This past weekend, I was a guest speaker and panel member at the New Orleans Gold Conference, an annual event catering to sophisticated investors in (no surprise) gold.
Apart from their interest in the yellow metal, people who attend this event tend to be well-informed, well-educated, and fairly well-off. Politically, the conference is home to a reasoned and intelligent brand of conservatism.
Among the people beside me on the panel was Eric Sprott, founder of one of Canada's largest independent securities firms, whose hedge fund has one of the best track records in the resource sector. Also there was David Walker, a former U.S. Comptroller General, author, and star of the film I.O.U.S.A.
Not surprisingly, the topic of America's weak economy and broken banking system was on everyone's mind. The panel laid most of the blame for these problems on profligate spending by the U.S. federal government that has led to record-high deficits and debt. The majority also agreed that the government's top priorities must be to 1) reduce debt and 2) cap, if not lower, taxes – especially for the wealthy, who should be rewarded for innovations that support the GDP. Naturally, the only way to achieve both these goals at the same time would be to slash government spending. Overall, those who spoke on these issues made a good case that was internally consistent.
Of course, left-wing intellectuals and economists have their own prescription for today's situation, which is also compelling. According to their version, today's high unemployment is a serious drag on economic growth as well as a social evil. To them, raising taxes on the wealthy would be an acceptable way to balance the budget, reduce government deficits, and take some of the burden off the poor and middle classes. Such a policy would also help reduce the extreme gap between rich and poor, which the left sees as another obstacle to growth and stability as well as an impediment to democracy. The left-wing interpretation regards government spending as a useful tool to prevent excessive hardship until the country gets back on its feet.
We prefer not to take sides in political discussions, but we think there's an important point that both sides have missed. It begins with the fact that – and we're not being partisan here – the economic stimulus bill that was passed in 2009 has to be the worst piece of legislation we've ever seen.
In the first place, any legislation that so divides the country along political lines is a poor way to solve a crisis that affects almost everyone. What we really needed was a plan that would bring people of different political stripes together.
Second, we believe the one thing that could have brought the nation together was a focus on restoring economic growth. Moreover, real, sustained growth cannot come from consumers buying more cars, bigger houses, or designer clothes. Real growth must come from the creation of new industries and new efficiencies. Such a foundation for growth would benefit everyone – rich and poor alike. It would create jobs, benefit investors, and allow the country to maintain a high quality of life.
The U.S. created such a foundation once before in history, towards the end of World War II. Take a look at the chart below which shows government debt as a percentage of GDP. Right now, this ratio is creeping closer to 100%, which is an alarming and perhaps unsustainable level. However, this is not the first time we've hit these heights.
Debt/GDP hit its historical peak of nearly 130% in 1946, at the end of WWII. Then, as now, the government had spent the equivalent of trillions of dollars. However, the money spent in the 1940s was used to create a solid foundation for growth. The U.S. emerged from the war with the highest industrial capacity of any developed nation. Our exports surged because we could supply products the world needed in abundance. In turn, new industries provided a high number of well-paying, middle-class jobs. The standard of living for both rich and poor Americans soared. Economic growth took off and remained strong into the 1960s and beyond.
Clearly, we need another such foundation, and building one would be well worth the added debt. You see, one of the great things about strong economic growth is that it makes debt more manageable. This is true for individuals as with nations. If you have large debts, you have only a few options. You can consolidate your various loans to get a better interest rate, or you can reduce your spending, which is psychologically hard. But the absolute best way to make debt manageable is to increase your income. In fact, you could say the burden of debt is relative not primarily to income but to income growth. Hence, borrowing money for education that leads to a better job is a good investment.
Similarly, everyone understands that businesses benefit when they take on debt in order to expand. “Good debt” is an investment that leads to higher revenues.
The problem in America today is that no one in government or out, on the left or the right, makes the distinction between bad government debt and good government – between spending and investment. They assume all debt is bad, which is not the case. The 2009 stimulus package was bad, not because it increased debt but because it did not create investment in new growth industries.
Please note, in advocating government investment, we are not promoting socialism. Capitalism often benefits directly from government investment. Such was the case with the industrialization program in WWII or the creation of the interstate highway system. Both programs increased productivity and corporate profits as well as median incomes.
Another example of government investment was the stimulus program launched by China in the wake of the 2008 recession. Relative to its GDP, China's spending program was many times larger than that of the U.S. Yet no one criticizes China for runaway government spending, because this program was all about investing in new industries and new jobs. It was a program to raise the GDP, thereby strengthening the country's financial state.
If the U.S. economy is to have a bright future we also need to invest in new industries that can address our most pressing problems, chief among which is resource scarcity. You've heard me speak about this problem before. Yet despite its urgency, our leaders seem willing to pay it only lip-service. At the Gold Conference, I was the only person who spoke about growth as the cornerstone of any policy, regardless of politics, and just about the only one who talked about resource scarcity.
In a recent update, we discussed the Nobel Prize given to the two physicists who discovered the properties of graphene in 2004. Graphene has some unique properties that could lead to new ways to store and produce energy. It could lead to better integrated circuits, wind turbines, and solar cells that could help reduce our dependence on Middle East oil.
Sure, it would take many billions of dollars to develop graphene-based applications. But along with superconductors, graphene may offer important solutions to the problem of energy scarcity. Its development is extremely important. Yet today, the most up-to-date spell checker on my computer won't even recognize graphene as a word – though it recognizes the names of many other things far less important and vital to our future. Clearly, our society has its priorities out of whack.
As a final note on the conference, several people there asked me what technology stocks I would recommend. As I told them, most important new technologies are so undeveloped that you can't even find a decent publicly listed company involved with them. There are no graphene-tech stocks on the NASDAQ or the NYSE. I know of only one company that deals with superconductors, and it is nowhere near any kind of large-scale roll-out.
So for now, the best way to invest in technology is to invest in commodities. Most cutting edge technology uses commodities that are becoming scarce. That's true not just of the rare earth metals but even mundane materials like iron and copper. Certainly, all alternative energy sources require large amounts of these substances. To invest in commodities is therefore the best way to invest in the next wave of technology.
For instance, if you want to invest in energy research, buy copper stocks such as NovaGold (NYSEMKT:NG), which owns large deposits of both copper and gold (also an important asset in today's world). We also like copper producers Freeport McMoRan Copper and Gold (NYSE:FCX) and Southern Copper (NYSE:SO).
If you want a stake in silver, another metal crucial to solar energy and other high-tech applications, consider investing in the Canadian silver miner, Tahoe Resources, which has recently been listed in the U.S.
And don't forget all the other great commodity stocks currently featured in TCI's portfolios. They are the way of the future, whether that future unfolds in the U.S. or elsewhere.