The "Real" Boom!

When our Paris amie, Amber Garrison, went to China, she met with among other notables Puru Saxena, an investment advisor and money manager based out of Hong Kong. Below you will find the first of Mr. Saxena’s contributions to The Daily Reckoning…

Let us assume that an investor is looking for one asset, which he could buy and hold for the coming 10 years. This individual is extremely busy with his work, so he does not have the time to closely monitor his investments on a regular basis. He is simply looking for an undervalued asset-class, which he could buy and forget for a decade without any sleepless nights. His plan is to invest his money in only one asset-class and he intends to cash in on the profits in 2015. So, which asset-class should this guy invest in? Should he buy U.S. stocks, Asian stocks, perhaps bonds or even leave his funds in cash?

First, let’s look at an underlying philosophy. As an avid student of economic history, I have realized that all assets go through multi-year economic cycles commonly known as bull-markets (boom) and bear-markets (busts). These cycles surely follow each other as night follows the day. During a bull-market, an asset goes from depths of undervaluation to overvaluation. A bull-market usually ends with intense public participation, optimism and euphoria. On the other hand, a bear-market takes an asset on its long journey from extreme overvaluation to acute undervaluation. A bear-market usually ends with "blood on the street" or deep, dark despair. As a money manager, it is my job to identify, which assets are in a bull-market and those that are in a bear phase.

Undervalued Assets: One Each for the 70s, 80s, and 90s

Looking back through history, it is now easy to see that if the above investor had to buy one asset in 1970 for the next 10 years, he should have bought commodities. For those who are not familiar, commodities went through an enormous boom during this period. Supply conditions were extremely tight, demand was rising and we also had the "Oil Shocks," which led oil to its all time high in 1980. During that period, the United States economy was in a recession, inflation fears were running high and interest-rates were rising fast. The whole world was convinced that inflation would continue to escalate and that savings would eventually become worthless. Thus, everyone turned to hard, tangible assets to protect their wealth. The boom, which started off as a gradual bull-market (as they all do) erupted into an enormous mania in the late 70’s as investors kept piling their cash in commodities whilst completely ignoring the prices they were paying. During the 70’s, several commodities went up through the roof. Sugar went from 1.4 cents/pound in 1966 to 66 cents/pound in 1974 – a staggering rise of 45 times! Oil went from $2/barrel in 1973 to over $30 in 1980 and gold went from $35/ounce in 1971 to over $850/ounce in January 1980! Looking at the statistics now, commodities were an obvious choice in the 1970’s, but hindsight is always 20/20.

If our investor friend was looking for one investment theme in 1980 for the next 10 years, he should have bought Japanese stocks and real estate. During that period, Japanese assets soared exponentially as the world became amazed by the "Japanese miracle." Money kept pouring in from around the world and the Japanese stock-market index (NIKKEI) rose from 6,500 in 1980 to 38,915 in December 1989. The future looked obvious: Japan’s hardworking and focused society seemed unstoppable. In the 1980’s, the Japanese economy was a sensation – the most dynamic economy the world had ever seen. Meanwhile, Japanese real estate also surged. At the peak of the bubble in 1990, Japanese real estate was worth four times the value of all property in the United States! The Imperial Palace in Tokyo and the nearby park were valued more than the whole of Canada! So, it is obvious now that the land of the rising sun would have been the best option for investment purposes in 1980.

Let us now turn to the next decade – the roaring 1990’s. During that period, our investor should have put all his money in American assets. During that period, the world’s super-power came alive as the world fell in love with the United States. As many will remember, the last decade saw the exponential rise of the American stock market led by the NASDAQ. Stocks, bonds and real estate soared as inflation was low and interest-rates were falling. In the 90’s, you just could not go wrong. All you had to do was to buy any American asset and the bull-market would have done the work for you. The technology-heavy NASDAQ rose from almost 500 in 1990 to over 5,000 at the turn of the millennium. Everyone was convinced that the "New Era" had arrived. Companies like Amazon, Cisco Systems and Yahoo became the technology darlings of the investment world. Locally, people standing in queues for and Sunday IPO’s come to mind. Looking back, it is obvious now that America would have been the best investment destination in the 1990’s.

After having gone through the various asset-booms of the past three decades, I would like to point out that they all had one thing in common – the eventual bust. Commodities peaked in 1980 and declined for two decades; Japanese assets peaked around 1990 and are still deflating after fifteen years; NASDAQ collapsed in 2000 and despite record-low interest rates, American stocks have failed to better their all-time highs recorded five years ago. The brutal truth is that no asset-class goes up or stays depressed forever. This is one fact that every investor must keep in mind when speculating or buying for the long haul. Our history is dotted with several "New Eras" and "Economic Miracles," which were supposed to change our world forever – American canal systems and the railroad boom in the 19th century, the auto boom at the turn of the 20th century, the commodity boom in the 70’s, the Japanese boom in the 80’s and the technology boom of the 90’s. Yet, none of these booms lasted forever. The current housing boom will be no exception.

Undervalued Assets: And Now?

So, let us address the original question – "which asset-class will boom over the coming decade?" I am of the opinion that commodities will prove to be the best performing asset-class. Therefore, our above investor should park all his funds in commodities and when he returns in ten years time, he should be sitting on a huge profit. Why have I chosen commodities out of all the assets? For the simple reason that in 2001, commodities were the cheapest they had ever been in the history or capitalism. The commodities bear-market (1980-2001), which lasted two decades, ended up wiping out a large number of businesses involved in their production. Declining commodity prices and increasing costs forced the marginal companies to either close down or look for alternatives. This resulted in tightening ofsupplies worldwide.

Let us take a look at the most important commodity – oil. Over the past 35 years, there has not been a single major oil discovery anywhere in the world! Global production is peaking and there is no additional supply. Meanwhile, demand for oil continues to rise especially in the emerging world where populations are huge and per-capita consumption of oil is still extremely low. As global demand rises and supply remains tight, oil prices will continue to surge.

Similar supply-demand patterns can be seen across the majority of commodities. As China and India become more prosperous over the coming years, their demand for food, clothing, housing and energy will increase significantly resulting in higher prices.

So far, industrial commodities such as metals and energy have done exceptionally well. However, agricultural commodities such as sugar, corn, wheat and orange juice haven’t gone up as much and are still close to their all-time lows adjusted for inflation. Over the coming 18-14 months, I expect agricultural commodities to provide the best returns. I don’t know about you but living in Hong Kong I can foresee that China is shifting away from a rice-based diet as its people become more accustomed to Western foods.

What will happen to the depressed wheat prices when the 1.3 billion Chinese start consuming more bread, cakes and pasta?

Similarly, let’s take a look at cotton. Despite the horrific inflation we’ve seen since the abandonment of the gold standard in 1971, cotton is extremely inexpensive. As the 3.6 billion Asians (56% of global population), acquire more wealth; their demand for clothing will also rise exponentially. This should send the price of cotton significantly higher in the years ahead.

Furthermore, I expect gold and silver to outperform industrial metals over the coming years. We now live in an era where inflation is the norm. Fed Governor "Helicopter" Bernanke comes to mind. Despite what the mainstream media says the "deflation threat" is not a real concern, but only a smokescreen, which allows central bankers to continue printing more money for their own benefit. In today’s world, where paper currencies are only empty promises backed by nothing, I expect all of them to keep losing value against time-honored wealth – gold.

In my opinion, the United States dollar is a doomed currency and will eventually become worthless, the euro is nothing more than a far-fetched political fantasy and the Yen isn’t attractive either, as Japan is still deflating. In these circumstances, the public will eventually wake up and smell the rat. Smart money has started treating gold as a currency rather that a commodity, and over the period ahead, you can expect gold to rise against all currencies – and not just the U.S. dollar.

Despite a strong run by commodities since 2001, the investing public remains skeptical. People are concerned that China’s economic slowdown will have a negative effect on the demand for commodities. I disagree with this theory because the previous bull-market in the 1970’s also took place amongst an economic recession and rising geo-political tensions in the Middle East.

Today, things are no different. Geo-political tensions are rising, inflation is becoming a concern, demand is rising and supply is extremely tight. Noting all of the above and as a capital preservation strategy, I strongly advocate an investment in commodities for the coming decade.


Puru Saxena
for The Daily Reckoning

July 21, 2005

Now that China has decided to revalue the yuan, commodity prices could soar…the Chinese had become voracious buyers of commodities. And a strengthening currency should help to boost their commodity consumption, so if you’ve ever wanted to get into resource stocks, the time is now.

Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication soon to be available at An investment adviser based in Hong Kong, he is a regular guest on CNBC, BBC World, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

There, in today’s International Herald Tribune, is our favorite columnist, Thomas L. Friedman. And there he is, commenting on US-China trade. This ought to be amusing…Friedman has no enemies that we are aware of, but even his friends must think he is an idiot.

But first…

"I know what is happening to you," said our friend at dinner the other night. "You spent the first 30 years of your career trying to make money…and now that you’ve made some, you’re wondering what it’s all really worth."

It is not quite that simple, dear reader. Nothing ever is. But as a working hypothesis, it is a fair one.

We are thinking about life and death, love and marriage, wealth and poverty…and about what really matters. Two friends married recently. Another is breaking up.

"You know, many of us spend our lives repairing damage from childhood," she added. "That’s what happened to me. My parents divorced when I was little. So, I was determined not to let it happen to me. That’s why I stayed so long in a relationship that really didn’t work for me. But I’m still young…I think I still have a chance to get what I want. I know it won’t be easy and I know there are a lot of dangers. But at least I have to try…"

More about this, tomorrow…in part deux of our series: Love in the Time of Viagra.

Why mention it today? Because it is on our mind. And because the conductor has cranked our Eurostar train up to a speed we have never before seen. We think he may have lost his mind. The countryside is flying by, we wonder how fast this train can go before it slips off the rails. He’s probably had an argument with his wife this morning. She probably admitted that she has been sleeping with the vicar. He’s decided to end it all in a spectacular way. Won’t she be sorry! At any moment, we expect to see a steward or an armed guard rush to the front of the train and put a pistol to the conductor’s head. Or maybe we are on a runaway train…. Well, it seems like a good time to think about important things…and if the train derails, we just want you to know what you’ve missed.

Back to Friedman…

Once again, he doesn’t let us down this morning. He sees a great bargain at the heart of the U.S.-China relationship. "Call it the Tiananmen-Texas Bargain. After Tiananmen, China’s leaders struck an implicit bargain with their people, argues Steven Weber, director of Berkeley’s Institute of International Studies. ‘The bargain is that China’s voters give up the right to vote, and the Chinese government guarantees China’s middle class 9% annual economic growth. China’s political stability today depends on that bargain.’

"The Texas side of the bargain came from the Bush team. For a long time, it ignored China’s undervalued currency so China could sell us lots of cheap stuff and would continue holding our devaluing dollars and helping to keep U/S.S. interest rates low."

Friedman sees the two countries as "Siamese twins." This is typical of Friedman; he never bothers to think about what he writes. America and China are joined in a curious trade relationship – but they are no more "twins" than a toad is twin to a runaway locomotive. They’re not even fraternal twins. China is almost the exact opposite of the United States. If they are joined at the hip, commercially, it is strange beast they make. One works; the other eats. One saves; the other spends. One gets rich; the other gets poorer every day.

None of these differences does Friedman worry about; instead, he fusses that China is not a democracy. What that has to do with it, we don’t know. Friedman doesn’t either. So he changes the subject.

"We now have to adjust the bargain at the heart of that relationship. Whether we can do that delicately, without destabilizing Beijing or the global economy, could be the big geopolitical story of 2005," he opines.

Like a blind man throwing darts, Friedman has hit the bull’s eye: it is the big geopolitical story, not just for 2005…but further into the future. But it is not a bargain that can "we" can adjust. There are no dials that can be turned, no levers that can be jerked. The real problem is that the United States has lived beyond its means – enabled by the Fed, China, Wall Street, greed, fantasy, and imperial conceit. China can dump her deadbeat U.S. customers. It won’t be painless or easy, but there is plenty of ready need and purchasing power in Asia. But here is no conceivable adjustment that can be made that will spare the United States a drop in living standards.

No matter how good the surgeons who try to separate these twins, one of them is going to die.

More news, from our team at The Rude Awakening…


Chris Mayer, reporting from Gaithersburg, Maryland:

"The Chinese do not have all the answers, but many Chinese companies certainly have the right ideas, capitalistically speaking."


Bill Bonner, with more thoughts…

*** Here’s one way to get the U.S. world-improvers to mind their own business – threaten them with nukes.

Beijing has claimed that it will use military force to prevent Taiwan from becoming a formally independent country, and if the U.S. military intervenes in any conflict over Taiwan, China could use nuclear weapons against the United States.

"If the Americans draw their missiles and position-guided ammunition on to the target zone on China’s territory, I think we will have to respond with nuclear weapons," Maj. Gen. Zhu Chenghu, said at an official briefing.

"If the Americans are determined to interfere, then we will be determined to respond," he said. "We Chinese will prepare ourselves for the destruction of all the cities east of Xian. Of course the Americans will have to be prepared that hundreds of cities will be destroyed by the Chinese."

We’re hoping that the world improvers don’t take that as a challenge…

*** And in more news from China… the long-awaited yuan revaluation has taken place.

Starting today, China will reform the exchange rate regime by moving into a managed float exchange rate regime based on market supply and demand with reference to a basket of currencies. Renminbi will no longer be pegged to the U.S. dollar, but to a basket of currencies instead.

Chuck Butler, President of EverBank, and our own "currency counselor" gives us the skinny on the move…

"Finally! China has announced that they no longer would peg the renminbi to the dollar. This had been the news that investors have waited for over two years to hear. The ‘floating currencies’ of Asia are moving stronger vs. the dollar on the news, and should continue as this new renminbi exchange rate regime unfolds.

"I view this move by the People’s Bank of China (PBOC) as simply symbolic at this point, as the (PBOC) gets to soothe the feathers of the U.S., and slam the door on the fingers of the currency speculators. However, this will lead to other currencies in the region to allow their currencies to gain vs. the dollar. We’ve already seen evidence of this in the announcement by Malaysia that they would also drop their currency peg to the dollar!

"There is no word at this point regarding the mix and weightings of the currencies in their new basket. I would think that a mix of 20% yen, 20% euro, 20% dollars, with other trading partner currencies making up the difference as a good start. If the final basket looks like this, I would think that yen, euro and other trading partner currencies would benefit greatly, while dollars would be sold, bringing the dollar back to the underlying weak dollar trend."

*** Although we all know we can’t always get what we want, we see no other option but to try. We know our investments, for example, are not likely to make us rich – but what else can we do but try to get rich?

But that’s not quite that simple either. There are, alas, some things you can’t get …

…a steward just rushed by towards the engine compartment. He did not seem terribly alarmed, but he had a purposeful look on his face…

…is the train slowing down? Not yet. He’s probably trying to talk the conductor out of his mad act of suicide and manslaughter. Since we are among the men to be slaughtered, we hope he succeeds. And yes…the train seems to have slowed down…slightly.

Oh well, we’ll continue our ruminations while we await events…

We were about to tell you how to get rich. Yes, well, we would like to lay aside the question of value…that is, of what it is worth to you. But we can’t. Everything that matters – marriage, housing, vacations, investments, what you read and eat – involves values. In each case, you have to decide what it is worth to you. If getting rich is worth the effort, can it really be separated from values?

The surest and fastest way to get rich right now is to become a housing speculator. Stocks have gone nowhere for a long time. One of the best stocks in America – Buffett’s Berkshire Hathaway – has gone nowhere for 12 years.

Yes, you might get lucky and find another Google, but the odds are against it. Housing prices, meanwhile, are still rising steeply in many parts of the country. The housing market is still subject to "speculative fervor," said Alan Greenspan yesterday. If you wanted to get rich above all else, the thing to do would be to quit your job and launch yourself quickly into full-time real estate speculation. Shop carefully. Buy the most expensive house you can afford…with the greatest potential for fast price-appreciation…better yet, buy two or three of them. Mortgage them heavily…use as much leverage as you can get away with.

But here is where the value comes in. How will you be adding value? If you can’t get something for nothing, what are you getting rich from? You are merely speculating…hoping to take money from people even dumber than you are. Most likely, you will fail. You will lose everything, including the time you put into it. And yet, there is a decent chance that prices will continue to rise and that you will find enough ambitious blockheads to make you rich.

You can do the math as well as we can. It doesn’t take long for a few million-dollar houses, growing in price at 15% per year, to add significantly to your wealth. But what is that kind of wealth worth? Did you earn it? Do you deserve it? Isn’t it a kind of fraud…like a marrying a woman under false pretenses…that you are likely to pay for later?

Hmmm…the train seems to have slowed to normal speed; it did so imperceptibly. We will not die on the 6:34 from London…not today.

[Ed. Note: Some Londoners were, unfortunately, not so lucky in their travels today. Unbeknownst to Bill at the time of his writing, more explosions were reported at London train stations and on a bus – smaller than the ones that were set off two weeks ago, but unsettling nonetheless. At this time, the police are still looking into the incident.]

*** Our DR special envoy Amber Garrison recently spent an action-packed week in Hong Kong seeking a foothold in the Asian markets. Here’s what she reported back:

"I stepped off the airplane into the subtropical heat of early summer and the immensity of Hong Kong, which feels like New York City on amphetamines. I wasn’t prepared for the urban landscape rising out of the water, each jutting skyscraper taller and more impressive than the last. Hong Kong feels like the center of the universe – the universe of the really, really rich. With more Rolls Royces per capita than anywhere else in the world – and, as far as I could tell, more shopping malls than a population of 7 million could possibly sustain on its own – the wealth is palpable.

"Mainland Chinese – and anyone else with cash to spare – are buying up real estate like crazy. Apartment flipping is widespread – with only a 1% closing cost on both the purchase and sale transactions, and skyrocketing prices, it’s not unheard of to hold a property for only a few weeks and turn a profit of several percentage points on the sale.

"I couldn’t leave Hong Kong without trying its famed dim sum. An acquaintance took me to Luk Yu Tea House in Stanley Street, packed with regulars on a Sunday morning, where I had the best pork dumplings and smoky black tea I’ve ever tasted. We talked about how life in Hong Kong has changed since the handover in 1997 and how the ‘one country, two systems’ doctrine actually works in practice. ‘There’s so much money and commerce here that no one from the mainland wants to change a thing,’ he said. ‘Besides, we have more freedom now than under the British. They’d just send over governors nominated by Parliament. At least now we seem to have choices…’

The Daily Reckoning