“Today, few realize that the U.S. stands on the cusp of significant economic gains stimulated by low energy costs. Ten years from today, [we will] celebrate a decade of unexpected strong growth, and the credit will go to countrywide gains from the very low energy prices found only in the U.S.. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tires. Fracking and the other technologies that gave us low natural gas prices will have added more than 1 percent a year to U.S. growth.

Four conditions will contribute permanently to a big improvement in the competitive position of the U.S.

1. The U.S. has perfected a means of “manufacturing” natural gas from shale, in effect breaking the monopolistic control on hydrocarbon supply once enjoyed by the majors.

2. This advantage gives manufacturing plants in the U.S. up to an 80 percent cost advantage over those operating in China, Japan, South Korea or European countries.

3. U.S. financial markets (principally futures markets) enable producers and consumers to lock in profits for years ahead. Low cash prices now do not deter producers that sold today’s production a year ago at much higher and profitable prices.

4. Competitive and open pipeline systems prevent any single large participant from denying these economic benefits to any producer or consumer.

No country other than Canada enjoys U.S. competitive conditions. Nor will any other country probably enjoy them in the future. Recognizing this, groups such as Michelin and Shell intend to build plants in the U.S. to take advantage of the country’s permanently lower-cost energy supplies. Steel mills are also being planned.

In short, low-cost energy provided primarily by shale gas production advances will almost certainly contribute to an investment boom across the U.S. economy. As a result of these circumstances, the benefits of low-cost energy supplies will spread throughout the U.S. economy, stimulating exports of goods and services and creating millions of jobs.” I hope this helps answer your question, Linda. I’m Mr. Sensible, and I take the mystery out of making money.

Mr. Sensible

First things first. You are not alone, my friend. There are a lot of investors out there rethinking a lot of decisions. I think it’s great you’re taking the initiative to ask a few questions about your financial security, especially in times like these. That being said, right now in the year 2012, there are some rationales suggesting we are better positioned financially than most tend to believe. In an article by Matt Ridley, former financier and current author, he highlights many points that can be interpreted as an indicator of national economic improvement, or he calls them, “reasons to be cheerful.”

1. We’re better off now

Compared with 50 years ago, the average human now earns nearly three times as much money (corrected for inflation), eats one third more calories, buries two thirds fewer children, and can expect to live one third longer. In fact, it’s hard to find any region of the world that’s worse off now than it was then, even though the global population has more than doubled over that period.

2. Poverty is nose-diving

The rich get richer, but the poor actually do better as well. Between 1980 and 2000, the poor doubled their consumption. The Chinese are ten times richer and live about 25 years longer than they did 50 years ago. Nigerians are twice as rich and live nine more years. The percentage of the world’s people living in absolute poverty has dropped by over half. The United Nations estimates that poverty was reduced more in the past 50 years than in the previous 500.

3. The important stuff costs less

One reason we are richer, healthier, taller, cleverer, longer-lived, and freer than ever before is that the four most basic human needs-food, clothing, fuel, and shelter-have grown markedly cheaper. Take one example: In 1800, a candle providing one hour’s light cost six hours’ work. In the 1880s, the same light from a kerosene lamp took 15 minutes’ work to pay for. In 1950, it was eight seconds. Today, it’s half a second. In these terms, we are 43,200 times better off than in 1800.

4. Population growth is not a threat

Although the world population is growing, the rate of increase has been falling for 50 years. Across the globe, national birth rates are lower now than in 1960, and in the less developed world, the birth rate has approximately halved. This is happening despite people living longer and infant-mortality rates dropping. According to an estimate from the United Nations, population will start falling once it peaks at 9.2 billion in 2075-so there is every prospect of feeding the world forever.

5. Oil is not running out

In 1970, there were 550 billion barrels of oil reserves in the world, and in the 20 years that followed, the world used 600 billion.

So by 1990, reserves should have been overdrawn by 50 billion barrels. Instead, they amounted to 900 billion-not counting tar sands and oil shale that, between them, contain about 20 times the proven reserves of Saudi Arabia. Oil, coal, and gas are finite, but they will last for decades, perhaps centuries, and people will find alternatives long before they run out.

6. We are the luckiest generation

This generation has experienced more peace, freedom, leisure time, education, medicine, and travel than any in history. Yet it laps up gloom at every opportunity. Consumers do not celebrate their wonderful field of choice and, according to psychologists, say they are “overwhelmed.” When I go to my local superstore, I do not see people driven to misery by the impossibility of choice. I see people choosing.

7. Great ideas keep coming

The more we prosper, the more we can prosper. The more we invent, the more inventions become possible. The world of things is often subject to diminishing returns. The world of ideas is not: The ever-increasing exchange of ideas causes the ever-increasing rate of innovation in the modern world. There isn’t even a theoretical possibility of exhausting our supply of ideas, discoveries, and inventions.

8. This depression is not depressing

The Great Depression of the 1930s was just a dip in the upward slope of human living standards. By 1939, even the worst-affected countries, America and Germany, were richer than they’d been in 1930. All sorts of new products and industries were born during the Depression. So growth will resume unless prevented by wrong policies.

9. Optimists are right

For 200 years, pessimists have had all the headlines-even though optimists have far more often been right. There is immense vested interest in pessimism. No charity ever raised money by saying things are getting better. No journalist ever got the front page writing a story about how disaster was now less likely. Pressure groups and their customers in the media search even the most cheerful statistics for glimmers of doom.

So there you have it, Josh. Nine positives most of which I believe in myself, especially the last one. Mr. Sensible is nothing if not a glass-is-half-full-kind-of-guy. Good luck. And do your best to stay positive. I’m Mr. Sensible with Sensible Portfolios, where we take the mystery out of making money.

There is plenty of research to show that expense ratios (the operating costs of the fund) are an excellent predictor of a fund’s future performance while past performance isn’t as useful. The one exception being that those funds that have performed poorly in the past typically continue to perform very poorly in the future.

I wrote a blog on this topic a few years back when Morningstar released the results of its study on how useful expense ratios and its five-star rating system were in predicting future performance. Two of the findings were:

1. “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested. Low-cost funds beat high-cost funds.”

The study found that low expense ratios were better at predicting future performance than Morning star’s star ratings.

1. “Investors should make expense ratios a primary test in fund selection. They are stil the most dependable predictor of performance.”

In November of 2011, Standards and Poors reported that very few funds retain its top-quartile ranking over two consecutive five-year periods. For large-cap funds it was 12%, for mid-cap funds it was 3%, and 20% for small-funds for the ten year period ended September 2011.

Bob, if you avoid mutual fund investments that have high expense ratios, I believe you greatly improve your chances of success.

SensiblePortfolios is close to releasing its new SensibleExpress investing platform that will continue to lower the cost of investing for our clients.

I’m Mr. Sensible and I’m out to take the mystery out of making money.

Mr. Sensible

It all depends on who you’re working with. There’s a guy by the name of David Swensen, Chief Investment Officer of Yale University’s $19.4 billion endowment. He said, and I couldn’t say it any better myself, “There are two sensible approaches to investing — either 100 percent active or 100 percent passive. Unless an investor has access to “incredibly high- qualified professionals,” they “should be 100 percent passive — that includes almost all individual investors and most institutional investors,” he added.

Like David, Mr. Sensible believes most active mutual funds are more interested in collecting fees than in boosting returns for investors. So, like I said up top, if you have access to really, incredibly, high-qualified money professionals, you might want to be 100% active. But if you’re like a whole lot of us who don’t have access or don’t want to pay those high fees, 100% passive is the way to go. Hope this helps you, Jackie. I’m Mr. Sensible and I’m out to take the mystery out of making money.

Mr. Sensible

“A remarkable thing happened in Silicon Valley during the past decade. Venture capitalists and entrepreneurs set their sights on clean energy as the Next Big Thing. They audaciously hoped to reinvent energy by harnessing the incredible innovation that had transformed information technology and biotechnology. 

The truth is that jobs are migrating from one area to another, as they have done for 150 years. Ever since the Industrial Revolution, factories have located where critical resources are available, and later moved when other resources replace them or become more important. The factories of the mid-19th century drew manufacturing from backyard workshops to central locations that offered water power. When steam and electricity eliminated the millstream’s advantage, plants were relocated closer to raw material supplies, labor pools, or markets. That trend continues.

Yes, low-level, labor-intensive work moved to China because labor is a lot less expensive there. But U.S. industrial output has continued to grow through continuously improving productivity and a migration to more sophisticated, higher-margin, less labor-intensive products.

China isn’t immune to this cycle. A growing middle class with its demands for higher wages and better working conditions is seeing jobs leave China for less-developed areas with the low wage rates that China can no longer offer. Chinese factories are now moving up to more sophisticated products and higher productivity in a continuation of the cycle.

In truth, China has seen job losses due to increasing productivity similar to those in the Western world. According to a 2004 report[1] by China’s Department of Industry and Transport Statistics, part of the National Bureau of Statistics: “The relative magnitudes of job loss in manufacturing in the developed world and China are similar, with both experiencing 15% declines between 1995 and 2002…For example, textiles was one of the worst hit industries in the U.S., with 415,000 jobs lost, but the losses in China were much greater, at 1.8 million jobs.”

Innovation is the key to the continued growth of Western manufacturing. And, yes, “continued growth” is the right description. Even though there are fewer manufacturing jobs here in the West, industrial output is still increasing year-to-year due to higher productivity. And that increasing middle class in the East will demand more Western products as their income and lifestyle improves. The weak dollar helps make our exports more attractive and imports relatively more costly, so demand for domestic products should increase here as well.

China is not the enemy. It is just another part of the manufacturing cycle, similar to what the U.S. was to Europe in the 19th century, Japan was to the U.S. in the 20th century, and Malaysia, Vietnam, and other countries are to China today. And so it goes. European manufacturing did not collapse when the young U.S. developed its manufacturing base — and U.S. manufacturing is not going away either.

by Mark Symonds is President and CEO of Plex Systems, and a member of the Manufacturing Leadership Council.

DFA, is a global asset manager that oversees $206.5 billion in all and owns a mind-boggling 13,000 stocks, or about 70% of the world’s publicly listed equities. Because DFA’s investment process is purely quantitative, it doesn’t have the option of succumbing to fear in the face of adversity. It certainly helped that DFA focuses much of its attention on some of last year’s highest-performing equity areas – value, small-cap and emerging markets.

The privately held firm (Arnold Schwarzenegger is an investor) also is known for keeping a lid on costs that can rob shareholders of performance points, steering clear of some foreign markets where it doesn’t believe funds can get a fair shake on prices.

SensiblePortfolios’ Smart Strategy seeks to generate global market returns using mutual funds engineered by DFA.  We too  understand that controlling fees and expenses is important for long term success.

To learn more about our  Smart Strategy please visit www.sensibleportfolios.com.

Congratulation DFA and thanks Merriman Inc. for  the article.

I hope everyone enjoys the 4th of July weekend… Darrell

From The Economist:

‘Labor arbitrage – taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labor arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by Boston Consulting Group (BCG).

‘Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,’ says BCG’s Hal Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.

BCG lists several examples of companies that have already brought plants and jobs back to America.

1. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas.

2. Sauder, an American furniture-maker, is moving production back home from low-wage countries.

3. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia).

4. Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.’

You’re a 19 year old kid. You’re critically wounded and dying in the jungle somewhere in the Central Highlands of Viet Nam. It’s November 11, 1967.

Your unit is outnumbered 8-1 and the enemy fire is so intense from 100 yards away that your CO (commanding officer) has ordered the MedEvac helicopters to stop coming in.

You’re lying there listening to the enemy machine guns and you know you’re not getting out. Your family is half way around the world; 12,000 miles away, and you’ll never see them again.

As the world starts to fade in and out you know this is the day. Then – over the machine gun noise – you faintly hear that sound of a helicopter. You look up to see a Huey coming in. But… It doesn’t seem real because no MedEvac markings are on it.

Captain Ed Freeman is coming in for you. He’s not MedEvac so it’s not his job, but he heard the radio call and decided he’s flying his Huey down into the machine gun fire anyway.

Even after the MedEvacs were ordered not to come. He’s coming anyway. And he drops it in and sits there in the machine gun fire as they load 3 of you at a time on board.

Then he flies you up and out through the gunfire to the doctors and nurses and safety.
And, he kept coming back!! 13 more times!! Until all the wounded were out. No one knew until the mission was over that the Captain had been hit 4 times in the legs and left arm.

He took 29 of you and your buddies out that day. Some would not have made it without the Captain and his Huey.

Medal of Honor Recipient, Captain Ed Freeman, United States Air Force died August 20, 2008 at the age of 70, in Boise, Idaho.

The chart below shows that the US monetary base has spiked since 2009. While inflation has fluctuated considerably, it has not tracked the changes in the monetary base. Although no one can reliably forecast inflation, we think markets do a pretty good job of sorting through all the macroeconomic data. At present (mid December), the markets do not appear to reflect expectations of runaway inflation in the near future.

US Monetary Policy since 2000

Source: Federal Reserve Board

Nevertheless, investors may be growing anxious in response to media coverage of the Fed’s continuing expansionary policy. For those who are certain QE2 will be inflationary, perhaps the recent example of Sweden’s monetary base run-up will offer some reassurance.

In the 1990s, Sweden’s central bank, the Riksbank, more than doubled the country’s monetary base during the Nordic banking crisis, but inflation remained moderate during and after the expansionary period. The graph below documents that even as the monetary base jumped from 1994 to late 1996, inflation did not follow suit, and in fact, remained flat before falling in 1996.

Swedish Monetary Policy in the 1990s
Source: Sveriges Riksbank

Sweden’s monetary base expansion is one of several international examples of quantitative easing over the past two decades. These case studies, which include past expansionary periods in the UK, Switzerland, Japan, Australia, New Zealand, and Iceland, are discussed in a recent Federal Reserve Bank of St. Louis review.3 The researchers concluded that doubling or tripling a country’s monetary base does not lead to high inflation if the public views the increase as temporary and expects the central bank to maintain a low-inflation policy.

Of course, many factors may come into play, and we cannot know whether the US will share the same fortune. But at least we know that quantitative easing has occurred without triggering high inflation.