Friday, August 29, 2008

Big Numbers

Focused as I am on company specific research and the small cap sector, I have a tendency to avoid the Big Numbers. Aggregate figures in the billions are often superfluous to the buy/hold/sell decisions on particular companies that measure success in the millions and sometimes the tens of thousands.

Take for example oil consumption. According to the CIA Factbook, the U.S. consumed 20.7 million barrels of oil each day in 2007 - a figure which puts Americans at the most oil thirsty people on the planet. The Chinese are a distant second at 6.5 million barrels per day. Of course on a per capital basis the U.S. does not look so greedy - over 25 barrels per day per America versus the top per capital consumer Singapore using 185 barrels per day per person. Chinese citizens consume 5 barrels per day per person.

Any sensible person looking at these numbers might conclude that the U.S. is over reaching. Yet another set of aggregate numbers show a different picture. The Pew Center on Global Climate Change provides the chart below, illustrating GDP growth and U.S. energy consumption. It appears that energy consumption and GDP growth in the U.S. are no longer linked as closely as in the early 1900s.

What does this mean for investors? First, it appears to be a bit of a “no brainer” that the shift from industrial (manufacturing) economy to a service (software) economy has been the primary factor in GDP growth without commensurate energy consumption growth. Second, even with the increases in the cost of manufacturing in other geographies, it is questionable whether a reverse shift back to U.S. based production will provide investors with the kind of economic returns the graph above implies. Significant efficiencies would need to be applied to manufacturing processes to retain the gap between energy consumption and GDP. A narrowing would probably mean a slowing in GDP and a reduction in returns.

Sometimes the Big Numbers provide clues to broad investing strategies even if they offer no clues to particular companies.

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