Friday, December 31, 2010

2010: the year in review


















The year is rapidly drawing to a close, and what a year it was. Many important issues came into the spotlight in 2010 -- too many in fact to cover in a short post, so we've selected three to discuss which we believe include some of the more important lessons investors can carry with them from 2010 into the years ahead.
  • The world is waking up to the folly of endless taxpayer-funded pension systems. We called this "The question of our time" and it dominated headlines from Greece to California this year. After World War II, many governments instituted pension payments for retirees that were funded by the taxes levied on those still working. At the time, life expectancies were much shorter (men often worked past 62 and the average life expectancy was only 65), and as the Baby Boom of children born after the war grew up and entered the workforce, these pension ideas seemed to work. In some places, the benefits became more and more generous and the retirement ages at which retirees could draw them became younger and younger. This year was the year in which many around the world woke up to the fact that this system is unsustainable. See also "Greece and California."
  • The "Unstoppable Wave" rolled on with a vengeance. The other half of the solution to foolish government entitlement programs is economic growth. While some pundits looked at the budget crisis in European countries such as Greece and in US states such as California and argued for an "austerity" solution of higher taxes and fewer entitlements, the real answer is higher economic growth rates and fewer entitlements. We've argued that the best recipe for economic growth is for government to ensure that it does not discourage innovation. We've also pointed out that the "Unstoppable Wave" paradigm shift taking place is so powerful that even ordinary-grade government ineptitude will be unable to derail it. The year 2010 provided all kinds of examples of the kind of transformative innovations that exponential increases in bandwidth can have on various industries, from the explosion of online retail shopping after Thanksgiving to the proliferation of smartphones and tablets, particularly their application to businesses but also even combat operations. Some of the best investment performance during the year came from businesses involved in this paradigm. See also "On the verge of something important" and "Another wake-up call."
  • The "experts" who wrote off the economic recovery were as wrong as those who wrote off the San Francisco Giants. Conventional wisdom going into 2010, and during much of the year, was that the rebound after the crater of March 2009 was just a big head-fake, and that the economy would probably slide back into "years of treading water" or even replay the worst that had gone before with a "double dip." It was fashionable in the media to say we were still in a recession, long after the recession had officially ended. In July, the UK's Telegraph published a story entitled "With the US trapped in a depression, this is really starting to feel like 1932" and opened with a quotation from Robert Reich declaring that "The economy is still in the gravitational pull of the Great Recession. All the booster rockets for getting us beyond it are failing," despite the fact that the economy (as measured by Gross Domestic Product) had been showing steady expansion since June 2009. Since then, the economy has continued to expand, embarrassing the critics who had written off America's ability to grow. Incidentally, we've argued that it would have grown even more without the harmful and wasteful government "stimulus" plans. We pointed out the similarities between those who confidently wrote off the economy and those who confidently wrote off the World Champion San Francisco Giants, and cautioned investors to beware of the conventional wisdom they hear on the financial television shows, even if it is coming from the mouths of impressive-looking economists with PhD's. In fact, we think that the Giants victory might well be one of the most important things for investors to remember from 2010, and recommend that our readers (even those who aren't Giants fans) revisit this post on the subject!
And on that happy note, we'd like to wish all our readers a very Happy New Year and a prosperous 2011!