IN RECENT WEEKS GLOBAL STOCK AND COMMODITIES MARKETS HAVE BEEN DELIVERING SOME VERY CLEAR MESSAGES…
Inflation is an oncoming problem and investors are buying resource heavy stocks and commodities to hedge against inflation.
The U.S. dollar is not able to compete with foreign currencies as U.S. interest rates are falling and foreign rates are rising.
Long-term demand for raw materials will keep commodities stronger for much longer…probably for a number of years.
Foolish behavior by mortgage lenders and their derivative holders will not be tolerated by the markets.
Although we have supported every one of the above ideas, we had been of the opinion that even though the U.S. dollar would fall in the long run, it might continue to rally for a few more months. We were wrong, and we now return to our short and long term bearish view on the dollar.
THUS FAR IN 2008:
A) Our clients’ portfolios have held, and continue to hold the largest percentage of their investments in precious metals, energy shares, and more recently base metals. This has been fortunate as their portfolios are doing much better than the world stock markets (most of which are down 5% to 15% in 2008), while commodities have been rising in value.
B) We have avoided (or have been short for accounts that can sell short) financial stocks, U.S. and European stocks, except for commodity producing companies.
C) In the last great commodity cycle that ended in 1980, we were able to exit our investments in both energy and gold stocks within a few percent of the ultimate highs during that period. We are not yet taking profits because in our opinion the uptrend in commodities will continue.
D) AS ALWAYS, THIS CYCLE HAS A LOT OF DOUBTERS. We disagree with those who say that gold, oil, and base metals have run their course and will not go higher. We continue to be bullish on all three groups. This bullish view is based entirely upon current and expected fundamental demand for all three sectors.
WE CONTINUE TO RESEARCH THE ABOVE TRENDS CAREFULLY AND WE REMAIN CONFIDENT THAT THEY WILL CONTINUE
We also continue to hold a bullish view on grains and associated stocks. As we are fond of saying, the demand for more protein in diets globally will lead to huge increases in the demand for more grain. It takes several pounds of grain to create one pound of meat. It is quite probable, and it is sad to predict, that the poor of the world will increasingly be priced out of the market for staples such as corn, soybeans, wheat, and rice. This could lead to civil unrest and starvation in some countries, which would be extremely sad to see. This is a prediction where we hope we are wrong.
This week I would like to share with you a truly important piece of research that in our opinion could help investors make a great deal of profit in the coming years. The research springs from the United Nations and has the adrenaline producing title of World Urbanization Prospects: The 2007 Revision.
In all seriousness, it is not nearly as boring as it sounds, and it clearly and concisely lays out a great deal of background information justifying the themes that we have been pushing (perhaps ad nauseum) for six years and longer.
AS OUR READERS KNOW WE HAVE LONG ESPOUSED THE THEMES OF DEVELOPMENT OF EMERGING NATIONS AND OF THEIR NEED FOR INFRASTRUCTURE
The U.N. report is lengthy and instructive. We don’t want to try to summarize it in a cavalier manner, but to us the most significant data is the following. The percentage of the population living in urban areas (by continent) today and the estimates for 2050 are:
The message is that Africa and Asia are the most rapidly urbanizing continents. In addition to population growth, Africa is expected to experience a 60% growth in the percentage of urban dwellers by 2050. Of course Asia, by far the most populous continent on earth, will also see its percentage of urban dwellers grow by over 60%.
By 2050 about 70% of the world’s population of over eight billion will by living in urban areas.
This trend is the main reason that we have been pointing out opportunities in energy, gold, base metals and the growth in the developing nations of Asia, Latin America and Eastern Europe.
URBANIZATION TAKES RESOURCES…CONSTRUCTION RESOURCES
A recent study by Morgan Stanley counted over 21 trillion USD (trillions not billions) already allocated to the purpose of building infrastructure in the emerging world within 10 years. This spending is from countries which have the capital to implement the projects.
This money will be spent to build roads, bridges, dams, tunnels, railroads, power plants, ports, buildings, utilities, refineries, etc. The ingredients for these are Coal, Iron Ore, Steel, Nickel, Copper, Zinc, Oil, Uranium and Natural gas, as well as on precious metals.
Spending even a few trillion dollars on these commodities will cause prices to rise substantially from current levels. This in short explains why we have been, and continue to be, bullish on commodities.
Thanks for listening
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