Economy: How Realistic Is A Four Percent Growth Rate?

(Drivebycuriosity) - Economic growth has been disappointing in the recent years. After the 2008 recession the USA experienced the weakest recovery since World War II (wsj ). Growth had been hold back by high taxes and a lot of regulations. Both worked as a brake and have been slowing down investments, production & consumer spending. If the new government fulfills her promises by cutting taxes and reducing regulation these brakes could be lifted giving way for more growth.

Economic growth also would be rekindled if America would follow the European role model and would privatize state owned enterprises like airports, harbors,  mail & railways (here my post driveby). The proceeds could be used to invest into the infrastructure (streets, railways) which is in a lamentable condition. Privatization and a better infrastructure could lift the American productivity and inspire more investments.

 

                                                High-Tech Revolution 

If the government policy gets more business friendly - and will avoid a global trade war - we should experience another prosperous period like the epoch 1985 through 2000 which was partly inspired by Reagan´s economic policy. I  think that there is a good chance that we will get 4% annual growth for a decade and more because there are strong fundamental tailwinds:

The US economy - and the rest of the world - is benefiting from a high-tech revolution. There is a deluge of technological innovations, creating a lot of positive tailwinds for the global economy in the coming years (driveby).

We are seeing rapid advances in:

- Robotics: Companies are using more and more robots to reduce costs and to respond more flexible to the demands of their customers. For instance robots are welding car parts together and are varnishing them & Amazon is using robotic systems in her gigantic fulfillment centers. The automatization process leads to cheaper & better products and raises the productivity.

- Self-driving cars & trucks will reduce the number of accidents and lower costs of transportation, which leads to cheaper consumer goods. Because they are efficient they waste less fossil energy - curbing the greenhouse effect.

- 3D printing: Software controlled machines are literally "printing" parts of other machines and devices by using computational power, lasers and basic powdered metals and plastics. Soon companies & persons can produce almost anything exactly bespoke for individual tastes with low costs.

- Nanotechnology: The creation of new materials, built at the atomic level, could revolutionize  everything from chemistry to aeronautics, like creating new medicines, new fabrics and building material. For instance scientists are working on a new material which is much stronger & lighter than steel (economist).


- Biotechnology: Companies and university scientists develop new vaccines and cures by adapting or exploiting processes found in living organisms which could lead to a longer & more healthful life for all of us.  Altering plants by genetic engineering makes them more resistant against pests and more tolerant of temperature changes and droughts. Food gets more affordable and could be enhanced with vaccines against cancers and other diseases.  


- Health technology: Sophisticated machines improve the quality of healthcare through earlier diagnosis, less invasive treatment options and reductions in hospital stays and rehabilitation times.  So these technologies improve life quality and productivity.

 - Mobillization of Internet: Smartphones, tablets and other devices allow everybody permanent access to the world wide web. So we can organize our life better, like better shopping, improving leisure time, traveling, dating, eating out and more.


- Internet of Things: Devices like thermostats,  TVs, refrigerators, household appliances are or will be soon connected to the world wide web which will make our life  easier and create new markets for a lot of companies. Smart watches for instance can be used for 24/7 medical observation and health monitoring to prevent heart attacks and to discover other medical problems.

- Cloud computing: Amazon.com, IBM, Apple, Google and other companies offer data storage and processing either for free or for low fees, giving everybody access to a network of supercomputers. Companies & persons can process and store huge amounts of data without spending much money for own data centers.




                                                               Falling Information Costs


In general the Internet - including the "cloud" - increases the flow of information and reduces the costs of data. Data can be gained, processed and stored faster & cheaper. New ideas can spread faster, encouraging discoveries and inventions and boost the technological progress. Falling information costs are creating more markets and are expanding existing ones.

Restaurants, shops, movie theaters and a lot of other companies are gaining more customers because they can be more easily found and can advertise better for their products & services. Applications and recommendations from friends or unknown reviewers on Amazon.com, Facebook and other websites can gain interest for many products & companies which would have stayed unknown without the Internet. I believe that the falling information costs foster economic growth because they lift the productivity of  companies & persons.

Examples: Internet based travel networks like Airbnb - a website for people to rent out lodging - give people additional income by temporarily leasing or sharing their flats. Their customers can reduce costs for vacations or business travels which fosters tourism. Uber, a transportation network company whose mobile apps connect passengers with drivers of vehicles for hire and ride-sharing services, enables car owners to earn an additional income, their customers reduce their travel costs. Big data processing companies like Hopper are helping people to find cheap flights (hoppertravel). I reckon that in the coming years many other new companies will appear using the Internet to create new industries and markets.



                                          Positive Feedbacks

Many of these technological advances are working together, amplifying their impulses. These innovations are lifting the productivity of the economy significantly and are creating new markets & incomes. And it looks like that the technological progress is accelerating. Almost daily new products and companies with interesting business ideas appear. All these developments are adding up and accelerate the economic growth rate.

The technological progress is also reducing the price of oil and curbing the power of Opec. Today oil is abundant again and relatively cheap. It will stay so thanks to innovations like fracking which are reducing the costs of oil production continuously. Low energy costs are giving consumers world wide more money to spend for other goods & services. They also translate into low transport costs which curb the prices for food and other goods. Cheaper energy also restrains the costs to produce steel, cement and many other energy intense goods. Today´s situation reminds me of the mid 1980s. Then the oil price also collapsed and commodities stayed cheap through the year 2000. Cheap commodities in combination with falling interest rates and a technological revolution (Internet) lead then to a period of prosperity (with the exception of 1992 as the first Iraq war caused an oil price spike which lead into a mild and short-lived recession), the longest boom in U.S. history (factcheck). In this period the Dow Jones climbed from 1,000 points onto 10,000 points.

A business friendly government policy in combination with technological progress & cheap oil could create a new epoch of strong economic growth.

Enjoy!

Contemporary Art: Look What I Found In The Hole

(Drivebycuriosity) - Some galleries have funny names. This week I visited the art gallery "The Hole" on Manhattan`s Bowery (312 Bowery, New York  theholenyc). Currently they have 2 interesting exhibitions. I display here my favorites from the shows, a very subjective selection as usual.

On top of this post you can see “More Then Party” by Maja Djordjevic (2017, oil and enamel on canvas, 71 x 47 inches, 180 x 120 cm).

Above some works by Anja Salonen: “Cornflake Crusade" (2016, oil on canvas, 72 x 60 inches, 182.9 x 152.4 cm) followed by "Dad Never Had It Like This” (2016, oil on canvas, 72 x 60 inches, 182.9 x 243.8 cm); "Conversation Piece” (2016, oil on canvas, 72 x 96 inches, 182.9 x 243.8 cm) & “Looking, Looked At, Look Away” (2016,oil on canvas, 60 x 40 inches each, 152.4 x 101.6 cm).





                                                           With Purpose

The second exhibition features works by David Bradley. The with purpose blurred images on the wall are created by dye transfer on synthetic velvet (david-bradley ).

Above an installation view with more images by by Maja Djordjevic.


Enjoy!

Stock Market: Happy Eighth Anniversary Bull Market - More Will Come

(Drivebycuriosity) - Today the bull market for US stocks celebrates his 8th anniversary. Since March 9, 2009 the S&P 500, the gauge for the US market, has more than tripled (plus 249% cnn ). Stock prices have been accompanying the healing global economy, especially the recovery of the US, and climbing company profits.

I think this bull market will see more anniversaries. Since 1928 (the long run) the US stock market (S&P 500) created an average return of about 10% p.a! (dividends reinvested nyu.edu/ investopedia). So, stock market gains are the rule and dropping stock prices (including corrections & crashes) are the exception.

I claim that we are in a secular bull market that could even dwarf the stock market rally from 1982 till 2000 when the Dow Jones jumped from just 800 points to around 10,000 points. My claim is mainly based on three arguments:

1. Company profits will continue their solid growth. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of rising company profits.

2. We are experiencing a new industrial revolution.  Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets.

3. If the new US president comes up to his promises and will reduce regulation & taxes and invests into the US infrastructure company profits will even climb faster.

4. We also are having solid tailwinds from the emerging markets which are even getting stronger. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple and other members of the S&P 500 (world).

I don´t fear that the Fed will spoil the expected stock market gains, even if Yellen & Co. will hike their interest rates three times as they had already projected. History shows that stock prices & interest rates can happily rise together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”

Enjoy!

Society: Impressions From International Women`s Day @ Washington Square Park, New York

(Drivebycuriosity) -Today is International Women`s Day. Worldwide women are rallying for their rights and their position in the society. My wife and I went to New York`s Washington Square Park to attend the event there.

The weather was great. Blue sky and temperatures in the upper 50s F (14 C) attracted quite a crowd as you can see. I took the occasion and shot a lot of pictures.

We could see a lot of banners displaying the opinions and messages of the attenders.

Being an amateur photographer I couldn´t resist to take pictures of the gorgeous faces I spotted there. Maybe the day also celebrates the beauty of the women.

There was even a Donald Trump imposter.


We are looking forward to next year`s Women`s Day. Enjoy!

Economy: The 100th Anniversary Of The Russian Revolution - No Reason To Celebrate

(Drivebycuriosity) - Today is the 100th anniversary of the Russian Revolution (nytimes). One hundred years ago, on March 8th 1917, started the largest economic experiment in history of mankind (wikipedia).  Russia replaced the regime of the tsars and transformed into the communist Sovjet Union. In the year 1991 the Sovjet empire - which also included Poland, Hungary and other European satellite states - broke finally down  - and proved the failure of the communist experiment.

The crash of the Sovjet empire wasn`t really surprising. It was surprising that the experiment had prevailed such a long time. In the 1980s I attended in Bonn a lecture by the German economy professor Wilhelm Krelle. The economist draw a graphic on the black board, which showed a steeply decling line. This was the GNP - the income - of the Sovjet Union, which was already in a free fall. The chart signaled that the Sovjet Union was approaching bankruptcy and couldn´t continue very long  - and so it happened.

The failure of the Russian Revolution can best shown in Germany. Actually there had been two Germanies: Shortly after World War II the country got split into two parts, the more or less capitalist Western Germany (Bundesrepublik Deutschland) and the communist Eastern Germany (Deutsche Demokratische Republik = DDR), another satellite of the Sovjet Union.  In the year 1990 Germany re-united. Then the Western part (and its whole population) was much wealthier than the Eastern part. Even the population of Western Berlin, which had been a capitalistic island in a socialistic ocean, was much wealthier than the residents in the  former socialist Eastern Berlin.

Western Germany is just one example, the USA, UK, France and many other non-communist countries also prospered and left the Sovjet Union and her satellite states far behind. Today there are still some countries which follow more or less the legacy of the Russian Revolution: Cuba, Northern Korea, Venezuela. They all belong to the poorhouses of the world.

Why did the Russian Revolution fail? The Sovjets disregarded the right and the ability of individuals to decide what is best for them. Instead they believed in a central government who decided for them. So the government decided what kind of goods and how many of them the companies have to produce and what the consumers are able to consume. This lead to inefficiency and a low productivity.

History proved that millions of individuals - consumers and company managers - are much more flexible and efficient than a centrally controlled economy. Western economies are based on markets where the production follow the demand of the consumers. Prices give signal to produce more or less and capital flows to the industries which have the most success. Over decades the flexible capitalist systems generated more innovations and was much more efficient & productive than the rigid communist economies.

The Sovjets also disregarded the profit motive which encourages people to work hard, to save and to invest.  Their system was based on commandos. Producers had to follow their targets which often lead to waste and to over- or underproduction. In the West profit maximizing producers try to gain and keep customers with relatively high quality and low prices - otherwise they will lose their customers.

Why did the Sovjet union survive so long in spite of her fundamental flaws? The answer: By exploiting workers and farmers. In the USA and other modern countries about 80% of the GDP are used for consume. In the Sovjet Union the government decided that most of the GDP is not ready for consume, instead most of the incomes got invested into the industry (compulsory saving) or used for military & space programs. A lot of capital flew into steel producers and other basic industries and got often wasted because of inefficiency and low productivity. As a result people had a very low standard of living, much lower then the people in Western Europe & the US, a forced sacrifice for the survival of the Sovjet Union.

The anniversary of the Russian Revolution is certainly no reason to celebrate. But maybe we can learn something from this failed experiment.

Books: Hunters In The Dark By Lawrence Osborne

 

(Drivebycuriosity) - Exploring unknown and exotic countries is a pleasure & an adventure. It could be done at home by reading just the right book. The novel "Hunters in the Dark" by Lawrence Osborne is one of these books - and one of the best novels I have read in the recent years (amazon).

"Hunters" takes the reader onto a journey into the dark sides of South East Asia. The plot follows Robert, a young Englishman and gambler "who had the aura of poverty about him". He visits Cambodia, described as a "tough Paradise", an exotic & dangerous country with a still fresh sinister history.  

Robert is a somewhat naive and innocent guy and driven by curiosity & by chance - a character which reminds me faintly of the German fairy tale "Hans im Glück (Hans in Luck)". His purity & carelessness lead him onto quicksand (this is a spoiler free blog). It`s partly a travel novel, a crime story, a romance and maybe a fairy tale.

I cared about "Robert", even that I find his naivety challenging. Osborne combines the sharp psychological & analytical skills of Vladimir Nabokov with Joseph Conrad`s intense descriptions of tropical adventures. The author is a great stylist and immerses the reader deep into the steamy & lush environment. 

I indulged into sentences like  "the long puddles brightened for a moment then grew dim, and the electricity which rippled through the air drew the eye upward to the slow motion mushroom cloud and its impending crisis, which would not arrive for hours, maybe not even till the next day". I almost could sense what the characters saw, felt, & tasted. Osborne also describes in an amusing way how an undiscerning Westerner flounders with an unknown culture & the Cambodian way of thinking.

I think I will reread the novel soon.

Economy: It`s Time For Another Interest Rate Hike

(Drivebycuriosity) - I think we will have to get used to this. Stock & bond markets expect that the Federal Reserve will raise her interest rates this month, the third hike since December 2015. I suppose that the Fed is already behind the curve and the markets will have to adapt to more hikes this year.

The global economy is getting stronger and the still extremely low interest rates don`t fit into this environment any more. Last week we learned that the US service sector, which accounts for about 80% of the economy,  "expanded in February at the fastest pace in a year and a half" (marketwatch  bespoke). We also heard that weekly jobless claims dropped to the lowest level since 1973 (when the US population was much smaller bespoke ), a sign that the US job market is already drying out. Europe, China & emerging markets are getting stronger as well.

The US inflation rate is already climbing, fueled by sharp commodity price increases (inflation).  For instance oil costs about 100% more than at begin of 2016. If the Fed would stay as supportive as she is now and would keep interest rates close to zero she would pour gasoline on the sparking fire. Postponing the necessary interest hike would mean steeper rises and higher interest rates in the future - which could cause a new recession

I am convinced that a modest hike won´t stop the global stock market rally. The recent gains are a response to climbing company profits which are fueled by a stronger global economy & efficiency gains. I assume that company profits will in the coming quarters even rise faster because the global economy is speeding up and more efficiency gains. Higher company earnings will overcompensate the moderate rise of the interest rates. Enjoy!