October 2011

After Midnight

"The darkest hour is just before the dawn."  Proverb

For the past twelve years, I have been outright negative about the economy and equity markets.  Recently though, at long last, I have started to feel optimistic.

Last month I hinted at my developing optimism.  A month later I am not all the way there yet mind you, but I can see the blue sky starting to form on the horizon.

Today, I want to cover four specific reasons that I am feeling better, and one incredible opportunity that is just developing.

But first, a public service announcement.

Pessimism Is a Contrary Indicator

Much as extreme optimism is an indicator that things really are not as good as they seem, extreme pessimism is an indicator that things really are better than they seem.

Today, pessimism is an overarching theme throughout not only the stock and bond markets, but also society in general.  While I would not argue that there are no legitimate reasons to feel pessimistic given the recent financial and social history of the world, it seems to me that the dark emotion is overstating reality at this point.

Where were the pessimists from 2002-2006 when we were creating our current financial mess?  Well, back then, most people were smiling optimists enjoying their good fortune.  Today, many of those same people are angry and anxious over today's seeming poor circumstance.  It is too much, too late.  It is time to look to the future.

Europe is Rich

Much of today's turmoil centers on fears that Europe is about to collapse the world economy.  There is a major problem with that theory.  Europe is rich.  It is very rich.  The Europeans have accumulated wealth for centuries.  Their biggest countries economically are fine, Germany in particular.  France needs bank support due to exposure to debtor nations, but otherwise, due to its energy policy is well off.

Greece is no more than an argument over who is going to pick up the tab for the person who didn't bring cash to dinner.  They are too small to matter other than in a rhetorical sense.  Italy and Spain are bigger problems, but hardly insurmountable.  Heck, Italy has higher net worth per capita than the United States.  They can draw on that if need be.

Depending on how the Europeans want to divvy things up, they will either clean up their Union or change it.  There are very strong mutual reasons for preserving the European Union and Euro in particular. The Euro is their tool for avoiding inflation due to their lack of natural resources.

Regardless of which way they go in the next year or two or three, their negative impact on the global economy will be very temporary should it get worse there- which is at least a 50/50 proposition at this point.  If they simply "print money" to shore up the banks and create better rules to keep those who do not produce from sucking from the system, they will contribute to global growth much sooner than later.

China is Rich and Getting Richer

China has 1.2 billion people.  About one quarter lives a middle class or better life.  That leaves three quarters still needing for that economy to develop further.  Without further economic development, the 900 million have-nots will cause upheaval at some point.

The Chinese political power structure has no intention of allowing civil unrest to develop.  Part of their methodology is clearly heavy handed, however, their main tool is economic growth.

The Chinese have over $5 trillion of foreign cash reserves to spend, in order to maintain growth.  Despite over building in the short run, there is still a long term shortage of housing.  As the next few tens of millions move into the empty units, construction will pick up again and help support growth in the high single digit rates.

Further, the Chinese have a cycle similar to the U.S. Presidential economic cycle.  With each 5 year plan the Chinese put together, there is an ebb and flow which is fairly regular.  This is the ebb year.  Next year begins to flow again.

Japan is Rich

This spring Japan was afflicted with the worst nuclear disaster in history, surpassing Chernobyl.  Food, land, water and air has been poisoned.  People have died.  More will die.  Our thoughts ought to still be with them.

Economically, that disaster created a huge void in global production.  Semi-conductor plants closed.  The auto industry, one of the most important global industries, lost massive production.  Millions of jobs were disrupted.

In 2012, Japan will continue to fill the economic gap created by the spring earthquake, tsunami and nuclear disaster which they have just begun to recover from.  The Japanese economy in a growth cycle will have immense fire power.  It would not be surprising if that terrible event jump started an economic boom in Japan which would positively impact the entire planet.

Long-term Japan will have some demographic challenges and likely will move sideways, however, their relationships and business acumen will keep them from falling off a cliff.

The United States is Rich and About to Get Richer

While we continue to argue about how to pay for the baby boomer retirement which has unfunded liabilities well into the tens of trillions of dollars (estimates range from 65 to 100 trillion), a simple fact escapes us, we are rich too.

Our rich currently is not in our individual net worth.  At least not for 80% of the population.  Our rich comes from three things right now:

First, our labor force is very good and has the ability to return to great in about four years time whenever we prioritize it.  My guess is we prioritize education and skills again shortly.

Second, our corporations and wealthy are in very good shape.  Some claim too good of shape, but I suppose if there is a problem to have, it is to have too much money, even if it is spread around poorly.  I have little doubt that one way or the other, much of that money finds its way back into the economy soon, after sitting idle the past several years.

Third, the United States, after sixty years of purposely and strategically using other nation's natural resources, especially oil, is beginning to tap our own resources.  This is in fact the biggest and most important point of this letter for Americans.

As of this year, the United States became a net exporter of fuel.  This is huge.  According to Goldman Sachs, by about 2017 the United States could be the largest producer of petroleum on the planet.  Add to it natural gas, coal, nuclear and solar exports and the United States is in a good position.

So, among the key reasons we are rich is because, per capita, we have a lot of natural resources.  Sometime soon and for the rest of the lives of everybody reading this, the United States will be a permanent net exporter of energy.  The trillions of dollars this country will make is well in excess of our debts over longer time frames.  Our only challenge will be to make certain everybody takes part in this national wealth and that we do not spend too high on the hog when everybody gets overly optimistic again.

As investors, we need to select investments that take part in this just beginning long term trend of the United States becoming an energy exporter.  Today's market turmoil, which will last awhile longer, is an opportunity to do that, as well as, buy some agricultural assets as well.  Agriculture has been one of the top performers post 2008-09 crash and is likely to rebound well.

While we will not get entry points perfect, simply being over weighted in the right areas will likely propel portfolios to higher levels.  The right areas appear to include energy and agriculture companies.

Your seeing the sun on the horizon Advisor,

Kirk Spano

This newsletter contains forward looking statements that may not come true.  Past performance does not guarantee future results.  This letter is intended for informational purposes only, and reflects only my thoughts and opinions in general, and do not constitute individual advice.  Opinions expressed may change without prior notice.