A Prediction for the Old Economy
I have been looking for the trends whose premises are false — especially those trends that have been carried far beyond traditional bounds — and guessing that they will sooner or later reverse.
So far, we’ve looked at a few:
A serf in the middle ages had to labor one day per week for his lord and master. During the succeeding centuries, the burden of politics declined — to become almost negligible in the 19th century. But in the 20th century it shot up to nearly 100% of human and material resources in many parts of the world. Even today, in our enlightened and super-prosperous liberal democracies, people work about half the time for the political authorities.
My bet is that politics will lose its stranglehold on the world in the century to come.
Also during the last century, America rose to be the most prosperous and powerful nation in the world. It did so because it had an economy that was freer than most others — and benefited from millions of immigrants bringing new ideas and energy.
Today, people believe that the US economy is unstoppable, just as they believed that the Japanese economy was unstoppable in 1985. Yet, carefully examined, we have seen that the US economy is less robust than people think. It’s no longer substantially freer than other economies — it’s just had more credit made available to it. Most likely, it will run into trouble in the decade ahead. And the dollar will fall.
I have also predicted that the Rocket Chips will fall to earth — a prediction which looked like it was beginning to be realized yesterday… when the Nasdaq fell 5.6%.
Today, I give you another immodest prediction. This is not one of gloom and doom — but promise and prosperity.
Financial news in America and Europe is dominated by high tech — words, ideas, technologies that we don’t really understand but believe are going to change our lives. My lunch companion yesterday reported that his mother had put in a new kitchen from a single biotech recommendation. A Daily Reckoning reader told me that I was right about the fraud of the New Era — but that it had paid off his mortgage.
But most of the world is dominated by low tech. Most people’s lives are not appreciably enhanced by faster connections to pornographic websites, nor easier storage of email messages. They are improved in the old fashioned way — by adding material comforts… the kind produced by the old economy, not the new.
The most dramatic financial trend of recent months has been the alienation of Wall Street from Main Street. And not merely Main Street, USA… but Main Street, Global Village.
Most people on the planet do not live in the highly- developed, caf? latte-drinking, BMW-driving world. They live in places you wouldn’t want to live. Like Minsk. Or Liberia. Or Indonesia. Places that smell bad. Places where a big mac is a big improvement over the local fare. Places were people barely earn a living — much less get million dollar Christmas bonuses.
These people are not bored by the old economy. Just the contrary, they’re excited by it. They want what the old economy can produce.
What brought these thoughts to mind was a very interesting letter from John Myers. John is the son of one of the investment world’s most colorful characters, C.V. Myers who died a few years ago. The elder Myers was uncompromising in his affection for hard assets, and in his contempt for politics. John seems to be following in his father’s footsteps.
John pointed out that half of the world is still laboring in an agrarian society. It is like America at the beginning of the 20th century. And the biggest explosion of wealth creation in the years ahead will be not be made by Amazon.com — but in the Amazon, the real Amazon… the real jungle.
The real money will be made by assisting the transition of poor, backward people into the modern age. And that will not be a process of getting them to wear Nikes and follow the Atkins diet. It will be a process of getting them in houses, with electricity and appliances… and central heating, and automobiles — and enough food on the table — all the things that the old economy produced in such abundance, and which we now take for granted.
The best investment opportunity, John insists, is therefore not digital, but analog. You don’t produce this stuff with software alone. You need raw materials, and factories.
I don’t know if raw materials, factories and other old economy investments will turn out to be inherently superior in the decade ahead. But given the fact that analog is currently cheap, while digital is very dear, I feel comfortable in predicting that old economy investments will perform relatively better than those in the new economy in the years to come.
In 1950 dollars, an ounce of gold still sells for only $40. Silver is only 78 cents a pound. And copper — which you could get for 55 cents a pound back when Buddy Holly was singing “Peggy Sue” is now available — as much as you want — for just 12 cents a pound.
Cotton is selling for 7 cents a pound — half of its price 5 years ago. And coffee — which you need for making a $5 cup of latte as well as a 50 cent cup of java — is so cheap it’s causing governments to topple in Africa and farmers to go out of business. It’s priced at one-eighth the price of 25 years ago.
And while productivity in food production has been greatly enhanced in the last half a century — it seems to be reaching the point of diminishing returns. Growth in yields per acre decline each year. Also, each year, less and less new cropland is brought into use… while some of the best tobacco land in Prince Georges County, Maryland — and elsewhere — is turned into housing developments.
John provides an interesting — but suspicious — figure for water usage. He says 50% of total water reserves were in use by 1950. Today, the figure is 90%. Meanwhile, people keep having babies. The population is expected to rise 40% by 2010, he says.
Most of these people will want a lot more of what you and I already have. And companies that can provide it are going to make money — not just over the next 5 years, but over the next 50.
John also suggests a simple way to take advantage of this opportunity. Buy the Fidelity Natural Resource fund. But here’s my prediction in a nutshell: Old economy stocks will outperform new economy issues. Count on it.
*** “Profit taking” — that’s how the media described yesterday’s worldwide stock sell-off.
*** What was actually happening might be better described by the obscure words of the European Central Bank which said it had begun a, “liquidity-absorbing fine-tuning operation.” It’s sopping up the Y2k cash, in other words.
*** Yesterday, I suggested you might want to take your money off the table. It’s still good advice today. You won’t have to pay tax until April of 2001. In the meantime, apply the money to places where it might make you some money — rather than cause you to lose sleep.
*** The Dow ended down 358 points. When I called up Richard Russell’s website I discovered that he had a technical problem… and got this message “Mr. Russell did not like today’s action at all.”
*** There were only 23 new highs and 160 new lows. Even the 28-year-old Net billionaires lost money yesterday… at least on paper (which is the only way they had any money anyway). What’s not to like?
*** But alas, gold was down big time, too. It fell $5.90. Gold is not telling us that inflation is around the corner. Of course, I don’t know if gold can see around the corner, either.
*** What the markets seem to be anticipating is a series of rate hikes this year. Greenspan is getting appointed for another term. But he won’t serve more than a quarter of it under Bill Clinton. And he may not want to be too accommodating to Al Gore’s election efforts — since Gore looks like a loser. In fact, he might be more concerned about his reputation.
*** Higher rates would, of course, be very bad for stocks, bonds and gold. But they would be good for the dollar. So, we could see more strength in the dollar before the big decline.
*** The smart money seems to have bought in December and to be selling stocks now. But there is still plenty of dumb money around too — so expect anything.
*** Here’s a snapshot of one of the Rocket Chips cruising past Pluto and soon to exit the Milky Way. Wit Capital lost $12.8 million in the last 9 mo. Of ’99. On 27.6 million in revenue. Its market cap, however, is $1.3 billion — 40 times revenue.
*** The secret of success on Wall Street last year was to lose money. Through December, stocks with no earnings were up an average of 50%. Those with earnings were down an average of 2%.
*** Gosh, as a businessman it’s no wonder I don’t “get it.” I can’t get it through my thick skull that I’m supposed to lose money, not make it. Think how much easier it would have been — if I had just realized that I didn’t need to struggle to make a profit. And think how much more valuable my business would be today… if I could capitalize my accumulated losses!
*** Yesterday’s action reminded Bill King of how the Japanese bubble ended — stocks fell on the first day of trading in ’90… and pretty much continued to go down for the entire decade!
*** The Vatican is said to be beginning its search for someone to succeed John Paul, who is ailing. And Bill Clinton says he may run for Congress from Arkansas.
*** Steve Sjuggerud has an interesting response to my comment about the necessity of getting off the trend before it is discredited. He bought an internet company in Singapore which has gone up 200% since he recommended it to Oxford Club members in October… including a 41% boost in a single day. But rather than try to figure out when the trend is discredited, he merely put on a stop- loss and will let that take him out.
*** I took the older kids to see End of Days, with Schwarzenegger the other day. I find his movies not as bad as many of the genre. Though laden with all kinds of improbable claptrap, they’re still entertaining and even ambitious. The kids had nightmares.
*** A new book about Pearl Harbor by Robert Stinnett adds fuel to the conspiracy fire. The book alleges that Washington knew the Japanese were planning an attack — they were aware that a Japanese spy had sent precise details, including bombing targets, to Admiral Yamamoto.
*** No one knows exactly what Roosevelt did with the news. But if his purpose was to draw the Japanese attack, he did so beautifully. Commanders in Hawaii were ordered to stop patrolling the waters north of Oahu — lest they detect the Japanese fleet. And the big aircraft carriers were dispersed — but not the rest of the fleet. After his planes returned, and Yamamoto was informed that the carriers were not there, he knew that the attack had brought the US into the war… but failed to cripple the US fleet.
Paris, France January 5, 2000