Motley Fool Money - Motley Fool Money: 05.18.2012

Episode Date: May 16, 2012

Facebook makes its public debut.  Our analysts discuss Facebook's future and share some stock ideas.  Plus, Yahoo! Finance columnist Dan Gross talks about his new book, Better, Stronger, Faster:  The Myth of American Decline and the Rise of a New Economy. Learn more about your ad choices. Visit megaphone.fm/adchoices

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app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Everybody needs money. That's why they call it money. The best thing in their life are free, but you can get them to the pond. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week. From Motley Fool Inside Value, Joe Mager, from Motley Full Income investor, James Early, and for a million-dollar portfolio, Mr. Ron Gross.

Good to see you. Good to see you, Chris, and Mr. Ron Gross. I gave you the mister this week. It's so sweet. Every once in a while, you give the mister to Jim Senegal, so I give you the mister. Coming up a little later in the show, we will talk with Dan Gross, no relation to Ron, columnist at Yahoo Finance and author of the new book, Better, Stronger, Faster, the myth of American Decline and the rise of the new economy.

But we are going to focus this week on the Facebook IPO. I should say, we have got our company's annual meeting this week, so we are actually taping this before Friday's IPO, but there is still, obviously, plenty to discuss beyond what happens. that first day of trading. Guys, let's start with the share price. Facebook has set the stock price at a range of $34 to $38 a share. Steve Wozniak, co-founder of Apple, has come out and said he will buy it at any price. Joe McGar, I'll start with you. You buying at any price? No. No stock is a buy at any price. I'm sorry. And that just speaks to the mania around the stock. You know, so many of my friends who have never bought a stock before

have come to me asking if they should invest in Facebook, and it's great that they're coming out of the woodwork and want to start investing, but it's not so great that they want to invest in something that they don't even really understand anything about the fundamentals or valuation with. That's so true, so true. The problem is all these Facebook users are getting excited about it, and they want to buy the stocks. You've got all these yo-yos from an investing perspective, and respect to Steve Watson.

My friends are not yo-yoos, not these guys, other people. And the problem is, anytime that that is a factor in a stock, like if you look at at professional sports teams is another example. When you have non-investing factors piling into the reasons why people buy, that's a bad sign for the long term. Ron? Gosh, I won't even dissent. I wish I could. It would make for more interesting radio. I give Facebook a ton of credit for what they've accomplished. It's really an amazing story. But at 100 times trailing earnings, I really can't get on board with that. And I think members should remember what these ratios are that we throw out. If you own the whole company and you pocketed all of their net income, it

It would take you 100 years to break even. Is that a long time? Now that assumes no growth, and we assume Facebook is going to be a high grower. But let's put it in perspective, 100 years. Boy, when you put it that way, even the was wouldn't want to buy into shares that. What do you think, and this, of course, requires a little bit of mind reading on the part of the Facebook executives, but what do you think defines a successful IPO for them? I mean, is it a huge pop opening day, Joe?

What do you think they are hoping for over at Facebook? Yeah, you want this middle ground where you want the stock to go up on the first day, so it creates some buzz and energy. But if it goes up too much, like 50, 60%, that means that the company and original investors left money on the table. So a sweet spot is somewhere maybe in like the 25%, 30% ballpark where everybody walks away pretty happy. And I think they're playing this fiddle perfectly. I mean, what we're seeing now is carefully manufactured frenzy with,

with this stock price being, you know, going up towards the end. This whole thing is set up. Rumors gradually probably leaked to the press about everyone is so excited. This anticipation builds, and it really helps Facebook. I think they've played it well. And we'll be cynical for the first half of the show. Let's not forget why they're actually going public. They're going public because they're soon to have over 500 shareholders,

and they were going to have to release public information to the public anyway. Not a great reason to go public. And you'll have some selling shareholders. who are using this as an exit strategy to monetize their investment. Also not a great reason to go public. You'd want to see concrete reasons why the company wants to access capital markets needs the cash to do something for the future. All right.

We will get eventually to the cash and what they might or might not do with it. But let's talk about the competitive landscape for a second because we've talked before about companies like Google, probably on some level, looking forward to this day. Looking forward to the day that Facebook is a public company, The playing field is leveled in terms of what they have to disclose, what they have to pay attention to, what they have to deal with just in terms of the SEC. Who are the big threats right now?

Is it Google? Is that number one on the competitive threat list? What do you think, Joe? Yeah, definitely, because Google is the fellow data kingpin and advertising kingpin and mindshare kingpin. So they're definitely up there. But I think a more subtle one that's a little more broad is just mobile at large because Facebook as a platform was built for the desktop. And it's not really transferred all that well to mobile.

And you can see that because when you start looking at revenue for Facebook, you're seeing more people using mobile, but they don't get as much revenue per mobile user because it's tough to stuff ads in there. And it's going to be a real challenge for them to transition to that world, whereas Twitter was actually designed for a micro-blogging smartphone world. Now, when you say mobile, are you including a company like Apple in that? Because I've heard people argue that Apple is not really a competitor

because Apple doesn't really have the same appetite for social media that Facebook and Twitter and those kind of companies have. I think it's less the actual companies themselves and just the challenge of making money on mobile, serving up ads on a smartphone in a way that isn't obtrusive or annoying to users. James, what do you think? I think it's a mix of Google in the short term and then somebody we haven't seen yet in the long term. We don't know how sticky this Facebook format is going to be indefinitely. We look at Netscape Navigator, the whole market for a long time until it didn't.

And it's worked with a bunch of different things on the Internet, MySpace before Facebook, there could be something else. Ron? Yeah, I think the guys have got it exactly right. When we think of Facebook now, we think of an advertising model. We really don't know what the model will look like five or ten years from now. Will there be a subscription-based model or a membership-based model where they go a completely different direction and have multiple streams of revenue?

Right now, it's an advertising company, and it has to compete. for those dollars, but I just don't know what it'll be 10 years from now. I think we should point out, too, that this ad market is very cyclical. First quarter revenues for Facebook were down 6% sequentially. So this ad thing is kind of matured. It might grow a little bit. They really have to do something different. We haven't seen that. They screamed out seasonality. When you look at Q4 to Q1, who knows if that's really the case. Well, revenue was up 45% year over year, so it wasn't all lost. But then again, you had LinkedIn post-73%. Well, I was just going to say, we talked about LinkedIn earlier in the week on our Marketfulery podcast. I mean, Ron, that's a company that, you know, when you look at revenue models, they've got sort of the premium membership model.

They've got businesses, including the Motley Fool, paying them on a monthly basis for access to their data. What is the lowest hanging fruit for Facebook when it comes to membership? model, a premium membership model. Is it something like the business space, like a LinkedIn, or is it more video gaming, video streaming, something like that? I think they can go a number of different routes, obviously, and they probably will. I do think something like LinkedIn makes sense because you have all these people in one place and you can really get the network effects from something like that, and you can charge as LinkedIn does a base level price and then perhaps a premium price for a little more. Whether

they build or buy, whether they go out and make an acquisition or they do it in-house themselves, I think that remains to be seen. I was going to say, Joe, I mean, one relatively easy way to do that is rather than just build it themselves, they can go out and buy a Netflix. They can go out and buy a Hulu or, you know, a gaming company like Zinga. I mean, if you're Facebook and you're suddenly about to be flush with cash, we just saw them buy Instagram for a billion, what do you think is a smart, likely acquisition. If it's not one of those companies I just named, maybe one sort of space that they should be looking at.

Yeah, well, first of all, they should be saving cash because this is a boom and bust industry, and they should have a huge war chest of a balance sheet. But looking past that, I think Netflix could be interesting. The stock's been hit. There are some corporate ties there. They've done some experimenting. And Netflix does have some contracts, relationships, and brand cashier. They could plug in well. James? Yeah, I agree, actually. I think, I think, Joe's first point is the most true one is that we don't know what's going to happen. Facebook's future is uncertain. They need to stockpile this cash. It will be dumb to go into spending

spirit. It doesn't mean they won't do it. It would just be a dumb thing they would do. But yeah, the benefit of personalization could extend to a lot of different things. I think, you know, Netflix being one. The other thing is simply to sell marketers access to their data, and maybe if you're a Facebook user, you pay if you don't want as much of your data given out. I mean, it can sort of hold you hostage like that, too. Ron, what do you think? In the nearer term, I'd like to see them do some technology acquisition, some smaller mobile-based technology, things that have helped them with that platform.

And then down the road, I think maybe they can look at the bigger brand name companies that will take the business in a different direction. Yeah, I know a lot of people talked about them buying Zingo, but I actually don't think that'd be a good move for them because they own the platform itself. And there are so many people competing on that. I would just say the real value is owning the platform. And winners will come and go in terms of serving up games to Facebook users. but Zingo won't be the only successful name.

You know, when we look at different companies that succeed in a big way, there are often hidden winners beyond that. There's a ripple effect that takes place. You could argue that Zinga is sort of a hidden winner with the success of Facebook. In the wake of this IPO, Joe, what are a couple of companies that you think could be in that category of sort of hidden winners? Yeah, well, they're all, you know, your Groupons, your Zingas, your LinkedIn's, were all hidden winners in a way because of the Facebook valuation. So it's coming out. It's probably an IPO at around 25, 26 times sales. That is such a rich price. LinkedIn's around 18. And 18 is astronomical. So 25, 26 is just off the charts. And suddenly it makes LinkedIn look relatively cheap, which I'm

sure all their investors appreciate. James? I agree with that. I have nothing ad. Fair enough. Companies that can benefit from, as I said that holden that huge network of people where they can access, and that's the advertising model, quite frankly. So people that need to access millions, hundreds of millions of companies, and there's plenty of those too many to name, are definitely going to benefit. But it's not necessarily from the IPO. It's from the existence of Facebook in general. Hundreds of millions of companies?

Hundreds of millions of people on Facebook. Just to wrap up on Facebook, I think it's fair to say that we pretty much always counsel people. You don't need to get on an IPO. See how a company does after at least a couple of quarters in the public markets before you get in and buy shares. That being said, for people who are looking at potentially buying shares of Facebook somewhere down the road, what is the metric they should be watching? Joe, I'll just start with you.

I'm watching revenue per user, and it's not something Facebook will necessarily provide, but it's easy math to do yourself. You just take the amount of revenue they have and divide it by the number of active users and on a given quarter and multiply it by four. See, it's very simple math. You'll have to trust me, but really it is a simple measure, and it's basically just a way of seeing how well they're monetizing the traffic coming into site because clicks and eyeballs aren't enough.

They actually have to bring home dollars. Math over the radio works great, too. Yeah, I'm sure everyone. It's compelling. Not so much a metric, but what are they going to do to replace ads? I would say, wait, let's see what that decision is and then decide. Find the second act, do you mean? Yeah.

Run? Net income, or? or free cash flow growth rates, how are they going to grow into that 100 times earnings? And if the growth rates are there, then you can start to get interested. If they're not, you got to stay far away. Some big underpants to fill. All right. Coming up, we'll give you a look at the stocks on our radar. Stay right here. This is Motley Fool Money. Money makes up world. Go around, subworld. Go around, subworld. Welcome back to Motley

Full Money. Chris Hill here in the studio with Joe Meager, James Early, and Ron Gross. Guys, before we get to the stocks on our radar, is it just me? Or have CEOs, some CEOs in this country just gone nuts recently. I mean, we've seen between the stuff happening at companies like Yahoo, Chesapeake Energy. You know, it seems like it's really given way, Ron, to activist investors, like Dan Loeb coming in at Yahoo and agitating for some board seats. Carl Icon at Chesapeake Energy.

What do you make of that as a general rule of thumb? Do you like to see that? Well, I used to be an activist investor in my hedge fund career. So I think there really is something to say for activist investors who will hold a company accountable for operating correctly and for having the correct corporate governance. I thought you were going to say hostage. No, hostages. I do like to see activists, though, that are not in it for the quick buck and going to flip

the stock. I wanted to see them being long-term shareholders, being long-term involved board members. Ron, what would you say as a percent of activists who are the short-term buck guys versus the long-term? And how do we know the difference as investors? You can look at their track record to see how long they typically hold stocks, and especially the ones that they've been successful on in getting what they want and done. Do they run for the door once they've been successful? And I would have to say, I think over 50 percent

are not long term. Gotcha. And which one were you? I was both. All right. We will get to the stocks on our radar. We're bringing our man, Steve Bruner, from the other side of the glass, with a question for each one of you. And just to mix it up, because we haven't done this in a while, you can have to have a Steve a question. So, Ron Gross, you're up first.

So we talked a lot about Facebook. I thought I was trying to look at something that went completely the opposite direction. And I noticed today that Home Depot, HD, was down today on earnings, one of the companies that report kind of late. But, I mean, net income was still up almost around 30 percent. This company is still doing well. It's a play on the economic recovery, a housing recovery. Maybe not the cheapest stock at 19 times earnings, but it's Home Depot. So I'm going to spend some time, dig in a little bit. Steve, question for Ron? You bet. My question for Ron about Home Depot, how do you ensure consistency at Home Depot's across the country? People have great or terrible experiences. How do you make sure everyone has a great experience at Home Depot?

Good question. That is a good question. I actually don't enjoy the shopping experience at Home Depot, and it's one reason I've stayed away from it. It's a little bit overwhelming for me, especially because I'm not that handy. But, I mean, it comes from the top. You need to put in procedures that, you know, that are just consistent across the board. And you need to, you know, keep that centralized. If you get a little too decentralized, then it suffers. Do you have a question for Steve? A question for Steve. So everyone knows you're a fantastic studio engineer here, Steve. But I was wondering, what did you major in in college? Is it related to what you do now?

I was a theater major in college. So perfect. There is hope. There is hope. For all those theater majors who listen to our show. James Early, your stock this week? Well, Steve, I know you're just about as concerned with the U.S.'s decrepit water and sewage infrastructure system as I am. He was just saying that to me before that show.

I'm going to talk about American Water Works. The ticker is AWK, which I think is also the editorial abbreviation for awkward. This is the largest U.S. water and sewage services in 30 states, two Canadian provinces, just raises dividend 8.7%. However, I'm not sure that I totally like it. It's on my radar. It was bought by a German company, taken private, then un-privated through an IPO a couple of years back. Unprivated.

Unprivated, that is, Ron. It's struggling a little bit to raise rates as high as it could like, but if we start to see a more favorable regulatory climate for utilities, this is a stock that could really rock it up. Steve? My question for you is desalinization. When is that going to be? That's a long way away. I mean, Veolia, VE is a ticker, is an I-I recommendation that is a world leader in desalization.

But this is, and it matters because a lot of the world's population lives close to the ocean, but it's expensive. It's not something that we're going to see mainstream for a while. James, do you have a question for Steve? Steve, speaking of water, what is the largest thing you have flushed down the toilet? That is a very, very bizarre question. I don't think anything comes to mind. I did try to stick a Star Wars Java up a faucet once as a child, but I don't think that qualifies. Okay.

That involves plumbing. Close enough. Joe Mager? I'm going to go with J.P. Morgan. The stock's been pounded and selling at a slight premium to tangible book value. Historically, it's sold at more than 100% premium to that. It's very cheap, cheaper against tangible book than it has for 95% in the last decade. Everyone hates the stock right now and they're afraid, but as investors, we want to be greedy when others are fearful.

And I think now is a very nice time to get into a very unpopular stock. And the ticker? JPM. JPM. Steve Brod, a question for Joe. How do I know if I can trust a company that is that large and does so many different things? I think most investors are asking the same question, and that's why the stock is so cheap right now. I think you just have to look at their track record.

I mean, these guys have been around for a long, long time. J.P. Morgan himself actually bailed out the U.S. government once. So this is a firm that's got a track record, and I think you have to point to that over a short-term blip. Joe, do you have a question for Steve? Yeah, do you have any recommendations on laundry detergent? That's a very good question. We are a Tide family. No, it's not.

It's really not a good question. It's a practical question. I'm playing along. Compared to James' question. We usually go with Tide. Okay. Scented or unsented? Unsented.

My wife is a big fan of the unscented, no perfumes. Just keep it clear. I've got to clear. I've got to ask Home Depot, American Wendtonset. Water, J.P. Morgan, you got a stock of... I think the water company sounds pretty cool. Didn't you do two sewage companies in a row? I've won the last three challenges, I'll remind you.

With sewage companies? Two of them probably been sewage companies. It's fascinating. And amazing. James was not penalized in any way by Steve for that bizarre question that he asked. Definitely weird, but hey, bring on the waterworks. Joe Magar, James Early, Ron Gross. Guys, thanks for being here. Thanks for being here. Thanks, Chris.

Coming up, a conversation with Dan Gross about the myth of American decline and the rise of the new economy. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. The doomsdayers and declinesists, the Debbie Downers and Double Dippers are too pessimistic by half. So writes Dan Gross, columnist and economics editor of Yahoo Finance and author of the new book, Better, Stronger, Faster, The Myth of American Decline and the Rise of a New Economy. Dan, thanks for being here. It's my pleasure.

So I got to ask, why the happy face? Well, really, I think maybe heavy drinking could be part of it. Well, you know, I've been around for a while, and I've been also outside of the, you know, the Acela corridor, the Axis of Misery, where, you know, so much dysfunction in Washington and New York in finance and politics. And I've had the opportunity to get out. I've been to 30 states in the last few years. I've been to 15 to 20 countries and had a chance to sort of see some of the. developments that are shaping our world, and I think a lot of them are actually working in our favor. There are places in this country where unemployment is 3 and 4 percent instead of 8 and 9 percent.

There are places where foreign companies are investing like crazy. There are places around the world where the demand for U.S. products is growing very rapidly. Our exports are at record levels. And when you look around the world as people grow richer, a lot of what they want to do is buy the stuff we make, whether those are Boeing jets or GE gas turbines or the food we produce, or they want to come here and pay $40,000 a year to get higher education or come here as tourists. We had a record number of foreign tourists. So to a large degree, foreign consumers are making up for the domestic demand that evaporated with the credit problems.

Now, one of the things that you address in the book is what you call myths about the U.S. economy, and one of the big ones is the myth of not making stuff the world wants. What are we making that the world wants? Right. Well, every month when the data comes out, I tweet, the U.S. doesn't make anything the world wants except $186 billion of stuff we exported last month. Exports, actually, you know, they fell very rapidly after Lehman Brothers crash. They bottomed in April 2009 at $125 billion a month,

started to turn up before the rest of the economy did. Obama said we should double that figure, and people laughed. The most recent month, I believe, March we were at $186 billion, so it's up 50% on a monthly basis. It's up, I think, 35% on an annual basis. We are the world's number one exporter in terms of the value of stuff we export. So a lot of it is goods, and that's, again, very expensive things like Boeing jets, which costs a couple hundred million bucks a pop.

I was at a GE gas turbine plant with Jeff M.L. Last year in Greenville, South Carolina, they will produce 90 of these things that retail for about $25, $30 million a pop. Every single one of them was going to a foreign customer. Agriculture is a $140 billion export industry, so we produce where the Saudi Arabia grains. We make corn and wheat and cows and chicken that go around the world where every people,

everybody's eating better. And we actually export services. We're primarily a service economy, and I was talking about education, higher education, record number of foreign students, 700,000 coming here and paying tuition. That's an export. When you see those people with funny accent in the gap or at Disney World or at McDonald's, that's an export. Tourism, record number in 2011, 63 million. So we make experiences, we make brands, and we make products that people like. And going back to the agriculture, apparently a lot of people around the world like pecans. Yes, I would say, you know, the Chinese are going to corner our nuts. And, you know, there was a headline in the Wall Street Journal.

Hey now. But you could see this in industry after industry. There's a great article in the journal that sort of pecan exports and nut exports generally went from sort of nothing in 2004-05 to China to, you know, $6,700 million. China is a very food and health-conscious society. Nuts are supposed to be good for your brain power. There's a source of protein. They ain't cheap, and they are being shipped over there like crazy. Now, one of the things I've got to say, I love the anecdotes that you share in your book.

You mentioned being on the factory floor with Jeff Amelt from GE. One of the things that you really paint the picture of is the scene in Davos, at this economic forum where, you know, everyone's on their iPhones. There's a party that Google is throwing that everyone is clamoring to get into. You know, Mark Zuckerberg is wandering around somewhere and people can't wait to get a glimpse of him. What do you think that says about sort of American innovation and in particular how that spells out job growth? Well, I think it says something quite positive, and I've been going every year for the last five years, and every year they're running down America telling us,

oh, the Persian Gulf, those sovereign wealth funds, they're hot, and they blow up. Oh, it's China. Oh, it's Turkey. And meanwhile, yeah, they're hanging out every word, you know, Cheryl Sandberg, Cheryl Sandberg, Chief Operatorianian, said at lunch, I've been at dinners where they ask Randy Zuckerberg, the sister of Mark, to get up and sing,

and everybody who's in Oz, even though she probably would not make the Hollywood round of American Idol. The big event is the Google Party, where you have private equity, Titans and various forms of royalty angling to get in. And once they're inside, they are entranced, not by any illicit substance, but by their iPhones. And I look at those three companies 10 years ago really didn't exist at all.

I mean, Apple was trading for less than the value of cash on its shares. Google was a piece of code, and Mark Zuckerberg was, I don't know, 16, 17. They have a market cap of $850 billion combined today. They are exporters. They are magnets for human capital. They are brands that represent the U.S. the way GM and Chevrolet once did. And they are kind of ecosystems for innovation. You know, the rap is, well, look, where all these jobs are going to come from?

Together those three companies employ 100,000 people directly, which isn't all that much. And, you know, when Steve Jobs died, people said, look, you know, he didn't really create that many jobs. Apple only employees, you know, I don't know, 10, 15,000 people in the U.S., which entirely misses the point. The importance of the telegraph and the railroad was not the sort of crappy jobs that were created by people digging ditches and putting down rails in the 1870s. It was that they built this infrastructure that every single business could use to be more efficient and that entire new industries were built on. And I think, you know, with the Internet, it's been the same way. It wasn't the job that Global Crossing created when they laid down the fiber. It's what people did with it.

So Apple, aside from creating jobs for all the people who work there, think of what it's done for the entertainment industry and for the people who develop apps and for publishing and for music, for film entertainment. Think of what Google has done for pretty much every business in the way it markets itself. Think of the way Facebook incubates other businesses like Zinga. And, of course, you know, it's now becoming a platform for marketing as well. So the key is can you create companies in everything,

enterprises that allow and inspire other people to do the same. And I think the evidence shows that, you know, yes, we can. Do you think part of what's going on is maybe we need a different definition for job creation, or maybe we need to think about it differently? Because it seems like, and you touch on this in the book, that, look, the days of single company creating tens of thousands of jobs, that's far less likely to happen. But what's more than, likely is this ripple effect where company creates X number of jobs and then the supply chain that feeds into that, you know, or flows out of that as a result, that's where you get 5x, 10x. Absolutely.

Unless jobs are and then everybody says, well, look, gee, doesn't employ that many people and employs people overseas, which again also misses the point. When you go to that turbine factory, first of all, it's heavily automated. You don't see that many people, but it might employ 3,000 people. and I asked him, where all the people? He said, look, for every job here, there are eight jobs in the supply chain. I mean, that's what lean manufacturing is.

So the people who are making the ball bearings up in Oregon, and the people who make the pallets, and the people who deliver, and the logistics people, and the trains. And this is why I think manufacturing is really important. You know, you could set up a hedge fund, and you might create a job for an assistant and end up creating jobs for some landscapers.

But when you decide to make stuff in this country, you draw your suppliers, so you bring in a lot of suppliers, and it calls into action all sorts of other services, the financial people, the accountants, the maintenance people, the logistics people. I have an example, the book of NCR, which decided to start making ATM kiosks in Georgia again. and part of their strategy is we want all our supplies to come from a 250-mile radius that lets us do just-in-time manufacturing. So even though their assembly plant there may employ 8 or 900 people, they're really creating a lot of jobs throughout. Coming up, more with Dan Gross, including a round of buy-seller hold. Stay right here. You're listening to Motley Full Money.

Money is honey. Where can my honey be? You're listening to Motley Full Money, talking with Dan Gross. author with the new book, Better, Stronger, Faster, The Myth of American Decline and the Rise of a New Economy. I want to look outside the U.S. borders for a minute here, because as investors, when we look at a country like China, we see it through the lens of, you know, stocks like Baidu, China Mobile, Sena, Sohu. There's a lot of talk, and there has been for years, about China becoming the preeminent economic superpower in the world. but one of the things you touch on is it's an incredibly fragile economy. What are some of the big threats to China's economy? Well, aside from the lack of freedom and this sort of blind human rights lawyer.

Well, right, yeah, there's that. Right. What I think is, I've been to China a couple times. It's enormously impressive what's going on there. On the other hand, you know, you don't see the sun, and it's not because the weather is bad. It's because of the smog. I went jogging in Beijing in about an hour.

After about a mile, I could start to taste the air. If the elites start to get fed up with the fact that their kids are all having asthma and young people are getting cancer, that to me is not a sustainable mode of economic development. They graduate. You think we have a jobs crisis, they graduate, you know, many millions of people from college. And if they don't have jobs, you know, they don't have outlets for dissent. have demonstrations and riots as outlet for dissent, not elections. So I think my takeaway from China is this enormous confidence in their ability to engineer things.

You'll visit a city in the interior, and they will show you a model for an industrial park, you know, with all these buildings, et cetera, and if you come back three years later, it'll probably be there. They have supreme faith in their ability to do that. Manage people's expectations and meet the aspirations of the rising aspirations of people, without having disorder, you know, they have a big lack of confidence. And the last time I was there, they was taken to a village, a couple hours outside of Shian, where there were sort of, you know, 50 or 60 people living on $15 a month pensions who had just gotten electricity a couple years ago, and there are 400 million people living

like this in this country. So they have a long way to go. And they also have a serious demographic problem. They've had a one-child policy for 30 years, so they're going to have a lot of old people and not quite as many young and working people to sustain them, and there's still a relatively poor society. So I think there's plenty of reason to be enthused about China as a new market, especially for U.S. consumer products companies.

But I think there's also, I think that China bulls overlook a lot of the potential negatives there. I have to ask you about Europe, and obviously with everything going to be. going on there. I'm curious, to what extent do you think the problems in Europe can undo any of the recovery that we've had here in the U.S.? Well, I think, you know, when you look at our stock market and our biggest companies, the IBMs, Caterpillars, Cokes, et cetera, numbers for the last couple of years, I think the ability of European demand to hurt them is not that great. I mean, if you were counting on the Greek consumer or Spanish construction for big new orders, that's been

in the tank for the last few years. And I think, you know, in Italy, you know, slow growth is sort of presume that they've been having slow growth for 15 years. When you look at these companies' earnings reports, it's, you know, sub-Saharan Africa, it's Latin America, it's Asia. So I think the ability to kind of put a dent in the overall kind of top-line growth. story of a lot of companies is relatively limited just because even though Europe's very big, it has not been a source of growth. You weren't getting 5% and 10% revenue growth out of Europe. I think the problem is if it infects the financial system, which then hurts our banks,

which then hurts everything, there the danger is much greater because there's a higher degree of interconnectivity, despite the fact that banks have higher capital. We don't have a Lehman Brothers with 30 to 1 less. leverage anymore. It's not good to suffer serious losses when you have eight to one leverage. And that's the situation our banks are in now. Before we wrap up with a round of buy-seller hold, I have to ask because I read your stuff on Yahoo Finance and anyone listening. Yes, obviously go out and get the book, but get to Yahoo Finance online and read what Dan is writing about every week.

When we talk about the health of the U.S. economy, it's almost like the U.S. suspects of data points come up, you know, GDP, unemployment. I'm just curious about, you know, a potential Dan Gross indicator. What's, what are like one or two things in the economy that you watch to really gauge the health of the economy that you think maybe should get a little bit more attention than they do? Well, I think auto sales. Those are the biggest manufacturing sector. We make an awful lot of them at home and foreign companies are investing to build here. They are tethered, obviously, the consumer confidence. They are tethered to finance because a lot of them are bought with credit.

It's the biggest retail sales sector we have, so they trigger things like sales taxes and a lot of activity. So I think that's a very, to me, that's a very big number, not just for, you know, because a lot of big companies are involved, but it says something to me about the health of the consumer and because, again, this is one of the thing that's been overlooked, a huge amount of innovation. Forget about the vault, forget about hybrids. The typical car sold today gets 15% better gas mileage than the typical car sold four years ago. GM sold 100,000 cars in March that get over, I believe, 35 miles per gallon. And what all that means is that we are much better, with each passing week, 250,000 new cars hit the streets, much better able to

handle high gas prices than we were a year ago, six months ago, two years ago. Two years ago. And I think that's one of the reasons that rising gas prices have not put such a debt in consumer spending. It speaks to efficiency, the rebirth, the restructuring of GM and Chrysler, forged very impressive turnaround efforts. And when you start having more production, good thing that we've seen more sales lead to more production. And higher levels of sales have also led foreign companies to make foreign direct investment and build new auto plants here. So I think that's one area that I, you know, it gets attention, but I don't think people are appreciating this sort of full dimensions of what those numbers are telling us.

I think you've got to get with the automakers and license the DGI, the Dan Gross Indicator. We will close out with a round of buy-seller hold. Buy-seller hold, the future of the euro. Oh, sell. Do you think five years from now it's still a currency? Yeah, I absolutely do. I hope it's a weaker currency because I like to go to Europe, and it's so enormously expensive. I can't wait for Greece to exit because I can relive my youth when I went to Santorini

and paid $10 a night to stay in somebody's house. Your book takes an optimistic view of the economy, and this economist is probably best known for his pessimism. Buy-seller-hold, Noriel Rubini. Bye. The guy throws great parties. He's at the Google Party in Davos. You can always see him on the dance floor. He, you know, I also think he's very pretty pretty, he made a business out of, you know, started as a blog about global economics that has turned into a pretty large enterprise that employs lots of people.

So I'm longnorial. Plus, you can't beat the nickname, Dr. Doom. There you go. And finally, the title of your book is a reference to the TV show, The Six Million Dollar Man. So with that in mind, buy seller hold, the bionic woman. Buy. I mean, she's due, look, after my book comes out, this is going to stimulate a craze. for Steve Austin and the $6 million-dollar man figurines.

And so that means there will be a subsidiary boom in Bionic Woman. Lindsay Wagner was the actress. Emmy Award winner, Lindsay Wagner. The book is Better, Stronger, Faster, The Myth of American Decline and the Rise of a New Economy. Dan Gross, thanks so much for being here. Anytime. As always, people on the program may have interest in the stocks they talk about, and the Motley Four may have formal recommendations for or against,

So don't buy ourselves stocks based solely on what you hear. That's it for this week's show. Let us know what you think. You can always drop us an email. Radio at fool.com is our email address. Or you can leave us a comment on iTunes. And speaking of iTunes, if you haven't already, check out our daily podcast, Market Foolery. It is our daily take on what's happening in the stock market and the world of investing.

That's a market foolery on iTunes and online at Marketfulery.com. That's it for this edition of Motleyful Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening, and we will see you next week.