The Daily Reckoning - Waves Of Commodities (Marc Faber, again)

verfasst von Firmian, 30.03.2004, 23:14

-->Waves Of Commodities

The Daily Reckoning

London, England

Tuesday, 30 March 2004


---------------------

*** Dow rises... but ignore the news...

*** Of lions and lambs, shepherds and sheep... and a
monetary riddle for your reading pleasure...

*** Efficient Market Hypothesis - we wish we'd thought of
it... Professions of faith... and other things...

---------------------

We did not think about investments yesterday. We opened no
newspapers; nor did we consult any websites... or even turn
on the television...

.. which makes us especially qualified to give an opinion
on what is going on...

Our opinion is that the tide has turned; after 20... or
50... years of flooding in, it is going out. Almost all
boats - that is, asset prices - will sink lower as credit-
soaked growth ebbs away.

In America, over the last half century, people gradually
shifted from production to consumption. Now, they depend on
credit from the rest of the world to continue spending.
While they grow older... and look forward to retiring on
money they haven't got... younger, more vigorous workers in
China, India, and elsewhere offer to do their jobs at lower
rates of pay.

The rally wrought by the feds with lower lending rates and
increased public spending was merely a backwash. Now, it
seems to have crested. Stocks and the dollar are headed
down.

These are just opinions. But at least they are uninformed
ones. Many are the 'facts' that might be shoved in our
faces to prove we are wrong. If we'd read the paper or
watched TV, we'd know that houses sold well last month.
People bought them by the dozens - as if they were Viagra
pills. Consumers continued spending their silly heads off.

Stocks, we see in today's headlines, rose 128 points
yesterday."Stocks are attractive with earnings growth
being pretty good," the International Herald Tribune quoted
someone this morning.

Well, there you are: stocks are attractive. All is well.
Another item tells us that the dollar is expected to rise,
not fall... and that gold"may disappoint" investors.

But that is the trouble with the 'news.' People take it
seriously. They read the paper and think they know
something. But what they know is nothing more than the
prejudices and illusions of their fellow investors and
media hacks... which they mistake for reality.

You're better off avoiding it, dear reader. But few people
can. An investor, for example, feels the need to 'inform
himself.' If he doesn't watch his investments, he fears
they may get away from him.

He would do better to go fishing. If he tunes into the
news, he finds out what other people already know... and
what other people already think. If he finds a stock that
sounds appealing, it is usually one the smart money is
already selling.

The typical investor does not inform himself in any real
way - digging into a company's annual report and studying
its business model as Warren Buffett might do. Instead, he
merely absorbs the latest mass sentiments and feels no need
to think. Thus does the poor schmuck fulfill his role as a
bagman for modern capitalism.

The man without media is in a better position. He knows
nothing. But he knows he knows nothing. He can buy and sell
in complete ignorance of investment fashion. Immune from
the currents of investment fashion... at least he has even
odds.

But we give you the news anyway... and urge you not to pay
too much attention to it:

-------------

Eric Fry, on the ground in Manhattan...

- Up here in the Northeast, the icy shroud of winter is
finally lifting, and an occasional crocus is venturing up
from beneath the soil. This year, March did indeed come in
like a lion, but, mercifully, is going out like a
lamb... which may explain the vast flocks of sheep
congregating around the Wall Street area.

- As their pinstriped shepherds lead them directly into
harm's way, the sheep repeatedly bleat,"Buuuy... Buuuy."

- Yesterday, the bleating didn't subside until the Dow
Jones Industrials Average had gained 117 points to 10,330 -
its second triple-digit gain in the last three sessions -
and the Nasdaq had jumped 1.5% to 1,993.

- Despite the market's recent gains, the Dow and Nasdaq are
both nursing losses of more than 2% for the year-to-
date... But the sheep don't care. Better to be slaughtered
together, they reason, than to wander alone.

- As usual, yesterday's stock-buyers found little use for
either gold or bonds. The yellow metal slumped $5.20 to
$417.00 an ounce, while bonds also fell, pushing the yield
on the 10-year Treasury issue up to 3.90% from 3.85% on
Friday.

-... And now for your reading pleasure, a monetary riddle
courtesy of Dr. Marc Faber, a regular contributor to
Strategic Investment and the editor of the Gloom, Boom and
Doom Report:

-"He's the head of a monetary authority who has not only
managed to create a series of bubbles in his domestic
economy, but has also managed to create bubbles elsewhere -
in the New Zealand and Australian dollars, emerging market
debts, government bonds, commodities, emerging market
equities and capital spending in China."

- Is our mystery man: A) Alan Alda; B) Allen Iverson; C)
Alan Abelson or; D) Alan Greenspan?

- The correct answer is, of course, Alan Greenspan. If some
of you guessed Allen Iverson, you weren't far off. It's
true that the flamboyant guard for the Philadelphia 76ers
mints money almost as fast as Greenspan does. But unlike
the Fed chairman, Iverson is partial to gold, diamonds and
other hard assets.

-"Mr. Greenspan's monetary [machinations] mark an
achievement no one else in the history of capitalism has
accomplished," says Faber."It is also one investors will
never forget and - once this credit-driven, universal
bubble bursts - will fill entire chapters of financial
history books with economic and financial horror stories.

-"I was leaning towards the view," Faber continues,"that
some assets would continue to increase in value in 2004
while others, such as bonds, would begin to fall by the
wayside and enter longer-term bear markets. After further
consideration, I am now increasingly concerned that
sometime soon 'everything' could begin to unravel. When
interest rates rise, it is conceivable that bonds, stocks,
commodities and real estate will all decline in value at
the same time. [Ed note: More on the case for - and against
- commodities in today's guest essay by Marc Faber,
below... ]

-"As I experienced in Asia in the 1990s," Faber concludes,
"it wasn't important to be 'asset-rich' before the crisis
of 1997, but to be 'cash-rich' after the crisis when
financial asset values had tumbled by 90 per cent and when
incredible bargains across all asset classes were
available."

- Cash-rich is not a bad position to be in, especially if
you've got the cash to be rich with. As we noted in the
Weekend Edition,"Legendary Investors are Drowning in
Cash... In fact, it's remarkable how many top-flight
managers currently have more than 20% of assets in cash and
say they find compelling opportunities scarce to
nonexistent."

- Remember, dear reader, that Warren Buffett, chairman of
Berkshire Hathaway, made his billions by buying low and
selling high. Is it not significant, therefore, that the
Oracle of Omaha is finding almost nothing to buy? At the
end of 2003, Berkshire Hathaway held 23% of its assets in
cash - up sharply from the single-digit levels of the
previous four years.

-"When so many justly respected managers are sounding the
same cautious note, it makes sense to listen," says
Morningstar's Greg Wolper."Even the greatest managers
can't consistently predict the direction of the markets -
and by and large, they don't try to. But right now, their
words - and deeds - speak volumes."

- He who has cash to save, let him save.

-------------

Bill Bonner, back in London...

*** Well, we're not in London yet... we're on the Eurostar
en route. We would have been in London, but Daylight
Savings Time began in Europe on Sunday. No notice of this
was received by our alarm clock.

*** We are still thinking about the way 'the news' harms
investors... and voters, too.

Economists won a Nobel Prize for describing the way markets
adjust to news. The idea was that the stock market was
'perfect'... or 'efficient.' That is, the price of a stock
incorporated in it everything that was known about it.

The 'Efficient Market Hypothesis' was not exactly wrong, it
was merely absurd. It imagined a market with no heart, no
soul, no mind. It simply toted up information as an
accountant might add up a balance sheet. Every minute of
the day the data poured in, and the great machine whizzed
up the numbers... without ever misplacing a decimal point.

It was impossible to know any more than the machine. It
knew everything there was to know. Thus did it come to the
'perfect' price for a stock every second of every day. No
investor could do better... or blame himself for failure. He
could buy Enron just before it blew up... or Webvan at the
height of its hallucination... and who could complain? For
hadn't he bought the stock at the perfect price?

A day later, the price might be half as much, but that is
just the charm of the efficient market hypothesis - the new
price was perfect, too!

We smile to ourselves. We wish we had thought of it.
Elegant. Consistent. Useless.

Imagine the poor investor watching the price of Enron rise.
Up and up... each daily news quote would have raised his
confidence. The market was clearly telling him that the
stock was getting better and better every day. The price
was rising... and the price had built into it all that could
be known. Mr. Market did not make mistakes. If a price was
rising... it was because the price OUGHT to rise. In the
democracy of the markets, there was no higher authority
than the voters themselves. Mr. Market merely added up
their votes and proclaimed each day's winners.

No, Mr. Market does not make mistakes. But he has a way of
changing his mind.

*** Yesterday's service at St. Peter's began with a fright.
We arrived early, but discovered a line of thousands of
tourists waiting to get into church. Metal detectors had
been set up; by the time we got through the line, Henry's
confirmation ceremony would be over.

We were about to throw ourselves on the mercy of the
Italian security forces when we noticed other parents in
the same predicament. Rather than mercy, the French pled
privilege.

"We're expected inside... they're waiting for us at a
special ceremony in the main chapel," said the tall
Frenchwoman. At least, that was what we made of
it... accompanied by gestures and expressions understood
throughout the Latin world. After a few minutes of
negotiation, we were let through.

Henry's class was arranged by height, meticulously, with
Henry near the tall end. All the students, dressed in blue
and white, boys and girls, stood quietly. Henry, in Rome
with his classmates since last Thursday, looked as though
he hadn't slept or brushed his hair. Nor did he seem
particularly pleased to see us. But that was the code of
the youngsters, we discovered.

"Louis barely looked at us," said one mother."Foucauld
seemed embarrassed that we showed up," said another.

St. Peter's is what it pretends to be: the most important
cathedral in the world... the mother church of the entire
catholic world. Angels and archangels and all the company
of heaven look down upon camera-toting visitors from
painted ceilings, frescos and statues. The voluptuous
luxury of the place must be appalling to Baptists. After
Vatican II, it is almost an embarrassment to Catholics. But
it was a delight to us. We craned out eyes upward until our
necks hurt.

*** Readers with ecclesiastic tendencies might be curious
about the ceremony itself. Henry has already been
confirmed, which is a holy sacrament. This service, his
priest explained, is unique to French Catholics. It is a
reaffirmation of the baptismal rites... called the
"profession of faith."

Parents took their seats in the main chapel. In filed the
professors. The ceremony, conducted in French, sounded like
a repetition of the baptism. Parents and students alike
agreed to renounce the devil. Then, after the devil had
been severely renounced, the children marched out, followed
by their parents, while tourists took pictures and probably
wondered what was going on.

We said our congratulations to Henry and took photos. Then,
hardly 10 minutes later, the students were rounded up and
hustled off to a pizzeria.

Elizabeth and her husband meandered about for a
while... walking around the old part of the city. Finally,
we found a delightful little piazza, just to the west of
the Piazza Navone. There, in front of the little Hotel
Raphael, we had lunch.

"Aren't we lucky," said Elizabeth."Who would have thought
that our son would celebrate his confirmation at St.
Peter's."

"Yes, especially since we're not even Catholic."

---------------------

The Daily Reckoning PRESENTS: Commodity prices could double
- or even treble - from current levels, writes Marc Faber.
But beware..."Significant downside volatility for
individual commodities, even in the context of a long-term
commodities bull market, is almost a certainty!"


WAVES OF COMMODITIES
By Marc Faber

In the past, I have frequently discussed long-term price
cycles and observed, based on research carried out by
economists such as Nikolai Kondratieff among many others,
that these long waves last between 45 and 60 years, with
each rising and declining price wave lasting around 22 to
30 years. These long price cycles are well supported by
historical price statistics of the 19th and 20th centuries.

The last commodity rising price wave took place between the
mid-1940s and 1980 and was then followed by a declining
price wave, which most likely came to an end in 2001, when
commodity prices, adjusted for inflation, reached their
lowest level in the history of capitalism.

But upon further consideration, while accepting the
existence of long price waves for an index of commodities,
I have also come to the conclusion that price waves for
individual commodities tend to be of far shorter duration.
In addition, different commodities move up and down quite
independently from each other.

If we look at sugar, for instance, we find that it peaked
out in 1974 at 70 cents per pound, collapsed into late
1978, and then soared once again to a high in the summer of
1980. In other words, within less than ten years, sugar
went through two huge price cycles before settling down for
the next 20 years or so in a price range of between 2.5
cents and 16 cents.

I am mentioning this fact because investors should be aware
that commodities can reach a new all-time high and
subsequently new lows within a brief period of time, since
during the price boom massive additional supplies are
produced that later depress prices. Even if we assume that
the long-term commodity price cycle did turn up in 2001, we
should also be prepared to occasionally see 50% declines in
the prices of individual commodities within a long-term up-
cycle.

In other words, investors who are betting on commodity
price increases should be aware that significant downside
volatility for individual commodities, even in the context
of a long-term commodities bull market, is almost a
certainty!

This isn't to say that commodity prices, certain of which
have recently seen parabolic increases, will collapse right
away. A friend of mine, Richard Strong, once took me to
task for being bearish on the U.S. financial markets and
asked me why, if Japanese stocks had been selling for 70
times earnings in 1989, the U.S. stock market couldn't
reach similar valuations. Richard proved to be very much on
the mark - the Nasdaq sold for even higher valuations in
the spring of 2000 than Japanese equities had sold for in
1989. The same rationale could also be applied to the
commodities markets.

We could therefore see prices of certain commodities double
- or even treble - from their present levels in a
speculative mania. This is not a forecast, but a warning to
investors of the extremely volatile and short-term nature
of bull markets in individual commodities.

There is one commodity, however, about which a very bullish
long-term fundamental case can be made: crude oil.

Unless the entire Asian region goes into a lengthy
recession/depression in the next few years, oil demand will
undoubtedly continue to rise. Oil consumption in Asia, with
its population of 3.6 billion people, is about 20 million
barrels per day (by comparison, oil demand in the U.S.,
with a population of 285 million, is 22 million barrels per
day). Based on demand trends in the last ten years, Asia's
demand for oil is likely to double within the next six to
12 years. This Asian rise in demand, which compares to a
total current global oil supply of 78 million barrels, will
inevitably mean higher energy prices.

There is also the supply side of the equation to be
considered. Recently, Matthew Simmons of Simmons & Company
published a very interesting study on Saudi Arabian oil
reserves. And while he kept short of forecasting a decline
in Saudi oil production, he nevertheless questioned in his
analysis the widely held assumption that Saudi Arabia is in
a position to meaningfully increase its production of crude
oil.

For instance, Simmons raised the possibility that Ghawar,
Saudi Arabia's largest field, with a daily production of
five million barrels (by far the largest in the world),
could be past its best years. Moreover, based on the
experience of declining production at other large oilfields
in the world, Simmons' report suggests that Saudi Arabia's
five super-giant oilfields will at some point (maybe sooner
rather than later) also experience declining production.

The possibility of declining oil production isn't the only
problem the Kingdom of Saudi Arabia is facing. Its
population has almost quadrupled since 1970 and per-capita
incomes have been in a steep downtrend since 1980. It has
therefore become increasingly politically unstable and, in
addition, its own oil consumption is rising rapidly. Rising
oil demand is also common in other Middle Eastern countries
whose combined population has increased in the last seven
years by more than 40 million, and now numbers around 160
million people. (It is estimated that Middle Eastern
countries could by 2015 have more people than the U.S.).

I may add that in 1956, Mr. King Hubbert predicted that
U.S. oil production would peak out in the early 1970s.
Hubbert was then widely criticized by some oil experts and
economists, but in 1971 Hubbert's prediction came true (see
also Figure 6). Hubbert's methods of oil reserve analysis
now predict that a peak in world oil production will occur
sometime between 2004 and 2008.

Now, given the certainty that oil demand in Asia and the
Middle East will rise substantially (by around 20 million
barrels per day over the next ten years or so) and the high
probability that world oil production will peak out in the
next few years, the fundamentals of crude oil as well as
oil companies look very attractive.

What is more, unlike the seventies commodity bull run -
when global oil demand was leveling off - the fact that the
coming energy crisis will happen in an environment of
rapidly growing demand from Asia means it could involve
price increases of unimaginable proportions.

And of course, neither Mr. Greenspan nor his lackey Mr.
Bernanke will be able to do anything about these price
increases! Moreover, if we look at the recent very
substantial increase in practically all commodity prices
and the behavior of the ISM Prices Paid Index, it strikes
me that the CPI figures reported by the U.S. government
statisticians cannot make any sense at all to anyone except
Mr. Greenspan and Mr. Bernanke. In fact, I wouldn't be
surprised if, one of these days, the bond market woke up to
the fact that inflation is far higher than what U.S. CPI
followers naively believe, or that bond prices could begin
to discount higher inflation rates in the future and sell-
off sharply.

In general, however, I would most like to warn investors
about short-term volatility in commodity prices - even in
those with great fundamentals, such as the energy complex.
Although it is true that commodity prices are likely to
have begun a long wave-up cycle, which could last for a
decade or more, cycles for individual commodities tend to
be of far shorter duration. Indiscriminate buying of
commodities that are in the midst of a parabolic rise
purely on the China demand story, for example, may result
in large losses.

Having made this point, however, the view that certain
commodity prices may have become vulnerable in the near
term doesn't change the presumption that a long-term (but
volatile) commodity up-cycle began in 2001. The future is
still quite bright for this sector.


Regards,

Marc Faber
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Waves Of Commodities (Marc Faber, again) - Firmian, 30.03.2004, 23:14
  • Dt. Fassung - Firmian, 31.03.2004, 22:49