Boomer Trends Coming to an End

Being in the right place at the right time is far more important than brains. Luck provides better investment returns than talent. Too bad. Because our luck seems to be running out. Bill Bonner explains…

George Soros says the great credit expansion that was born with the baby boomers…and has lasted as long as we have…is now over. And this week comes word that the "end of abundance" is here too. That’s what it said on page nine of Monday’s Financial Times. And then, Bo Diddley died.

All the palmy trends of the boomer generation seem to be coming to an end.

Naturally, the world’s leaders are worried. They gathered in Rome this week for the customary monkeyshines. Even Robert Mugabe – who is banned from traveling in Europe – put on a false mustache so he could dine out on the Via Veneto, leaving his lieutenants in Harare to beat and starve Zimbabwean voters. Poor Mugabe. Goebbels would have gotten a warmer reception at a meeting of Jewish orphans.

At 84, Mr. Mugabe is almost living proof of Haeckel’s biogenetic law. It maintains that the history of the individual rehearses the history of the species. In Mugabe’s long life, from prison cell to presidential palace, he is the history of revolution…a Kerensky and a Stalin… the liberation struggle’s saint and its monster, too…all in one. To black Africans he is a big disappointment. To whites he is proof that Ian Smith was right all along. When Ian Smith left the top man role in Rhodesia, the country was the ‘bread basket of Africa’ with a currency as strong as the pound. Now it is a basket case whose peoples’ bones stick out and whose dollars are already as worthless as a campaign promise.

But everything follows the same laws – from embryo to corpse…from boom to bust…from seed to fruit to rot…nothing escapes, neither an individual, an empire, a species, nor a market.

This is not the first time in our lifetimes that the world has seen this kind of show. In the ’70s, Paul Ehrlich, like Malthus before him, foresaw a crowded, hungry world. In his popular book, "The Population Bomb," he said hundreds of millions of people would starve to death. This was a world in which England couldn’t even exist; he said it would disappear by the year 2000. He was wrong about that. He was wrong about a lot of things. Julian Simon challenged him, arguing that a free economy always reduces real prices. On September 29th, 1980, the two made a famous bet – on whether the prices for 5 basic metals – chromium, copper, nickel, tin and tungsten – would actually go down, inflation adjusted, in the following ten years – despite population growth. What happened? Simon won. On the 29th of September 1990, the prices of all five were lower. Ehrlich settled up with a check for $576.07.

In theory, Simon will always win a bet like that; competition and technology always force prices down. But Ehrlich wasn’t wrong about everything. And Simon wasn’t right about everything. While one believed the weight of numbers would send the world to Hell…the other had a god-like faith that the market would always save it, guided by an invisible hand to progress and prosperity. But while Simon is right in theory, the invisible hand is not always the gentle paw that he imagines; it does not necessarily call out for more booze just because the crowd gets thirsty. In fact, sometimes it vanishes altogether, allowing a Mugabe to ruin a country…instead of permitting the free market to build it up.

Simon had the good luck to make his bet at the beginning of a major decline in commodity prices. Oil, for example, hit an all-time high over $100 a barrel, in current dollars, in December 1979. Ten years later, it was trading near $30. And by 1998, the price had fallen to $10. Had he made his bet ten years earlier or ten years later, he probably would have lost.

Back to the raw facts facing the Roman holidaymakers: Over their plates of crespelle all fiorentina, delegates will learn that high food prices are putting millions of people on the verge of starvation. Then, as they wash down their peposo with a tide of Barolo or Chianti Classico, they will reflect on how this came to be. The "green revolution," someone will mention, seems to have run its course. (Out of politeness or imbecility, no one will mention the Fed’s easy money policies.) Ehrlich’s population bomb never exploded, they might come to believe, because irrigation, selective breeding, and the use of petroleum-based products greatly improved farm productivity.

But now, the green revolution has turned brown. It is as mature as the credit cycle…or Robert Mugabe himself. The water is running out. Opposition to bio-engineering is growing. And petro-chemical inputs are both less effective and much more expensive than they used to be. Result? In 1961, crop yields grew by 10% per year. Lately, they’ve increased less than 1% per year.

Meanwhile, in 1970, there was about 1 acre of arable land on the surface of the planet for every pair of feet. But the feet have multiplied – just like Erhlich said they would – from a bit over 3 billion people to more than 6 billion; and now the species is expanding like sub-prime debt. Just look at a chart. Human population looks just like the NASDAQ in ’99 or oil in ’08. This bubble-like population explosion, along with urbanization, highways, pollution, desertification and so forth, has cut the amount of farmland per person in half. Meanwhile, the number of people bellying up to the bar continues to grow by 11% per year – more than 10 times faster than crop yields.

Everyone wants a drink; but there’s only so much beer on tap. Who knows? This may be a good time to short the whole damned race.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

June 6, 2008 — Berlin, Germany

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

Oh, where to begin, dear reader? When you have something important to say, like launching a nuclear missile…you have to be careful how you aim the thing…

But first, let’s look at the major headlines: the Dow shot up more than 200 points yesterday. And then back down this morning. Oil rose $5. The dollar fell back…and gold dropped. Nothing worth getting excited about…so let’s return to our story…

What happens when one bubble runs into another one? Which bubble survives…the one in commodities? Or the bubble in the people who buy them?

By the charts ye shall know them – bubbles, that is. The lines roll along nicely, calmly, along the bottom of the page, then all of a sudden, the line shoots up. When you see a chart like that, whether it is the price of tulip bulbs, shares in the South Sea Company, or Alan Greenspan’s career, you know what will happen next. The line will go down!

What goes up must come down. A bubble is an extraordinary thing – a rare phenomenon, like a presidential candidate with an honest opinion. And all extraordinary things tend to become less extraordinary over time. "Regression to the mean," is what statisticians call it. The "mean" marks the territory that is normal. Whenever anything ventures into abnormal territory, chances are very high that it will soon come back on familiar ground.

Take an extraordinary person, for example. More than likely, his children and grandchildren will be more like everyone else than like himself. It must be a terrible burden to be the son of an extraordinary man; people look at you like you were a dotcom stock in ’99 – they expect something exceptional. Almost inevitably, they are disappointed.

Or take a Great Empire. What is an empire but an extraordinarily successful state? It stands out in history because it has managed to lord over its neighbors. Yet, what empire lasts? None…all regress to become commoners…ordinary lumpen-nations.

Or take the weather. A rainy spell may last for a long time. But the more days it rains, the more dry days will be needed to bring the rainfall down to "normal" levels.

Regression to the mean is one of the surest bets an investor can make. Let prices go to extraordinary levels and he’s almost guaranteed that they will come back to normal. In markets, regression to the mean is even more certain than it is in nature. Because extraordinary prices set in motion a series of actions and reactions that almost always bring them back in line. Today’s record-beating oil price, for example, has already touched off a series of derriere-kicking trends and events that are sure to take it down a notch.

On the supply side, the industry is spending four times as much on exploration and development than it did when the century began. The price of drilling equipment rentals has more than tripled. And now, believe it or not, a young man graduating from an Ivy-League college with a degree in petroleum engineering earns more money than a man who goes to Wall Street.

On the demand side too, changes are underway that will cut the amount of oil used. The cure for high prices is high prices, as we opined yesterday. Bubbles are self-correcting. The higher prices cause people to look for alternatives – or simply not use so much. U.S. imports of oil went down over the last 12 years. And, for the first time ever, Americans are driving fewer miles.

Another track of the feedback loop is the economy itself. High oil prices work like higher interest rates or higher taxes – removing money from domestic commerce. The effect is to "cool" the economy…chilling demand for energy.

Elsewhere, substitutes for oil are being developed at breakneck speed – including wind, solar, and bio-fuels.

Regression to the mean works. Markets work. Lower energy prices seem a cinch.

But now we introduce an annoying nuance. While the bubble in oil prices was expanding…another, much bigger bubble was shaping up – and hardly anyone noticed.

Where? Just look in the mirror, at our own species. In the many, many thousands of years of our prehistory, we were hardly worth counting. There were tribes of us all over the globe…but they were small…barely holding their own against other species in the competition for food and resources. It took until about 1800 to get the population up to one billion. Worldwide. Then, man was a big winner. Numero Uno…the crown of creation. By 1930, another billion had been added. And another billion was added in the next 40 years. That brings us to about 1970, when the earth hosted about 3 million two-legged yahoos. Since then, the population has more than doubled. The line shot up, in other words.

But we are a proud and egotistical race. As our numbers rise, we think the road will rise to meet us. What a shock it would be to find that the whole species is mean-reverting, just like everything else! What a surprise to find no road at all – to find that we are running off the edge of a cliff, like lemmings. More below…

*** What brings these thoughts on our species to mind is a report in the Daily Telegraph. It tells us that a conference organized by Goldman Sachs has revealed the world’s "Top Five Risks." The Goldman team turned its back on America’s bugaboo, terrorism. Instead, they believe the biggest risk is a shortage of water.

Not that there isn’t enough water. There just isn’t enough in the right places. And getting it to the right places is going to be expensive. Ergo, Goldman explained, there is money to be made.

We don’t know whether it was the report that was stupid…or the Daily Telegraph. It says, for example, "water is not a renewable resource." Oh? What happens to it? It evaporates, says the paper. But doesn’t it later fall as rain? Maybe we’re missing something.

Then, quoting directly from the report, "it is estimated that by the year 2050, about one third of the global population will not have access to adequate drinking water." How could that be? By definition, if people are alive, they must be drinking something. And it must be adequate, or they’d drop dead from thirst.

The real question is: how much will it cost to get it? And where will people get the money?

But let us put those questions aside. What interests us today is how it works. Does a lack of water doom the bubble in humankind? Or, do we Homo sapiens have some special grace that exempts us from the bubble laws…from reversion to the mean, for example?

As water becomes scarce, naturally its price rises. Sooner or later, the price of water will get into bubble territory too. But what happens then? Will the bubble in water prices pop the bubble in our species? Or will we find some way around the problem…effectively popping the bubble in water, so that we will all have plenty to splash around at every day low prices?

Colleague Chris Mayer, points out that crumbling water infrastructure is a big problem in the United States.

"The U.S. alone has nearly 700,000 miles of aging pipeline and pumping stations.

"Some of these U.S. systems are over 100 years old. They wear out. Pressure falls. Water leaks out. Cities lose as much as 30% of their clean water supply to leaks alone. And then things like arsenic, human waste particles, chlorine, and decayed metal leak in.

"With over 55,000 public drinking water systems…about 20,000 public wastewater treatment plants… and around 75,000 dams and reservoirs… in the U.S. alone… you’re looking at a massive infrastructure in need of updating and repair."

And there’s some major opportunities for investors here…

"New 2005 water purity laws from the EPA demand that those systems get updated. U.S. spending on new water infrastructure alone could top $1 trillion by 2015, according to both Merrill Lynch analysts and the Wall Street Journal," continues Chris.

"And remember, that’s just the U.S. China’s market for water-systems infrastructure will grow at nearly twice the global rate – with as much as $250 billion in new spending, just between now and the end of 2008."

*** A report from our South American correspondent, Horacio Pozzo, tells us that inflation is walloping Chile. Chile’s inflation rate has risen to 8.3%, while it central bank still lends money for 6.25%. As in the U.S.A., privileged borrowers can get money for about 2% below the inflation rate.

But the big success story in South America is Brazil. The country was always the "land of the future," until now. Now, Brazil’s day has come. It has energy! And food! And water! Will America and Brazil change places in the 21st century…with the former become the ‘Land of the Past’ and the latter becoming the ‘Land of Here and Now?" It could happen.

The Daily Reckoning