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Dr. Stephen Leeb is the editor of The Complete Investor newsletter. The Complete Investor newsletter has earned awards for Editorial Excellence for 2004 and 2005 by the Newsletter & Electronic Publishers Association. Dr. Leeb is the author of six books on investments and financial... More
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  • Time To Invest With The Ants 5 comments
    Jul 13, 2009 05:36 PM
    Meredith Whitney, the well-known banking analyst, upgraded her outlook on Goldman Sachs this morning, resulting in the market as a whole making some gains.
     
    We have to give Ms. Whitney her due. After all, she was one of the first to call attention to the problems at Citigroup and other banks, the weakness in the housing industry, and how these might affect the economy as a whole.
     
    However, we think the market's reaction to Whitney's comment highlights a serious problem in our nation. Investors today pay far too much attention to quarterly (if not daily) results, and not enough to the long-term picture. 
     
    Betting a healthy portion of your life savings on an event that may happen tomorrow isn't investing. At best it's speculating. At worst it's an act of desperation. Either way, the odds are stacked against you.
     
    Forgive this abrupt segue (it will make sense in the end), but let's consider for a moment the recent G8 meeting...
     
    G8? G13? O5?
     
    The Group of Eight (G8), as you likely know, are world's wealthiest, industrialized nations, all of which are in the northern hemisphere. They are Canada, France, Germany, Italy, Japan, Russia, the UK, and of course the US (with the EU as a tag-along member). 
     
    Once upon a time, a G8 meeting had real significance. Ten years ago, the G8 probably represented 60% of the world's economic pie. But today, that portion has probably shrunk to under 50% (we'll know the exact figure in a few months). 
     
    What we do know for certain is that the G8 nations will no longer represent the bulk of the world's economy. Consequently, some think that new members could be added to the G8 club. Known as the Outreach Five, the potential recruits include Brazil, China, India, Mexico and South Africa. (Actually, it's more like the O5 must be allowed to join the G8. Otherwise, when the O5 have most of the wealth, the G8 might be petitioning them for membership – which would be embarrassing.)
     
    That would be an outrageous statement in many circles, but such is the nature of a sea change. It happens so unexpectedly and gradually that no one with a vested interest in the old order believes it is happening until it is too late to change course.
     
    Today, for instance, people recognize that China's economy and resource consumption are growing stronger than that of G8 nations, but no one wants to consider the long-term implications of these trends. Perusing the more authoritative blogs about the economy, we rarely see any acknowledgment that foreign or non-G8 nations matter. China and other resource-rich, high-growth nations remain off the radar screen. The minutias of the US market are treated with far more respect – and far more than they deserve compared to the developing world.
     
    (For the purposes of this discussion, we are including China among the resource-rich nations because it seems to be actively trading its cheap labor and growth to obtain a large and secure supply of resources.)
     
    Regarding commodity prices, although they have come down from their highs, the recession has failed to push them below their lows. That's because of rising demand from China and the rest of the developing world. 
     
    China has been stockpiling commodities, particularly oil and iron ore. Unlike Americans, the Chinese think long-term. Rather than worry about next quarter or next week, China plans decades in advance – and it has over a billion people to house, clothe, feed, and transport to work each day.
     
    Buying resources makes perfect sense if you have even a broad idea of the resource crisis that's approaching. The problems we have today may seem big, but at least they can be solved by money. The coming resource shortage cannot. China's method of using money to accumulate resources is now one of a few possible answers. As the fable goes, they are the ants, and we unfortunately are the grasshoppers.
     
    Why does China want so much iron ore? As we showed in a recent issue of TCI, there has been a massive spike in demand for iron in China. China's stimulus campaign seems to be working. 
     
    Infrastructure projects are booming. Auto sales in China now surpass those in the US, even though the number of Chinese people owning cars is only about 30 per thousand versus 800 per thousand here. Car ownership in China has a lot of room to grow. And those cars must be made of steel.
     
    Meanwhile, China also has the problem of needing more energy. There's only so much oil in the world to fuel all those new cars. T. Boone Pickens, among others, thinks the world hit Peak Oil production last year (at 85 million barrels per day). Sometime next year, as US oil demand starts rising along with the rest of the world, we will be in real trouble.
     
    Of course, there's one area where not even China is looking far enough ahead...
     
    ALTERNATIVE ENERGY: THERE'S NO ALTERNATIVE
     
    The world today has dropped the ball regarding our eventual need for alternative energy. Wind remains the cheapest and easiest alternative energy source, but building enough windmills to meet our energy needs may take more steel than can be produced at a reasonable cost in the future. And we're barely making an effort now. China may be accumulating iron ore with this problem in mind, but we cannot say for certain.
     
    Nonetheless, China's foresight is our misfortune. As commodity prices rise – which they inevitably will despite short-term dips – the world's population may have problems obtaining enough power, food, etc. There is simply no way five billion people can enjoy the lifestyle of today's average New Yorker – unless we somehow discover a few more resource-rich planets we can cheaply exploit. If we don't start copying China's accumulation of resources and building alternative energy, we may be left out in the snow when the global winter hits.
     
    Higher resource prices, after all, are the worst type of tax we could endure. Income taxes, onerous as they are, can at least be used by the government to pay down debt, build infrastructure, or support other beneficial programs. Higher resource prices only benefit producers, an increasing number of which are overseas companies and nations.
     
    Frankly, there's no short-term solution to a resource shortage, so if we don't start thinking long-term, we will be in serious trouble.
     
    INVESTING FOR YOUR PERSONAL FUTURE
     
    Since we can't force our nation to become more far-sighted, all we can do is help you get rich by investing in resource-rich countries. These BRACC nations – Brazil, Russia, Australia, Canada, and China (a new addition) – are where the long-term gains will be made. 
     
    As for US stocks, we have no reason to believe a real bull market is underway or even approaching. We seem to be gyrating sideways, nothing more. Apart from commodities, BRACC nations, and a few special situations, you should probably avoid the major indices. The risks outweigh the potential gains.
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This post has 5 comments:

     
  • You just need two more members, China and India, to the G-10 from the original G-7. That will give you far more than 50% of the world's GDP.
    2009 Jul 13 05:52 PM Reply
    •  
  • I think you hit the nail on the head. We are looking at a different future for the US than many Americans care to admit. It is the slow erosion of empire fueled by debt, over consumption, and arrogance. I agree that going forward its wise to invest in the resource rich countries, much as it was wise to invest in the US in 1918 after WW1 which began the decline of the British empire. The British didn't think the sun would set on their empire or the British pound either, but their debt was their doom.
    2009 Jul 13 09:35 PM Reply
    •  
  • China is indeed a resourse rich country even if it did not buy lots of them. China is very rich in tungston, bauxite, zinc, manganise and tin. The US and EU are charging China for not allowing the export of these commodities in WTO.
    2009 Jul 14 05:47 AM Reply
    •  
  • Good point..Thank you. But my basic argument is that China is not resource independent and on balance imports more baic resourecs than they export


    On Jul 14 05:47 AM Ben Gee wrote:

    > China is indeed a resourse rich country even if it did not buy lots
    > of them. China is very rich in tungston, bauxite, zinc, manganise
    > and tin. The US and EU are charging China for not allowing the export
    > of these commodities in WTO.
    2009 Jul 14 10:10 AM Reply
    •  
  • thanks for the comment and info. While China is rich in a number of resuorces. In addition to the ones you list there is also phosphorous and gold. Still the company is dependent on certain critical resources such as iron ore and oil for its growth.
    2009 Jul 14 10:12 AM Reply
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