The Investment U e-Letter: Issue # 674
Tuesday, May 14, 2007 The Fate of the U.S. Economy: Will Today's "Roman Empire" Collapse?
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
The monks of Cappuccini in Palermo want you to recognize that our lives are just a brief interlude suspended between two eternities. And there's nothing like being surrounded by 8,000 desiccated corpses to drive the point home.
Our Oxford Club/Investment U group is here in Sicily, visiting the Catacombs of Cappuccini, certainly Palermo's most macabre sight. Preserving the dead using lime, arsenic and the drying effects of the sun has been a Capuchin tradition for centuries. When you visit the gloomy, subterranean corridors beneath the monastery here, you're treated - if that's the right word - to row upon row of moldering bodies hung or posed in a variety of gruesome positions. All - including children - are wearing the clothes they died in. Quite frankly, it's hard to look… and impossible not to. The Fate of the U.S. Economy… Will Today's "Roman Empire" Collapse? Why are we here, exactly? In the 18th and 19th centuries, the Grand Tour - a cultural and historical visit to Europe's leading cities - was a kind of finishing school for the wealthy and intellectually ambitious. The idea is that by acquainting yourself more thoroughly with the past - the classical period, in particular - you might better understand the present. I think our group has taken a few modest steps in that direction. We've explored first hand the best-preserved ruins of the Roman Empire, marveled at the grandeur (and equally grand excesses) of past monarchies and papacies, and admired hundreds of masterpieces of Renaissance art. (Personally, I haven't been exposed to this much culture and breeding since I finally cleaned out my refrigerator in college.) However, some investors and analysts may be stretching the lessons of history a bit thin. A hot topic of conversation on this tour - perhaps due to fellow editor Bill Bonner's address to the group at Chateau D'Ermeonville near Paris - is whether we should draw a parallel between the current state of affairs in the U.S… and the decline and fall of the Roman Empire. As you may know, some historians believe that Rome's prosperity - which lasted 12 centuries - ripened into decay because prosperity eventually gave way to arrogance and excess. Bill - and others with a similarly pessimistic frame of mind - argue the same thing is happening in the United States today. Specifically, they cite the dramatic decline of U.S. manufacturing, the United States' zero savings rate, and the presumed "fact" that Americans are spending everything and wallowing in debt. Not exactly. 21st Century America Is Prospering It's true that manufacturing employment has collapsed. It now makes up less than 9% of the U.S. economy. In fact, there are no more workers in U.S. manufacturing today than in 1958. If you planned on spending your life working on an assembly line in Detroit, enjoying a high salary and benefits, this is indeed an unfortunate turn of events. The rest of us, however, have reason for optimism. The new model for U.S. companies - take Apple as a prime example - is to provide central branding and design while outsourcing everything else. This not only makes everything you buy at Circuit City considerably cheaper, it's good for developing nations too. (Their economies get the opportunity to move from a dependence on mining, forestry and agriculture to industry. And that, ultimately, leads to new markets for U.S. products.) Many of the other arguments from the "America is Rome" school I've already dealt with in previous columns. For example, Americans appear to be saving nothing because of the way government calculates savings, which is post-tax. It's smarter, of course, to save pre-tax. So millions of Americans contribute to 401(k) plans and other qualified retirement plans. Also, when you make your monthly mortgage payment, part of it goes to pay off principal, building equity. But the government counts that as consumption, not savings. Over time, stock portfolios and home values tend to rise. That results in increasing affluence… not bankruptcy. Remember, debt is meaningless except in relation to income and assets. If you total up all the real estate, savings accounts, bonds, stocks and other investment assets of Americans and then subtract all the mortgages, credit card balances, personal loans and other debts, U.S. citizens have a total net worth of over $54 trillion. That's $12 trillion more than four years ago. And nearly 11 times the total net worth of Americans in 1980. It takes a bit of imagination to call this The Decline of the Roman Empire, Part II. I might add that Rome's fall unfolded over a couple hundred years. I'll go out on a limb here and predict that's a tad longer than your personal investment horizon. Of course, if you find the "America is Rome" argument persuasive, you can always cash in your ill-deserved, Fed-induced gains and plunk the proceeds into T-bills and gold coins. That didn't work in 1980, when Howard Ruff's "How to Prosper During the Coming Bad Years" topped the best-seller lists. And it hasn't worked since. Funny how history repeats itself. Good Investing, Alex Today's Investment U Crib Sheet - To get the true "facts" about the U.S. savings rate, and to find out what the "real threat to our future prosperity" is, take a look at Alex's recent message, The U.S. Savings Rate: Why the Perma-Bears Are Wrong About Savings and Debt.
- Apple's "central branding and design" has produced stellar results. The company's most recent quarterly earnings are 87% higher than last year's. Its product line is expanding. And it's carrying roughly $12 billion in cash on the balance sheet, and no debt. Clearly, manufacturing iPods in China, among other products, has its benefits. The stock is up 115% in less than 12 months.
- For more companies expanding their top lines and widening their profit margins, here's what Alex Green is recommending to subscribers of his Momentum Alert service.
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