The Next Thirty Years?

Many of you know that I am a wealth advisor to high net worth individuals and families by profession.  I use this website and my various Facebook and Twitter communications for all sorts of things, but I do not use these mediums to discuss investment strategies or work-related material (I am strictly forbidden from doing so by the regulatory authorities).  The article below was sent out as part of my Weekly Market Commentary that I send every single Friday to clients and subscribers.  I am posting this particular edition because I am confident that it has nothing to do with investment advice whatsoever, and is, in fact, a truly ideological piece.  I hope you enjoy it. 

I dropped my oldest son off Wednesday morning for his very first day of Kindergarten.  It was a special day for me and my family.  Joleen and I are both hopeless sentimental saps, and anyone who knows Mitchell knows that he has been waiting to go to school since he was about three months old.  The launch of this stage of life has caused me to think about the world we are living in.

It is incredible to think about all the things that are going on in the world.  The President’s popularity has dramatically dropped despite the fact that it was not very long ago that people were begging for him to come in to replace an extremely unpopular Republican President.  Oil prices are high and appear to be getting higher, but wages are certainly not growing with this increase in energy prices.  Pundits everywhere question the wisdom of our current national energy policy, yet there does not seem to be any political will whatsoever for some of the alternative plans that exist.  At the top of many people’s list of major concerns is the national debt.  Deficits are skyrocketing and debt as a percentage of national GDP is at levels once considered to be unthinkable.  Jobs are very hard to come by, and the number of people who believe their job is never going to come back seems to be increasing by the week.  Dramatic tax increases are looming over us, and there is almost a national movement in place to protest the levels of taxation we already deal with.  Geopolitical tensions are high.  Iran is a hotbed for ongoing problems, and few can deny that uncertainty in the Middle East remains a major fear on the markets, and on overall national security.  There is an election around the corner, but many wonder what changes are possible, and what is just plain too late.  National confidence in Congress has eroded, and it is difficult to feel optimistic about the state of the economy.  Businesses express extreme trepidation about the future, and consumer confidence is nowhere near its recent highs.  There are global debt crises all over the world, and central bank authorities admit they do not know if deflation or inflation is the next monetary threat to prepare for.  Taxes, debt, spending, politics, jobs, energy – whatever category we discuss, the overall feeling seems negative.  What a discouraging time to be alive. 

I did not mean to change the subject, but I was just reminiscing about the state of affairs during my first week of Kindergarten.  Yes, on September 4, 1979, things were not good.  In fact, some would say that the headlines lined up in ways to the present state of affairs that is almost uncanny.  Re-read the paragraph above.  Is there any sense in which the paragraph itself is not totally interchangeable between 1979 and 2010?  A lot in the world is different, and a lot about our present economic woes is dramatically different, but there are some things that are nearly exactly the same.  Let me get it into one of those major similarities.

When I began Kindergarten, the entire United States stock market had a grand total of just three companies with a market cap of over $40 billion: AT&T, Exxon, and IBM (this is over $100 billion in inflation-adjusted dollars today).  All three of those companies are still with us, and still at least at that same market capitalization (actually much higher), but there are also 21 other companies on that list now.  The largest 24 companies in America are worth nearly $4 trillion in aggregate value.  It is truly incomprehensible.

Five of the companies that today are among the largest 24 companies in America did not even exist when I began Kindergarten (or were literally JUST starting as a baby company): Apple, Microsoft, Google, Cisco, and Oracle.  Microsoft, by the way, has turned four of its major shareholders into billionaires, but it also turned 12,000 run-of-the-mill employees into millionaires, another stat so mind-boggling you have to do a double-take when looking at the data. 

A little discount retailer by the name of Wal-Mart currently sees revenue of $36 million – that is, $36 million, every single hour, of every single day.  They employ 1.6 million people worldwide.  90% of Americans – that’s right, 90% – live within 15 miles of one.  They sell more food than any company in the world – food.  Many people did not know they sold food.  Since I graduated high school (forget Kindergarten), 31 major multi-state supermarket chains have gone bankrupt.  Wal-Mart now does more gross sales than Kroger, Safeway, Home Depot, Sears, Target, Costco, and K-Mart – combined!

My point is not to (necessarily) recommend any of the companies mentioned in this email.  Instead, I am trying to make a different point: Economic history is the story of companies that fail, only to be replaced by other companies that succeed.  I speak with young people sometimes and ask them when they think Apple or Google might be distant, forgotten companies, and they laugh at me.  But how many of us talk about Xerox, or Eastman Kodak, or Polaroid, or Commodore, or, I don’t know – General Motors – as a leading, dynamic, impressive company.  Could Google or Apple be among the world’s largest and most successful companies in 25 years?  Of course.  Would I bet that they will be?  Not necessarily.  The reason why: A new company could come in and do what they do even better (if history is any guide).  That is how amazing free market capitalism is – that the most dominant heavyweights in the world are routinely replaced by even more impressive fighters.  In the time span it has taken one young boy to begin Kindergarten, and then a generation later see his own boy off to Kindergarten, the entire world has changed.  The change I refer to is “the greatest era of prosperity and economic growth in world history”.  Did anyone ever think it possible?

Unemployment was above 10% in the recession of the early 1980’s.  There was no reason to feel optimistic.  But over forty million NET new jobs have been created since 1980.  I believe that in free market economies, the process that Joseph Schumpeter called “creative destruction” is constantly at work – destroying some industries that have outlived their usefulness, but simultaneously creating new industries that will usher in entirely new qualities of life.  Progress is an amazing thing – it is tough to see minute-by-minute, but impossible to ignore decade-by-decade.

The next thirty years will not contain the same technological advancements of the last thirty years.  Actually, the next thirty years will likely contain far bigger technological advancements.  I mean that with every ounce of breath in my body.  The exponential nature of technological progress is unfathomable for his mere mortals.  I believe that by the time Mitchell drops his firstborn off at Kindergarten, he will look back at the technology, medicine, business, and industrial environment of 2010, and express shock that we ever thought the world was ending.  Self-interest is a powerful thing.  When you look at it generationally, it becomes simply awesome.

I find the burden of active portfolio management in times like the ones we live in now to be a monumental task.  I take it very, very seriously.  I would never dare downplay the challenges we face as a society economically and otherwise.  But let me say this: the pathological pessimists who are so sure that “this time is different”, and “this time we will never recover”, would never dare take me up on my bet to re-evaluate things when Mitchell’s kids go to Kindergarten.  They would be insane if they did.  I do not know what the prescription for financial repair is going to be this time.  I know what it was in 1979, and history has shown us how robust economic recovery can be in times like the stage we went into just after 1979.  More time is needed to see exactly what the next big sector is going to be, and what companies are going to be the mega-caps of the next 35 years.  I do not have a crystal ball.  But what I do have is an undying faith in the DNA of this country.  Economic growth is the fruit of an industrious spirit, driven by self-interest and the quest for human advancement.  Just as all of you want a better life for your children and grandchildren, I want desperately for Mitchell, Sadie, and Graham to experience the kind of growth and prosperity that I have lived through since 1979. 

All the particulars of the journey are not known at this time, but I feel that I know a lot about the destination.