‘cheap energy’ dividend…which began with the large-scale exploitation of coal in the 18th century, followed by the wide use of oil in the 19th and 20th centuries?

And if that is true, what next? Are there no new sources of cheap energy?

What about nuclear?

Well…a possibility…but recently nuclear power was dealt a huge setback. It’s not cheap, not when you add in all the safety features… and the cost of the occasional emergency. Many nations are now re-examining their energy policies to decide whether nuclear has any role to play at all.

What about conservation…energy saving measures…going green?

Well, yes…you can stretch your energy. You can probably even increase your standard of living, by using it more efficiently. But you don’t get above-trend economic growth gains by reducing the inputs of energy. You appear to get rapid growth only from big breakthroughs that make new energy available…and put it to work for you.

So, what can you expect? The critical component of growth has suddenly become three times as expensive as it was five years ago. The economy can probably continue to ‘grow’…but how much? Without a new breakthrough, what can it expect? About the same level of growth as before the new technology came on line – negligible growth, in other words.

And if that is true, how will investors make any money?

Answer: they won’t.

Hmmm… This is getting interesting.

‘Bill, let me get this straight… You’re saying that the kind of growth the US saw in the 18th, 19th and 20th centuries was just an anomaly…right?’

Well, that’s the implication.

‘You’re saying that when the world gets its fill of a new technology – even if it is something as big as oil – that it grows up to the limit that that technology makes available…and then it comes to a halt.’

Yes, that is what this analysis suggests. Let’s say you look back at when the bow and arrow was invented. It probably enabled primitive hunters to get more game. They could support more people. So, the human population grew. But once the bow and arrow was widespread, the population probably stopped growing. We had squeezed all the juice we could out of that innovation.

‘And you’re saying that the investment returns of the past couple hundred years actually may reflect this anomaly…and that investors may never again realize anything like it.’

Well, yes. Not in the advanced, mature economies.

‘Then, it sounds like I should just forget about investing all together.’

Nope. First, there are huge parts of the world that are not ‘built-out’ yet. Where energy use is still very low. These areas can still make rapid progress as they catch up. They’re like tribes that hadn’t taken up the bow and arrow. When they got it, they could make progress.

You ought to be able to participate in their progress, too, simply by buying companies that are operating in these growth areas. And they’re not just foreign companies… US, European and Japanese companies are all taking advantage of growth in the developing world.

Second, there is still the opportunity for making money the old fashioned way…by compounding earnings, not capital gains. We’re so used to stocks and real estate going up that is it hard to imagine a world with stagnant prices. But that is what we could be facing. Slow rates of growth should mean very slow or negative price appreciation in America’s capital stock. Dividends will become more important. And people who get wealthy will probably do it as they did for centuries before the Industrial Revolution – either by saving and compounding small gains over many years, or by taking it away from someone else.


Bill Bonner
for The Daily Reckoning