Mike Norman (Norman): Hi, and welcome back to HardAssetsInvestor.com. I'm Mike Norman, your host. Here today with me is Andre Julian, senior market strategist at OpVest Wealth Management. Andre, welcome back.
Andre Julian, senior market strategist, OpVest Wealth Management (Julian): Thank you for having me.
Norman: Pleasure to have you. A lot has gone on since your last appearance here. Let's start right off with the big commodity rally that we have seen in the last six months, and also recently, the horrific earthquake in Japan, the nuclear situation. How do you view the big-picture landscape right now?
Julian: Well, you still have a lot of demand coming in from China. You still have a lot of demand coming in from India. But I think, in the short term, you obviously have these geopolitical tensions that are happening in the Middle East. And then you have this tragedy. I mean, it's a tragedy. You can't really say anything different in Japan.
So, if you look specifically into the energy sector, I think you're going to have some opportunity there. Because remember, about 30 percent of Japan, right now, is offline. And that's how they power their energy, is through nuclear; at least 30 percent of their country.
Norman: Are you looking at more petroleum consumption? You're looking at what, oil? Natural gas? Coal?
Julian: Yes: oil, natural gas, coal, diesel, specifically diesel. Because remember, here in the United States, we don't export our oil. We basically export our gas and our diesel, so we keep the oil here. Maybe a little bit goes to Canada, but that's about it. And so, what's going to happen is, I think there's going to be a big draw on the diesel fuel, because diesel is going over to Japan, just for the short term, for that instant amount of energy influx that they need, to make up for the energy that they've lost.
So you have the pressure on diesel. But then, that's also going to put pressure on the oil. Because obviously, more is getting distilled than diesel. So it just starts exacerbating itself.
Norman: Now, we've seen oil run back up over $100. As of today [March 23, 2011], it was around $105. Do you think we're going to get back to that $150 area that we saw back in 2008?
Julian: Everybody asks that question. I think that eventually we will, without a doubt.
Julian: Yes. It's not going to happen tomorrow, unless something happens in Saudi Arabia. If something happens in Saudi Arabia, and what's happening in Bahrain and Yemen spills over to there, you could see it at $150 tomorrow. That's the way it works. But eventually it'll get to $150, and even higher, over the long term, simply because of the global fuel demand and the global demand we have for consumption coming out of, specifically, China and India.
So, over the long term, let's say the next five to 10 years − which I know in trader talk, that's a lifetime – but …
Norman: But can that be sustained? What about demand destruction? What about the argument that prices get so high, people start to cut back, or they start to look for alternatives, taking public transportation, your bike, whatever? We kind of saw that happen in 2008. Is there some price threshold where the impact to the economy, the real effect, starts to create some demand destruction? You see maybe an economic downturn as a result. That's how you get a weakened demand as well.
Julian: You'll have demand destruction, and it comes in cyclically. So right now, we really have supply-side rallies that you see coming in the grains, coming in the fuels, because there's a problem with supply in the short term. And then you see that supply-side rally. Well eventually, like you said, the price's peak demand starts slipping away. And then you see the prices come back down.
But then what happens when the prices come back down? That demand resurfaces. So we just keep getting higher floors put into the market as the market supports these higher prices. So that's going to happen. But globally, people I think really underestimate what's happening in China. They really underestimate the growth.
Norman: What's happening? In terms of growth, you're talking about?
Julian: Yes, in terms of growth. They continuously slow down their growth. But it's still growing at 10 percent.
Norman: It's not that slow.
Julian: It's really not slow. It's grown 10 percent for 30 years. So when they're slowing down their growth, it's only because they don't want to overheat; they don't want to grow at 12, 13, 14, 15 percent. They like that 10 percent level. But a statistic I really like to look at is in the car industry, in the automotive industry. You have to understand that last year, China outsold the United States in cars. Sixteen million cars were sold.
Norman: Right. They surpassed the U.S. as the largest auto consumer.
Julian: Yes. Now, how many people own cars in the United States, as a percentage? Eighty-seven percent of the population owns cars. And a lot of them own two. But what percentage of the population in China owns cars?
Norman: Yes, but there's a lot of capacity. If you look at our industrial capacity, we're running in the 75-76 percent industrial capacity. So we're nowhere near the levels we saw, back in the early '80s, when you're up in the mid to high 80s. So there's a lot of capacity that could be brought online.
Getting back to the oil discussion, a couple of years ago, you had Saudi Arabia, whose output was maybe 1.5, 2 million barrels a day higher than it is right now. So you could say, "Well, they could definitely step in as a mitigating force to kind of keep prices under control."
So you're saying, now, this very bullish commodity trend − which really has sort of revved up in the last six months − I mean, the game is still on, as far as you can see.
Julian: The game is still on. And it's going to be volatile. You're going to have pullbacks. And they're going to be healthy corrections. That's the way it works. But I think that today's prices are just going to be the new floors. We're really not even at high prices, when you look at inflation. Not even historically high prices. We haven't even come close to the prices of 2000, especially in the grains. We haven't come close to the price of even 2008. So there's still a lot of room to grow. I think it's just a continuously bullish market over the next decade.
Norman: All right. The game's still on, folks − continuously bullish market; you heard it. That's it for this portion of my interview with Andre Julian. I'll see you next time. This is Mike Norman, saying bye-bye.