From Commodore Vanderbilt to Silicon Prairie

Today’s Daily Reckoning begins in ‘Silicon Prairie’. If you don’t know where that is, don’t worry. Neither did I until this week. But it gives the future a nice look, and sure beats listening to the latest drivel from the Federal Reserve minutes. The ongoing comeback of the US is right in front of us.

‘Silicon Prairie’ is a gentle nudge at Kansas City in the United States. The city is part of the Midwest, otherwise dubbed the ‘flyover’ area between the East and West coasts of America. From my understanding, Kansas is mostly famous for corn, wheat and open fields. But Kansas City happens to be the first test city of Google Fiber.

According to my colleagues at the Palm Beach Research Group, Google Fiber is a division of the tech behemoth and its mission is to wire every house, office and business in the United Sates with fibre optic cable. Kansas City already has 7000 miles of it. It’s Silicon Valley tech in middle America. Hence the Silicon Prairie tag.

That can transmit data about 100 times faster than the best broadband cable service. That equates to downloading a two hour high definition movie in 25 seconds. They quote Goldman Sachs as estimating the total cost of the project across the entire country at US$140 billion.

Google’s not alone in this telecommunications race. AT&T and Verizon have billion dollar project plans as well. The productivity gains from this could be huge.

And if you’re feeling a bit gloomy about the world, let’s not forget Apple [NASDAQ:AAPL] this week. The company reported the largest quarterly earnings in corporate history. That’s $74.6 billion in revenue with $18 billion in net profit.

Apple CEO Tim Cook described it another way: they sold 34,000 iPhones per hour, 24 hours a day, every day of the quarter. The company now has an astonishing US$178 billion sitting in cash. It’s facts like this that make us very optimistic about the future over at Cycles, Trends and Forecasts. There are plenty of gains to be had if you know where to look.

The question for Apple is, what do they do with the money? They could buy Californian real estate, which is what China’s big firms are doing. The Wall Street Journal reported this week that, ‘China Oceanwide Holdings Group Co. and its chairman, Lu Zhiqiang, have poured hundreds of millions of dollars into U.S. West Coast commercial and residential real estate in the past two years. The buying spree shows how, amid a wave of foreign money coming into U.S. commercial real estate, Chinese investors often top the list.

You could say the same about Australia. At the start of this week the Financial Times revealed Chinese firm Dalian Wanda has ‘accelerated’ its expansion plans, with $1 billion set for a ‘landmark’ property on Sydney Harbour. It’s Dalian Wanda’s second big investment in Australia, following its controlling stake in the $970 million Jewel hotel development in Queensland.

China’s second richest man, Wang Jianlin, owns Dalian Wanda and is on a buying spree all over the world. Last week came the news that Jianlin had taken a 20% stake in Spanish football club Atletico de Madrid. He already owns a landmark tower in Madrid worth €265 million.

Hmm. Buying distressed Spanish real estate is one thing, but it looks like he’s collecting trophy assets more than anything. Wanda has bought British yacht maker Sunseeker, US cinema chain AMC and gone after a Swiss sports marketing company. Its stable of businesses already include Chinese shopping malls, hotels and karaoke rooms. Famous fund manager Peter Lynch described the strategy of companies that diversify and grow like this as usually ‘diworsification’.

According to the Financial Times, Jianlin is on a mission ‘to build a global entertainment empire stretching from China’s rust belt to the heart of Hollywood. Is it all an ego trip run wild?

I don’t know, but the money’s flowing for now. Wanda’s commercial property group raised US$3.7 billion in Hong Kong last December. Of course, it always pays to take a look at who’s on the other side of the trade. In the case of the Sydney property earmarked for the one billion dollar development, the seller is US firm Blackstone Group.

Blackstone only bought the Sydney site in 2011. With the move in Sydney’s real estate since, we can only guess at the money they made on the trade. Blackstone has been buying real estate in recent years all over the world as well, quite profitably it seems.

Here’s their chart…

Blackstone on the move

Source: Big Charts

¬ The stock is close to breaking out into all-time new highs. It’s been on a tear since about 2012. You can see the benefit of buying ‘when there is blood on the streets’, as there was back in 2008 and 2009. Blackstone went on a buying spree in 2010.

A break to the upside in the chart of Blackstone indicates the market is expecting Blackstone to report better earnings over the next few years. Analysis of the real estate cycle indicates this is highly likely. The most recent issue of Cycles, Trends and Forecasts has dated this movement of the cycle quite clearly. It is, after all, just history repeating.

Whilst history clearly repeats, it can never be exact. In the 1800s, the great railway barons like ‘Commodore’ Cornelius Vanderbilt jostled with each other to lay railway tracks across the United States and connect the east with the wild west. It brought stupendous wealth to that country. And absolutely massive property booms, followed by even bigger busts.

Google Fiber is now going to do the same thing. That means even faster connections between east and west, with even bigger booms and then busts. Cycles, Trends and Forecasts can date this quite exactly for you.

We really ought to be doing the same thing in Australia. Unfortunately, over here we have a PM more interested in awarding knighthoods to his favourite kings and queens than focussing on building up a great, fully connected nation.

The Blackstone chart indicates a very bullish few years ahead for the US. Get on it.


Callum Newman
for The Markets and Money Australia

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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