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Sunday, May 26, 2024

The Worst-Case Scenario: Getting Real With Global GDP!

$10,500.

That is the per capita average GDP for the 6Bn ape-like creatures on this planet who have pockets and purses.  Of the still hairy and pocketless apes, there are only about 1M left and they are mainly prisoners so we won’t be worrying about them but it would be nice to consider the plight of our ancestors once in a while…  Anyway, so 6Bn of us fill in those last 3 images in the planetary labor pool with the vast majority of us STILL FARMING and, of course, a select group of us are still hunting and gathering and contributing very little to the GDP

None of our problems are new – as noted in this 2005 cartoon:

The United States of America with it’s highly evolved population of shopoholics has a per capita GDP of $46,381 – VERY IMPRESSIVE but we rank 6th!  Brunei does a little better than we do and Singapore is up at $50,523 (so let’s hear it for corporal punishment) and Norway (one of my top choices of countries to flee to when it all hits the fan) is at $52,561 but Luxembourgh ($78,395 – banking) and Qatar ($83,841 – oil) simply trounce us in earnings power per person.  For those of you who like to think Capitalism is all about keeping score – they must be better than you because they make more money, right?

Below the US, per capita GDP drops off fairly quickly.  Rounding out the top 10 are Switzerland ($43,007 – watches and more bankers), Hong Kong ($42,748 – don’t tell China!), Netherlands ($39,938 – legal drugs!), Ireland ($39,468 – free beer when on wellfare!) and Australia ($38,911 – beer comes in oil cans plus gigantic bouncing rats).  20th on the list is Germany at $34,212, Greece is 25th at $29,882 (but not for long), 30th is South Korea at $27,978, 40th is Slovakia at $21,245.  Lithuania comes in at 50 with $16,542 (1 ahead of Russia) and it steadies out there with emerging market star Brazil in 75th place with $10,514 and, keep in mind – that is where you FINALLY get to the average leverl of economic activity for the world. 

Another BRIC in the global wall is mighty China, with a per capita GDP of $6,567 for each of their 1.2Bn persons and India’s Billion people average out at less than half of that, at $2,941, ranking 128th and still ahead of 53 other nations like Congo (181st, last at $332), Zimbabwe (180 – $355), Afghanistan (169 – $935 per person yet we can’t find one 6 ft – 4 inch rich guy on dialisys?), Ethiopia (167 – $954), Haiti (157 – $1,339, just 750 miles from Florida) and Iraq, who rank 124th at $3,570 per person, even after we have spent $1 Trillion (10 x their entire GDP) "Nation Building." 

The combined population of our top 10 nations in GDP is under 400M add another 600M EU and Japanese people, who have per capita GDPs of about $30,000 so there’s about a billion of "US" (1Bn) in the top 17% with an average per capita GDP of $37,000 and "THEM" in the bottom 83%  (5Bn) with an average per capita GDP of $5,000

Now, let’s assume that tomorrow the entire global economy collapses and all the banks in Europe, the US and Japan all fail at once and the government can’t stop it and all assets are wiped out and our economies grind to a halt and 50% of us are unemployed on Tuesday.  Would you stop eating?  Would you stop using electricity?  If the answer to those questions is no, then you are already going to be better off than Nigeria, where many people are forced to do without one or the other or both bu still have a $2,249 per capita GDP.  How about clothing – will you wear that?  Will you take your kids out of school or still send them?  Will you no longer seek medical attention when you are sick?  How about driving?  Plan on giving it up?  Heat?  Air conditioning? 

Let’s assume, for argument’s sake, that we (US, Europe and Japan) all fall to the level of the Mexican economy, ranked 60th with a per capita GDP of $13,628.  What would that do to the $60Tn global GDP?  Dropping our 1Bn privileged asses from $37,000 to $13,600 would knock $23.4Tn off the global GDP, about 1/3.  So, if we call that a "worst case" scenario (for us, the people in Nigeria could care less whether or not you get to see Avatar in IMAX or how big your flat-screen TV is) then what is the logic of dropping the stock market 66%?  You will still brush your teeth (PG, JNJ), you will still eat Mac and Cheese, probably more than before (KFT), you will need to wear sneakers to stand on the bread lines (NKE), the police will need riot control gear (TASR), they will probably GIVE AWAY TVs and electricity to calm people down (SNE, EXC).

Will we no longer fly in planes (BA) or communicate on the web (CSCO)?   We’ll probably make phone calls – Even Dorothy had a phone in depression-era Kansas (T, VZ)!  We might not buy homes anymore but we’ll still need to fix them (HD) and when we have headaches, we will still take a pill (MRK, PFE) and the barter system is a fun fantasy but even Nicaragua, ranked 133 with a per capita GDP of $2,627 per person has 30 Walmarts, so there’s another stock we can stick with as well as McDonalds, where I hear the gazelle-burgers are wonderful in Africa.  

Will we give up soda (KO, AA) or entertainment (DIS) using computers (HPQ, IBM, INTC) or stop using fertilizer and farming with machines (DD, MON, CAT)?  Unless we abandon the buildings then UTX’s Otis division should still find work.  MSFT may have trouble if there are nor rich people to choose Windows over Linux and XOM and CVX may suffer from soft demand.  We’re writing off Dow components BAC and JPM in our global implosion but GE will likely survive as will MMM (where would we be without Post-Its?) and even farmers may want insurance through TRV.  So that’s the Dow, which is already 30% off the 2007 top yet the global GDP is UP $4,000,000,000,000 (7%) since then. 

We can assume that our 2007 highs were based on the very false assumption that we would grow the global GDP from $55Tn in 2008 to $61Tn in 2009 to $68Tn in 2010 to $75Tn by 2011 so this year’s $60Tn is a nasty 13.33% disappointment and let’s assume that over the next 3 years we SHRINK the GDP of the planet earth all the way back to $45Tn (down 25% from here).  Contrary to any historical trends observed in War, Famine, Depression or even under the triple threat of Nixon, Ford and Carter – we have NEVER contracted for more than 2 years in a row…  Let’s give the bears a bone and say we will grind down and down and down until the whole planet looks to Mexico for economic leadership.  Even then, we have a $45Tn global GDP! 

$45Tn is actually an average of just $7,500 for 6Bn people, that would put us down in the low 90s with Ecuador, Belize, El Salvador, Bosnia and Herzegovina – Borat would be laughing at us (Kazakstan is 70th)!  So, if you follow the bearish doomsday scenario to it’s obvious social conclusion – this is what they expect to happen to America, Europe and Japan when they tell you the Dow is going back to 7,500 – or perhaps even lower!  If you don’t believe that you will be skinning your own game for clothing in 2011 – then perhaps it’s not such a bad idea to be a bit of a contrarian and do a little bottom-fishing here

I am NOT advocating a BUYBUYBUY premise, we are still 80% in cash (we got out at the end of April) but we have begun, at Dow 10,200 to begin scaling into positions in companies like the blue chips listed above.  We are doing it in scaled amounts in option spreads that obligate us to buy another round that would put us in twice the current position at an average price 20% or more below the current price.  That means, at approximately Dow 8,000, we will trigger our second round, deploying another 20% of our cash to buy twice as much stock in T, PFE, JNJ, MCD, UTX, KO… 

At that point we will very likely DO IT AGAIN as we will have not only 60% of our cash left, but a substantial gain from our Disaster Hedges, which pay us a 500% return if the market doesn’t recover from where it is right now.  Not only that, but, at the point where we would double down at 8,000, we would take another round of disaster hedges using the original principal from the first disaster hedges so if we hedge with $5,000 (5% of $100K) in round 1 and use $20,000 to buy stocks at a 20% discount, then if the market falls 20% we still have $20,000 worth of stocks, $75,000 in cash AND $30,000 from our disaster hedge!

At that point we double down on our stocks so now we have $40,000 worth of stock, $80,000 in cash and another $5,000 in disaster hedges.  If the CNBC doom and gloom crowd are right and the markets fall another 20% (Dow 6,400), we end up with another $30,000 from our disaster hedges, and we again double down on our stock (now down 40% from today’s price) and we end up with $80,000 worth of stock and $70,000 in cash AFTER THE MARKET FALLS 40% – SO BRING IT ON BEARS! 

If at any point the market turns up, we make at least 20% on our stocks (it’s built into the strategy) – providing, of course they generally stick with the indexes.  That’s why we prefer blue-chips during a crisis – aside from the inherent brand value, they tend to stick with the broader market and often lead recoveries.  I don’t think we will get a chance to buy that much stock that low.  It would be great if it happens (great for us, sad for the planet) but I don’t think they can panic people to sell stocks at the clearly irrational "Wolrd will end tomorrow" pricing we got in March of 2009 but we try to never underestimate the stupidity of the average investor

I gave a similar speech to this one in February of 2009 but we have a lot of new Members since then and I want you to understand exactly what I mean when I say things are undervalued so we can be prepared to act if the opportunity arises.  Certainly they can go much lower – half the stock on the market are still over 100% higher than they were a year ago but, on March 6th of 2009, I was POSTIVE it was the bottom and I pounded the table and then I did say BUYBUYBUY using some of that cash to make more aggressive plays and we got in at what we thought, up unitl two weeks ago, was a once-in-a-lifetime opportunity for long-term investing. 

"Long-term" turned out to be just over 12 months as we took our 100% plus gains off the table and our non-greedy exits have already been rewarded with 20% discounts to buy back the same stocks we loved back then with hedges that protect us all the way to 40%.  Should we wait for 40%?  What if 40% never comes?  What if the MSM doomsayers are wrong?  Since we have a plan that works in either direction, we’re sure not going to idle all of our cash for no reason – certainly not at today’s interest rates

Well, opportunity may be here again so let’s ignore the BS and prepare ourselves for some real shopping opportunities.  The world will not end tomorrow and, even if the Western World drops back to the stone age, somebody in China will still want to put a diaper on their baby tomorrow morning and, one day, our stocks will recover!  Plan the trade and trade the plan and we will be able to go out there and, not only shop with confidence, but have fun doing it! 

Happy hunting,

– Phil

 

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