Tag Archives: technology

Don’t believe the doom and gloom about the economy.

The invaluable Brian Wesbury, Chief Economist of First Trust, recently made some interesting comments about the economy.

First, there are the employment statistics:

The best news for the consumer is that the labor market continues to heal. At 4.4%, the unemployment rate is the lowest since 2007. Some watch what they call the “true” unemployment rate, which includes discouraged workers as well as part-timers who claim they’d prefer full-time jobs – that’s 8.6%, also the lowest since 2007. Meanwhile, wages and salaries are up 5.5% in the past year, outstripping inflation.

Meanwhile the average American has reduced his debt burden to levels not seen since the early 1980s.  While student loans have reached record levels and auto loans delinquencies have grown, consumer debt has dropped by 50% since the end of 2009.

Finally, consumers have changed their buying patterns.  They are shifting their buying to the Internet and away from brick-and-mortar stores.  Some of the old-line retailers are experiencing sales and profitability problems even as a company like Amazon is building physical stores.

We remain in the midst of a technological revolution.  Stay alert and very nimble.

If you want to learn how to navigate your way through the shoals and rapids of the investment river, give us a call and we’ll be happy to help.

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The Plow Horse is Dead – Long Live the Race Horse

Race horse

We have referred to the economy over the last decade as the “Plow Horse Economy.”  There has been a huge increase in technology available to the economy over that period of time.  “Fracking” has unlocked huge oil and gas reserves in the energy sector.  The “Internet of Things” is tying our appliances together, automating our homes, even allowing us to control them with voice commands.  Self-driving cars are becoming a reality faster than I believed possible.  3D printing is revolutionizing production processes.  Yet despite this dazzling technological revolution, the economy is only managing 1.2% GDP growth.

Why?

Many analysts believe that if we compare the economy to a horse, we have a thoroughbred economy that’s plodding along like a Plow Horse.  The problem is that the rider is too heavy.    That rider is the government.  It’s holding growth down.  In the year 2000 government was 17.6% of Gross Domestic Product (GDP).  In 2016 it was 21.1% of GDP, an increase of 20%.  That’s a big move from the private sector to the public sector.

Keep in mind that government doesn’t manufacture anything.

On top of that, government today regulates virtually everything, generating a hidden cost to producers and consumers.  Some analysts think it’s a miracle that the economy actually grew despite increased borrowing, taxes and regulation.

The incoming Trump administration has a staunchly pro-business agenda.  The focus on jobs and economic growth is front and center.  A new executive order instructs federal agencies to halt the issuance of more regulations, and the new President has indicated a desire to reduce them by 75%.   Another executive order has frozen hiring of federal employees, opening the door to replacing government employees with technology, something that has happened in the private sector.  Yet other executive actions advance the approval of the Keystone XL and Dakota Access oil pipelines – using American steel – creating new high-paying construction jobs and indicating an interest in making America energy independent.  Reducing tax rates, especially the high corporate tax rate, is another Trump administration objective.  It’s the carrot to encourage companies to build here, even as he waves the stick of high tariffs for goods brought in from overseas.  It’s getting a respectful hearing from otherwise skeptical business leaders.

These actions are not going to be enough, but they are indications that the new administration is determined to streamline government and incentivize private industry to grow.  According to Brian Wesbury, Chief Economist of First Trust, the earning per share of the S&P 500 is estimated to be $130, an increase of 20% in 2017.  Growth in earnings of that magnitude can justify an increase in market valuations and add a few percentage points to the annual GDP.

To get back to our horse analogy, it looks as if the jockey riding the horse will be put on a diet.  If that happens the thoroughbred who was a “Plow Horse”  may become a “Race Horse.”

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Technology, Magic and the Economy

If you have read the “Lord of the Rings,” you know that wizards were able to talk and see things going on in distant places by peering into a crystal globe called a “Pilantir.” When J.R.R. Tolkien wrote his trilogy during the mid-20th century this was magic, imaginary things only available to people with special powers. Today, it doesn’t take a wizard with special powers to see and talk with people far away. The devices that everyone uses today are called “smart phones” and they do things that make a Pilantir look old-fashioned.

British science fiction writer Arthur C. Clarke gave us “Three laws of Prediction”

  • When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
  • The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
  • Any sufficiently advanced technology is indistinguishable from magic.

We had an opportunity to attend a meeting recently at a new medical facility near our office and had an opportunity to speak with the facility’s  President. He spoke of advances in medical technology and the amazing improvements that have been made in imaging systems. Scanners that allow physicians take three-dimensional pictures of our internal organ in a few minutes.  What once was magic is now useful technology.

Those of you who are of a certain age may recall a cartoon character by the name of Dick Tracy. He was a detective who wore a wrist watch that was also a two-way radio.  That was technologically impossible in those days.  Today, the entire industrialized world is built around wireless communication devices. Our basic industries would come to a halt without them. Cars, trains and planes would stop without them. Modern factories would shut down; banking and investing would stop. To anyone born in the 19th century today’s reliance on wireless electronic communication would look like magic.

Many people worry that the engines of growth seem to be grinding to a halt; that the future is going to be bleaker than the past. But that is to deny what’s going on. Just a few examples: the old adage that you can’t get blood from a stone is still true, but we can get oil from rock, it’s called “fracking” and has made oil and gas more abundant than ever. Facebook has revolutionized the way we keep in touch with friends. Twitter has changed the way we communicate ideas. Apple has made so many changes in our lives that it’s hard to list them all. Entire new industries worth many billions of dollars have been created in the last few years, and changes keep happening. Companies we think of as Internet entities are planning moves that will transform brick-and-mortar industries. Google is developing and self-driving cars and Amazon will deliver your order using remote-controlled drones.

The technology 25 years from now will look like magic to the people living today. All these things represent an opportunity for investors who share a vision of the future; the kinds of things we once relegated to the realm of magic. That magic will make us all richer.

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It took 15 years, but the NASDAQ is back.

Fifteen years after it soared to its peak at the height of the dot-com era, the Nasdaq Composite Index cruised to a record closing high yesterday.

In the year 2000, the NASDAQ, driven to ridiculous heights by the technology stock bubble (often referred to as the dot.com bubble) collapsed, taking lots of people’s dreams with it.

A spike in stock prices driven by greed collapsed as people fled the technology sector in fear. As an aside, it provided a great opportunity for those who had the courage and skill to find outstanding bargains amidst the rubble.

The tech bubble of the 1990s is a great lesson in investor psychology. When values are driven by hope rather than by reality, people stop being investors and turn into speculators. The sad story of that time is that even mom and pop investors were caught up in the frenzy. And the collapse ruined many plans and some lives.

We read today about how great index investing is. It cheap, it’s effective and it works … until is stops working. Those who bought the NASDAQ index in 2000, if they had the fortitude to stick it out, would have found themselves breaking even after 15 years of being financially under water.

A good investment strategy always looks at risk. We know that “trees do not grow to the sky” and things that look too good to be true … are not. The first rule of making money is not losing it.

Our investment philosophy is focused on risk control. What that means in real terms is that when the market takes one of its periodic tumbles, it won’t take us 15 years to get even.

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