The Start of an $80 Billion Business

Posted On Jul 22, 2016 By Dave Gonigam

  • 10 million downloads in a day — another signal of the “AR” revolution
  • The patents that open a window on an $80 billion market
  • Team Obama blows off the student loan crisis…
  • …while borrowers say they’d contract Zika to get out of their obligations
  • Mediocre manufacturing (which is good by recent standards)… a reader who doesn’t mind the occasional cry of “wolf”… relative time in Washington, Barbados and Malaysia… and more!

“The moment I found out the servers were up, I jumped right out of bed, got dressed and ran outside with my iPhone and two extra battery packs,” says Samuel Lucas — an Australian living in Japan.

Sounds important. Why the urgency, sir?

“So far,” he tells the BBC, “I’ve been to the Japan post office, which was my first Poké Stop, and now I’m on my way to a big park near my house.”

Yep. Pokémon GO. After a two-day delay, the augmented-reality mobile phone game debuted today in Japan — where the original Pokémon trading cards made their first huge splash two decades ago.

As we write, it’s late evening over there, and the game’s developers say they’ve already registered 10 million downloads.

Shares of Nintendo have climbed down from their dizzying heights of a few days ago… but they’re still up more than 60% from where they were before the game’s U.S. debut on July 6.

“Pokémon GO is the beginning of the mixed reality revolution,” says our Ray Blanco — back today to pound the table about why it’s so much more than another mobile-phone game.

“I’m talking about augmented reality (AR) and virtual reality (VR). It’s the breakout beginning of a market Goldman Sachs estimates will reach $80 billion by 2025.

“AR will change the way we see the world. It opens the door for smartglasses. Regular-looking glasses, just like the ones you might be wearing right now. But built into them will be a camera… motion sensors… image processing tools …location data…

“The end result will be the superimposition of a world of valuable information over everything we see.”

But don’t take Ray’s word for it: Take it instead from the United States Patent and Trademark Office — where the likes of Nike and Apple have applied for AR patents.

Nike is cooking up a scheme in which “users could use the software to design their own custom shoes in holographic fashion, using what appears to be a Google Glass-style headset,” says Investor’s Business Daily.

Apple, meanwhile, filed an application for “synchronized, interactive augmented reality displays for multifunction devices.”

Fortunately, Apple puts it in plain English: “For example, a car mechanic can hold [the AR-enabled device] over a car engine and an outline identifying parts and providing excerpts from a repair manual or schematics can be displayed in the live video to assist the mechanic in repairing the engine.”

And those are applications filed this month alone.

“Games aren’t a joke,” Ray affirms. “They are a big reason for why technology has advanced so rapidly.

“One of the first computer games, called Spacewar, ran on a DEC PDP-1 minicomputer in the early ’60s… by today’s standards, an incredibly crude piece of hardware.

“In the early ’70s, Pong became a hit. It was the first popular consumer computer game.

“As for me, I grew up on post-Pong Atari, Nintendo and PC games. From my young point of view, the whole point of owning a computer was to play games.”

In other words, games are where cutting-edge computer technology goes through its shakedown cruise. As Ray said here on Tuesday, Pokémon GO is the Pong of future augmented-reality games. It’s buggy and crude, but it heralds a future of earthshaking changes.

“I predict there will be a frenzy of R&D among tech and gaming companies after the success of this new game finishes sinking in,” says Ray. “Everyone is going to flock for a piece of this industry.”

Ray has spent months handicapping the potential winners and losers. You can check out the fruits of his research at this link.

It’s a quiet day in the markets as the week winds down. The Dow is treading water at 18,516, after notching its first loss yesterday in eight trading sessions.

Gold made a run past $1,330 overnight, but couldn’t hold it. At last check, the bid is back to $1,320. Much of that drop appears to be a function of dollar strength; the U.S. dollar index has pushed to another four-month high, at 97.4.

Crude is set to end the week below $45.

The big economic number of the day is the “flash PMI” — a read on how U.S. manufacturing is doing so far during July. Numbers above 50 indicate a growing factory sector, and the new number is 52.9.

Not spectacular… but it’s way better than the “expert consensus” was counting on, and the best reading since last October. It affirms the raft of numbers yesterday that point to an economy that’s still weak but better than it was a few months ago, and inching away from a recessionary tipping point.

The Obama administration has adopted the Alfred E. Neuman approach to the student loan bubble: “What, me worry?”

We’ve been keeping a wary eye on this bubble going back to the earliest days of the “recovery” in 2009. This week, the White House Council of Economic Advisers issued a report saying the $1.3 trillion overhang of student debt is not a drag on the economy at all. In fact, it’s a boon! “The main macroeconomic impact of student loans, particularly over the longer run, is via the boost to output and productivity from a more educated workforce.”

The report’s conclusions are, to say the least, self-serving. The volume of outstanding student debt has nearly doubled during the Obama presidency.

The report reaches its conclusions in part by statistical sleight of hand: It says the average undergrad borrower owes $17,900 — without citing a source — while most credible estimates put the number between $29,000–37,000.

The report also redefines success, and the promise thereof. “If you go to a school that is not high-quality, if you don’t complete or get unlucky in terms of your earnings, you can face difficulties,” says Council of Economic Advisers chairman Jason Furman.

In other words, pay no nevermind to all the poor saps who didn’t graduate, don’t benefit from the higher compensation graduates generally get, but still owe massive debts. They don’t count.

Even “conservative” analysts who should know better are buying into this bilge. “The report is important for dispelling a dangerous myth that we see a lot, which is that student loans hold back the economy,” says Jason Delisle at the American Enterprise Institute.

“We’ve heard that this time and time again from advocacy groups complaining about rising levels of student debt. They say student debt is forcing people to delay things like buying a house, starting a family, all productive things. This report is pretty clear that isn’t the case.”

Well, it’s “pretty clear” if you take the report’s assertions at face value, like: “By age 26, households with student debt are more likely to buy a house than those that did not attend college. By age 34, college attendees with and without student debt are equally likely to buy a home.”

Which might be true… but that only reflects the fact homeownership is becoming less accessible to the indebted-but-not-graduated crowd. Historically, around 40% of home purchases are by first-time buyers. Now it’s only 30%.

But let’s hear it from the borrowers themselves.

The folks at Student Loan Report conducted a couple of surveys of borrowers recently. These are online and, as near as we can tell, unscientific surveys… but they’re an interesting snapshot:

  • 63% said student debt was making it harder to buy a home
  • 41% said student debt was making it harder to keep up with daily expenses
  • 34% said student debt was making it harder for them to start a family.

Most significantly, in light of our concern about innovation and startups, 23% said student debt hampers their ability to start a business. Presumably most of the rest are too busy paying the bills to even think about starting a business.

In a separate and more tongue-in-cheek survey, 27% of respondents said they’d be willing to contract the Zika virus to get out of student debt… and 58% said they’d be willing to talk with Comcast customer service an hour a day for the next five years. Heh…

Naturally, Amazon sees a profit opportunity in all this.

Subscribers to its “Prime Student” service — basically Amazon Prime at half the yearly fee — will now be eligible for a 0.5 percentage-point discount on student loans from Wells Fargo.

Hooray?

Says Pauline Abernathy of the Institute for College Access & Success: “It is a cynical attempt to dupe current students who are eligible for federal student loans with a record-low 3.76% fixed interest rate into taking out costly private loans with variable interest rates currently as high as 13.74%.”

Here at The 5, we view the student-debt bubble as part of a larger higher-ed bubble — a bubble comparable to the health care bubble we discussed earlier this week but whose growth trajectory is even more out of control. It’s doomed to collapse, even if we don’t know when. But whenever it does, all those assistant provosts, vice chancellors and associate directors whose positions didn’t exist 30 years ago will have to go out and find real jobs.

“There are commentators who are saying that the market is making new highs, thus we shouldn’t be worried,” muses a member of our Equity Reserve.

“If I felt that the market highs were based on solid fundamentals, even at least partially, I would be more hopeful. However, the current situation feels more like saying, ‘The Jenga stack has never been so high before. It will most likely keep going up, so stay invested, and don’t worry about day-to-day wobbles.’

“One truth about Jenga stacks is that they do get taller than you would expect, especially if the players are reasonably skilled, but another truth is that eventually there always comes a ‘Jenga moment,’ usually following several false alarms (close calls), when the stack really does fall.

“It’s impossible to predict ahead of time when that moment will come, but it always does, eventually. And when our current market finally has its Jenga moment, it will be far better to have been prepared a few false alarms too soon than to hope to get out just as it starts to topple.”

We hasten to add this reader wrote in before we consumed a heaping portion of humble pie in yesterday’s episode. Someone else wrote in afterward to say, “You do good work and your lack of hubris serves you well.” Thanks…

On the matter of “Federal Standard Time” with which we’ve had some fun this week, we heard from a reader in Malaysia.

“When I was a kid and we lived in Barbados some 60 years ago,” he writes, “party and dinner invitations always came with a time specified and an important qualifier. The time was simple, say 6 p.m., but the qualifier, always specified, was English time (be on time) or Bajan (Barbados) time, which invariably was always sometime after 6.

“Now living in Malaysia, the same qualifier (Malaysian time, always blamed on traffic) is in effect.

“So perhaps we need a 5-er Time.”

The 5: Oh, sure, bring it back to the how-long-it-takes-to-read-The 5 thing…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. “Bloodbath.”

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Already, Jim’s IMPACT System gave some investors the chance to as much as double their money…

In this new crisis, some investors will win. Most will lose…

Heres your chance to be among the big winners (click to see).


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