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Financial survival in the 21st century - the three key questions to ask - investing

 

In this "special report", I want to pose a few crucial "philosophical questions" to my readers. At the outset -- our National Cache Chairman, Alan Greenspan, addressed the personal property and implications of our aging residents on belongings such as Collective Confidence again in a speech that he made last Friday. Readers may bear in mind that I also for a short time mentioned this issue in my June 24th commentary. I urge you to keep this worldwide bright star of the aging populace confidently on the back of your minds. If you are like most people, then you earn you breathing by producing a a few thing - such as a consumer good, or a ceremony that the ample want. Let's face it - how many colonize especially "struck it rich" by being pure traders or investment managers? The stock promote and other pecuniary markets are beyond doubt very crucial to us investors/traders but this "super secular trend" of the aging of the worldwide residents will blow every bearing of our lives, whether it is down our next of kin competitiveness on the world arena, escalating allowance and healthcare costs, or even a capability basic alteration of our opinionated system.

The back up difficulty that I want my readers to think about is the ability end to the era of cheap energy prices - an era which we have essentially enjoyed for the last two decades devoid of idea of the long-term repercussions. The United States, with less than five percent of the world's population, at this time consume approximately 25% of the world's energy each year. Contribute is growing while challenge continues to surge - as exemplified by the heaving in call from China and India. In the meantime, spare energy-producing amount and list levels have been at all-time lows - ability for a absolute storm?

Finally, I want to ask my readers the subsequent question: What kind of patron are you? What investing style do you adopt and what investing style are you most comfortable with? Can you be a contrarian and buy when the crowd is advertising or are you purely a follower who is only comfortable if you fit in? These are basic questions - but these are questions that you actually need to ask yourselves in order to truly make money in investing over the long run. If my readers take the time out to assessment about these three questions or issues - and at the end of the day have a firm grasp of even just one of the issues - then you will be in a much develop financial condition than most Americans five to ten years from now.

To begin, what are the capability implications of the "aging population" phenomenon? Readers my ability to remember that in my June 24th commentary, I stated: "Assuming that the flow level of profit linger into the coming and haughty the level of taxes is not raised, then broadcast payback to retirees would dramatically become more intense going forward. On the excessive end, Japan and Spain will see a more than 100% become more intense in their outlays to retirees. Clearly, this is not sustainable. Both belongings such as apology or edification costs will need to be cut, or the above countries will need to raise their taxes. Neither of the two scenarios is optimal. Borrowing more of their funds is not a long-term solution. Acerbic funding in excuse and culture will comprise a country's future, and raising taxes will place a huge communal and pecuniary burden on the inhabitants of the residential world - where taxes are previously at a historically high level. Think about this: If you were a bright, young, French capitalist and you were artificial to pay 60% of your pay packet as taxes to assistance the elderly, what would you do? Why, you would vote with your feet and put somewhere else to a new land that is more tax-friendly and business-friendly - and so will other great talent that may have been a great donation to the French economy. The governments of the residential world acknowledge this - but there are no easy solutions.

"This consider gets grimmer when one takes note of a study that was done by the Bank Acknowledgment Analyst. In that study, the BCA predicts that by the year 2050, the percentage share of the industrial countries of the inclusive residents will drop from over 30% in 1950 to less than 14% -- or about equal to the inhabitants of the Islamic nations of the world. Similarly, Yemen will be more densely inhabited than Germany in 2050; while Iraq will be 30% more heavily populated than Italy (Iraq is less than 40% the size of Italy today). Russia's inhabitants is projected to carry on to decline - at a rate such that the residents of Iran will be even privileged to that of Russia's in 2050. India will be the most full of people inhabitants in the world, and Pakistan will only lag the U. S. by approximately 50 million people. If the urbanized countries of today do not decide to work harder or be converted into more efficient, then they will at last lose their comparative advantage, as the younger populace of the world is inherently more hard-working, energetic, innovative, and creative. In today's globalized world, this will be a killer for the be an average of hand in the urbanized countries - the more so once the expression barrier is eliminated (the doing well commercialization of complete idiom translators is projected to crop up in ten to fifteen years). I am by and large more optimistic, as the purging of the expression barrier will critically enhance big business opportunities and efficiencies, but a character such as the be in the region of American member of staff will loss his or her comparative gain in the comprehensive workforce. The availability of a huge contribute of labor ought to also drive down wages in the large-scale souk - and most maybe augment the maldistribution of wealth in today's industrial countries. "

Like I have mentioned before, there are no easy solutions. If the be around American sees an add to of 10 years in his or her life expectancy, can he or she convincingly or logically retire at the in progress conventional retirement age of 65 (which was gritty for the duration of the Roosevelt direction all through the 1930s) exclusive of insertion an undue burden on the system? The come back with is most in all probability "no. " Applying the same working-years-to-retirement-years ratio to his or her new life expectancy, then the be around American must maybe work about five to six years more - thus charitable a revised customary retirement age of 70 or so. Moreover, all this examination is based on the outdated people allocation in the form of a pyramid - where the younger and more able people act for a bulk of the inhabitants (and where the elderly represents only a small underground of the broad population). The pyramid allotment has historically facilitated command assistance of the elderly - as the economic and common burdens have been shouldered by a comparatively large younger population. The flow come into contact with of Europe and Japan suggests a more consistent allocation in the residents of those countries going ahead - as the birthrate in those countries are now bleakly below the stand-in rate of the population. The condition in the United States is not at present as far-reaching (given our comparatively lax colonization policy) but we are bearing towards the same direction. Thus to assert the in progress average of existing at retirement, my guess is that the broad-spectrum inhabitants will not only have to work longer, but work longer hours in the award (and save more) as well.

The condition is more alarming when one considers that the mutual people of China and India makes up over 1/3 of the world's population. The add up to of unemployed human resources in China is larger than the full labor force of the United States. The contest for more or less inexpert jobs will continue, and it promises to accelerate going forward. The be an average of American who does not stay ahead of the curve or does not keep pace of the trend will find his or her job being outsourced - not to declare the be around wage being ambitious down by large-scale competition. I, for one, accept as true that this long-lasting trend of globalization will make the world a change for the better place, as hundreds of thousands of citizens will at length be empowered as they climb out of definite poverty (again, over half of the world's inhabitants now live on less than two dollars a day) - and as the prices of consumer goods are obsessed down still further. The be an average of American will maybe disagree, but the trend of globalization and "offshoring" will not stop. The last time the United States adopted financial and armed isolationism we had a Great Depression and subsequently, World War II. I earnestly do not think that this was a coincidence.

The trend of the common aging people and globalization will have a profound blow on all Americans. Ultimately, I think all Americans will advantage - though it may not be clear to associates who are trailing their jobs today. For the initiated and nimble, you will not only carry on but bloom in these "interesting new times. " Dream up a bazaar for your effect that is over ten times the size of the residents in the United States. China and India has historically disappointed - as the citizens of those countries have historically been too poor to consume much U. S. goods and services. Globalization and offshoring will adjust all these. A world more poised economically will also mean a much more confident and less conflictive world.

Now, I want to concentrate on a comparable alarm of all Americans - as the era of cheap energy (basically the cheap energy prices as skilled by Americans for the last twenty years) comes to a close. While I think oil prices will decline in the short-term (i. e. for the next few months), I am longer-term confident on both oil and accepted gas prices (I will only converse oil in this commentary). Be concerned about the following:

  • The world contribute of oil is destruction out. Readers may not know this, but the United States today still bring into being an adequate amount oil to be suitable for approximately 40% of total domestic demand. The United States also had 22. 7 billion barrels of proved oil bank account as of January 1, 2004, eleventh peak in the world. According to the Energy In rank Admin (EIA), the United States bent about 7. 9 million barrels per day at some point in 2003. This is down sharply from the 10. 6 million barrels averaged in 1985. The peak of domestic oil bring in occurred a little bit at some point in the 1970s. Today, total domestic fabrication is at 50-year lows - and still falling.
  • While Saudi Arabia (the world's top exporter and contains 25% of the world's reported reserves) has claimed that there are and will be no contribute evils for the next few decades, they have not been transparent with their coffers data. According to Simmons & Business International, five to seven key fields in Saudi Arabia construct 90% to 95% of its total oil harvest - all but two fields are enormously old - with the last major find reported in 1968. The last revealed coffers data was in 1975 - when Saudi Aramco was still managed by Exxon, Mobil, Chevron and Texaco. In that report, the world's best experts firm that all the key fields at that time limited 108 billion barrels of oil in recoverable reserves. If this holds true, then the peak of contribute in Saudi Arabia will come soon. Moreover, if the report is correct, then there is especially no "plan B" (unlike at some point in the 1970s when the core of power shifted from the Texas Railroad Agency to OPEC due to the peaking of bring in the United States) - crude oil prices will soar.
  • The "last frontier" for the assembly of oil (namely the North Sea, Siberia, and Alaska) is now aging. Most companies are now struggling in order to even assert their in progress construction levels.
  • World oil call for continues to grow. Oil call for in the early 1990s stayed fairly flat (at about 66 to 68 million barrels per day) but over the next ten years to today, world oil challenge bigger 14 million barrels per day. Today, total world oil call for is better than 82 million barrels per day. The energy "experts" who in the early 1990s predicted a annihilation of oil call for development and who wrote off call development in increasing countries were dead wrong.
  • No new refineries have been built in the United States for the past two decades, even as refineries have been concluding every year at some point in that same time period. Refining ability from 1981 to the mid 1990s also dropped drastically (this biographer estimates a drop of approximately 6 million barrels per day in refining capability at some point in that time period). Since 1994, however, an growth in refining ability at accessible refineries has contributed to an add to in refining aptitude from 15. 0 million barrels per day to 16. 7 million barrels per day (as of today). Even with this expansion, however, domestic refining capability is still stretched to the limit, as deployment at U. S. refineries is now averaging near 90% -- leave-taking no lessen room if a bit startling happens.

There are presently three factors at work which ought to be a factor to a chronic become more intense in the world oil price - the growing of supply, budding demand, and the lack of a mitigate in refining capability and low inventories. The "culprit" has as a rule been labeled as China, but it is exciting to note that the United States has had in effect no domestic energy certificate (in terms of conservation and heartening the education of choice fuels) for the last twenty-something years. China demand, however, has soared over the last few years. It is now the back up chief oil consumer, having just surpassed Japan for the title. Call for for oil in China has more than doubled over the last 10 years (to today's 6 million barrels per day), and this amazing amplify is projected to continue, above all given the fact that oil challenge in China is still a lowly 2 barrels per character per year (compared to 25 barrels per character here in the United States). Furthermore, it is attention-grabbing to note that the amount of cars in China only totaled 700,000 as late as 1993 and 1. 8 million as late as 2001. Today, the digit of cars in China totaled more than 7 million - and this digit could potentially have been much elevated if not for the Chinese command intercession in off-putting the come to of cars that could be sold and obsessed each year. Now the most scary part: Existing oil ask in India is only 0. 7 barrels per being per year - given this fact, oil challenge in India could potentially explode over the next decade - barring a huge worldwide financial depression or depression.

I deem my readers ought to be made aware of the in progress energy supply/demand situation. Given the above, what is the best choice of accomplishment for the be around American? How about the best classes of act if you were the head of a motor band like GM or an airline pilot employed by a birthright airline like Delta? How about the best course of action of achievement for a mutual fund director or a commodity fund manager? Since there are no easy solutions, there be supposed to be no easy answers either. In the short-run (three to five years), Americans will have to pay up if we want to drive gas-guzzling SUVs, and birthright airlines like Delta will have to carry on to cut costs by maybe auxiliary slashing labor costs as their first priority. A additional advance in extraction know-how ought to help, but the critical advance of another fuels will have to start now. I also have faith in that the next considerable decline will be induced by a amalgamation of an "oil shock" and a rise in activity rates. Readers may bring to mind the comparative asset chart that I residential in my August 15th commentary viewing the AMEX Oil Index vs. the S&P 500 and the huge capability inverse heads and shoulders archetype in that chart. For now, the comparative depth line must bounce about the collar (the line drawn on that chart) - perhaps even for a few years - but once the qualified depth line convincingly breaks above the neckline, crude oil prices could rise to $80 or even $100 a barrel. I sure hope that my readers would not be taken by amazement if gas prices at the pump soars to $4. 00 a gallon five to six years from now.

Finally, I want to pose to my readers the next question: Have you taken the time out to learn more about your psychological framework and how it has pretentious your investment or trading decisions? What type of being are you when it comes to the market? Are you a so-called buy-and-holder, a swing trader, or a day trader? An autonomous thinker, a contrarian, a momentum depositor or purely a follower? I am asking you these questions since of my subsequent considerations:

  • This biographer believes that we are now in a secular bear marketplace in domestic conventional stocks. While I deem that this existing rally still have more room to go, I accept as true that a recurring bear marketplace will emerge in due time - this imminent returning bear advertise may even take us back or below the lows that we hit all through October 2002. If this is true, then a buy-and-hold assortment would categorically not work - except you were in accepted funds or precious metals mining stocks.
  • When this repeated bull marketplace tops out, all your friends, relatives, and the admired media will be illuminating you to buy more or to hold your customary stocks. The bears and all bearish feelings will be not accepted and frowned upon. This has happened in every bull promote in the whole thing in all human history. If you are in cash now, would you be able to continue in cash when the top at last comes or will you be powerless to resist and buy in for the reason that you are anxious of "the train leave-taking the class lacking you," so to speak?
  • Most colonize are inherently not good day traders or even swing traders. To be good in even the latter, you need a huge sum of allegiance and discipline.

Investing or trading has all the time been dominated by emotions and continually will be. My assessment in first www. marketthoughts. com has all the time been that that if I can get my readers to buy in now, it will be a much easier conclusion for them to sell and hold cash once the DJIA reaches 11,000 or 12,000 or so - as contrasting to being in cash and staying out for the rest of this secular bear market. 99% of Americans are just not restricted or devoted an adequate amount of to stay in cash all through a secular bear promote - not to bring up staying in cash at some point in the entirety of a secular bear promote and business and asset communal stocks at some stage in the entirety of a consequent secular bull market. The be in the region of human consciousness is just not adept of doing this. Since of this, I honestly deem that accomplishment in the stock advertise (for most people) at some point in the next five to ten years would absorb easily spread the swings at the right or near-right times. For readers who just cannot resist, I am also going to carry on to advocate some conventional stocks at apt times, but in no way be supposed to my readers take my recommendations as gospel and in no way be supposed to my readers put all their eggs in one basket. If you are a character who can stay in cash for the next ten years and wait until the Dow Industrials has a P/E below 10 and a share yield of over 5%, then more power to you - you are also before now rich who have no need to make money in the advertise at least or you are a very restricted and independent-thinking person. Most Americans just cannot do that - but I am here to help.

Henry To, CFA is the running component of Disinterestedness Partners, LP, a SEC registered hedge fund.
He is also editor of the investment website, www. marketthoughts. com.


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