Economic Survival in the 21st Century – the Three Key Questions to Ask

In this “special report”, I want to pose a few important “philosophical questions” to my readers. Firstly — our Federal Reserve Chairman, Alan Greenspan, addressed the effects and implications of our aging population on things such as Social Security again in a speech [http://news.yahoo.com/news?tmpl=story&u=/ap/20040828/ap_on_bi_ge/greenspan_32] that he made last Friday. Readers may remember that I also briefly mentioned this issue in my June 24th commentary. I urge you to keep this worldwide phenomenon of the aging population firmly on the back of your minds. If you are like most people, then you earn you living by producing a certain thing – such as a consumer good, or a service that the masses want. Let’s face it – how many people really “struck it rich” by being pure traders or investment managers? The stock market and other financial markets are definitely very important to us investors/traders but this “super secular trend” of the aging of the worldwide population will impact every aspect of our lives, whether it is losing our relative competitiveness on the world arena, increasing pension and healthcare costs, or even a potential fundamental change of our political system.

The second question that I want my readers to think about is the potential end to the era of cheap energy prices – an era which we have basically enjoyed for the last two decades without thinking of the long-term repercussions. The United States, with less than five percent of the world’s population, currently consume approximately 25% of the world’s energy each year. Supply is maturing while demand continues to surge – as exemplified by the surging in demand from China and India. In the meantime, spare energy-producing capacity and inventory levels have been at all-time lows – potential for a perfect storm?

Finally, I want to ask my readers the following question: What kind of investor 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 selling or are you merely a follower who is only comfortable if you fit in? These are straightforward questions – but these are questions that you really need to ask yourselves in order to truly make money in investing over the long run. If my readers take the time out to thinking about these three questions or issues – and ultimately have a firm grasp of even just one of the issues – then you will be in a much better economic situation than most Americans five to ten years from now.

To begin, what are the potential implications of the “aging population” phenomenon? Readers my recall that in my June 24th commentary, I stated: “Assuming that the current level of benefits remain into the future and assuming the level of taxes is not raised, then public benefits to retirees would dramatically increase going forward. On the extreme end, Japan and Spain will see a more than 100% increase in their outlays to retirees. Clearly, this is not sustainable. Either things such as defense or education spending 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. Cutting funding in defense and education will comprise a country’s future, and raising taxes will place a huge social and financial burden on the population of the developed world – where taxes are already at a historically high level. Think about this: If you were a bright, young, French industrialist and you were forced to pay 60% of your income as taxes to support the elderly, what would you do? Why, you would vote with your feet and relocate to another country that is more tax-friendly and business-friendly – and so will other great talent that may have been a great contribution to the French economy. The governments of the developed world recognize this – but there are no easy solutions.

“This picture gets grimmer when one takes note of a study that was done by the Bank Credit Analyst. In that study, the BCA predicts that by the year 2050, the percentage share of the developed countries of the global population will drop from over 30% in 1950 to less than 14% — or about equal to the population of the Islamic nations of the world. Similarly, Yemen will be more populous than Germany in 2050; while Iraq will be 30% more populous than Italy (Iraq is less than 40% the size of Italy today). Russia’s population is projected to continue to decrease – at a rate such that the population of Iran will be even higher to that of Russia’s in 2050. India will be the most populous nation in the world, and Pakistan will only lag the U.S. by approximately 50 million people. If the developed countries of today do not choose to work harder or become more efficient, then they will ultimately lose their comparative advantage, as the younger population of the world is inherently more hard-working, energetic, innovative, and creative. In today’s globalized world, this will be a killer for the average worker in the developed countries – the more so once the language barrier is eliminated (the successful commercialization of universal language translators is projected to happen in ten to fifteen years). I am generally more optimistic, as the elimination of the language barrier will greatly enhance business opportunities and efficiencies, but a person such as the average American worker will loss his or her comparative advantage in the global workforce. The availability of a huge supply of labor should also drive down wages in the global marketplace – and most probably increase the maldistribution of wealth in today’s developed countries.”

Like I have mentioned before, there are no easy solutions. If the average American sees an increase of 10 years in his or her life expectancy, can he or she reasonably or logically retire at the current normal retirement age of 65 (which was determined during the Roosevelt administration during the 1930s) without placing an undue burden on the system? The answer is most probably “no.” Applying the same working-years-to-retirement-years ratio to his or her new life expectancy, then the average American should probably work around five to six years more – thus giving a revised normal retirement age of 70 or so. Moreover, all this analysis is based on the outdated population distribution in the form of a pyramid – where the younger and more able workers represent a majority of the population (and where the elderly represents only a small minority of the general population). The pyramid distribution has historically facilitated government support of the elderly – as the monetary and social burdens have been shouldered by a relatively large younger population. The current experience of Europe and Japan suggests a more uniform distribution in the population of those countries going forward – as the birthrate in those countries are now dismally below the replacement rate of the population. The situation in the United States is not currently as drastic (given our relatively lax immigration policy) but we are heading towards the same direction. Thus to maintain the current standard of living at retirement, my guess is that the general population will not only have to work longer, but work longer hours in the present (and save more) as well.

The situation is more alarming when one considers that the combined population of China and India makes up over 1/3 of the world’s population. The number of unemployed workers in China is greater than the entire labor force of the United States. The competition for relatively unskilled jobs will continue, and it promises to accelerate going forward. The average 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 mention the average wage being driven down by global competition. I, for one, believe that this continuing trend of globalization will make the world a better place, as hundreds of thousands of people will finally be empowered as they climb out of absolute poverty (again, over half of the world’s population currently live on less than two dollars a day) – and as the prices of consumer goods are driven down still further. The average American will probably disagree, but the trend of globalization and “offshoring” will not stop. The last time the United States adopted economic and military isolationism we had a Great Depression and subsequently, World War II. I sincerely do not think that this was a coincidence.

The trend of the general aging population and globalization will have a profound impact on all Americans. Ultimately, I think all Americans will benefit – although it may not be clear to people who are losing their jobs today. For the initiated and nimble, you will not only survive but thrive in these “interesting new times.” Imagine a market for your product that is over ten times the size of the population 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 change all these. A world more equalized economically will also mean a much more secure and less conflictive world.

Now, I want to address a similar concern of all Americans – as the era of cheap energy (basically the cheap energy prices as experienced 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 bullish on both oil and natural gas prices (I will only discuss oil in this commentary). Consider the following:

  • The world supply of oil is flattening out. Readers may not know this, but the United States today still produce enough oil to satisfy approximately 40% of total domestic demand. The United States also had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest in the world. According to the Energy Information Administration (EIA), the United States produced around 7.9 million barrels per day during 2003. This is down sharply from the 10.6 million barrels averaged in 1985. The peak of domestic oil supply occurred sometime during the 1970s. Today, total domestic production 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 supply problems for the next few decades, they have not been transparent with their reserves data. According to Simmons & Company International, five to seven key fields in Saudi Arabia produce 90% to 95% of its total oil output – all but two fields are extremely old – with the last major find reported in 1968. The last publicized reserves data was in 1975 – when Saudi Aramco was still managed by Exxon, Mobil, Chevron and Texaco. In that report, the world’s best experts determined that all the key fields at that time contained 108 billion barrels of oil in recoverable reserves. If this holds true, then the peak of supply in Saudi Arabia will come soon. Moreover, if the report is correct, then there is really no “plan B” (unlike during the 1970s when the center of power shifted from the Texas Railroad Commission to OPEC due to the peaking of supply in the United States) – crude oil prices will soar.
  • The “last frontier” for the production of oil (namely the North Sea, Siberia, and Alaska) is now aging. Most companies are now struggling in order to even maintain their current production levels.
  • World oil demand continues to grow. Oil demand in the early 1990s stayed relatively flat (at around 66 to 68 million barrels per day) but over the next ten years to today, world oil demand increased 14 million barrels per day. Today, total world oil demand is greater than 82 million barrels per day. The energy “experts” who in the early 1990s predicted a flattening of oil demand growth and who wrote off demand growth in developing countries were dead wrong.
  • No new refineries have been built in the United States for the past two decades, even as refineries have been closing every year during that same time period. Refining capacity from 1981 to the mid 1990s also dropped drastically (this author estimates a drop of approximately 6 million barrels per day in refining capacity during that time period). Since 1994, however, an expansion in refining capacity at existing refineries has contributed to an increase in refining capacity from 15.0 million barrels per day to 16.7 million barrels per day (as of today). Despite this expansion, however, domestic refining capacity is still stretched to the limit, as utilization at U.S. refineries is now averaging nearly 90% — leaving no cushion room if something unforeseen happens.

There are currently three factors at work which should contribute to a continued increase in the world oil price – the maturing of supply, growing demand, and the lack of a cushion in refining capacity and low inventories. The “culprit” has usually been labeled as China, but it is interesting to note that the United States has had virtually no domestic energy policy (in terms of conservation and encouraging the development of alternative fuels) for the last twenty-something years. China demand, however, has soared over the last few years. It is now the second biggest oil consumer, having just surpassed Japan for the title. Demand for oil in China has more than doubled over the last 10 years (to today’s 6 million barrels per day), and this amazing increase is projected to continue, especially given the fact that oil demand in China is still a lowly 2 barrels per person per year (compared to 25 barrels per person here in the United States). Furthermore, it is interesting to note that the number of cars in China only totaled 700,000 as late as 1993 and 1.8 million as late as 2001. Today, the number of cars in China totaled more than 7 million – and this number could potentially have been much higher if not for the Chinese government intervention in limiting the number of cars that could be sold and driven each year. Now the most scary part: Current oil demand in India is only 0.7 barrels per person per year – given this fact, oil demand in India could potentially explode over the next decade – barring a huge worldwide economic recession or depression.

I believe my readers should be made aware of the current energy supply/demand situation. Given the above, what is the best course of action for the average American? How about the best course of action if you were the head of a motor company like GM or an airline pilot employed by a legacy airline like Delta? How about the best course of action for a mutual fund manager or a commodity fund manager? Since there are no easy solutions, there should 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 legacy airlines like Delta will have to continue to cut costs by probably further slashing labor costs as their first priority. A further improvement in extraction technology should help, but the serious development of alternative fuels will have to start now. I also believe that the next serious decline will be induced by a combination of an “oil shock” and a rise in interest rates. Readers may recall the relative strength chart that I developed in my August 15th commentary showing the AMEX Oil Index vs. the S&P 500 and the huge potential inverse heads and shoulders pattern in that chart. For now, the relative strength line should bounce around the neckline (the line drawn on that chart) – possibly even for a few years – but once the relative strength 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 surprise 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 following question: Have you taken the time out to learn more about your psychological makeup and how it has affected your investment or trading decisions? What type of person are you when it comes to the market? Are you a so-called buy-and-holder, a swing trader, or a day trader? An independent thinker, a contrarian, a momentum investor or merely a follower? I am asking you these questions because of my following considerations:

  • This author believes that we are currently in a secular bear market in domestic common stocks. While I believe that this current rally still have more room to go, I believe that a cyclical bear market will emerge in due time – this upcoming cyclical bear market may even take us back or below the lows that we hit during October 2002. If this is true, then a buy-and-hold portfolio would definitely not work – unless you were in natural resources or precious metals mining stocks.
  • When this cyclical bull market tops out, all your friends, relatives, and the popular media will be telling you to buy more or to hold your common stocks. The bears and all bearish thoughts will be ostracized and frowned upon. This has happened in every bull market in everything in all human history. If you are in cash now, would you be able to remain in cash when the top finally comes or will you be unable to resist and buy in because you are afraid of “the train leaving the station without you,” so to speak?
  • Most people are inherently not good day traders or even swing traders. To be good in even the latter, you need a huge amount of dedication and discipline.

Investing or trading has always been dominated by emotions and always will be. My thinking in starting www.marketthoughts.com has always been that that if I can get my readers to buy in now, it will be a much easier decision for them to sell and hold cash once the DJIA reaches 11,000 or 12,000 or so – as opposed to being in cash and staying out for the rest of this secular bear market. 99% of Americans are just not disciplined or dedicated enough to stay in cash during a secular bear market – not to mention staying in cash during the entirety of a secular bear market and buying and holding common stocks during the entirety of a subsequent secular bull market. The average human psyche is just not capable of doing this. Because of this, I sincerely believe that success in the stock market (for most people) during the next five to ten years would involve catching the swings at the right or near-right times. For readers who just cannot resist, I am also going to continue to recommend some common stocks at opportune times, but in no way should my readers take my recommendations as gospel and in no way should my readers put all their eggs in one basket. If you are a person who can stay in cash for the next ten years and wait until the Dow Industrials has a P/E below 10 and a dividend yield of over 5%, then more power to you – you are either already rich who have no need to make money in the market anyway or you are a very disciplined and independent-thinking person. Most Americans just cannot do that – but I am here to help.

Nine Questions About Baby Boomer Retirement That Your Company Must Answer

The Baby Boomers are the members of the generation born between 1946 and 1964. At 79 million people, they’re the largest US generation in history. The oldest Boomers will turn 65 in 2011 and many of them may choose head for the exits.

Can you answer these questions about Baby Boomer retirements at your company? The first five are about raw numbers

How many people at your company are eligible to retire in each of the next ten years?

The odds are good that not everyone who is eligible to retire will do so. But it’s a good idea to consider how many people could leave at a moment’s notice and when they’re eligible to do so.

How many of your senior managers are in that group?

Senior managers have mission critical knowledge and experience. When they leave, they take it all with them, unless you’ve created alternatives for them to stay on, or work as a consultant.

Review your succession planning. Identify the less experienced managers that are best qualified to move up. Help them with personal and career development, especially growth assignments, so they’re ready when their time comes.

How many of your key technicians and craft workers are in that group?

We’re talking here about the kind of hands-on technical work that it’s hard to outsource or offshore. Many of the pipelines for technicians and craft workers have been slowly drying up over the last couple of decades. Union apprentice programs have been hit especially hard.

How many of your first line supervisors are in that group?

Your front line bosses have more impact on morale and productivity than any other group of people in your company. Make sure you’re ready to replace retiring supervisors with qualified new supervisors who’ll get the benefit of solid supervisory skills training.

How many of your knowledge connectors are in that group?

Knowledge connectors are vital to your operations, but they don’t have that title on any organizational chart. Knowledge connectors are the people other people call for help because they’re experts or because they know how to find people or knowledge to help solve problems. You can do a social network analysis to find out who they are, or just ask around.

I call the problem the “Boomer Brain Drain” because of the loss of knowledge and experience when Boomers retire. If you’ve answered the questions above, you have an idea how big a threat this is to your company and you can start to work on responses. The next four questions deal with different kinds of responses to the potential Boomer Brain Drain.

What human resources measures are you or will you use to meet the challenges of Boomer Brain Drain?

Human Resources (HR) responses to the challenges of the Boomer Brain Drain include everything you do to modify your recruiting, training, retention and succession planning. They also include changes to policies and procedures and may include union negotiations.

Since Boomers may be starting to flow out the back door, it’s logical to plan on increasing the flow of recruits in the front door. It’s logical, but it’s dangerous.

Generation X is the generation next in line behind the Baby Boom. It’s only about half the size of the Baby Boom generation, so you’ve got a smaller pool to draw from. You can’t count on simply increasing recruiting to fill the spots left by retiring Boomers.

Several companies are investigating tactics such as having people return to work after retirement or stay at work past their official retirement date. There’s some evidence that this will work since studies by financial services companies tell us that Baby Boomers don’t have a lot put back for retirement.

Older workers are great hires in lots of ways. Their turnover rate is lower than that of younger workers. When CVS compared their older workers to younger workers, they found that older workers are far less likely to call in sick.

If you choose some set of retire late/come back after retirement solutions, there are issues to consider. Start with your current pension and retirement policies. Can Boomers continue to work without losing benefits? This may be something you need to have a dialogue with your unions about.

You may also need to modify your policies and procedures for part-time work. Retired Boomers may want a different kind of flextime than younger workers. They might prefer the ability to take more time off, to accommodate medical appointments and visits to children.

Analyze your corporate culture. Do you see older workers as contributing members of the workforce, or do you see them as workers with their eyes on retirement and one foot out the door? Do you provide training to older workers the same as you do to younger one?

You should also think about how you’ll need to change your work processes to make them friendlier to older workers at the same time as you find ways to get more productivity out of fewer workers.

How will you change or adjust your business processes to meet the challenges of Boomer Brain Drain?

Older workers may be great workers, but they tend to have more physical limitations than younger workers. You may have to modify either processes or equipment so they’re older-worker-friendly. You’ll be in good company. Toyota has been doing this for some time.

Make sure, for example, that the gauges on equipment are easy to read. If instructions are conveyed orally in a workplace, make sure they’re loud enough for older workers to hear.

You can also make changes to business processes that make Boomer retirement irrelevant. If you eliminate some specialized equipment or standardize on fewer kinds of equipment, you may be able to increase your scheduling flexibility and handle more equipment with fewer workers. You can also use technology to capture the knowledge of experienced workers so that it’s available to younger workers.

How will you use technology to meet the challenges of Boomer Brain Drain?

Knowledge management technology is often touted as the way to capture Boomer knowledge and put it to use. In reality, most of the knowledge that Boomers, like other workers, have is in their heads and will go out the door with them. But you can still do some things to capture important knowledge if you start now.

Consider job-shadowing as a knowledge transfer tool. Think about investing in people to chart and document processes that do not currently have formal documentation.

Use simple technological tools, such as electronic discussion groups to capture “shoptalk” and the knowledge that only comes with time on the job. Use social network analysis to identify which people get contacted to solve specific problems.

There are three rules to follow in using technology to capture knowledge. The first is that a tool that no one will use, because it’s too complex or time-consuming, is a useless tool. The second is that culture always trumps technology. Rule number three is that technology that adapts to human habits works better than technology that demands that humans change the way they work.

Have you conducted a “Threat Assessment” to give you an idea of where you need to concentrate your efforts?

Before you move on to planning for Boomer retirements, take the time to do an accurate Threat Assessment. It will make your efforts more productive in the long run.

Assess every position in your organization. Determine when the person in that job can retire. Evaluate how important the position is to accomplishing the mission. And assess how prepared you are to replace the incumbent.

These questions are just the start. Your next step will be to develop a strategy for dealing with a potential Boomer Brain Drain. But the sooner you get started, the sooner you’ll see results.

Restaurant Success Factors – Questions to Ask Yourself Before Opening a Restaurant

When it comes to starting a restaurant, many entrepreneurs jump in and risk their time and startup capital without giving the idea proper consideration. Like other business models, restaurants have a high failure rate and owners quickly realize that being in the restaurant trade is not as glamorous or enjoyable as they first imagined.

That said though, for the right type of people who have done the right preparation, restaurants offer some excellent business opportunities. Many end up thriving and enjoying the lifestyle that goes with owning a business in this industry.

Before deciding to take the plunge and open a restaurant take some time to consider the following restaurant success factors. These are set out as a series of questions to ask yourself to see if you have what it takes to open and manage a restaurant business.

1) Do you Need Experience and Qualifications?

It is still possible for someone with no formal training or experience to open a restaurant and succeed. However, you will increase your chances of success dramatically if you have had some kind of formal training, experience or both. There are numerous culinary schools throughout the United States offering a variety of courses of various durations.

If you are able to get some experience working in a restaurant then this is also a great way to learn about how things are done and to get ideas for running your own business. Start off doing one role and persuade the owner to let you work a variety of roles so that you can understand the whole operation.

2) Do you have General Business Management Skills?

Having good money management skills will be useful when it comes to handling cash and budgeting for expenses. While not absolutely necessary, restaurant owners that understand all the cash flows coming into and flowing out of their business are more likely to feel in control and turn a profit. Doing a course in small business administration or bookkeeping would be extremely useful if you don’t possess these skills already.

3) Do you have Creative Talent?

While you can rely on the creative talents of others, such as chefs and interior decorators it will be helpful if you are a creative person. You can then have considerable input into creating a unique and workable restaurant concept, menu design and dining room decoration among other things.

4) Can you Face Long Working Hours?

Running a restaurant business will require you to spend a good deal of time away from your family if you have one. When your children are home from school in the afternoons and evenings it is likely that you will be working as most restaurant business models follow these hours (unless you focus on breakfasts and lunches). Weekends are the busiest days of the week for most restaurants so it is likely that you won’t see your family much on Saturday and Sunday as well.

5) Do you have Full Support from your Family?

Clearly you have to have the support of your spouse, at least in the early days until you are able to step back and have managers run your operation in a way that allows you to have some time off. And if you will be working with your spouse then you must make sure that your relationship is strong before going into business together.

6) Do you have enough Startup Capital?

You will need to make sure that you have access to the funds required to get your business up and running as well as to cover operating costs in the early stages. You will also require funds for your personal living costs over the first few months of your businesses life while you are getting established and revenues are still low. Unexpected expenses will undoubtedly arise as well so make sure that you don’t get caught short.

7) Are you a People Person?

As a restaurant owner or manager you will have to relate well and communicate effectively with all kinds of people.

With your staff you will have to show strong leadership skills and communicate clearly to them in order to maximize productivity and maintain good relations with them.

Restaurant owners that have strong personalities and get to know many of their guests often become the face of the brand. Sometimes the owner even ends up being part of the attraction that draws customers to dine at specific restaurants. As a restaurant owner you should be prepared to get out on the dining floor and mingle with your patrons whenever possible. Be sure to do it in a way that doesn’t interrupt their dining experience.

With your suppliers, city officials, inspectors and other parties you will also have to have the ability to communicate with them in a way that allows you to get what you want and to build strong relationships.

8) Are you Hard-Working and Organized?

As a self-employed restaurant owner you must be motivated and disciplined if you are to get everything done and achieve your goals. Being organized is the key to managing your time and the time of your employees effectively.

9) Can you Keep Cool in a Crisis?

In the day to day running of your restaurant you will encounter lots of small and large problems, especially in the early days. To keep things running smoothly you must be able to take control in a crisis situation, calm your employees and offer quick, practical solutions that avoid stressing everyone out. As the owner and manager you then have to work on eliminating problems so that they don’t occur again.

There are many assets, personality traits and other attributes that the ideal restaurant owner should have. To some extent these restaurant success factors can be acquired, learnt or developed before you open your doors for business.

While you should always keep financial rewards in mind when you start up in the restaurant trade it is also important to have other reasons for going into this business. If you have a love for people, food and hospitality then there is nothing that you can’t pick up along the way to turn yourself into the perfect restaurant manager.

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