Seeking Alpha

Jason Tillberg's  Instablog

Jason Tillberg
Send Message
I am 37 years old, happily married and have two young daughters 2 and 4. I live upstate New York near Ithaca in a town called Newfield. I study home economics and will write articles about companies and investing ideas that play into home economics and demographics.
My company:
Economy of The Home
My blog:
Economy of The Home
My book:
Put Your Money to Work - What you Need to Know to Invest in Stocks
  • It's Time To Invest In Your Home Economy 0 comments
    Mar 12, 2013 5:31 PM | about stocks: AAPL, CREE, DELL, FSLR, GE, GM, GY, TSLA, WMT

    Each and every year, the physical assets in America, from our cars to the school buildings our children attend, depreciate due to normal wear and tear. At the same time, each and every year, we invest some money back into either replacing these old assets or improving the assets with new technologies and better design.

    What has been happening over the last 4 years is we've cut back in investing in the physical economy as I will show you below. I would like to argue that some of the best investments we can make are investments in physical assets and not just stocks or bonds.

    Take a look at this monthly chart of total public construction spending from 1992 to 2013:

    (click to enlarge)

    This includes spending on highways and streets, educational buildings, healthcare related building and public housing.

    Public construction spending as a percent of gross domestic product (NYSE:GDP) since 1992, is about the lowest since 1998:

    (click to enlarge)

    Our current state of investment in general public construction is so low it's getting scary.

    Not only public construction spending, but businesses and homeowners also invest to replace or improve their capital assets every year.

    Each year, assets are acquired and some are disposed, like a television set that may work fine but is disposed of and a new television set is bought.

    The net result of all these assets acquired and disposed gives us what's known in economic terms as "Gross Capital Formation."

    In 2012, the U.S. gross capital formation was $2,473.35 billion.

    (click to enlarge)

    Gross capital formation as a percent of looks like this:

    (click to enlarge)

    The percent of our GDP that was spent on the physical economy has collapsed in the past 4 years to between roughly 15% and 16%.

    Every year, a percent of our fixed capital assets get consumed. In 2012, the U.S. consumed $2,011.8 billion in fixed capital. Here is a chart of consumption of fixed capital in the U.S.:

    (click to enlarge)

    Gross fixed capital formation and consumption of fixed capital as a percent of GDP together looks like this:

    (click to enlarge)

    The blue line is the percent of GDP that is invested in gross capital formation and the red line is the percent of our fixed capital that was consumed.

    I played around with these numbers. Using inflation adjusted dollars, I added up the previous 10 years worth of gross capital formation and total consumption of the fixed capital starting from 1955-1964.

    I then divided the consumption of fixed capital by the gross capital formation to get a percent of the consumption of the previous 10 years worth of gross capital formation.

    In 2012, we consumed 71.39% of the total gross capital formation of the previous 10 years. This was the highest percentage rate of consumption of formation for the previous 10 years going back to 1955. Here is the chart I created showing that result from 1964-2012:

    (click to enlarge)

    A lot of the fixed assets have a life of over 10 years, like bridges and houses. Some have a life of as little as 3 months, like a pair of sneakers from Walmart (NYSE:WMT) that I once bought for $12 that literally ripped in half on me in 3 months. (You get what you pay for.)

    My case is as follows: We need to constantly invest in our physical estate from our own homes to the private construction of our utilities, to the public construction of our streets and schools in order to maintain and grow our standards of living.

    Innovation and technology are the drivers to improving our productivity, which is critical and vital to both growing and even maintaining our standards of living.

    I would be substantially less productive if I were still using my Dell Computer (NASDAQ:DELL) from 2001 Vs the 2011 Apple iMac (NASDAQ:AAPL) computer I'm using now. If I were still driving my 1986 Monte Carlo (NYSE:GM) Vs. driving my 2005 Toyota (TOY) Camry, I would be paying a good deal more in gasoline. Visiting Grandma takes us about 500 miles round trip. That Monte Carlo got at most 20 miles per gallon Vs the Camry that gets at least 30 mile per gallon. At $4 a gallon of gas, the difference in gas price is $100 driving the Monte Carlo and $67 driving the Camry to visit Grandma.

    Ideally, for comparing the cost it takes to drive 500 miles, I need to drive a Tesla (NASDAQ:TSLA) Model S, as I calculate, based on data from this website, it would cost me $23.65 in energy to make the 500 mile trip.

    I counted 50 light bulbs in my house. I could stick with having all 50 bulbs be General Electric (NYSE:GE) 40 watt incandescent bulbs that last maybe 2-4 years, or I could invest in Cree's (NASDAQ:CREE) new 40 watt LED equivilent that uses 84% less energy and comes with a 10 year warranty. Now that could be a good $500 investment right there!

    A snow storm on Long Island a month ago could not be adequately addressed by the local government's snow plow team. Granted, 30 inches of snow fell down, but this was the response by the local Government there:

    "Panico said a scarcity of heavy equipment caused an issue with snow removal since the snow was heavy and traditional plows weren't able to handle the weight of it.

    He said the highway department had 500 pieces of equipment available for snow removal, with help from the town's departments of parks and waste management. He said a "good amount" of equipment got stuck or broke down during the storm."

    (emphasis mine)

    Perhaps that's because they are not keeping up with the required investment in general maintenance of their snow plow fleet.

    Here is a chart of major power outages up to 2011 compiled by various sources indicated:

    (click to enlarge)

    For example, our streets won't be adequately cleaned of snow, then it may make sense to invest in some Goodyear (GT) snow tires for your automobile. If you continue to see long periods of having now power because of storms, invest in some batteries and perhaps First Solar (NASDAQ:FSLR) or any other company's solar panels for your home.

    Jeff Immelt, CEO of General Electric, said in a recent letter to shareholders, according to a CNBC reporter, that "GE's top priority remained growing the dividend." He went on to warn that the fiscal situation in the U.S., coupled with political uncertainty will impact capital investment.

    It's not very encouraging for the CEO of one of America's largest capital equipment companies to be too scared to invest the company's money into America's fixed capital base.

    At least as individuals, we are the chief asset allocator of our home economies. I recommend looking at home for investment opportunities, like replacing old light bulbs with new and improved, more efficient LED light bulbs to start.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: economy, dont-tag-as-pro Stocks: AAPL, CREE, DELL, FSLR, GE, GM, GY, TSLA, WMT
Back To Jason Tillberg's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.