Finding the Bottom in Commodities

In just the last couple of months, commodity stock prices have melted like ice cream on a hot summer day. I’ve been burning the phone line and firing off e-mail to people in the field about what they see.

Over the years, I’ve developed quite a network of contacts. If I have a question about natural gas in Kentucky, I know someone who can tell me what I need to know. He’ll know exactly what property I’m talking about and who the operators are. If I want to know about Barnett Shale, I know a guy who’s spent many years in the area. Heck, I talked to a fellow the other day who’s been drilling for oil and gas for 50 years. He talked about 1970 as if it were yesterday. If I want to talk to someone about mining whatever in Western Canada, I have a contact for that, too.

These are all successful and smart people. They are my behind-the-scenes eyes and ears. And while no one wants to call a bottom — they are too smart for that — they all say they are buyers, or at least hanging onto their commodity investments. The view from the field is bullish. Many marvel at how cheap some names have become.

Investing in the Age of Scarcity — the View from Vancouver

“Gastown, Vancouver’s oldest neighborhood…founded on the shoulders of desperate alcoholics by an entrepreneurial bar owner.”

— Anthony Bourdain, No Reservations

It might be too much to say Vancouver got its start with a bunch of alcoholics, but there’s no denying that Jack Deighton, or “Gassy Jack,” as he was known, had a hand in making the city.

As legend has it, Gassy Jack, a garrulous Yorkshire-born steamship operator, arrived in 1867 with a yellow dog, a First Nations wife and a barrel of whiskey. He solicited help from workers by telling them if they helped him build a tavern, he’d give them free drinks. So they did, and within 24 hours, the Globe Saloon was open for business, slaking the thirst of a rough frontier crowd of miners, trappers and loggers.

When a little village grew up around the saloon, Gastown was born.

This is where modern Vancouver began. Today, Gastown is the old section of the city. You can stroll down its cobblestone streets adorned with antique street lamps and stop off at one of the many bars and restaurants. You can see the old steam clock on Water Street, a local landmark. (But it’s kind of a sham, because the steam clock is actually powered by electricity. It was also built in 1977, despite its antique look.) There are also some shops hocking the usual kitschy fare like faux totem poles and snow globes.

Salute the bronze statue of Gassy Jack, standing atop a whiskey barrel, in Maple Square. Then head over to my favorite microbrewery in the city, Steamworks, and order a Lions Gate Lager and a brick-oven pizza.

As you wipe the beer foam from your lips, you can think about the story of early wealth creation in Vancouver. Spanish explorers in search of the Northwest Passage arrived in the 18th century. You can still see their influence in street names such as Cordova, Cardero and Valdez. The British explorer Capt. James Cook also hit the west coast of Vancouver Island, looking for the Northwest Passage. Vancouver, though, gets its name from George Vancouver, who sailed the inlet in 1792.

Eventually, a number of early explorers, including Simon Fraser and Alexander MacKenzie, helped map the region’s interior. In 1824, the Hudson Bay Co. began running fur trading posts out here. In 1858, prospectors found gold on the banks of the Fraser and Thompson rivers. The first sawmills along the Fraser River opened up in 1860. And there you have the triumvirate that drew adventurers and entrepreneurs from all over — furs, gold and timber. Into that swirl stepped Gassy Jack.

I like the city of Vancouver and enjoy going there every year for my publisher’s big annual conference. This year’s theme tackled investing in the age of scarcity. Perfectly appropriate for the market we find ourselves in.

Your Path to Riches Is Well Trodden

Gassy Jack and all those early explorers, adventurers, prospectors, loggers and miners did their part to spice up the 19th century. As with most of the history of the Americas, fortunes bloomed as men beat paths to nature’s riches. It was the basic stuff — metals, timber and other commodities — that made men rich. The voracious appetites fueled by the Industrial Revolution and rising urbanization created enormous demand for the natural storehouse of riches in the largely untapped Americas. If you were bold and talented (and lucky), you could strike out on some open valley or inviting hillside or promising riverbank — and dig or plant or pan your way to fame and fortune.

Despite all the advances and promises of the 21st century, we still need those basics. We’ve always needed them, but there is new urgency to the quest. The motor for that demand is a sort of second Industrial Revolution, in China and India, in particular. But it’s a revolution that broadens out to many emerging markets. The analogy is not lost on certain investors.

Jeremy Grantham heads up GMO, a respected money manager. Grantham has been largely spot on in the big-picture sense of staying bearish on stocks for the last eight years or so. He is bullish long term on commodities. In his latest quarterly letter, Grantham makes some good points about the future of commodities and emerging markets.

His conclusion first: “In the short term, slowing world economic growth combines with credit, currency and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities. Longer term, the reverse is true, and they look like the assets to own.”

Regards,
Chris Mayer
September 10, 2008