Global Market Comments
April 3, 2020
(THE CODER BOOM)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
Global Market Comments
April 3, 2020
(THE CODER BOOM)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways or down a small amount in price over a defined limited period of time.
It is the perfect position to have onboard during markets that have declining or low volatility, much like we experienced in 2014, and will almost certainly see again.
I have strapped on quite a few of these across many asset classes this year, and they are a major reason why I am showing positive performance numbers for 2016.
To understand this trade, I will use the example of an Apple trade, which I executed on July 10, 2014. I then felt very strongly that Apple shares would rally into the release of its new iPhone 6 on September 9, 2014.
The same play has just started to kick in for the iPhone 7 released September of that year.
So followers of my Trade Alert service received text messages and emails to add the following position:
Buy the Apple (AAPL) August 2014 $85-$90 in-the-money bull call spread at $4.00 or best
To accomplish this, they had to execute the following trades:
Buy 25 August 2014 (AAPL) $85 calls at……………$9.60
Sell short 25 August 2014 (AAPL) $90 calls at……$5.60
This gets traders into the position at $4.00, which cost them $10,000 ($4.00 per option X 100 shares per option contract X 25 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (August 15, 2014) and only different strike prices ($85 and $90).
The breakeven point can be calculated as follows:
$85.00 – Lower strike price
+$4.00 – Price paid for the vertical call spread
$89.00 – Break even Apple share price
Another way of explaining this is that the call spread you bought for $4.00 is worth $5.00 at expiration on August 15, giving you a total return of 25% in 26 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can’t lose any more than the amount of capital you put up, in this case, $10,000.
If Apple goes bankrupt, we get a flash crash or suffer another 9/11 type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like spreads so much.
As long as Apple traded at or above $89 on the August 14 expiration date, you would have made a profit on this trade.
As it turns out, my read on Apple shares proved dead-on, and the shares closed at $97.98 on expiration day or a healthy $8.98 above my breakeven point.
The total profit on the trade came to:
($1.00 profit X 100 shares X 25 contracts) = $2,500
This means that the position earned a 25% profit on your $10,000 investment in a little more than a month. Now you know why I like Vertical Bull Call Spreads so much. So do my followers.
Occasionally, these things don’t work and wheels fall off. As hard as it may be to believe, I am not infallible.
So, if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money. On those rare occasions when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
That stop loss is usually at the lower strike price when there is still a lot of time to run to expiration, as the position still has a lot of time value remaining, and the upper strike price when there are only a few days left until expiration.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your own online platform, please click here.
Global Market Comments
March 24, 2020
(TEN SIGNS THE MARKET IS BOTTOMING),
(FXI), (BRK/A), (BA), (DAL), (SPX),
(INDU), (UUP), (VIX), (VXX), (AAPL)
We all love our FANGS.
Not only have Facebook (FB), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) been at the core of our investment performance for the past decade years, we also gobble up their products and services like kids eating their candy stash the day after Halloween.
Three of the FANGs have already won the race to become the first $1 trillion in history, Apple, Amazon, and Microsoft.
In fact, the FANGs are so popular that we need more of them, a lot more. So how do we find a new FANG?
Here is where it gets complicated. None of the four have perfect business models. All excel in many things but are deficient at others.
So, there are at least four different answers as to what makes a FANG. A more accurate answer would probably be 4 squared, or four to the tenth power.
I will list the eight crucial elements that make a FANG.
1) Product Differentiation
In medieval times, location was the most important determinant of business success. If you owned Ye Olde Shoppe at the foot of London Bridge, you prospered.
Then, great distribution was crucial. This occurred during the 19th century when the railroads ran the economy.
Products followed with the automobile boom of the 20th century, when those who dreamed up 18-inch tailfins dominated. This strategy was applied to all consumer products.
The Financial age came next, when cheap money was used to assemble massive conglomerates that was the primary determinant of success.
The eighties and nineties spawned the era of global brands, be it Coca Cola, MacDonald’s, Lexus, or Gucci.
Today, the global economy is ruled by those who can provide the best services. Facebook offers you personal access to a network of 1.5 billion. Apple will sell you a phone that can perform a magical array of tricks.
Netflix will stream any video content imaginable with lightning speed. Alphabet will deliver you any piece of information you want as fast as you can type, but charges advertisers hundreds of billions of dollars to get in your way.
This has created what I call an “Apple” effect. It stampedes buyers to pay the highest premiums for the best products, assuring global dominance.
While Apple accounts for less than 10% of the smart phone market, it captures a stunning 92% of the net profits. Everyone else is just an “also ran.”
Instead of driving my car into a dingy dealership every few months to get ripped off for a tune up, Tesla (TSLA) does it remotely, online, while I sleep, for free.
Unlike battling for a smelly New York taxi cab in a snow storm, a smiling Uber driver will show up instantly, know where to go, automatically bill me at a discount price, and even give me restaurant recommendations in Kabul.
And you all know what Amazon can do. It beats the hell out of looking for a parking space at a mall these days, only to be told they don’t have your size (48 XLT).
2. Visionary Capital
If you have a great vision, you can get unlimited financing free from investors anywhere. That puts those who must pay for expensive external financing for growth at a huge disadvantage.
Have a great vision, and the world is your oyster.
Elon Musk figured this out early with Tesla. By promising a “carbon-free economy,” he has been able to raise tens of billions of equity capital even though his firm has never made a real profit.
Alphabet is “organizing the world’s information”, while Facebook is “connecting the world.”
Chinese Internet giant Alibaba (BABA) invented a holiday from scratch, “Singles Day,” November 11, which has quickly become the most feverish shopping day in history. In 2019, they booked an unbelievable $30.8 billion in sales in a single 24 hours period, up 27% from the previous year.
And you know the great thing about visions? Not only do venture capitalists and consumers love them, so do stock investors.
3) Global Reach
You have to go global or be gone. A company with 7 billion customers will beat one with only 330 million all day long.
Go global, and economies of scale kick in enormously. This is only possible if you digitize everything from the point of sale to the senior management. Some two-thirds of Facebook users are outside the US, although half its profits are homegrown.
By the way, the Mad Hedge Fund Trader is global, with readers in 135 countries. Our marginal cost of production is zero, and the entire firm is run off my American Express card. It’s a great business model. And boy, do I get a ton of frequent flier points! Whenever I board Virgin Atlantic’s nonstop from San Francisco to London, the entire crew stands up to salute.
Who doesn’t like Mark Zuckerberg, with his ever-present hoodies, skinny jeans, and self-effacing demeanor. And who did Facebook send to Washington to testify about internet regulation but the attractive, razor-sharp, and witty Sheryl Sandberg? The senators ate out of her hand.
Bill Gates and Steve Ballmer? Not so likable. Their arrogance invited a ten-year antitrust suit against Microsoft (MSFT) from the Justice Department which half the legal profession made a living off of.
And here’s the thing. If people like you, so will consumers, regulators, and yes, even equity investors. It makes a big difference to the bottom line and your investment performance.
5) Vertical Integration
Crucial to the success of the FANGs is their complete control of the customer experience through vertical integration.
When FANGs don’t manufacture their own products, as Apple does, they source them, rebrand them, and sell them as their own, like Amazon.
The return on investment for advertising is plummeting. Just ask the National Football League. So, it has become essential for companies to keep a death grip on the customer the second they enter your site.
Some, like Amazon again, will keep chasing you long after you have left their sites with special offers and alternative products. Even if you change computers they will hunt you down.
One of my teenaged daughters used my computer to buy a swimsuit last summer, and let me tell you, booting up in the morning has been a real joy ever since.
This was the genius of the Apple store network. Buy one Apple product and they own you for life, like an indentured servant. They all integrate and talk to each other, a huge advantage for a small business owner. And they are cool.
No pimple-faced geeks wearing horn-rimmed glasses here. Get your iPhone fixed and you don’t talk to a technician, but a “genius.” It’s all about control.
Expect other strong brands to open their own store chains soon.
6) Artificial Intelligence
There is probably no more commonly known but least understood term in technology today. It’s like counting the number of people who have finished Dr. Stephen Hawking’s “A Brief History of Time” (I have).
A trillion-dollar company absolutely must be able to learn from human data input and then use algorithms to analyze it. Data has become the oxygen of the modern economy.
The company then use other algos to predict what you’re most likely buying next and then thrust it in front of your face screaming at the top of its lungs.
This has been evolving for decades.
First, there was demographic targeting. White suburban middle-class guys have all got to like Budweiser, right?
This turned into social targeting. If two friends “liked” the same brand, regardless of their demographics, they should be targeted by same advertisers.
Now we live in the age of behavioral targeting. There is no better predictor of future purchases than current activities. So, if I buy a plane ticket to Paris, offerings of Paris guidebooks, tours, French cookbooks, French dating services, and even seller of discount black berets suddenly start coming out of the woodwork.
It would be a vast understatement to say that behavioral targeting is the most successful marketing strategy ever invented. So, guess what? We’re going to get a lot more of it.
As depressing as this may sound, the number one goal of almost all new technological advancements these days is to get you to buy more stuff.
Better to use the public computer at the library to buy your copy of “50 Shades of Gray.”
If you want to throw gasoline on the growth of a company, you absolutely have to have the best people to do it. The companies with the smartest staff can suck in free capital, invent faster, develop speedier services, and always be ahead of the curve when compared to the competition.
This has led to enormous disparities in income. Companies will pay anything for winners, but virtually nothing for losers.
I’ll never forget the first day I walked on to the trading floor at Morgan Stanley (MS). I am 6’4” and am used to towering over those around me. But at Morgan, almost all the salesmen were my height or a few inches shorter.
The company specifically selected these people because they delivered better sales records. Height is intimidating, especially to short customers.
And that’s what the FANGs have, the programming equivalents of a crack all-6’4” sales team.
A few years ago, my son got a job as the head of International SEO at Google. He was rare in that he spoke fluent Japanese and carried three passports, US, British, and Japanese (born in London with a Japanese mom and American dad).
However, when he met his team, they all spoke multiple languages, were binational, and were valedictorians, National Merit Scholars, and Eagle Scouts to boot!
This is why immigration is such a hot button issue in Silicon Valley these days. If you can’t get a work visa for a graduating PhD in Computer Science from Stanford, he’ll just go back to China or India to start a local competitor that may someday eat your lunch.
By the way, if you get a FANG on your resume, even for a short period, you are set for life. Oh, and by the way, Apple gets 100,000 resumes a month!
It all about location, location, location. It’s no accident that Silicon Valley took root near two world class universities, the University of California at Berkeley (my alma mater), and the godless heathens at Stanford across the bay.
When the pioneers moved west in covered wagons in 1849, they came to a fork in the road. The god fearing families went right to the verdant farmland of Oregon, while young men cashing in on the latest get-rich-quick scheme chose left for the gold fields of California. Nothing has changed since.
Cal in particular was the recipient of massive government funding for the Manhattan Project that built the first atomic bomb during WWII. The tailwind lingers to this day. The world’s first cyclotron still occupies a local roundabout.
Universities provide the raw materials essential to create hot house local economies like the San Francisco Bay Area. And as much as every region in the US or country in the world would like to do this, none have been able to.
There is only one place in the world were a company can hire 1,000 engineers from scratch on short notice, and that is the Bay Area.
Also, innovation is city centered. Some two-thirds of future GDP growth will emanate from cities.
So, if you want to move your career forward, you better count on spending some serious time in Silicon Valley, New York, London, and Tokyo.
I’ve done all four and it paid handsomely.
So there you have it. Now we know what makes a FANG. I’ll be addressing who the most likely FANG candidates are in a future letter.
I want to thank my friend, Scott Galloway of New York University’s Stern School of Business for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
Global Market Comments
January 9, 2020
(WEDNESDAY, FEBRUARY 5 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(CAPTURING SOME YIELD WITH CELL PHONE REITS),
(CCI), (AMT), (SBAC),
(JNK), (SPG), (AMLP), (AAPL), (VZ), (T), (TMUS), (S)
I am constantly bombarded with requests for high-yield, low-risk investments in this ultra-low interest rates world.
While high-yield energy Master Limited Partnerships LIKE (AMLP) can offer double-digit returns, they carry immense risks. After all, if the prices of oil drop to $5-$10 a barrel, replaced by alternatives as I eventually expect, all of these instruments will get wiped out.
You can earn 5%-8% from equity-linked junk bonds. However, their fates are tied to the future of the stock market at a 20-year valuation high against flat earnings.
You might then migrate to Real Estate Investment Trusts (REITs) like Simon Property Group (SPG), which acts as a pass-through vehicle for investments in a variety of property investments. However, many of these are tied to shopping malls and the retail industry, the black hole of investment today.
So where is the yield-hungry investor to go?
You may have heard about something called 5G. This refers to the rollout of fifth-generation wireless technology that will increase smartphone capabilities tenfold. Whole new technologies, like autonomous driving and artificial intelligence, will get a huge boost from the advent of 5G. Apple (AAPL) will launch its own 5G phone in September.
5G, like all cell phone transmissions, rely on 50-200-foot steel towers strategically placed throughout the country, frequently on mountain peaks or the tops of buildings. With demand from the big phone carriers soaring, there is a construction boom underway in cell phone towers. There just so happens to be a class of REITs that specializes in investment in this sector.
Cells Phone REITs constitute a $125 billion market and make up 10% of the REIT indexes. They own 50%-80% of all investment-grade towers. They are all benefiting from a massive upgrade cycle to accommodate the 5G rollout. These REITs own or lease the land under the cell towers and then lease them to the phone companies, like Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Sprint (S) for ten years with 3% annual escalation contracts.
American Tower (AMT) is far and away the largest such REIT, with 170,000 towers, has provided an average annual return over the past ten years, and offers a fairly safe 1.65% yield. They are currently expanding in Africa. Even during the 2008 crash, (AMT) still delivered an 8% earnings growth.
SBA Communications (SBAC) is the runt of the sector with only 30,000 towers. However, it has a big presence in Central and South America and is seeing earnings grow at a prolific 80% annual rate. (SBAC) is offering a 1.48% yield at today’s prices.
Crown Castle International (CCI) is in the middle with 40,000 large towers and 65,000 small ones. 5G signals travel only a 1,000 meters, compared to several miles for 4G, requiring the construction of tens of thousands of small towers where (CCI) is best positioned. (CCI) offers a hefty 3.39% yield.
Small cell towers are roughly the size of an extra-large pizza box and will soon be found on every urban street corner in the US. AT&T (T) has estimated that there is a need for over 300,000 small cell phone towers in the US alone.
So, if you’re looking for a sea anchor for your portfolio, a low-risk, high-return investment that won’t see a lot of volatility, Cell phone REITs may be your thing. Buy (CCI) on dips.
Can you hear me now?
Global Market Comments
December 30, 2019
(WILL SYNBIO SAVE OR DESTROY THE WORLD?),
(XLV), (XPH), (XBI), (IMB), (GOOG), (AAPL), (CSCO), (BIIB)
Global Market Comments
December 27, 2019
SPECIAL ISSUE ABOUT THE FAR FUTURE
(PEAKING INTO THE FUTURE WITH RAY KURZWEIL),
(GOOG), (INTC), (AAPL), (TXN),
This is the most important research piece you will ever read, bar none. But you have to finish it to understand why. So, I will get on with the show.
I have been hammering away at my followers at investment conferences, webinars, and strategy luncheons this year about one recurring theme. Things are good, and about to get better, a whole lot better.
The driver will be the exploding rate of technological innovation in electronics, biotechnology, and energy. The 2020s are shaping up to be another roaring twenties, and asset prices are going to go through the roof.
To flesh out some hard numbers about growth rates that are realistically possible and which industries will be the leaders, I hooked up with my old friend, Ray Kurzweil, one of the most brilliant minds in computer science.
Ray is currently a director of Engineering at Google (GOOG), heading up a team that is developing stronger artificial intelligence. He is an MIT grad, with a double major in computer science and creative writing. He was the principal inventor of the CCD flatbed scanner, first text-to-speech synthesizer, and the commercially marketed large-vocabulary speech recognition.
When he was still a teenager, Ray was personally awarded a science prize by President Lyndon Johnson. He has received 20 honorary doctorates and has authored 7 books. It was upon Ray’s shoulders that many of today’s technological miracles were built.
His most recent book, The Singularity is Near: When Humans Transcend Biology, was a New York Times bestseller. In it, he makes hundreds of predictions about the next 100 years that will make you fall out of your chair.
I met Ray at one of my favorite San Francisco restaurants, Morton’s on Sutter Street. I ordered a dozen oysters; a filet mignon wrapped in bacon and drowned it all down with a fine bottle of Duckhorn merlot. Ray had a wedge salad with no dressing, a giant handful of nutritional supplements, and a bottle of water. That’s Ray, one cheap date.
The Future of Man
A singularity is defined as a single event that has monumental consequences. Astrophysicists refer to the big bang and black holes in this way. Ray’s singularity has humans and machines merging to become single entities, partially by 2040 and completely by 2100.
All of our thought processes will include built-in links to the cloud, making humans super smart. Skin that absorbs energy from the sun will eliminate the need to eat. Nanobots will replace blood cells, which are far more efficient at moving oxygen. A revolution in biotechnology will enable us to eliminate all medical causes of death.
Most organs can now be partially or completely replaced. Eventually, they all will become renewable by taking one of your existing cells and cloning it into a completely new organ. We will become much more like machines, and machines will become more like us.
The first industrial revolution extended the reach of our bodies, and the second is extending the reach of our minds.
And, oh yes, prostitution will be legalized and move completely online. Sound like a turnoff? How about virtually doing it with your favorite movie star? Your favorite investment advisor? Yikes!
Ironically, one of the great accelerants towards this singularity has been the war in Iraq. More than 50,000 young men and women came home missing arms and legs (in Vietnam these were all fatalities, thanks to the absence of modern carbon fiber body armor).
Generous government research budgets have delivered huge advances in titanium artificial limbs and the ability to control them only with thoughts. Quadriplegics can now hit computer keystrokes merely by thinking about them.
Kurzweil argues that exponentially growing information technology is encompassing more and more things that we care about, like healthcare and medicine. Reprogramming of biology will be the next big thing and is a crucial part of his “singularity.”
Our bodies are governed by obsolete genetic programs that evolved in a bygone era. For example, over millions of years, our bodies developed genes to store fat cells to protect against a poor hunting season in the following year. That gave us a great evolutionary advantage 10,000 years ago. But it is not so great now, with obesity becoming the country’s number one health problem.
We would love to turn off these genes through reprogramming, confident that the hunting at the supermarket next year will be good. We can do this in mice now which, in experiments, can eat like crazy but never gain weight.
The happy rodents enjoy the full benefits of caloric restriction with no hint of diabetes or heart disease. A product like this would be revolutionary, not just for us, healthcare providers, and the government, but, ironically, for fast food restaurants as well.
Within the last five years, we have learned how to reprogram stem cells to rebuild the hearts of heart attack victims. The stem cells are harvested from skin cells, not human embryos, ducking the political and religious issue of the past.
And if we can turn off genes, why not the ones in cancer cells that enable them to pursue unlimited reproduction, until they kill its host? That development would cure all cancers and is probably only a decade off.
The Future of Computing
If this all sounds like science fiction, you’d be right. But Ray points out that humans have chronically underestimated the rate of technological innovation.
This is because humans evolved to become linear thinking animals. If a million years ago, we saw a gazelle running from left to right, our brains calculated that one second later, it would progress ten feet further to the right. That’s where we threw the spear. This gave us a huge advantage over other animals and is why we became the dominant species.
However, much of science, technology, and innovation grows at an exponential rate and is where we make our most egregious forecasting errors. Count to seven, and you get to seven. However, double something seven times and you get to a billion.
The history of the progress of communications is a good example of an exponential effect. Spoken language took hundreds of thousands of years to develop. Written language emerged thousands of years, books in hundreds of years, the telegraph in a century, and telephones 50 years later.
Some ten years after Steve Jobs brought out his Apple II personal computer, the growth of the Internet went hyperbolic. Within three years of the iPhone launch, social media exploded out of nowhere.
At the beginning of the 20th century, $1,000 bought 10 X -5th power worth of calculations per second in our primitive adding machines. A hundred years later a grand got you 10 X 8th power calculations, a 10 trillion-fold improvement. The present century will see gains many times this.
The iPhone itself is several thousand times smaller, a million times cheaper, and billions of times more powerful than computers of 40 years ago. That increases price per performance by the trillions. More dramatic improvements will accelerate from here.
Moore’s law is another example of how fast this process works. Intel (INTC) founder Gordon Moore published a paper in 1965 predicting a doubling of the number of transistors on a printed circuit board every two years. Since electrons had shorter distances to travel, speeds would double as well.
Moore thought that theoretical limits imposed by the laws of physics would bring this doubling trend to end by 2018 when the gates become too small for the electrons to pass through. For decades, I have read research reports predicting that this immutable deadline would bring an end to innovation and technological growth and bring an economic Armageddon.
Ray argues that nothing could be further from the truth. A paradigm shift will simply allow us to leapfrog conventional silicon-based semiconductor technologies and move on to bigger and better things. We did this when we jumped from vacuum tubes to transistors in 1949, and again in 1959 when Texas Instruments (TXN) invented the first integrated circuit.
Paradigm shifts occurred every ten years in the past century, every five years in the last decade, and will occur every couple of years in the 2020s. So fasten your seatbelts!
Nanotechnology has already allowed manufacturers to extend the 2018 Moore’s Law limit to 2022. On the drawing board are much more advanced computing technologies, including calcium-based systems, using the alternating direction of spinning electrons, and nanotubes.
Perhaps the most promising is DNA-based computing, a high research priority at IBM and several other major firms. I earned my own 15 minutes of fame in the scientific world 40 years ago as a member of the first team ever to sequence a piece of DNA, which is why Ray knows who I am.
Deoxyribo Nucleic Acid makes up the genes that contain the programming that makes us who we are. It is a fantastically efficient means of storing and transmitting information. And it is found in every single cell in our bodies, all 10 trillion of them.
The great thing about DNA is that it replicates itself. Just throw it some sugar. That eliminates the cost of building the giant $2 billion silicon-based chip fabrication plants of today.
The entire human genome is a sequential binary code containing only 800 MB information, which after you eliminate redundancies, has a mere 30-100 MB of useful information, about the size of an off-the-shelf software program, like Word for Windows. Unwind a single DNA molecule, and it is only six feet long.
What this means is that, just when many believe that our computer power is peaking, it is in fact just launching on an era of exponential growth. Supercomputers surpassed human brain computational ability in 2012, about 10 to the 16th power (ten quadrillions) calculations per second.
That power will be available on a low-end laptop by 2020. By 2050, this prospective single laptop will have the same computing power of the entire human race, about 9 billion individuals. It will also be small enough to implant in our brains.
The Future of the Economy
Ray is not really that interested in financial markets, or for that matter, making money. Where technology will be in a half-century and how to get us there are what get his juices flowing. However, I did manage to tease a few mind-boggling thoughts from him.
At the current rate of change, the 21st century will see 200 times the technological progress that we saw in the 20th century. Shouldn’t corporate profits, and therefore share prices, rise by as much?
Technology is rapidly increasing its share of the economy and increasing its influence on other sectors. That’s why tech has been everyone’s favorite sector for the past 30 years and will remain so for the foreseeable future. For two centuries, technology has been eliminating jobs at the bottom of the economy and creating new ones at the top.
Stock analysts and investors make a fatal flaw estimating future earnings based on the linear trends of the past, instead of the exceptional growth that will occur in the future.
In the last century, the Dow appreciated from 100 to 10,000, an increase of 100 times. If we grow at that rate in this century, the Dow should increase by 10,000% to 1 million by 2100. But so far, we are up only 6% even though we are already 19 years into the new century.
The index is seriously lagging but will play catch-up in a major way during the 2020s when economic growth jumps from 2% to 4% or more, thanks to the effects of massively accelerating technological change.
Some 100 years ago, one-third of jobs were in farming, one-third were in manufacturing, and one-third in services. If you predicted then that in a century, farming and manufacturing would each be 3% of total employment and that something else unknown would come along for the rest of us, people would have been horrified. But that’s exactly what happened.
Solar energy use is also on an exponential path. It is now 1% of the world’s supply but is only seven doublings away from becoming 100%. Then, we will consume only one 10,000th of the sunlight hitting the earth. Geothermal energy offers the same opportunities.
We are only running out of energy if you limit yourself to 19th-century methods. Energy costs will plummet. Eventually, energy will be essentially free when compared to today’s costs, further boosting corporate profits.
Hypergrowth in technology means that we will be battling with deflation for the rest of the century, as the cost of production and price of everything falls off a cliff. That makes our 10-year Treasury bonds a steal at a generous 2.60% yield, a full 460 basis points over the real long-term inflation rate of negative 2% a year.
US Treasuries could eventually trade down to the 0.40% yields seen in Japan only a couple of years ago. This means that the bull market in bonds is still in its early stages and could continue for decades.
The upshot for all of these technologies will rapidly eliminate poverty, not just in the US but around the world. Each industry will need to continuously reinvent its business model or disappear.
The takeaway for investors that stocks, as well as other asset prices, are now wildly undervalued, given their spectacular future earnings potential. It also makes the Dow target of 1 million by 2100 absurdly low, and off by a factor of 10 or even 100. Will we be donning our “Dow 100 Million” then?
Other Random Thoughts
As we ordered dessert, Ray launched into another stream of random thoughts. I asked for Morton’s exquisite double chocolate mousse. Ray had another handful of supplements. Yep, Mr. Cheap Date.
The number of college students has grown from 50,000 to 12 million since the 1870s. A kid in Africa with a cell phone has more access to accurate information than the president of the United States did 15 years ago.
The great superpower, the Soviet Union, was wiped out by a few fax machines distributing information in 1991.
Company offices will become entirely virtual by 2025.
Cows are very inefficient at producing meat. In the near future, cloned muscle tissue will be produced in factories, disease-free and at a fraction of the present cost, without the participation of the animal. PETA will be thrilled.
Use of nanomaterials to build ultra-light but ultra-strong cars cuts fuel consumption dramatically. Battery efficiencies will improve by 10 to 100 times. Imagine powering Tesla Model S1 with a 10-pound battery! Advances in nanotube construction mean the weight of the vehicle will drop from the present 3 tons to just 100 pounds but will be far safer.
Ray is also on a scientific advisory panel for the US Army. Uncertain about my own security clearance, he was reluctant to go into detail. Suffice it to say that the weight of an M1 Abrams main battle tank will shrink from 70 tons to 1 ton but will be 100 times stronger.
A zero-tolerance policy towards biotechnology by the environmental movement exposes their intellectual and moral bankruptcy. Opposing a technology with so many positive benefits for humankind and the environment will inevitably alienate them from the media and the public, who will see the insanity of their position.
Artificial intelligence is already far more prevalent than you understand. The advent of strong artificial intelligence will be the most significant development of this century. You can’t buy a book from Amazon, withdraw money from your bank, or book a flight without relying on AI.
Ray finished up by saying that by 2100, humans will have the choice of living in a biological, or in a totally virtual, online form. In the end, we will all just be files.
Personally, I prefer the former, as the best things in life are biological and free!
I walked over to the valet parking, stunned and disoriented by the motherload of insight I had just obtained, and it wasn’t just the merlot talking, either! Imagine what they talk about at Google all day.
To buy The Singularity is Near at discount Amazon pricing, please click here. It is worth purchasing the book just to read Ray’s single chapter on the future of the economy.
Global Market Comments
December 16, 2019
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD NEWS IS OUT)
(FXI), (AAPL), (FXB), (VIX), (USO), (BABA), (NSC), (MSFT), (GOOGL)