Economy: The Optimistic U.S. Consumers - The Engine Of The Global Economy

There is a lot of speculation that the global economic upswing my come to an end soon because of the recessions in Europe and the cooling economies in China & India. But these fears are overblown. Yesterday we got news that the engine of the  global economy,  U.S. consumer spending, is still running smoothly.

"Americans increased their spending by the most in seven months as an improving labor market boosted confidence, adding to evidence that the world’s largest economy is gaining strength", wrote Bloomberg (bloomberg). Personal consumption expenditures increased in February $86.0 billion, or 0.8 percent and January spending was revised up (calculatedriskblog).

The rise in consumer spending is encouraging. It shows that U.S. consumers are still defying the climbing oil prices. The rising expenditures at the gas pump are still counterbalanced by the mild winter (less heating costs), the shrinking prices of natural gas and increased energy efficiency (cars and other machines burn less gasoline and electricity). The spending growth is financed by the recovering job market and by the rally on the stock markets that expands the wealth of American majority.

The data also show that the American consumers are still optimistic, instead of the perpetual negative news drum in the media. Maybe this positive thinking is encoded in the American genes as a heritage to the pioneer ancestors.

As long as the U.S. consumers are willing to expand their purchases, U.S. companies can continue their profit growth. Climbing consumer spending & company earnings will trigger more investments and create more jobs in the U.S. But not only American companies will benefit: Rising U.S. consumer spending also causes climbing imports that translate into rising revenues & profits  of European & Asian companies like Mercedes, Adidas or Samsung. This should help to stabilizes Europe and help China to avoid a hard landing.

Economy: As Good As It Gets?

History shows that after every recession the economy recovers and gets better than before. But the recent recovery has been painstakingly slow and many pessimists claim that this time is different. The other day the "New York Times" had the headline "Are the Good Times Never Coming Back? (economix.blogs.nytimes.com). They wrote: "There is growing chatter in economics circles about the unsettling possibility that the nation may never recover completely from the recent recession". The article reports about economists who claim, that "the present situation is about as good as it gets".

These pessimists argue that the slow pace of the recent  recovery (disappointing job market, slow rising GDP) reflects a long-term deterioration in economic prospects.
They claim that the pace of growth is faltering because the work force in the U.S.  is expanding more slowly as in the past. "Population growth has slowed, and so has the pace at which women are entering the labor market" quotes the "New York Times".

This argument is flawed because it has 2 fundamental mistakes: For instance Apple doesn´t need any U.S. workforce to expand and to produce more iPhones and iPads. These devices are manufactured in China by Foxcom. Therefore the relevant workforce for producing goods isn`t the U.S. workforce. It is the global workforce. I reckon that many pessimists are too much focused on the U.S. and Europe and ignore the globalization and the growing influence of Asia & Latin America.

The pessimistic argument has a second mistake which counts even more. Even if the U.S. growth of workforce is slowing down it doesn`t  hamper the economic growth. For instance Amazon.com recently acquired a company that produces robots which could replace workers in their warehouses (forbes). Therefore the online company could grow even when their workforce would stagnate or shrink. You could also find more and more industrial robots in car factories and other plants.

Robots are just one example of the automatization process which has been augmenting the efficiency & productivity of the global economy since the 19th century. Today an average worker can produce many more goods & services than in the past thanks to technological progress. This is the one of the main reasons why the job market is recovering so slowly.

However the automation process is raising the efficiency of the companies and therefore expanding their profits. Rising company earnings create more wealth via stock market gains & climbing dividends and will animate more investments which will finally create more income and jobs.

The "New York Times" also reports that "many claim that the financial crises that ended in spring 2009 was particularly traumatic". This is true and might explain the disappointing pace of the recent recovery because the post-recession trauma is slowing down investments. But rising company profits and the climbing stock market prices will heal this trauma over time.

I guess that another obstacle for growth also will lose importance and heal over time. Many skeptics claim "that high levels of debt are restraining growth", writes the New York Times. Indeed high public debt, especially in Europe, is enforcing sharp cuts of public expenditures (austerity policies) which cause lots of headwinds for the economic upswing at the moment. But these cuts will lead to a leaner government and will create more space for the private economy which is more dynamic & productive than the public economy. I reckon that the condensation of the public economies in the U.S. and Europa will augment growth in the future. I claim furthermore that the rising company profits and the general economic upswing will spill more money (tax income) into government cash boxes and in that way, reduce the debts soon.

History shows that globalization & technological progress in combination with a rising efficiency of the economy will raise company profits, production and personal incomes to new heights. I am convinced that these developments will continue and might even accelerate because there is a flood of innovations and improvements in many fields (iPads, robotics, medicine, engineering, nanotechnology etc.) which could fast-track technological progress.

Hunger Games: Being Afraid Of The Future?

 

(Drivebycuriosity) - This weekend the highly anticipated film "Hunger Games" is opening in many movie theaters. It tells a dystopian science fiction story based on a series of dark novels. Movie and books are parts of a broad trend: The majority of science fiction shows a future that is getting worse than the present. The science fiction author Neal Stephenson ("Snow Crash" wikipedia.org) argues, that today’s science fiction is fixated on nihilism and apocalyptic scenarios (smithsonianmag).

I guess this is a part of the gloomy "Zeitgeist'" and reflects a common pessimistic belief. Many seem to believe that we will become poorer, will run out of oil and other commodities and that the climate and the environment will get naughty. It looks now that it is popular to be afraid of the future. 

I do enjoy dark movies like "Blade Runner" & "Mad Max" and post-apocalyptic novels like "A Canticle for Leibowitz". They are fun like eating very bitter chocolate or chewing sharp curries. But they are just fairy tales, I don´t share the gloomy outlook.

History shows quite the contrary: The wealth of the Western world has been rising since the 14th century.  In Europe and the U.S. the income growth has been accelerating since World War II and many nations in Asia and Latin America are catching-up now. This is a result of technological progress, which is raising the efficiency of the economies, and globalization, which fuels the world trade. In Western Europe and the U.S. even the welfare recipients have a higher life standard than average people at the beginning of the last century, including TVs and refrigerators. In European & U.S. cities the environment is better than 50 years ago thanks to the technological progress and the higher life standard which finances tougher regulations.

History also shows that nations get more democratic when they get more mature and wealthier. For instance the U.S. got rid of slavery as the wealth rose and the nation approached equal rights in the recent 50 years. The Soviet Empire broke down because the rigid system couldn´t compete with the Western nations and even the communist China adopted parts of the market economy in order to accelerate the economic growth.
  
There is no reason that the growth of the global wealth should come to an end soon. Globalization and technological progress, the engines of wealth, are still accelerating. There is now a flood of innovations and improvements in many fields  (iPads, robotics, medicine, engineering, nanotechnology etc.) which confirm Moore`s law that describes that the power and speed of computers, smart phones and many other devices double every 18 months. All these trends should lead to more efficiency and a better future.

Investing: The Magic Of Longevity

People are living longer and longer. In the U.S. and in many other countries life expectancy is growing. Even the elderly could enjoy a long (rest of their life) span. An UN Population Survey shows that "a healthy couple aged 65 in the United States has a 50% chance that at least one of them will live to the age of 92 and a one-in-four chance that one of them will reach 97" (blackrock.com). If you are under 40 you could live 50 years and more. If you are 20 something you can expect your life to last more than 60 more years.

This has important implications for investing. You could invest parts of your money for more than 20 years when you are 60 and for more than 50 years when you are 30 or younger.

History shows what gains you could expect when you invest over a long span of years. Take for instance the S&P 500 as a gauge for the U.S. stock market (wikipedia). In March 1962 the index moved around 70 points  (wolframalpha). Since then its value multiplied with the factor 20, that implicates that every dollar invested then is now worth $20. Someone who invested $5,000 in March 1962 and stayed in the market has now $100,000. If you take a 30 year period, for instance from 1982 (wolframalpha) to today, then an invested dollar would be multiplied with a factor of 12.  If you start the calculation in the spring of 1992 you would get the factor 3.5. All these periods & calculations include the naughty years since 2000 and the ugly recessions.

Maybe the next 20, 30 and 50 years are even better then the past. Globalization and the catch-up process of the emerging markets should drive global wealth and stock markets higher. And it looks like the technological progress is accelerating (drivebycuriosity). Rapid innovations in computing (including iPads & iPhones), engineering, robotics, nanotechnology and other fields could speed up the pace of economic growth and therefore generate continuosly rising profits on the stock markets.

Culture: The Global Trend Of Artfully Painting Buildings

Globalization has many faces. One of them is the trend of artfully painting buildings. While visiting New York City I always indulge in seeing the artful murals & graffiti you can find on many buildings in Manhattan and in Brooklyn`s district Williamsburg.

But it seems that this trend is flourishing worldwide. Yesterday, as I visited Köln (Cologne/Germany) again, I discovered that some streets have changed in recent years.

Some places look as cool now as the coolest parts of New York. I am happy to share some of my impressions with you. The picture were shot at Luxemburger Str. and the area around.

Enjoy!

Investing: Water - The Oil Of The Future?

Today rising oil & gas prices are the talk of the town, maybe sometimes in the future water will be the topic that rules the headlines. The situation seems to be paradox: Around 70% of the earth is covered by water, but in many regions clean and drinkable water is a scarce resource. Some scientists think that the changing earth climate could cause huge droughts and expand the deserts. For instance the U.S. South-West has already been fighting the scarcity of water. Likewise, a growing global population and rising living standards could raise the demand for clear water.

Today Water is already a billion $ market, but supplying clear water & disposing of waste water could grow into a much bigger business. Therefore the topic water seems to be very interesting for investors with a long term horizon.

You can find a lot of ETFs on water, for instance the PowerShares Water Resources (New York Stock Exchange: PHO  finance.yahoo) and the Guggenheim S&P Global Water Index (New York Stock Exchange: CGW  finance.yahoo.com). But these ETFs have one disadvantage: They invest in a lot of companies which aren´t pure plays. For instance both invest in Veolia Enviroment (veolia.com). This is a French conglomerate with many business activities, including waste management, energy and transportation. Water is just a part of them. The Guggenheim ETF also invests around 10% in the German company Geberit, which claims to be the European market leader and global provider of sanitary technology, including installation systems for residential wall-hung toilets, as well as bath waste and overflows for bathtubs. I guess this is not really what a "water investor" wants.

But you can find "water" stocks which are "pure plays". There are some water stocks on the New York Stock Exchange which could benefit from the long term growth of the U.S. and the water problems in some regions. You can read an interesting survey about American water stocks on this page (seekingalpha.com).

American Water  Works (New York Stock Exchange: AWK, market cap. $6 billion  finance.yahoo.com) has the largest market capitalization of the U.S. water utilities ($6 billion).  The company serves (in their own words) "approximately 15 million people in more than 30 states as well as parts of Canada" (amwater.com)  AWK has had an impressive performance. The stock has almost doubled since end of 2009 and over-performed the S&P 500 in the last 12 months. But because of the growth of U.S. economy & population the rising trend could continue.

  
It seems that the stock of Aqua America (New York Stock Exchange: WTR, market cap. $3 billion  finance.yahoo ) needs some patience.  WTR missed the recent rally and now looks neclected. The company calls itself the "leading provider of drinking water and wastewater services for nearly 3 million people in 11 U.S. states"  (aquaamerica.com).   Maybe local regulations and the debt problems of the U.S. deliver some headwinds, but economic growth and a rising interest in the water topic could lead to a discovery of the stock.

Surprisingly the stocks of California Water (NASDAQ: CWT, market cap. just $ 760 million  finance.yahoo ) have been a continuous bore on the market -  in spite of the water scarcity. The company caters the regions California, Washington, New Mexico and Hawaii. Maybe the financial problems of California have frozen the stock. But analysts expect a continuously growing income. If the water problems in the South-West becomes even more severe, then the CWT could be discovered.

If you want to participate in global water issues you could try your luck with Suez Environnement Company SA (finance.yahoo). This is a French-based utility company which operates largely in the water treatment and waste management sectors, writes Wikipedia (wikipedia). Formerly an operating division of Suez, the company was spun out as a stand-alone entity as part of the merger to form GDF Suez on 22 July 2008. GDF Suez remains the largest shareholder of the company with a 35% stake. Suez Environnement shares are listed on the Euronext exchanges in Paris and Brussels. The company (suez-environnement) operates in Europe, North Africa, the Middle East and in Asia (China, Malaysia, Indonesia).

It looks like Suez started a rally in the beginning of the year. But at their home stock exchange they are traded in €. A weak € could weaken the performance for American and other investors who calculate in $. Anyway: Because it is Suez is my favorite in this industry.

Generally these stocks are utilities and may be too boring for traders. But the expected rising demand for water should be very positive for the industry.

Disclosure: I don`t have any positions in the mentioned stocks & ETFs.

New York City: The Culture Of Diversity

If you have never been to New York City, you have to go there! The metropolis ranks first among 120 cities across the globe in attracting capital, businesses and tourists, reports a new study (Economist Intelligence Unit report commissioned by Citigroup  bloomberg). Wow. The city beat a list of strong competitors including Singapore, Paris and Hong Kong.

The report cited New York’s diverse economy, driven by media, arts, fashion, technology and finance. Indeed the city offers a huge variety of impressions in architecture, art, gastronomy, entertainment and more.

You can find many thousands of restaurants, cafes, bars and pubs and the hundreds of music clubs, theaters and cinemas could make your day. The huge spectrum of possible activities works as a magnet for ambitious musicians, painters, poets and other artists. The countless graffiti and murals you can find at many places are often a source of amazement and joy.

I visited NYC first in 1994 and got addicted to it. I have often returned quite allured by the beauty of the buildings, which frequently are painted with cool pictures by artists, the cuteness of the girls and the charm of a city which never sleeps.

In 2010 I found my girlfriend there and now I am eternally connected with this city. I love New York.

Commodities: Coffee - Don`t Forget The Farmers

I have to confess: I`m a caffeine addict, 3 or 4 cups of coffee are my daily average. Therefore I was very happy as I read the Reuters headline "Coffee flirts with 16-months low" (reuters). And on Monday coffee futures fell to their lowest in 17 months. Prices have fallen nearly 40% from peaks hit in May 2011, commented Reuters (reuters). Wow, how could that happen?

The answer: Coffee is traded on financial markets. The commodity is represented by coffee futures (delivery contracts) which are financial assets like stocks. In recent years futures on soft commodities like coffee, cocoa, cotton and wheat became a fashionable investment idea. Many investors are setting high bets on rising agriculture prices (long positions) because they are expecting that a climbing demand will meet a tight supply. In the case of coffee the rising popularity of chains like Starbucks signals a climbing demand for the delicious beans. Therefore financial investors & speculators like hedge funds, huge pension funds and ETF providers are investing billions of dollars into coffee futures.

From 2003 through the spring of 2011 this additional money has driven prices further north (futures.tradingcharts.com). Rising futures thus attracted more speculators who were just following the climbing trend (momentum players). The usual herding behavior of the hedge funds and other speculators sharpened the price hike and led to a huge rally in coffee futures. In May 2011 the coffee price on the financial market climbed to a 34-years high. Banks like the Australian broker Macquarie threw some gas on the fire and recommended even more coffee buying because they predicted a shortage amid an alleged dense supply.

But then happened what usually happens when agriculture prices rise: Farmers worldwide responded by planting more coffee plants because they expected more profit. Now Reuters has the headline "Record global coffee crop seen in 2012/13" (reuters). Expectations that the leading producer country Brazil will have a larger crop than last year are especially pushing prices down. Vietnam (No. 2) also is expected to have a record harvest. The media also report that Indonesia expects the largest harvest in 3 years and that the Ethiopian coffee production (No. 4)  is rising too. 

The surging crops in these countries are overcompensating for problems in Columbia (No. 3), where too much rain has indeed caused a reduced harvest. The (expected) rising supply is sending coffee futures south and many funds are trying to save their profits from the rally and are taking money off the table now.

Oil: The Power Of Demand Destruction

Surprise, surprise. China reported that car sales had the worst start since 2005, writes Bloomberg (bloomberg). Wholesale deliveries of passenger automobiles, including multipurpose and sport-utility vehicles, declined 4.4 percent to 2.37 million units in January and February, the biggest drop since 2005. But this is not really a surprise, it`s just another response to the climbing price of gasoline. "Record fuel prices discouraged consumers in the world’s largest vehicle market", explained Bloomberg. The price of gasoline trailed the climbing global oil price: The average price of China`s February’s crude imports was $112.39 a barrel, up from $92.28 in the same month last year, wrote Bloomberg in another report (bloomberg).

But the Chinese aren´t the only consumers who are responding to the oil price rise. Even the energy-hungry Americans are cutting back: Total U.S. fuel demand fell an average 78,000 barrels a day to 18.2 million last week, an Energy Department report on March 7 showed (bloomberg). U.S. fuel consumption was down 7.6 percent from the same week a year earlier, reported Bloomberg. And Mastercard, who tracks gasoline purchases paid by credit card, reported that U.S. gasoline use was down 6.5 percent from a year earlier, the 26th consecutive week demand was lower than year-earlier levels (bloomberg).

The falling gasoline consumption has 2 explanations: People drive less and are using cars, which - on average -burn less gasoline. But not just cars are getting more and more energy efficient: Modern refrigerators, washing machines, air conditioners and many other household appliances use less electricity than older models. This is a clear response to the rising costs of energy and part of the technological progress. For centuries people respond to rising commodity costs and by finding cheaper alternatives.

Rising oil prices therefore cause a demand destruction. As a result oil is getting less important to our lives. Oil consumption was 4.8 percent of U.S. national income in 2010, compared with 9.7 percent in 1981, shows another Bloomberg report (bloomberg). These statistics are another proof for the long term trend of rising energy efficiency. The blog "Early Warning" reports that this trend accelerated recently (earlywarn.blogspot.com). Since 2010 the "amount of gross domestic product produced by the US economy per barrel of oil consumed" rose sharply "presumably under the influence of fairly high prices", writes the blog.

These statistics raise hope that the damage caused by rising oil prices will be less than in 2008 as an oil price hike to $147 sharpened the recession.