21st Century Economics

Nearly all of the wars in the past 3,000 years can be traced to having a strong motivating factor of a disparate distribution of wealth within or between countries. When that has not been the direct cause, it has been a major contribution factor.

Now consider this:

The United Nations reported last month that the net worth of the three richest families in the world (the Gates family, the Sultan of Brunei and the Walton family) is greater than the gross domestic product of the 43 poorest nations on Earth — combined.

A recent issue of Nation contained an article noting that pharmaceutical companies spend far, far more money researching lifestyle drugs for the affluent than life-saving drugs for the hundreds of millions of the world’s poor people. Instead of trying to come up with treatments for life-threatening diseases, resources go into treatments for wrinkles, impotence, baldness and obesity.

Recent business surveys indicate that the ratio of the salary and perks of a firm’s CEO to that of the average employee of the firm is at an all-time high. Nowhere in the world is it higher than in the US.

Other studies indicate that although profits are rising, productivity is increasing and the stock market is advancing, employee compensation remains flat.

A professor at New York University estimates that the richest 1 percent of Americans own half of all stocks, bonds and other assets.

These stories and many more like them indicate that there has a been a basic paradigm change in our basic moral sense of fairness and philanthropy. Greed, ego and self-preservation has taken over as the predominant factor in many social and business decisions. Although this is being observed all over the globe, it is by far the most egregious in America.

Other reports in this information service have also told you about the “information haves and have-nots” and the impact of that growing gap.
Combine this with the historical cause of revolutions, wars and social upheavals and you have the formula for some bad, sad times to come.

Of course, the object of this blog is to discuss Profit and that does certainly seem to demand that we limit our rock throwing while standing in our glass house but there are good reasons why we must examine even the worst of our most advantageous behavior.

The simple answer is that there is not a shred of evidence, analytical data or economic, historical or scientific justification to believe that the good times will continue for very much longer. In fact, by historical standards, we are way overdue. By social standards, we are stretching the rubber band of class tensions almost to the breaking point. By economic standards, we have surpassed conditions which have, in the past, precipitated great economic upheavals or social unrest. Standby, it will happen again.

As an investor, you should understand two very important factors that have been absolutely proven to be fact:

Timing Does Not Work - Study after study has shown that, in the long run (actually as short as 3 years)that investment timing does not work as compared to invest and hold strategies.

This does not, of course, apply to investments in known events that have an economic consequence. In fact, that is precisely the premise of 21st Century Economics - that the only way to make a timely investment is to either (1) plan for a long term investment or (2) invest in a known event that has economic consequence. The failure of the timing in the classic sense is that it applies to the chasing of money that is common in day trading and in the rapid and short sighted buy-sell mentality that has always pervaded Wall Street. See a separate report on this subject elsewhere on this service.

Good Times Don’t Last Forever - The extensive reporting contained elsewhere in this service on the concept of Regression to the Mean is not an investment philosophy. It is scientific and mathematic fact. The mean growth rate of the stock market since before 1900 has been under 7% - no matter how you figure it or what adjustments you make. We have had a 3 year growth rate in excess of 25%. It is a FACT and an absolute certainty that 50 years from now, we will again look back at the average growth of the stock market and it will not be appreciably higher than 7%.

Any finite period can show growth or loss depending on the time selected but over long periods of time, a gradual increase in the rate of growth is possible but nothing like 25% - more like 3% in 50 years. If the mean that the average growth of the market returns to is 10% in 50 years - then when do you suppose it will change from 25% growth back to less than 10% so that its mean will be 10% in 50 years?

What all this rambling is about is that the known event that has economic consequence is that our world society is headed for a major adjustment in the social order based on the distribution of wealth, information and influence. That “adjustment” will be of such large economic consequence that those that have money now will need to begin now to prepare for it.

How? Like this:

Diversify your portfolio - The tried and true investment strategy of spreading your money across a range of investments is an old one precisely because it works.

Pay off Debt - We are a debtor nation now, currently spending more than we earn and with a national savings that is negative. When the economic turnaround happens, you don’t want to be in debt for a lot of luxury items that you can’t afford to maintain. If you are wealthy now, use that wealth to pay off your debt. If you are spending beyond your means now, stop and begin to prepare for a time when those that do that will be on the streets, out of work or worse.

Save - I am not going to predict the nature of the economic turnaround that will happen, only to say with confidence that it will happen but there are certainly some powerful pointers that it will not be good.

The retiring baby boomers will cause the real estate collapse of the second decade of the new millennium will the worst in history.

The boomers will also create the worst stock market fall in history - mostly because of how high it has risen above the “norm”.

If we make it to 2010 without a major social upheaval that is economically motivated, then the one that is motivated by the aging world population, demands on the publicly funded infrastructure and the disproportionate power of the older generation will certainly cause problems.