IS THE GLASS HALF FULL?

(click image to enlarge)

The world press almost uniformly predicts slow or no economic growth for the next few years and devastating economic consequences for many countries and individuals. However, there have been suggestions this week that the “bottom” may have been reached, whatever that means.

If you look at the chart, this is the (US) S&P composite returns index since 1900. What it demonstrates is long cycle periodicity in investor composite returns. What it doesn’t show (without my annotations) is the source of wealth creation in periods of rising equities prices.

After WW1, equities price upswings were largely driven by consumption spending, home construction for the soldiers, and innovation based manufactures. After WW2, military R&D investment generated completely new industries in plastics, aerospace, vehicles, consumer electronics etc, financed by the advent of readily available consumer credit for the first time. In the 1980’s, US military R&D expenditure on the development of the internet, the revolution in molecular biology, and the advent of a venture capital market led directly to the iPhone and modern medical care. Fortunes were made by technical entrepreneurs in these sectors based on science, government funded R&D, commercialisation skills, and access to venture capital. The 1987 stock market crash destroyed some of what had been created, but then rising Asian demand for commodities and western lifestyles underpinned yields even if equity prices themselves remained static. That came to end, other than in resources at least, in 2008.

So where am I investing for the future? And when?

Firstly, the when. The glass is half full. Equity markets will improve. Capital will become more readily available. From 2013 onwards.

Where? Please have a look at www.millhouse.co  The demand drivers will be: the entrepreneurial United States, becoming once again an energy independent economy with the worlds’ best Universities. Supported by German- led Europe with tremendous science and engineering skills enabling manufacture of best of breed products in a high cost economy. Selling to: SE Asia, China, and other countries in those regions who can afford western-style consumption products, food, and healthcare for an ageing population. These dynamics will drive trade and investment for the next cycle and companies with these exposures will benefit from an upturn in their equity prices.

These dynamics will govern the world as we shall know it from 2013 onwards.

davidmillhouse.com.au