INFLATION IS HIGH AND RISING IN EVERY GEOGRAPHIC
REGION OF THE GLOBE!
THERE IS A BIG TREND WHICH WE
SHOULD ALL BE AWARE OF... AND INVESTMENTS
SHOULD BE POSITIONED TO TAKE
ADVANTAGE. THAT TREND IS...
INFLATION IS HIGH
AND RISING IN EVERY GEOGRAPHIC REGION OF THE GLOBE
Wall Street experts have been talking about the coming inflation for
two
years now. Individual countries satrted to notice it about eighteen
months ago, and a few months ago inflation finally came to the public's
notice on a worldwide scale. However, the seeds of the current price
increases were sown at least two or three years ago. What is more
important is that the growing season for prices is nowhere near
complete.
A few salient points for those who want to protect themselves from the
current and oncoming inflation.
1. Inflation takes a long time to incubate. Its soil is the fertile
ground of irresponsible monetary policies that take the form of
governmental money creation.
2. Countries then institute price controls and government imposed export
curbs.
3. Shortages develop in world markets for commodities.
4. Inflationary psychology lags inflation by a long time, but once
inflationary psychology begins to grip the populace there is a scramble
to acquire and hoard goods instead of money, bonds or bank accounts.
5. Citizens of inflation ridden-countries wish to hold something other
than cash, bonds, bank accounts and income producing stocks. The
psychology begins to be, "Every day that I hold cash it is losing value
to the inflation rate." So countries and investors take the following
actions: People buy stocks, hoard food, gold, oil, commodities and
other
resources and in normal times. If credit is available, they hoard real
estate. Currently, real estate can be hoarded in the developing world
but in the developed world there is a credit liquidation going on due
to
an increasing illiquidity in the credit markets...simply put, real
estate cannot be easily financed so hoarders go to other assets.
6. Countries begin to raise taxes on extractive industries or even force
them to sell their companies to the government at low prices. Then
the
government operates them inefficiently with political goals in mind.
A
politically operated company is usually grossly inefficient, production
falls and prices rise even faster.
7. Investors begin to call their money managers, stock brokers
[financial consultants] mutual funds managers and ask "how can I stay
ahead of inflation?"
8. Before this stage hits (it is about 6 months away in our view), you
are wise to be invested in the industries and companies which benefit
from inflation.
WHO BENEFITS FROM INFLATION? ENERGY, GOLD, FOOD,
BASE METALS AND THE
FAST GROWING COUNTRIES, SUCH AS CHINA ALL BENEFIT.
LET US TAKE THESE AREAS ONE A TIME AND BRIEFLY
DISCUSS OUR INVESTMENT
STRATEGY FOR EACH
ENERGY
In the past six years (having owned a lot of energy investments while
oil has gone from $30 to $116 per barrel) we have invested in several
sectors. Currently, we are focusing on those companies which find energy
or provide services in finding energy in harsh environments, in
unpopular countries, and in offshore deep water environments where
most
all of the big new discoveries are taking place. We focus on the foreign
and harsh environment companies because of the expertise that they
possess, in the form of country contacts, and/or technical expertise
that will be very valuable in finding energy located off the beaten
path. The reason for this is that the energy investments on the beaten
path are more highly priced. In our opinion, bigger profits can be
found
off the beaten path.
GOLD AND SILVER
For the past six years we have focused on precious metals of the
following type. When owning mining companies, we favor companies with
a
royalty model or with a model that uses equity financing and no debt
with derivatives attached. Companies who do not sell forward future
production as collateral to pay off their loans, and whose growth model
does not use derivatives (selling forward future production to get
the
mine started) are preferred. Such companies are few.
For those who do not want to own stocks, buy precious metals ETF's
assuming they are solidly and fairly constructed.
FOOD
Food prices have only been rising for a couple of years, and for that
long we have been focusing on it. Food prices will rise much more
because politicians are starting to manipulate food prices for their
political gain. They are installing price controls, export controls,
tariffs and other artificial boundaries which have always led to
long-term inefficiencies and problems. These actions tend to cause
long-term price increases as they spread incoherence in the farming,
distribution and consumption process.
Investing in food is easier now due to the proliferation of ETF's,
especially grains. Many ETF's exist to buy grains in several countries.
Meats are harder to buy because meat producers consume a lot of grain
and grains will rise a lot more in price longer term. In addition to
grain ETF's we like to buy fertilizers. We have analysts focused purely
on fertilizers, which has been a very successful investment area for
us.
BASE METALS
Base metals are in huge demand to build the infrastructure of China
and other fast growing countries like Russia.
The world's biggest sellers of base metals are Brazil, Canada, Russia,
Australia, U.S., and Africa. To a lesser
degree other Latin American and Asian countries also sell base metals.
FAST GROWING COUNTRIES
Most economists agree that it looks like the growing countries,
especially China, India and Brazil have decoupled
from the U.S. and Europe. They are growing, and growing fast. While
Brazil is still growing much slower than the
other two, its income distribution plan has worked only because the
commodities that it sells are rising rapidly in
price. Brazil and India must develop more manufacturing and services
to supplement farming and commodity sales.
China is a phenomenon, and thus far a very successful one. China is
a
commodities importer. China has a much
more developed manufacturing sector, and now its growing consumer
sector is developing.
Even though there were huge snow storms in the first calendar quarter
throughout southern China, the GDP growth
was stunningly good. The government is trying to slow inflation and
is raising interest rates. Thus far, there has
been little effect on Chinese economic growth.
To us, Brazil and India are OK if you focus on special companies, but
both markets are more vulnerable than China.
China's stock market has fallen 50% from the highs while corporate
profits grew about 25% in the last year. In our
opinion, some Chinese stocks are getting quite cheap and amount to
a
good long term play.
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