The "Real" Boom
Let us assume that an investor is looking for one asset, which he could buy and hold for the coming 10 years. This individual is extremely busy with his work so he does not have the time to closely monitor his investments on a regular basis. He is simply looking for an undervalued asset-class, which he could buy and forget for a decade without any sleepless nights. His plan is to invest his money in only one asset-class and he intends to cash in on the profits in 2015. So, which asset-class should this guy invest in? Should he buy US stocks, Asian stocks, perhaps bonds or even leave his funds in cash? Below, I provide my analysis of what he ought to be doing with his money.
But first, I want to start with an underlying philosophy. As an avid student of economic history, I have realised that all assets go through multi-year economic cycles commonly known as bull-markets (boom) and bear-markets (busts). These cycles surely follow each other as night follows the day. During a bull-market, an asset goes from depths of undervaluation to overvaluation. A bull-market usually ends with intense public participation, optimism and euphoria. On the other hand, a bear-market takes an asset on its long journey from extreme overvaluation to acute undervaluation. A bear-market usually ends with "blood on the street" or deep, dark despair. As a money manager, it is my job to identify, which assets are in a bull-market and those that are in a bear phase.
Looking back at history, it is now easy to see that if the above investor had to buy one asset in 1970 for the next 10 years, he should have bought commodities. For those who are not familiar, commodities went through an enormous boom during this period. Supply conditions were extremely tight, demand was rising and we also had the "Oil Shocks", which led oil to its all time high in 1980. During that period, the US economy was in a recession, inflation fears were running high and interest-rates were rising fast. The whole world was convinced that inflation would continue to escalate and that savings would eventually become worthless. Thus, everyone turned to hard, tangible assets to protect their wealth. The boom, which started off as a gradual bull-market (as they all do) erupted into an enormous mania in the late 70's as investors kept piling their cash in commodities whilst completely ignoring the prices they were paying. During the 70's, several commodities went up through the roof. Sugar went from 1.4 cents/pound in 1966 to 66 cents/pound in 1974 - a staggering rise of 45 times! Oil went from $2/barrel in 1973 to over $30 in 1980 and gold went from $35/ounce in 1971 to over $850/ounce in January 1980! Looking at the statistics now, commodities were an obvious choice in the 1970's but hindsight is always 20/20.
If our investor friend was looking for one investment theme in 1980 for the next 10 years, he should have bought Japanese stocks and real-estate. During that period, Japanese assets soared exponentially as the world became amazed by the "Japanese miracle". Money kept pouring in from around the world and the Japanese stock-market index (NIKKEI) rose from 6,500 in 1980 to 38,915 in December 1989. The future looked obvious: Japan's hardworking and focused society seemed unstoppable. In the 1980's, the Japanese economy was a sensation - the most dynamic economy the world had ever seen. Meanwhile, Japanese real-estate also surged. At the peak of the bubble in 1990, Japanese real-estate was worth four times the value of all property in the US! The Imperial Palace in Tokyo and the nearby park were valued more than the whole of Canada! So, it is obvious now that the land of the rising sun would have been the best option for investment purposes in 1980.
Let us now turn to the next decade - the roaring 1990's. During that period, our investor should have put all his money in American assets. During that period, the world's super-power came alive as the world fell in love with the US. As many will remember, the last decade saw the exponential rise of the American stock-market led by the NASDAQ. Stocks, bonds and real-estate soared as inflation was low and interest-rates were falling. In the 90's, you just could not go wrong. All you had to do was to buy any American asset and the bull-market would have done the work for you. The technology-heavy NASDAQ rose from almost 500 in 1990 to over 5,000 at the turn of the millennium. Everyone was convinced that the "New Era" had arrived. Companies like Amazon, Cisco Systems and Yahoo became the technology darlings of the investment world. Locally, people standing in queues for Tom.com and Sunday IPO's come to mind. Looking back, it is obvious now that America would have been the best investment destination in the 1990's.
After having gone through the various asset-booms of the past three decades, I would like to point out that they all had one thing in common - the eventual bust. Commodities peaked in 1980 and declined for two decades; Japanese assets peaked around 1990 and are still deflating after fifteen years; NASDAQ collapsed in 2000 and despite record-low interest rates, American stocks have failed to better their all-time highs recorded five years ago. The brutal truth is that no asset-class goes up or stays depressed forever. This is one fact that every investor must keep in mind when speculating or buying for the long haul. Our history is dotted with several "New Eras" and "Economic Miracles", which were supposed to change our world forever - American canal systems and the railroad boom in the 19th century, the auto boom at the turn of the 20th century, the commodity boom in the 70's, the Japanese boom in the 80's and the technology boom of the 90's. Yet, none of these booms lasted forever. The current housing boom will be no exception.
So, let us address the original question - "which asset-class will boom over the coming decade? I am of the opinion that commodities will prove to be the best performing asset-class. Therefore, our investor above should park all his funds in commodities and when he returns in ten years time, he should be sitting on a huge profit. Why have I chosen commodities out of all the assets? For the simple reason that in 2001, commodities were the cheapest they had ever been in the history or capitalism. The commodities bear-market (1980-2001), which lasted two decades, ended up wiping out a large number of businesses involved in their production. Declining commodity prices and increasing costs forced the marginal companies to either close down or look for alternatives. This resulted in tightening supplies worldwide.
Let us take a look at the most important commodity - oil. Over the past 35 years, there has not been a single major oil discovery anywhere in the world! Global production is peaking and there is no additional supply. Meanwhile, demand for oil continues to rise especially in the emerging world where populations are huge and per-capita consumption of oil is still extremely low. As global demand rises and supply remains tight, oil prices will continue to surge.
Similar supply-demand patterns can be seen across the majority of commodities. As China and India become more prosperous over the coming years, their demand for food, clothing, housing and energy will increase significantly resulting in higher prices.
So far, industrial commodities such as metals and energy have done exceptionally well. However, agricultural commodities such as sugar, corn, wheat and orange juice haven't gone up as much and are still close to their all-time lows adjusted for inflation. Over the coming 18-14 months, I expect agricultural commodities to provide the best returns. Below, I provide a long-term monthly chart of wheat (inflation-adjusted). I don't know about you but living in Hong Kong I can foresee that China is shifting away from a rice-based diet as its people become more accustomed to Western foods.
WHEAT - (Spot Cash, $ per bushel - adjusted
What will happen to the depressed wheat prices when the 1.3 billion Chinese start consuming more bread, cakes and pasta?
Similarly, take a look at the long-term inflation-adjusted monthly chart of Cotton. Despite the horrific inflation we've seen since the abandonment of the gold standard in 1971, cotton is extremely inexpensive. As the 3.6 billion Asians (56% of global population), acquire more wealth, their demand for clothing will also rise exponentially. This should send the price of cotton significantly higher in the years ahead.
COTTON (spot cash, cents per pound - adjusted
Source - www.thechartstore.com
Furthermore, I expect gold and silver to outperform industrial metals over the coming years. We now live in an era where inflation is the norm. Fed Governor "Helicopter" Bernanke comes to mind. Despite what the mainstream media says, the "deflation threat" is not a real concern but only a smokescreen, which allows central bankers to continue printing more money for their own benefit. In today's world, where paper currencies are only empty promises backed by nothing, I expect all of them to keep losing value against time honoured wealth - gold.
In my opinion, the US dollar is a doomed currency and will eventually become worthless, the Euro is nothing more than a far-fetched political fantasy and the Yen isn't attractive either as Japan is still deflating. In these circumstances, the public will eventually wake up and smell the rat. Smart money has started treating gold as a currency rather that a commodity and over the period ahead, you can expect gold to rise against all currencies and not just the US dollar.
Despite a strong run by commodities since 2001, the investing public remains sceptical. People are concerned that China's economic slowdown will have a negative effect on the demand for commodities. I disagree with this theory because the previous bull-market in the 1970's also took place amongst an economic recession and rising geo-political tensions in the middle-East.
Today, things are no different. Geo-political tensions are rising, inflation is becoming a concern, demand is rising and supply is extremely tight. Noting all of the above and as a capital preservation strategy, I strongly advocate an investment in commodities for the coming decade.
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