Wall Street Week With Fortune; #0346

Coming up The Wall Street Week With fortune as prices at the club soar out of control concern the consumers look to find the cause. Jeff Kaufman explores the politics of supply and demand are we facing an energy crisis or is there really a bottomless well. And the fact that we're now living longer healthier lives is creating seismic changes in our national landscape. Karen Gibbs looks at how corporate America plans to profit from playing the demography card. Welcome to Wall Street Week With fortune. Will the good fortune is made possible in part by Nuveen investments in today's tempting market how can you protect yourself from yourself.

Connect an educational website of Nuveen investments is proud to support Wall Street Week With fortune. Welcome to Wall Street with quick fortune. I'm Karen Kim. And I'm Jeff called and while I thought about riding your bike to the mall gasoline costs to 24 a gallon this week on average and forecasters say it's headed higher. We import most of the oil we use in America but Asia now uses more than we do and China and India are cozying up to Iran and Sudan to secure their own supplies. In fact some geologists say global oil production is now in long term decline as the world of energy turns upside down. How will our lives change how worried should we be fairly worried says Daniel lash of director of the global warming project at the Natural Resources Defense Council. Not too worried at all says Peter Huber a senior fellow at the Manhattan Institute and co-author of the bottomless well the twilight of fuel the virtue of waste and why we will never run out of energy. Don't you believe America's dependence on oil is so severe that it's actually a

threat to our national security. How so. It is well you one virtue of $50 a barrel oil is it makes the math easy. We import two and a half million barrels a day of oil from the Middle East alone at $50 a barrel that's one hundred twenty five million dollars a day going into the Middle East some of their hands ends up some that money ends up in the hands of people who don't want to do us good and are really trying to do us harm so we're in effect financing both sides of the war on terrorism right now and the future just looks more and more dependent on the Middle East because they hold two thirds of the world's oil reserves. And so you believe that we the United States need to become massively more efficient right. Absolutely that's the cheapest fastest and cleanest way for us to reduce our oil dependence we also need to be investing in alternatives to oil. The other fuel such is fuel that we can grow at home. Biofuels make ethanol or other energy sources. Now Peter one of the many counter-intuitive points in your book is efficiency solves nothing.

Now that will make no sense at all to most people was the argument that historically the efficiency of every technology you look at the engines inside your car your refrigerator compressor you name it efficiencies rise and rise they have throughout the industrial revolution technologies get better those higher efficiencies let us do all sorts of things we didn't used to do we drive an extra 2 percent miles every year we buy bigger cars we get bigger refrigerator as we fly more every year. It's human nature it seems efficiency unfortunately over the long term makes us do more because of the way the economics work as our use of oil becomes more efficient. We would use even more oil not less even if we don't have these technologies are global technologies China today we burn seven billion barrels of oil a year China's only to these very efficient technologies will get deployed in countries that today are very modest users of oil. OK but here's another counter-intuitive point from your book you say. More energy consumption isn't worse it's better energy is an enormous enabler I mean people resent paying for it at the pump we resent paying for everything but it is

absolutely crucial to you know you can't name a segment of our economy from the transportation sector the Internet that isn't powered by energy of one form or another by the way oil is not our dominant fuel and electricity is and very little of our electricity is generated with oil. But when one form or another energy is absolutely essential to everything we do. OK Dan Peter has made a couple of points here. One efficiency won't solve anything this seems exactly counter to what you're saying. Well it's just wrong. I mean efficiency there is what economists would call a small take back effect that as you become more efficient so you double your efficiency. I'm not going to drive twice as many miles I might drive 10 percent more miles so we're not going to get the full benefit of the efficiency but we can make very substantial reductions in our oil consumption by becoming more efficient. Yes well we've become more efficient over the last 30 years total oil consumption went up but if we hadn't been. More efficient over that period our oil use would be several million barrels a day higher than it is OK let's hold off right there do you agree with that. That's the diet coke fallacy and I'm saying if I drink enough diet sodas I'll get thinner.

I mean it just doesn't work now and fourthly there's always a double fudge brownie somewhere else. The cars are a prime example of what has really grown over the last 10 years partly or miles but people are flying way more than that to people just leave these things out of their calculation. OK the other point is it doesn't really matter because oil is a shrinking part of our total economy anyway. Well our transportation system is 97 percent dependent on oil so that is a huge problem and it's something that we need to do something about both by becoming more efficient and diversifying the sources of energy we use for transportation. Peter you have been talking about energy in the large sense meaning all kinds of energy but for a moment let's focus on oil. Do you believe as some people have said the actual annual oil production has begun to decline is in long term decline. Well if it hasn't started today because we are actual oil production annually I mean these are historical facts you know have been rising and rising people keep saying we've reached the peak. It didn't peak in the last 12 months with this it is higher today than it was 12

months ago right. And it's a lot higher 12 months ago than it was two years before. I think it is very unlikely that we are anywhere close to the peak of liquid hydrocarbon production there are many different ways of producing it from tar sands and from from corn if you really want to I don't think that's ideal but we're nowhere close to the production up because the prices up in other words if the price went back to $35 a barrel would production storage or decline certainly high prices help it but that is not the factor because these are inelastic markets over one year you want to get small changes. Production is up. Decade after decade because our technology keeps improving faster than the horizon of the fuels recedes we are incredibly clever at digging deeper and further to get oil out of the ground. Dan do you have a view on this has or will production peaked or is it about to. I really don't know. On a global basis for the U.S. It has our oil consumption our oil production is going down and has been for for quite some time. But I think the real concern is not whether total global production is peaking but it's the reality that most of the supplies are in the Middle East and certainly the cheap to produce supplies

are in the Middle East so we become as long as we're dependent on oil we inevitably become more and more dependent on that very unstable region of the world and that creates lots of problems. Peter. Well that is right that Saudi Arabia can pump oil for well under $5 a barrel we currently import 15 percent of our oil from the Persian Gulf. Our primary producers in order are the United States Canada and Mexico in that order. Sixty percent of our oil is from North America. The Europe is very dependent on the Persian Gulf you know we are not that dependent on Persian Gulf oil it's 15 percent of our oil. So does this undercut the national security argument or does the fact that our oil comes from outside the United States at all form the basis of your plan. Yeah it really doesn't matter that much where our particular supplies come from because of course there's a global market so when there's a disruption in the Middle East that shoots the price of oil to $50 a barrel or $100 a barrel people are talking about if you took out a sulfur clearing power in Saudi Arabia that's going to affect the price of every barrel of oil we buy regardless of it's origin. Well oil is right now about $50 a barrel.

Which way do you think it's headed in. Well you know I don't know when I started in this business in the 70s we were projecting oil at $100 a barrel by the year 2000 and it was up and down in between. You know I think it's going to be high for a while because of growing demand in Asia and in continued growth in the United States because we've been so slow to improve our efficiency but you know we could also see a crash in the Economist this week says it could go to 10 it could go to 100. Now you have written something Peter that I saw recently saying you don't think it's headed up the oil prices will come down again in the next 10 years we're going to see $30 oil possibly in the 20s. Look we're not about the record highs today the highest price for oil in current dollars was around 1981 about eight. Over $80 adjusted for inflation that's right. There is no reason to suppose at 50. There are many places that can pump oil today at under $50. The problem is Saudi oil is so cheap Iraqi oil is so cheap that this deters capital investment if the prices stay up the capital investment will be made and prices will come. So let's take let's take a step back and look at the big picture thinking of energy overall

oil plus all the other sources of energy. What is the outlook for America's standard of living. In the next five years I think our standard of living continues to grow because we innovate. We figure out how to become more efficient in using energy we develop new energy sources. Then we stick our heads in the sand and make the bet that GM made that oil's going to be $20 a barrel forever and you end up losing two billion dollars in a quarter which they just did. But we don't need to do that we can have a smarter energy policy to reinvest in American technology. Dan mentioned what our energy policy should be what do you think America's energy policy should be we should promote domestic supply and so North American supply promote supply from the politically stable countries and we should promote them on oil fuels where we can the fuels that prop power particularly the ones that power our electric grid which are coal and uranium and natural gas. Well I knew you mentioned fleetingly uranium but in the most recent report from the National Natural Resources Defense Council there's not even a mention of

nuclear power. Why is that. Well because primarily we just don't think it's economic. Nobody actually risking their own money in a competitive market has ever built a nuclear power plant I really don't see that changing anytime soon if ever it still has problems with waste disposal and proliferation risk so I just don't see it as part of the picture and certainly has nothing to do with the oil market because as Peter mentioned we don't produce electricity from oil. Wrong Wrong on both counts to begin with our heating sector 15 percent of our oil is still in the industrial heating sector and we. About a billion barrels of oil a year OK industrial heating all displaced. The main reductions in oil consumption between 1900 today came from displacing oil with coal and uranium in our electric sector. Much of the growth in oil demand today in China and India is to generate electricity there burning oil because they don't have a grid. So across the board without touching the transportation sector you can have a major impact on oil consumption. Uranium you know NRDC has been saying for 20 years uranium can't do it. We are therefore burning today 400 billion tonnes of coal more a year than we were in

1900 because coal has always been the path of least political resistance is a very bad policy very bad for the environment and in every other respect as well. James Lovelock a very prominent environmentalist has written. Nuclear power is the only green solution. Is he wrong. I think is wrong absolutely. We can meet our energy needs reduce emissions of carbon dioxide that causes global warming reduce our dependence on coal without relying on nuclear power. I don't rule out using nuclear power if it can solve these problems. It wasn't an RTC that something nuclear energy was Three Mile Island and Wall Street pulling their money out. What are the cars we drive. Five six seven years from now we're going to be like there will be one hybrid not because as Washington says we modest store because for green reasons although it is greener it is more efficient but the technology is unconditionally superior. I think that's a good good development. Detroit will go there Japan is going there. I think we're going toward plug in hybrids which will then bridge the electric sector and the transportation sector because we'll be

getting some of our auto power from the electrical grid and that electricity is generated for the most part not with oil. Almost no oil behind the electricity. Is this the future you see for automobiles. I agree with that I think hybrids are going to grow rapidly. I still think we need a little push I mean they're still they're very popular right now but they're still less than 1 percent of the auto market so we are going to need some incentives to get them out there and we need to raise fuel efficiency standards to drive that technology. You guys disagree on an awful lot but I'm wondering if you might agree on something what should those of us who are interested in this debate but don't know what to think what should we watch what indicators should we watch to tell us which way it's going to tell us who's right. As things develop. Peter you can you can watch the price of oil OK. Be patient OK remember that seven years ago oil was at record low prices OK. These are volatile markets. And then look at the political situation a lot of the volatility in oil markets is is political uncertainty of democracy breaks out all over the Mideast you'll see dramatic things happen to

the price of oil and vice versa. Dad What should we watch. You have to watch the percentage of the world's oil that's being produced from the Middle East which is going to go up regardless what happens to prices. The other thing you have to watch is the concentration of carbon dioxide in the atmosphere because that's going to drive a real change in energy policy that we need to prevent dangerous global warming. It is a fascinating topic and really at the top of the news and I think going to stay there for quite a while so then lush often Peter Huber. Thank you very much. It's no secret that we live in a youth obsessed culture. All you need to do is turn on a TV or open a magazine to have that idea slammed in your face. But now as the first wave of baby boomers hits what used to be known as the retirement years everything is changing. Corporate America is starting to wake up to the fact that people over 50 are sitting on roughly seven trillion dollars can die qualität spent a career trying to help companies figure out how to get a piece of that pie. He's president of Age Wave an author of numerous

books on the topic. William Sterling created an investment firm trilogy advisers designed to capitalize on that Boomer plus market. Gentlemen welcome. Well Kim let me ask you how are boomers a factor in the retirement years of the so-called golden years. First the boomers because their enormous size and remember this is the generation of 76 million people born right after World War 2. Every time they've migrated across the lifeline there are enormous demographic heft has forced companies to wake up and take notice. And those that have been clever enough to position in front of this wave have made a fortune. So whether that was Gerber baby foods or Johnson Johnson or McDonald's or Ford Mustang and he but who could catch that wave at the right moment is going to profit. So number one the fact that the boomers are no longer kids but are beginning to look towards their 60th birthday as the next major milestone is beginning to cause the marketplace to take notice of this new stage of life. Second the boomers have no intention of growing old as their parents did.

They intend to grow old youthfully with the spirit of adventure with an idea of personal reinvention. With the hope of maintaining all the things they like in life but just for longer. Bill what does this push this momentum that baby boomers are bringing to the marketplace. I mean for corporate America if you look at where the growth in the population is going to be most pronounced over the next five to 10 years it will be and people above the age of 55 or people sort of in their late 40s to late 50s there's an actual bust baby bust in the number of people in the mid 30s to mid 40s. And then there's also an echo boom the children of the boomers are now in their teens to mid 20s. So that's the other area of greatest population growth so this basic pattern is boom bust and echo. And you know we think it's going to have implications for lots of different industries. Candy what about the implications for the economy. Well it depends on which scenario one buys. If we assume that when the boomers reach their 60 second birthday as today's elders have done and retire and cease earning then there's a pretty scary scenario for the economy because what it

implies is that you'll have a huge population of taxpaying high earning high spending people who will go into a state of frugality and spend down. I don't believe that's what's going to happen I actually think the boomers will continue working even if it's part or phase work or flex retirement for decades. And so I actually think the boomers will continue to be very active in the marketplace the economy will continue to grow. But I think as Bill is pointing out you're going to see a decline in those enterprises oriented towards youth as you mentioned we've been a youth focused culture but that must come to an end. During the 1990s the number of 18 to 34 year olds in America actually shrank by 9 million people while the number of people over 50 grew by 12 million people. So while you might see a decline in youth focused businesses you're going to see an enormous growth in products and services that cater to the 50 plus crowd. If you look around you see Sean Connery is approaching 80 and he's still considered a sex symbol and Sophia Loren is around 70 and she's still pretty terrific in the average age of the Rolling Stones right now is 60 sting just hit 54. What's happening is that we're beginning to

kind of relax our notion that people over 50 or 60 are coming over the hill. Alan Greenspan runs the Fed at 78. We're beginning to get the idea that maybe some of our notions about aging are old fashion and simply wrong. And in its place we're presenting a more boomer ish notion that a 50 or 60 or 70 or 80 year old still may have quite a bit of life in them. Well you bring up a very important point you know it does look like a rosy picture but one of the guys you mentioned Fed Chairman Alan Greenspan is not quite as optimistic in fact recently he warned Congress that baby boomers are starting to retire in a few years and how spending continuing to soar our budget position will almost surely deteriorate substantially in coming years if current policies remain in place. That means that we're going to have to see a shift of expectation whether it is in the boom or whether it's in society as a whole in my life. OK let's keep in mind that Social Security was crafted

First of all in an era when there was a 25 percent unemployment and so the reason so security was put in place was not so much to give people 20 years of entitled leisure but rather to move them out of the way to make room for the young. There were 40 workers for each recipient and the life expectancy was only 63. Thanks to the triumph of increased longevity we now have only three point four workers to each recipient. And I think what Mr. Greenspan is indicating is that as we live longer and longer and as this boomer generation becomes the new mature generation we're going to have to rethink a lot of our entitlement programs because we simply can't afford to cover so many people who are going to live so long. The origins of Social Security actually go back to Otto von Bismarck and Germany when they introduced a 65 year old retirement age. But the average life expectancy there was forty nine. So from our point of view That'd be like saying well we'll give itself security when you're 95 or 100. It wasn't a big deal then but it's obviously a much bigger deal now whether the politicians are willing to admit it or not you did mention not only the swelling number of baby boomers but the increase in life expectancy. So what sectors are

poised to benefit from this seminal shift. Well I think the sectors that are favorably positioned you know first of all if you do the demographic numbers what we try to do is look at how people's spending patterns change as the age and then we use the age projections to factor in what industries will grow most rapidly. Top of the list is health care. You know some comedian recently said that the famous rock stars now are taking more drugs now than they did in the 70s but they're doing it all with Medicare drugs. The problem with that is that the drug industry demographics look so great that it's actually a problem for the industry because the government which is funding you know roughly half of the purchasers are saying we can't do this so the pricing pressure on the big pharmaceutical companies I think could be tremendous as investors were looking at sort of other areas in health care like medical devices medical equipment orthopedics. We think a big theme for investors will be the sort of spare parts for aging baby boomers.

So a company like Zimmer holdings which focuses on orthopedic implants and the like we think is very well positioned for this age wave that's that's coming. There's a diabetes epidemic that's very much associated with The Age Wave. It was actually a German company called for a zennie es which even though it's located in Germany operates the biggest chain of dialysis treatment clinics in the United States we think that's a very well-positioned company for The Age Wave. If you look beyond health care most people don't have a vacation home until they're in their 50s. We've had a boom in recent years in vacation homes and I think that's likely to continue. Most people don't take an ocean cruise until they're in their 50s. And I think that's probably a pretty well-positioned industry because of this pattern. So you know leisure retirement spending health care. Cannot be asked about two things. A corporate America and talk about big pharmaceuticals and how they are responding to the aging of America. Have you seen any specific ads that kind of range your bow in terms of big pharma. Diabetes in particular. Yeah diabetes mention is a good example there's 18 million diabetics in America that you know half the

population of Canada as a comparison. Very clever ad appeared recently they had B.B. King in it. B.B. King isn't himself in the 70s he is a diabetic and he doesn't particularly want to be hurting his fingers with the old traditional technology of taking samples. Very clever use of an older icon in a growing problem. If I could add to a bill saying that I think you're not only going to see anything having to do with the body such as health and health care and anti-aging and spas and fitness and wellness and medical devices but I also think the financial services industry itself is going to rise up as tens of millions of boomers start to play a little catch up game with their wealth accumulation. There's also going to be somewhere between 10 and 20 trillion dollars of inheritance passed over this next 15 year period. And so the whole idea of the state management is going to be a growth area as well. I'd also add the whole notion of experience you will. Activities when we're young we want to accumulate things that makes us feel we've arrived. Once you've lost a loved one or you achieved either success or failure in your life at around 50

you take a deep breath and you realize that the experiences you have are way more important than things. So whether that means time at the theatre adult education Lifelong Learning family vacations remodeling your home learning to cook you're going to see a mature population moving towards an experience based purchasing pattern versus a thing based purchasing pattern and I think that companies who can line up with that are going to do great. One stock we like on that very theme sort of the leisure and entertainment company the future right now is interactive Corp stocks down this year but it's run by Barry Diller has a very interesting portfolio of businesses all the way from the online Expedia travel company to Ticketmaster to Home Shopping Network kind of great businesses for their couch potatoes are people want to get experience. It's an Internet company essentially but with businesses that make money and it's also got about a billion dollars of cash on the balance sheet. But I think it's a portfolio of companies that are targeted towards the needs of the aging boomer generation.

It's a pretty interesting play we think. What I think companies jump out at you. Well you know we also think that again in the leisure entertainment area we like some areas of consumer electronics that's partly getting back to the echo boomers as well but when we look around the world for what we think is probably likely to be a great story in terms of a new brand emerging and consumer electronics. Look at Samsung Samsung is a Korean company. They've actually made a great hit in terms of the cell phones with the cell phones that take pictures and the like. That appeals to all age groups just the demographic story. But they have about 13 percent of the world market now compared to Nokia is 36. But they're pretty determined to catch up or exceed Nokia by the end of this decade. We think they have a terrific sort of brand that's being built right now and it's a stock trading about 13 times earnings believe it or not gambling is one of the you know it's a low impact sports like robot but it has no impact on the demographics for that whole resort sort of casino industry look very favorable. Wonderful conversation.

Thanks very much for joining us. Thanks. Well the markets look favorable as well this week. The Dow ended the week up almost one hundred fifty three points. The NASDAQ added nearly 46 while the S&P picked up fourteen and a half. That's our program. Next week the deaths of the so-called death tax. Well maybe as Congress debates permanent repeal of the state taxes we explore its impact on people and the economy so long. We'll see you next week. Do you trust to tell the story. Do you trust too much. Who do you trust to teach your children. Who do you trust to help make sense of it all Americans trust people. Yes more than any other television network. To learn more about this program visit PBS dot org

for a transcript of this program send a $5 through transcripts Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7 1. Wall Street Week With fortune that was made possible in part by Nuveen investments in today's tempting market. How can you protect yourself from yourself. ETF connects an educational website of Nuveen investments is proud to support Wall Street Week With fortune on PBS.