COMMODITIES CONTINUE TO ROLL!!!
Demand for commodities continues, as the awareness is finally reaching the major brokerage houses and banks that:
1. India will consume commodities, just as China has.
2. China will continue to demand commodities.
3. Brazil, Russia and others will also demand commodities. In other words every one wants to grow, prosper and enjoy a higher standard of living.
Some parts of the world still like to squabble, fight, and steal from their countrymen. These areas will remain backwaters. Those who want to make money will be growing and creating wealth. To do that as an undeveloped or under-developed country you must use large quantities of commodities to create the infrastructure that is needed for the creation, manufacture and distribution of products and services.
Even if yours is an economy that exports services rather than goods, as India has been so far, you will still use commodities to create consumer goods like cars and refrigerators for domestic consumption as the standard of living in your country rises. Commodities are in demand and will stay in demand over the long term.
WHY MOST INVESTORS ARE LATE TO THE GLOBAL INVESTING PARTY
Most investors for the past several decades have looked to the U.S. economy as the driving influence on the global economy, even until today. The fact that the U.S. has not been the only important economy since the 80’s has been lost on many. When Japan had hard times beginning in the early 90’s, many who had seen Japan as becoming important, resumed their shortsighted view that only U.S. economic statistics mattered. This is incorrect. Ignoring the rest of the world’s economic statistics has been a big mistake, one that grows bigger with each passing year.
WORLD WIDE ECONOMIC GROWTH SURPASSES U.S. GROWTH
In fairness, U.S. data is easy to come by. While Japan’s is not too hard to get, and European data is ok, China’s data is poor, and is delivered late. In India, the data is ok, and is becoming more available. Getting all this economic data is more work, but investors must get with the program. Our job is to do the work, to get the information, which will make us successful investors.
As global investors we have always had a bias toward global data and global view of the world. Even the slowest moving and most stodgy investors are now getting the message, “Ignore the rest of the world at your peril.” We have been repeating this for more than a decade “it is time to be global when investing.” The world is a big place and growing very fast. About 6 billion souls live on earth, each and every one facing the kind of decisions we personally face every day. They may be striving, loafing, learning, staying ignorant, growing in abilities or stagnating, and this is their choice. We can rest assured, however, that many individuals in every country with high intelligence, good education and a strong desire to achieve are out there every day competing with us.
COMPETETION IS FOR THE COMPETENT: THUS A CLEAR VISION OF THE FUTURE IS IMPERATIVE TO COMPETE EFFECTIVELY
In order to compete in the world of investing, business building, and nation building, one must see the future clearly and plan for developments which have not yet taken place. How can one plan correctly if one does not see the future trends clearly?
WHAT ARE THE TRENDS?
1. Liquidity continues to flood the world. Ignore all of those who say higher U.S. rates will destroy liquidity. Japan is still creating massive liquidity with a weak yen and low interest rates.
2. The U.S., Europe and other parts of the world continue to create liquidity with lending and liquidity pumping.
There is so much cash that every asset class is getting it. Real estate just got way too much money. Prices got way ahead of the income levels of buyers. One major effect of the greed that dominated real estate was that many unsophisticated individuals who were sold unreasonable expectations. Some of them may have to adjust their lifestyle a bit as residential real estate values in many parts of the U.S. continue to decline for the next few months.
In my opinion, this is not the end of the game. Liquidity has moved into commodities. Mainly oil, sugar, metals, but many other commodities are rolling as well.
Liquidity is also moving into stocks. Within a few years liquidity will return to real estate, but not for a few years. How long will this take? It depends upon many variables, but you will be able to identify when it returns.
Liquidity has been and will continue to move into emerging markets. More powerful nations will seek to buy influence by investing in emerging countries and economies. China, India, Russia and the oil rich Middle Easterners all want to be influential in Eastern Europe and in developing Asia. Venezuela, newly rich in oil, wants to be influential in Latin America, as do China and India.
NOT EVERYONE THINKS LIKE WE DO!!!
China has a long-term view; they need raw materials for the long term. China has announced that they will have a highway system as big as the U.S.’s extensive system by 2025. That is only 19 years away. This means a lot of materials are needed to build the bridges, tunnels, roads, rest stops, gas stations, and hotels. Let’s think about the implications this highways system means for cars. As I have mentioned in the past, China is discouraging car purchases with taxes and other disincentives, but eventually a lot of Chinese will own cars that don’t own them today. The same can be said of Brazilians, Indians and Russians. The number of cars in the world could double in the next couple of decades. This means a lot of gasoline consumption and a lot of consumption of raw materials to build the cars.
INDIA WANTS MORE RAW MATERIALS. THIS MEANS HIGHER RAW MATERAIL PRICES
India, a democracy and filled with corruption, has been slower because many in the bureaucracy like to slow things down.
India now believes that they are falling behind China in the global raw materials grab. They are concerned that there will not be enough raw materials (commodities) to allow them to grow as rapidly as they desire. I look for India to become more active in the global commodities acquisition game. This will create a new competitor for raw materials and longer term will certainly not cause prices to fall.
OUR INVESTMENT OUTLOOK REMAINS CONSTANT
We continue to believe that energy, energy services, precious metals, base metals, financial institutions that can sell insurance and investment services to the Chinese and Indians (we are using European financials for this purpose), healthcare and Japanese stocks are the places to be.
TODAY THE U.S. IS MAKING A POTENTIALLY FATAL SERIES OF MISTAKES
I AM WORRIED THAT MANY IN GOVERNMENT AND OTHER AREAS OF INFLUENCE IN SOCIETY ARE NOT BASING THEIR DECISION ON THE FACTS
In U.S. politics, in all other areas of power in the U.S., and throughout most of the world, people do not rely on facts. They rely on opinions and political leanings and try to spin research to make their vested or perceived interests look reasonable and accurate. Some thinkers have argued that this behavior is human nature. Everyone wants to win. Many people argue that the nobility of the end goal justifies the behaviors needed to achieve those goals. I could not disagree more with this approach to government, business, the media, education or any other sphere of society.
CHECKS AND BALANCES MUST EXIST OR THE SOCIETY WILL BE DESTROYED
THE GATHERING OF FACTS IS NECESSARY SO THAT WE MAY SEE THE EFFECTS OF POLICIES THAT ARE IMPLEMENTED
In my opinion, we are always best served by having the actual facts and establishing policies in tune with these facts. Policy cannot be made with the vested or perceived interests of any group. Failure to gather facts and failure to have checks and balances to keep all of these disparate interest groups in line is what leads to major catastrophes for any civilization.
Today, the danger to our society is not immediate, but the outlandish approach we are taking is very possibly one that could destroy our place in the world, and thus the future generations of Americans. Today we find ourselves being threatened by an unprecedented and certainly un-researched policy of running massive budget, current account and trade deficits.
The problem lies in our fiscal policy. Fiscal policy deals with taxing and spending. The Republicans decided to spend more to gain more leverage with special interest groups and thus gain money to attract voters. Politicians love to give things away. Running budget deficits is a political decision that is made so more money can be spent to undertake more programs: wars, social programs, and government handouts to special interest groups of voters.
The current Congress and President are both Republican, but the Democrats also love to give money away and do not like to tax people who might vote for them. Tax cuts have been endorsed by many important Democratic strategists. They just prefer to cut taxes for different sectors of society.
Thomas Sowell, the great economist, social historian and thinker said the following when criticizing the social policies of the United States in 2000 in his book The Vision of the Anointed. I believe that his words are prescient in the area of my concern as well:
“To a remarkable extent however, empirical evidence is neither sought beforehand, nor consulted after a policy has been instituted. Facts may be marshaled for a position already taken, but that is very different from systematically testing opposing theories by evidence.”
I am echoing: Do not spend what you cannot prove is useful and/or constructive for your society in the short and long run. In today’s environment, everyone with power “The Anointed” is trying to control the game. In order to control the game and appeal to middle income voters, the Republicans abandoned their long time aversion to deficits. This means that the strategists of both parties now believe that deficits are ok. Now, everyone believes that running deficits is acceptable, as long as it gets more voters when elections roll around. The checks and balances on our national checkbook are gone.
TODAY’S DEFICITS WILL LEAD TO TEARS
There is no evidence that our current approach will produce good results. In fact there is a lot of historical evidence that it may lead to the destruction of our place in the world, our economic well being, and the future of our coming generations. Yet we go blithely ahead, creating deficits year after year.
History is replete with examples of major powers collapsing when spending outstripped income. As a result, political power ended, economic power ended and the standard of living of the people fell dramatically. Unfortunately, unless something is done to reverse these budget deficits soon, the same fate will befall the U.S. This is my opinion. Thanks for listening.
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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.
Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.