What does it take to have a strong economy since 1990?
1. Capital: the world has to be awash in money. In 1994, Bill Clinton signed into law a regulation that allowed banks to hold less in reserve. The world became awash in cheaper money. Greenspan lowered rates significantly during the latter part of the decade. In 2001, the Fed aggressively cut rates and kept cutting them into the next year, and we saw 1% for over a year.
2. An asset class that attracts the ordinary investor and institutions alike. In the 1990’s, we had stocks and in particular IPOs. It was the decade of equities. It will forever be known as the tech boom, most likely, but in general, the last 5 years of the decade were simply ruled by a white hot stock market and an institutional appetite to invest in startups. Billions of dollars were poured into new companies who developed technologies – many / most of these companies failed, but the result was a huge influx of advanced technology into society.
In the first five years of 2000, housing ruled the American economy. As investors who were burned by tech stocks looked for the next big thing, many of them felt more comfortable buying real estate than investing in the stock market. They were finally listening to their mothers, who said the stock market was risky (a Great Depression era mentality) and put their money into a hard asset like real estate. I have a friend who says that trading and real estate are different, because when something goes wrong with your trade, you can quickly go broke, but when something goes wrong with real estate, you can simply hold on. Well, if you look at a heat map (www.hotpads.com) of foreclosures in the southwest, we’ll all agree that holding on to underwater real estate isn’t what is happening.
Both the stock market and real estate bubble had something not only for the regular investor, but more importantly, had huge appeal to the institutions and funds who needed to park massive amounts of money. It was easy enough to invest in startups, venture firms, office parks, housing developments, and the returns were great during the good years.
So what’s happening now? It seems we’re due for a contraction, which we’re getting right now, before the next bubble comes along. But issue is: what’s the next bubble? Where’s the next driver of the American economy?
We are, as a world, swimming in a sea of capital. There are trillions – yes, trillions – of Wal-Mart- and Petro-dollars in the world today. “Wal-Mart dollars” is my term for the export dollars created when Asian nations ship us cheaply made products and we send them our hard-earned cash. You know what petrodollars are.
So we’ve got the first element: the world’s got money. And piles of it all around us – to the Far East (Wal-Mart dollars), the South (Mexico has its fair share of Nafta-Flavored Wal-Mart dollars), and the Middle East and North (Islamic Petrodollars, and Canuck petrodollars). There are still billions of private equity and venture capital dollars in the states. We’re not hurting for cash as a world right now, and that’s why it’s so easy for WaMu, Wachovia, Citibank, Morgan Stanley – all of them – to raise more capital very quickly. It begs the question of why Bear Stearns couldn’t be helped at the last minute by a big investment rather than a big bailout, but that’s a question for another time.
Do we have an asset class that fits the bill? I think we not only have one, but we have two potential candidates.
The first is health care. Baby boomers were born between 1946 and 1964. There are 82 million of them. The oldest ones are now 62 years old. And for the next 20 years the oldest ones will reach 82 and the youngest 62. That means we’re going to get about 80 million super-users of health care over the next 20 years. Medical equipment, pharmaceuticals, hospitals, disease prevention and curing, and genetic research are just five areas that could use loads of institutional capital to grow. This is probably the next bubble, and it’s going to be huge. This industry is easy for ordinary investors (through stocks) and institutions to invest in.
The second is energy. Energy efficiency is the harder of the two to for me to believe in. The drive to wean ourselves from oil in the states is going to go slower and take more political effort than we might have. If we did muster the courage to do this as a nation and a world, we could launch a huge technological boom. Most of this, however, seems like it would have to come from the government and private sector: there are simply not enough areas for the ordinary investor to participate in – there aren’t enough alternative energy stocks to go around just yet. Maybe that can change.
The point to this enormous post is to say that the conditions are right for another boom. Sure, we need a period of cooling off. We need to shake out the bad people from Wall Street, bail out some rich people, save some banks, contain the cost of food and energy, and finish off the mass foreclosure process around the country. That’s going to take 12-18 more months.
And then, let’s bring on the next boom.
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