The market appears to be at an inflection point. The period of overt government stimulus may be winding down and investors are concerned that this may end the market’s three-year run. I don’t think so. I am not convinced that Quantitative Easing 1, 2 or 3 contributed to the current market run as greatly as people suppose. The reckless spending and excess of America’s bubble culture are about to be bailed out by an unlikely source: global prosperity stimulating demand for all things American and especially for U.S. technology. I think stocks are headed much higher, and that will be due to the emergence of a global middle class that did not previously exist in countries like India and China.
Globalization is Driving Prosperity Across the Globe
Check out this quote from a recent Brookings Institute study titled, Poverty in Numbers:The Changing State of Global Poverty from 2005 to 2015:
“Our results indicate that the world has seen a dramatic decrease in global poverty over the past six years, and that this trend is set to continue in the four years ahead. We estimate that between 2005 and 2010, the total number of poor people around the world fell by nearly half a billion people, from over 1.3 billion in 2005 to under 900 million in 2010. Looking ahead to 2015, extreme poverty could fall to under 600 million people - less than half the number regularly cited in describing the number of poor people in the world today. Poverty reduction of this magnitude is unparalleled in history: Never before have so many people been lifted out of poverty over such a brief period of time.”
That is some pretty meaningful information.
This is what economist Robert Fogel predicts in his research report on Chinese economic prospects titled: $123 trillion - China’s estimated economy by the year 2040. Be Warned:
“In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a super-rich country in 2040.”
While some of these China growth research reports indicate cause for fear and concern and a threat to the U.S., I disagree.
U.S. Brands and Technology Will Continue to Lead for Many Years
Europe may well suffer dramatically with the emergence of the wealthier new Asian middle class, but the U.S. will be one of the more pronounced beneficiaries. There are reasons the best technology companies to date have emerged from the U.S. To succeed at innovating, a society must foster risk and embrace potential failure while developing the supporting academic, financial and government infrastructure. The lack of stigma associated with financial failure in the U.S. and the widespread pursuit of financial and technological superiority are the vital elements in its continued dominance – it is inherently a society of intelligent risk takers. By contrast, Japan is an example of a nation without the societal endorsement of innovation.
While I was studying business many years ago, Japan was momentarily regarded as the world leader in business and manufacturing. The Japanese government funds some of world’s largest technology research programs in areas like nanotech. But the cultural habits that push research into innovative enterprise seem to be absent. So Japan enjoyed a brief moment of perceived leadership, ultimately to cede leadership permanently to the U.S. only a few years later. Is it surprising, then, that business failure in Japan is associated with a terrible negative stigma?
It will take generations for any country to overtake the U.S. in innovative areas like technology. Not for lack of intelligence but for lack of infrastructure, attitude and experience. In the U.S. there is a prevailing acceptance of the risk necessary to lead and innovate. This is at the core of our culture and it cannot be copied or even learned. That attitude and success is revered internationally. Countries with aspirations of wealth don’t want to crush us; they want to be us. That dynamic won’t change in my children’s lifetime.
Global Prosperity Will Drive Global Equities Much Higher
This growing global middle class will drive international GDP growth. Fogel says,” In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000.” If China’s economic growth is anywhere near this prediction, all of this new prosperity will be driving massive increases in revenues and profits for global companies. This is consumption that did not previously exist and is not anywhere near reflected in stock prices. Needless to say as this new middle class accumulates savings and wealth they will also be sold a myriad of retirement/investments products that will find a home in stocks, further contributing to a coming multi-decade boom in global equities.
I am buying a portfolio of stocks in the most exciting areas of new technology to prepare for this unprecedented investment opportunity. While I like such companies as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), I would much rather own the next big success story, not the last. Some companies I am buying right now include Given Imaging (GIVN), Codexis (NASDAQ:CDXS) and Rockwell Medical Technologies (NASDAQ:RMTI). These companies are positioned to be some of the leaders in the continuing technology bull market.
Disclosure: I am long CDXS, GIVN, RMTI.