How to grow grey hair and think 10 years younger.

I hate to say it, but as you are reading this blog you have aged. Don’t bail out, what I have to share with you will at least give you some financial security as you cultivate that grey hair.

Wednesday I wrote a blog about demographics being the big dog that wags the stock market tail. Invest a few moments of your life and read this post first, it will make more sense, I hope. Don’t shoot the messenger!

http://franchisewhale.com/2008/04/demographics-and-stock-market.html

Last November I wrote a post that talked about the recession was baked into the 2008 pie because of a very accurate indicator that screamed contraction the day before Thanksgiving 2007. Doh! Darn economic tryptophan!

http://franchisewhale.com/2007/11/thanksgiving-surprise-locks-in.html

Those stories are background to this main point. Just like everything else in nature, people, groups and even countries, all go through growth and decay cycles. As an entrepreneur, our job is to help people live better through the growth a decay cycles and make money in the process. Let’s first look at the major growth markets and then we can drill down to the industries.

Young people take more risk than old people.

Insurance companies know this too well. I live in Arizona and trust me, the dinner-before-5-bunch do not drive any better than the High School musical crowd. The elderly have a better grip on their own sense of mortality however. I know this for a fact, at 40 years old I found myself bouncing down the road at 50 miles an hour with no helmet! At that exact moment in time, I realized, “This is really going to hurt!” Time literally stopped and 138 feet later of an epidermis laden skid mark, I realized, I was mortal.

Most people are much wiser than myself and discover that obvious jewel of mortality wisdom earlier than I did. At some point we all realize it. That realization makes us more cautious, more risk adverse and more conservative in our financial affairs. When you have a country full of people that realize they are getting older at the same time, the economy will also “slow down.”

We are almost at the peak of a very tall spending hill. 2010, we will start down the hill and will spend less each year for the next decade in America. What breadcrumbs can we follow to put together our Macro hotlist of countries that will keep spending and growing while we are getting older and more conservative?

• What is the average age of the country we are interested in?

• If I find a real young country, do the political and economic systems support growth? (Afghanistan is full of youngsters but would be a nightmare investment environment.)

• As countries urbanize, they have fewer children.

• Fewer children, fewer spenders, slower growth (Think Europe and Japan).

The geography box score looking ahead:

• Slower and declining growth: Europe, America, Canada and Japan.

• Moderate growth: China.

• Fast growth: Latin America, South East Asia and the Middle East.

• The Mother of all growth markets: India.

I know some of those seem counter intuitive. How can China actually be in the moderating growth column? Two big reasons. The “one child” policy put a kink in the Chinese birth canal. In 2015 their version of the Baby Boomers will enter their peak spending cycle top. They will also be nursing a slowdown as their biggest export market, America continues to spend less. Double Wammy!

What about India? They are packed with youngsters, a very bureaucratic but democratic system none the less. Combine that with a massive birth rate, huge human capital pool and pro business planners. They will not peak in their spending until 2065! Also they have avoided the mistakes the social planning meat heads made behind the rice curtain. The Chinese do not have a corner on the market of dumb growth policies. Japan and Germany have very rigid immigration laws and the USA is moving in the wrong direction building a wall when it should be opening an express freeway for bright, honest foreigners. Check out the birth and immigration trends in Japan and you will see why the Nikkei average peaked December 29, 1989 at 38,916. Today the average is at 13,342. Still down 65% after 14 years! The US stock market declining from 2010 to 2023 is impossible! Think again.

When God gave the commandment in the garden, “Be fruitful and multiply and replenish the earth”, it was the biggest stock tip in the history of the world! If you produce fewer consumers than yourself, you are digging an economic grave for yourself.

A brilliant move the Indian planners made was to skip the industrial phase and jump right to services. It took the USA about 100 to ramp up and take the manufacturing power away from Europe. China took that away from us in about 30 years. India realized, why fight over declining margins and try and compete with a bigger labor force. The planners jumped straight to the services and information phase. Do you ever see your kid’s toys or your clothes labeled “made in India?” When was the last time you had someone in tech support or a call center help you from India? If you told a guy in the 1950's that they would one day pay someone else to change their oil in their car, do their yard work and repair their dishwasher, he would have thrown your pansy candy butt out of his yard! Things change. Change is the only guaranteed certainty in the future.

Africa is a real wild card. That could be a very interesting market for the brave at heart but too much to analyze in this story and much lower hanging fruit around the world to consider first.

I know, Harris, easy boy, I am not that adventurous and want to make money in the USA. OK, you just need to figure out where people will still spend money as it grows grey and get there before they do. Next week I will be interviewing some CEO’s that will open your mind to the accelerating franchise boom providing services to the elderly.

Demographics and the stock market.

In 1987 I had the incredible luck of hearing from my manager that I passed the securities examination. He told me the results on Monday the 19^th day of October. For you younger readers (I can't believe I typed that) in one day, the Dow Jones went down 22.6%! This was a very big day.

At the time it was blamed on too much portfolio insurance. I know, how can too much insurance make things fall apart? Wall Street always has a nice answer to each major catastrophe. I think they love putting a name and reason on each big crash to give us that feeling that it was all expected, no worries. This round it is too many subprime loans, underwritten and bought by the wrong people. I can’t wait to hear the next excuse in 2010, but more on that in a moment.

One thing I learned at Lehman, all crashes are caused by the big boys running for the exit at the same time and trying to slam the slow guys fingers in the door. This round, Goldman Sachs and JP Morgan Chase made it to the door first, Bear Stearns was a little too old and fat. The good news, Wall Street is not going away, the bad news, we are.

Out of all the clutter I have read by over educated economists that are long on theory and short on real experience, Harry Dent’s work really stands out. He is a Harvard chap, we don’t hold that against him, but he has cut his teeth as a fund manager and has a elegantly simple answer that is eerily correct over the past 50 years.

The stock market is controlled by demographics.

I know not earth shattering breaking news for some, overly simple you might say. I love simple. Here is the theory. We go through economic cycles as individuals from the moment we pop out of the womb to the time they stick us in a pine box. Studies have shown that between the age of 46 and 50 we peak in our spending patterns. His theory was, if I project ahead 48 years and overlay the stock market on the birth cycle, it should correspond.

More consumption= more production= higher stock prices.

Check out the chart on the top (Click the chart to see a large version). Do you see that giant red top like a bloody roller coaster? That is 2010. That is when the herd of baby boomers will have passed their prime economic spending and each year after that we take a long slow painful decline for 12 years until Gen-X enters their prime spending. Twelve years!? It will make the crash of 1987 look like a speed bump.

This not only has corresponded with each blip in births for the last 50 years it makes total sense. Our economy is a scary 80% consumer spending now and 20% savings and manufacturing. If the spending slows down, prices will go down. As we start out we don’t spend much until we get to high school. In college the cash starts getting consumed even as we live like a monk. Next we get our first jobs and need fancier clothes, eat out more, need a car. Next I am getting married; need a house, bigger car, more spending…when we get to about 48, things turn over. We pull our horns in and realize we will not live forever and we take less risk, spend less and prepare for the day we need to live off of equity, not add to it. (See chart).

If Harry is right, by 2010 you better have a solid 10 year plan.

So where do we go for opportunity in all of this. The answer might surprise you. Friday I will dive into how we can capitalize on getting into the right demographic markets internationally and what are the hot franchise opportunities domestically after 2010. Next week, I will be interviewing some CEO’s that are running businesses that will thrive while most sectors will be in triage for the next decade.

Buckle up, it is going to be a bumpy ride!

Build a monopoly the justice department will love.

Trust busting and monopoly breaking season is here. During the run-ups, everyone is sipping their own Kool Aide and too busy to notice things are getting dirty. Once the water drains out of the economic tub, it leaves a nasty ring the shareholders are only too quick to point out and politicians love to clean up. That may sound unfair to call politicians soap scum lickers. In the financial ecosystem they do serve their purpose, without bottom feeders things tend to stink even worse over time.

Google has a 70% market share of the online ad franchise; some might say that sounds like a monopoly. Google I am sure was on the sidelines smiling not too long ago when Microsoft got raked over the coals. When Microsoft got spanked for their monopolistic behavior during the last recession, it was not for their massive 90% market share of the client operating system market. That number has not come down since the monopoly settlement in 2001. What got the regulators and competitors upset was, Mr. Softy mandating Explorer as the only browser when you used Windows. Evidence of muscling suppliers and computer manufacturers to only load Explorer did not help their case.

The justice department is not against monopolies despite what their press agent may say. If they were, how can they explain allowing a merger of the only two satellite radio companies to form a new one with a 100% market share? Sirius buying XM was allowed today because they did not use their existing monopoly to create a lock in a new market. The justice department is against using one monopoly to launch another monopoly. That is the line in the sand Microsoft crossed.

Rockefeller has probably received more ink than anyone else for monopolistic moves. He was not just a monopolist, he was a blatant one. He believed that a monopoly was for the betterment of all mankind. He took the stance that a benevolent monopolist beat a self interested free market hands down. Without the competition, capital would not need to be wasted on pesky client acquisition costs like advertising and marketing. In a strange twist it sounds like that reasoning came right out of a Marxist playbook. Sometimes you can go so far to the right you show up on the left.

The government did not see the benevolence in Rockefeller’s argument. It was certainly not their intention but the trustbusters unquestionably made Rockefeller the world’s richest man and preserved his posterity’s piggy bank until the end of the world.

Chopping off the head of Rockefeller just mutated Standard Oil into an oil pumping hydra!

· Standard Oil of New Jersey became (Exxon).

· Standard Oil of New York (Mobil).

· Standard Oil of Indiana (Amoco).

· Standard Oil of California (Chevron).

· Atlantic Refining (ARCO).

· Continental Oil (Conoco).

· Standard Oil of Ohio bought by (British Petroleum)

It was like the government plucked the biggest dandelion from the oil patch and gave it a big blow! Rockefeller’s equity was sprinkled all over the world. They did him a favor.

Wal-Mart seems to be the latest punching bag for the press. Believe it or not, this is déjà vu. The Great Atlantic & Pacific Tea Co., the grocery-store chain, stood astride the U.S. market in the 1920s and 1930s with a dominance that has likely never been duplicated. At its peak, A&P had five times the number of stores Wal-Mart has now (although much smaller ones), and at one point, it owned 80% of the supermarket business. Some of the anti-predatory pricing laws in use today were inspired by A&P's attempts to muscle its suppliers.

I assume Rockefeller was a sharper operator than the board of A&P. The chart will show you the staggering decline of stores over the past 100+ years.

Rise and decline in number of stores

Year	No. of Stores
1876	67
1915	1600
1925	13,961
1930	16,000
1955	10,000
1965	5,000
1970	4,000
1978	3,500
1980	2,000
1990	1,000
2000	600
2002	500
2007	456

Government intervention can be a blessing or a curse.

So what can we learn by all of this? I know you probably are thinking, “Harris, if I woke up and my assistant told me the justice department was on the phone that would be a great problem to have!” I think the main thing to remember is this. One man’s monopoly can be another man’s freebie. What could you offer your customers that means nothing to you but would go right at the heart of your competitor’s margin? Do you have something you could afford to give away that would make it impossible for your competitors to match because they have too much invested in charging for it?

I’ll take a Big Mac and the Crawfish Bisque

Twenty years ago when I went to Hong Kong for the first time, I was amazed out how cheap McDonald's was. I know, go all the way to the Far East and what are you doing eating that American crap! I am a very adventurous eater, I try anything. I love to eat strange foreign things. Breakfast however is a different story. Asian breakfast is just too bland. When it starts with a bowl of rice porridge, things can only go downhill from there.

I recently went to Hong Kong again and found myself transported back 20 years. McDonald's is still cheap there! The Economist magazine puts out a Big Mac Index every year showing the price of a Big Mac in 120 countries. (Check out the chart I posted, you will need to click it to enlarge the chart). The purpose is to show purchasing power parity and the over or undervaluation of foreign currencies against the dollar. For example you will pay over $7 US Dollars for a Big Mac in Scandinavia and only $1.41 in China. This shows the overvalued Kroner and the Chinese Yuan is undervalued to the US Dollar.

The second cheapest place to buy a Big Mac in the world was Hong Kong. The interesting piece of this fast food puzzle is the Hong Kong Dollar has been pegged to the USD since 1983. Hong Kong also has relatively high labor costs now and the rents so high you would get vertigo writing the check each month. Hong Kong, Tokyo, Manhattan and London are always neck and neck for the highest commercial rents in the world.

So what gives? When I can go to Causeway Bay and order two English muffins, sausage and scrambled eggs and orange juice for $2.50 US and get a bowl of crawfish bisque for an extra .80 cents, this is fast food heaven! I find the McDonald's Hong Kong prices 60% cheaper than Manhattan prices.

With a pegged currency the only explanation is the lack economic restraints. Could 60% of the costs be chalked up to regulatory and bureaucratic fat? According to the Heritage Foundation’s annual Index of Economic Freedom ranking, they put Hong Kong again at #1 for 2008 for economic freedom. http://www.heritage.org/Index/country.cfm?ID=HongKong

Hong Kong runs a tight ship. Last week they announced that they had an extra 5 Billion (In US Dollars) they needed to return to tax payers. This was not an American style rebate to help juice the economy by printing more money. It was an actual old fashion kind of surplus. The kind that you have when more money is left over after you pay all the expenses, you know those strange exotic types of surpluses. The tax payers will get a 75% rebate on their taxes paid and the checks will be sent out over an 11 month period. When asked why so long to get the rebates out, finance minster Tsang said, “we do not want to send out the checks immediately because we fear taxpayers will spend the money and worsen inflation”.

What a contrast to the politicians here in the America. They want people to spend it, and fear they might save it.

Can high tax rates, soaring budget and trade deficits and a choking regulatory environment explain why a Big Mac is 60% more expensive here than in Hong Kong? I think so, I would love to hear your take on it. Meanwhile “I’ll take the crawfish bisque and some fries to go please.”