The Big Picture for the Week of February 27, 2011

One of the building blocks for successful country selection over the last few years has been to pick places where a middle class is ascending where there previously had been no middle class. I believe this theme will have legs for many years to come and is powering much of the spending that must be done (improved infrastructure and improved services) which will result in consumer spending that will be done (improved diet, other staple items and maybe even aspirational discretionary purchases).

If it is true that destinations where a middle class is ascending makes for an attractive investment or at the very least creates a tailwind then it stands to reason that countries where the middle class is shrinking are at the very least facing substantial headwinds. This link from Mother Jones which comes via Zen Trader has all sorts of grim statistics about the wealth gap in the US.

One hot topic here has been the extent to which higher prices at the pump have offset stimulus action and then this most recent leg up creating a new “tax” on consumers with economists trying to quantify the impact. Deutsche Bank’s analysis has been making the rounds, I found it at Pragmatic Capitalism, which says that a $10 increase in the price of crude leads to $0.25 per gallon and that every penny per gallon collectively costs consumers $1 billion.

While I do not believe tab A can fit into slot A so neatly as implied in Deutsche’s analysis it certainly creates a framework for beginning to understand the magnitude of the problem. If filling the tank for a typical vehicle has gone from $40 to $55 and the typical commuter needs to fill his tank twice a week then the extra $120 per month seems meaningful based on average incomes, high indebtedness and meager savings rates. And if the extra $120 is simply being added to credit card balances (which seems plausible) then the problem is worse. While $100 oil is probably not permanent today I believe the path for increased global demand is pretty clear and $100 as a permanent floor will not be an abstract concept.

The portfolio implication here is a point I’ve made before. The US is trying to hold on to the top spot which is far more difficult than it is to move up from some lower spot in the pecking order to a slightly higher, but still low, spot. We should have no expectation that middle class life in Brazil will look too much like middle class in the US as we think of it but better home construction (construction could improve and still be below US standards), reliable electricity, 30 channels of cable TV (compared to the hundreds we have in the US), decent roads, and more protein in their diets would be life changing and require astronomical sums of money to make happen.

It makes sense to spend time finding these tailwinds and figuring out how to access them for a diversified portfolio where narrow decisions are appropriate.

5 Comments

  1. How can a foreign person invest in USA products, mutual funds, etf’s, fixed annuities?

    Reply
  2. You can chart the beginning of the decline of the middle class from the mid-point of LBJ’s Great Society largesse.

    Call me insensitive, but if folks would not be able to eat and obtain other essentials (and luxuries like that 52-inch wall tv I saw this week at a rent-free homee) free, a middle class would reappear in short order.

    There is simply no incentive for a large minority of our population to work.

    Reply
  3. I mark the beginning of the decline of the middle class when we came off the gold standard. Politicians no longer had to worry about “paying” for anything”…we were able to keep moving the expenses to the future. The future is now here.

    Reply
  4. The beginning was NOT when we came off the gold standard, it was 30 years later when everyone figured out that you really have to pay the bills on credit and they, only then, began tightening their belts. (I will say everyone except wall streeters and bankers that have robbed the public blind at a cost/risk of…….nothing. Complete lack of oversight/consequence pre and now post meltdown.)

    Reply
  5. Roger,

    Just wanted to say thanks for the link sharing love….

    Great blog, always enjoyed your Sunday Morning Coffee section.

    Reply

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The Big Picture for the Week of February 27, 2011

One of the building blocks for successful country selection over the last few years has been to pick places where a middle class is ascending where there previously had been no middle class. I believe this theme will have legs for many years to come and is powering much of the spending that must be done (improved infrastructure and improved services) which will result in consumer spending that will be done (improved diet, other staple items and maybe even aspirational discretionary purchases).

If it is true that destinations where a middle class is ascending makes for an attractive investment or at the very least creates a tailwind then it stands to reason that countries where the middle class is shrinking are at the very least facing substantial headwinds. This link from Mother Jones which comes via Zen Trader has all sorts of grim statistics about the wealth gap in the US.

One hot topic here has been the extent to which higher prices at the pump have offset stimulus action and then this most recent leg up creating a new “tax” on consumers with economists trying to quantify the impact. Deutsche Bank’s analysis has been making the rounds, I found it at Pragmatic Capitalism, which says that a $10 increase in the price of crude leads to $0.25 per gallon and that every penny per gallon collectively costs consumers $1 billion.

While I do not believe tab A can fit into slot A so neatly as implied in Deutsche’s analysis it certainly creates a framework for beginning to understand the magnitude of the problem. If filling the tank for a typical vehicle has gone from $40 to $55 and the typical commuter needs to fill his tank twice a week then the extra $120 per month seems meaningful based on average incomes, high indebtedness and meager savings rates. And if the extra $120 is simply being added to credit card balances (which seems plausible) then the problem is worse. While $100 oil is probably not permanent today I believe the path for increased global demand is pretty clear and $100 as a permanent floor will not be an abstract concept.

The portfolio implication here is a point I’ve made before. The US is trying to hold on to the top spot which is far more difficult than it is to move up from some lower spot in the pecking order to a slightly higher, but still low, spot. We should have no expectation that middle class life in Brazil will look too much like middle class in the US as we think of it but better home construction (construction could improve and still be below US standards), reliable electricity, 30 channels of cable TV (compared to the hundreds we have in the US), decent roads, and more protein in their diets would be life changing and require astronomical sums of money to make happen.

It makes sense to spend time finding these tailwinds and figuring out how to access them for a diversified portfolio where narrow decisions are appropriate.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing