Posts tagged ‘Fareed Zakaria’

Curing Our Ills with Innovation

Fareed Zakaria thoughts have blanketed both traditional and internet media outlets, spanning everything from Newsweek to Time, and the New York Times to CNN. With an undergraduate diploma from Yale and his PhD from Harvard, Dr. Zakaria has built up quite a following, especially when it comes to foreign affairs.

In his latest Time magazine article, Can America Keep Pace?, Zakaria addresses the role of innovation in the U.S., “Innovation is as American as apple pie.” The innovation lead the U.S. maintains over the rest of the world will not evaporate over night because this cultural instinct is bred into our DNA – innovation is not something you one can learn directly from a textbook, Wikipedia, or Google (GOOG). With that said, the innovation gap is narrowing between developed and developing countries. New York Times columnist Tom Friedman captured this sentiment when he stated the following:

“French voters are trying to preserve a 35-hour work week in a world where Indian engineers are ready to work a 35-hour day.”

 

The fungibility of labor has pressured industries by transferring jobs abroad to much lower-cost regions like China and India, and that trend is only expanding further into countries with even lower labor cost advantages. Zakaria agrees:

“America’s future growth will have to come from new industries that create new products and processes. Older industries are under tremendous pressure.”

 

The good news is the United States maintains a significant lead in certain industries. For instance, we Yankees have a tremendous lead in fields such as biotechnology, entertainment, internet technologies, and consumer electronics.

The poster child for innovation is Apple Inc. (AAPL), which arose from the ashes of death ten years ago with its then ground-breaking new product, the iPod. Since then, Apple has introduced many innovative products and upgrades as a result of its research and development efforts, including the recently launched iPad.

The Education Engine

Where we are falling short is in education, which is the foundation to innovation. In a country with a high school system that Microsoft Corp.’s (MSFT) founder Bill Gates calls “obsolete,” society is left with one-third of the students not graduating and nearly half of the remaining graduates unprepared for college. In this instant gratification society we live in, the long-term critical education issue has been pushed to the backburner. Other emerging countries like China and India are churning out more college graduates by the millions, and also dominating us in the key strategic count of engineering degrees.

Government’s Role

With the massive debt and deficits our country currently faces, an ongoing debate about the size and role of government persists. Zakaria makes the case that government must place a significant role when it comes to innovation. Unfortunately, the U.S. wastes billions on pork-barrel projects and suboptimal subsidies while dilly-dallying in political gridlock over critical investments in education, infrastructure spending, basic research, and energy policies. In the meantime, our fellow competing countries are catching up to us, and in certain cases passing us (e.g., alternative energy investments – see Electric Profits).

Zakaria makes this point on the subject:

“The fastest-growing economies are all busy using government policy to establish commanding leads in one industry after another. Google’s Eric Schmidt points out that ‘the fact of the matter is, other countries are putting a lot more money into nurturing new industries than we are, and we are not going to win unless we do something like what they’re doing.’”

 

As a matter of fact, an ITIF (Information Technology & Innovation Foundation) study measuring innovation improvement from 1999 to 2009, as it related to government funding for basic research, education and corporate-tax policies, ranked the U.S. dead last out of 40 countries.

Not All is Lost – Pie Slice Maintained

Source: Carpe Diem

Although the outlook may sounds bleak, not all is lost. In a recent Wall Street Journal interview with Bob Doll Chief Equity Strategist at the world’s largest money management company (BlackRock has $3.6 trillion in assets under management),  he makes the case that the U.S. remains the leading source of technological innovation and home to the greatest universities and the most creative businesses in the world. He sees this trend persisting in part because of our country’s relative demographic advantages:

“Over the next 20 years, the U.S. work force is going to grow by 11%, Europe’s going to fall by five, and Japan’s going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth.”

 

So while emerging markets, like those in Asia, continue to gain a larger slice of the global GDP pie, Mark Perry at Carpe Diem shows how the U.S has maintained its proportional slice of a growing global economic pie, over the last four decades.

Growth is driven by innovation, and innovation is driven by education. If America wants to maintain its greatness, the focus needs to be placed on innovation-led growth. The world is moving at warp speed, and our neighbors are moving swiftly, whether we come along for the ride or not. The current, sour conversations regarding deficits, debt ceilings, entitlements, wars, and unemployment are all essential discussions, but more importantly, if these debates can be refocused on accelerating innovation, the country will be well on its way to curing its ills.

See also Our Nation’s Keys to Success

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and AAPL, but at the time of publishing SCM had no direct position in MSFT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 5, 2011 at 8:19 pm 2 comments

V-Shaped Recovery or Road to Japan Lost Decades?

The Lost Decades from the 1989 Peak

The Lost Decades from the 1989 Peak

On the 6th day of March this year, the S&P 500 reached a devilish low of 666. Now the market has rebounded more than 50% over the last five months. So is this a new bull market throttled into gear, or is it just a dead-cat bounce on route to a lost two decades, like we saw in Japan?

Smart people like Nobel Prize winner and economist Paul Krugman make the argument that like Japan, the bigger risk for the U.S.  is deflation (NY Times Op-Ed), not inflation.

Now I’m no Nobel Prize winner, but I will make a bold argument of why Professor Krugman is out to lunch and why we will not go in a Japanese death-like, deflationary spiral.

Let’s review why our situation is dissimilar from our South Pacific friends.

Major Differences:

  • Japanese Demographics: The Japanese population keeps getting older (see UN chart), which will continue to pressure GDP growth. According to the National Institute of Population and Social Security Research, by 2055 the Japanese population will fall 30% to 90 million (equivalent to 1955 level). Over the same time frame, the number of elderly under age 65 is expected to halve. To minimize the effects of the contraction of the working population, it will be necessary both to increase labor productivity, loosen immigration laws, and to promote the employment of woman and people over 65. Japan’s population is expected to expected contraction in Japan’s labor force of almost 1% a year in 2009-13.

    Source: The Financial Times

    Source: The Financial Times/UN (Declining Workforce Per 65 Year Old)

  • Bank of Japan Was Slow to React: Japan recognized the bubble occurring and as a result hiked its key lending discount rate from 1989 through May 1991. The move had the desired effect by curbing the danger of inflation and ultimately popped the Nikkei-225 bubble. Stock prices soon plummeted by 50% in 1990, and the economy and land prices began to deteriorate a year later.  Belatedly, Japan’s central bank began a series of interest rate-cuts, lowering its discount rate by 500-basis points to 1% by 1995. But the Japanese economy never recovered, despite $1-trillion in fiscal stimulus programs.
  • The Higher You Fly, the Farther You Fall: The relative size of the Japanese bubble was gargantuan in scale compared to what we experienced here in the United States. The Nikkei 225 Index traded at an eye popping Price-Earnings ratio of about 60x before the collapse. The Nikkei increased over 450% in the eight years leading up to the peak in 1989, from the low of about 6,850 in October 1982 to its peak of 38,957 in December 1989. Compare those extreme bubble-icious numbers with the S&P 500 index, which rose approximately a more meager 20% from the end of 1999 to the end of 2007 (U.S. peak) and was trading at more reasonable 18x’s P-E ratio.

    Source: Dow Jones

    Source: Dow Jones

  • Debt Levels not Sustainable:  Japan is the most heavily indebted nation in the OECD. Japan is moving towards that 200% Debt/GDP level rapidly and the last time Japanese debt went to 200% of GDP (during WWII), hyper-inflation ensued and forced many fixed income elderly into poverty. Although our debt levels have yet to reach the extremes seen by Japan, we need to recognize the inflationary pressure building. Japan’s debt bubble cannot indefinitely sustain these debt increases, leaving little option but to eventually inflate their way out of the problem.
  • Banking System Prolongs Japanese Deflation: Despite the eight different stimulus plans implemented in the 1990s, Japan lacked the fortitude to implement the appropriate corrective measures in their banking system by writing off bad debts. An article from July 2003 Barron’s article put it best:
After the collapse of the property bubble, many families and businesses had debts that far exceeded their devalued assets. When a version of this happened in America in the savings-and-loan crisis, the resulting mess was cleaned up quickly. The government seized assets, sold them off, bankrupted ailing banks and businesses, sent a few crooks to jail and everything started fresh, so that deserving new businesses could get loans. The process is like a tooth extraction — painful but mercifully short. In Japan this process has barely begun. Dynamic new businesses cannot get loans, because banks use available credit to lend to bankrupt businesses, so they can pretend they are paying their debts and avoid the pain of write-offs. This is self-deception. The rotten tooth is still there. And the Japanese people know it.

 

The Future – Rise of the Rest: Fareed Zakaria, Newsweek editor wrote about the “Rise of the Rest” in an incredible article (See Sidoxia Website) describing the rising tide of globalization that is pulling up the rest of the world. The United States population represents only 5% of the global total, and as the technology revolution raises the standard of living for the other 95%, this trend will only accelerate the demand of scarce resources, which will create a constant inflationary headwind.

For those countries in decline, like Japan, demand destruction raises the risk of deflation, but historically the innovative foundation of capitalism has continually allowed the U.S. to grow its economic pie. Economic legislation by our Congress will help or hinder our efforts in dealing with these inflationary pressures.  One way is to incentivize investment in innovation and productive technologies. Another is to expand our targeted immigration policies towards attracting college educated foreigners, thereby relieving aging demographics pressures (as seen in Japan). These are only a few examples, but regardless of political leanings, our country has survived through wars, assassinations, terrorist attacks, banking crises, currency crises, and yes recessions, to only end up in a stronger global position.

This crisis has been extremely painful, but so have the many others we have survived. I believe time will heal the wounds and we will eventually conquer this crisis. I’m confident that historians will look at the coming years in favorable light, not the lost decades of pain as experienced in Japan.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 10, 2009 at 4:00 am 4 comments


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