I recently took the opportunity to read Stephen Leeb's book, Red Alert: How China's Growing Prosperity Threatens the American Way of Life. The book covers several themes relating to its subtitle, but the basic thesis is that the Chinese government foresees a tremendous need for commodities in order to improve its citizens' quality of life. It its therefore committed to procuring these commodities by virtually any means necessary, as it values this procurement over virtually everything else. As a result, the Chinese leaders have no qualms about bribing African dictators, sabotaging efforts to bring about an international agreement regarding communal action on climate change, or allowing its citizens to die in unsafe gold and coal mines so that they can obtain the materials necessary in order to support a rising standard of living for the world's largest and still growing population.
Leeb contends that this is a zero-sum game for many resources, including both commonly recognizable commodities (e.g. oil and copper), as well as for commodities for which the Chinese have effectively cornered the market (e.g. rare earth elements). We can see this in the observation that since the turn of the century, prices of commodities have risen substantially as Chinese demand has increased, while American demand has been forced downward, as their salaries have not kept up with this commodity price inflation. The reader is probably familiar with many examples, but some include:
- Copper has risen from about $0.60/lb. to over $3/lb.
- Oil has risen from about $10/bbl. to over $90/bbl.
- Silver has risen from about $4/oz. to about $20/oz.
- Dysprosium has risen from $7/kg. to $340/kg.
A great deal of the rise in demand for these commodities has come from China as its citizens' standard of living improves. Meanwhile, the American standard of living is falling when we look at energy and commodity consumption (obviously it is rising when we look at new technologies, but we can easily backtrack if we can't get the dysprosium, graphite, silver, or copper found in our new nifty electronic devices).
Leeb's concern is less about America's capabilities - it can get these resources. The trouble is that the Americans have the wrong attitude. He likens China's resource scramble to a war-like effort - Chinese officials see a threat to its long-term societal vision, and it seeks to overcome that threat by any means necessary. This means massive spending on resource extraction and alternative energies despite its apathy with respect to the polluting effects of greenhouse gases.
American officials, on the other hand, fail to recognize this threat. Our standard of living hasn't fallen that much in the past several years, and we are still having a relatively easy time getting our hands on the resources and goods we need, even if it is through the Chinese who produce a great deal of goods used here as well as several key commodities such as rare earth elements, graphite, tungsten, and molybdenum. We put our faith in the free market and on technology as the sources to the solutions to these threats, and Leeb believes that we are writing our own death sentence.
So with this in mind, Red Alert is less an investment book and more a call to action. That isn't to say that there is no investment advice to be had from reading this book (more on that in a minute), but these implications aren't discussed as investment ideas. Despite the fact that Americans value its pseudo-democratic political system that supposedly guarantees certain rights to each individual citizen, they need to take a war-like stance with respect to this issue in much the same way they did back in World War 2 when we utilized our collective efforts in order to achieve a common goal. This means that we, too, have to take a nationalistic and even a mercantilistic approach to resource accumulation, pool our collective resources, and delegate authority to some sort of resource-accumulating autocratic bureau. We have to recognize that there simply isn't enough oil, copper, zinc, or silver to go around, and that if we don't grab them someone else - probably the Chinese - will.
Seeking Alpha is a source for investing ideas, and while Leeb is a professional investor, Red Alert is not an investment book, at least overtly. Nevertheless, there is a clear takeaway for investors, namely to buy commodities. But naturally this is far too simplistic a viewpoint, and it comes with its own issues - investing in commodities isn't easy despite the fact that the burgeoning ETP world makes it appear that way. So let's look at a couple of investment takeaways from the book, keeping in mind that these are starting points for further research and not investment recommendations.
Leeb is a proponent of the "peak oil" theory. This theory has different forms, but the one espoused here is that at some point in the near future oil consumption will outpace production and this will create a de facto shortage. Clearly, this is a very controversial and complicated topic that requires an enormous amount of geological knowledge to even begin to debate intelligently. Leeb provides an admittedly simplistic and uninspired argument for this theory that is largely based on anecdotal evidence (e.g. why would the Saudi leaders want to postpone exploring for oil if they weren't running out, or why are we expending so much effort on deep water drilling to find oil unless there is a shortage?). While I remain skeptical, oil has been one of the best investments of the past 15 years, and companies that have oil and can produce it inexpensively should do extremely well.
Alternative Energy and Related Commodities
The Chinese are looking to find energy supplies in any form possible, and this means alternative energies. They are less concerned about the environment and more concerned about their resource security, but either way Chinese companies developing alternative energy infrastructure should perform extremely well. Furthermore, this infrastructure is going to require a lot of commodities, particularly metals. Wind turbines contain a lot of iron ore as well as permanent magnets that contain rare earth elements such as neodymium, terbium, and dysprosium. Solar panels contain a lot of silver. Lithium ion batteries, which are found in electric cars, contain graphite and lithium. And all of these things contain a lot of copper. So these metals and the companies that mine them should be compelling investment opportunities.
The Chinese are acquiring a lot of gold in order to eventually exchange it for energy (the Chinese have already exchanged gold for Iranian oil). Chinese leaders are encouraging their citizens to convert their savings into gold (and silver), and there have been rumors that the Chinese will be backing the Renminbi with gold. Furthermore, as commodity prices rise, the U.S. government will have to borrow more money to sustain its spending in real terms, and if it cannot find buyers it will resort to quantitative easing. We've been told that QE will end, but this isn't the first time in the past few years that we've heard this, and I suspect that since international interest in U.S. bonds has been waning we will see more QE, which will de-value the dollar and boost gold's price.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.