From Dan Denning, alleged spy of neo-liberal elitists, in Melbourne:
With the Australian government’s $15 billion take on the sale of its Telstra (ASX: TLS) stake, we are tempted to revisit the entire issue of private (pirate) equity today. Skipper John Howard and XO Peter Costello must be pleased with the haul. But we first wanted to tell you about our weekend project infiltrating the heart of the anti G20 protestors in Melbourne… video footage of our excursion here.
We use the word ‘infiltrated’ rather liberally. All we really did was put on a baseball cap and some trainers to go with our shorts and t-shirt. Then, we walked up to strangers who were shouting or carrying signs, pointed our cheap digital camera in their face, and asked them to tell the world what they thought.
This confirmed two things for certain to us. First, most people like to hear themselves speak. Second, the easiest way to win most political debates is to say nothing at all. Give you opponent the floor, press record, and let the public spectacle begin. Sooner or later even the most learned of agitators will run out of clichés.
Actually, we didn’t do any debating. We just asked a few questions here and there and tried to avoid flying objects. In the digital age, everyone is a reporter. And there were really more reporters than protestors this weekend. The Really Really Free Market we were eager to participate in was nowhere to be found at Alexandra Gardens on the banks of the Yarra. It was even more invisible than Adam Smith’s guiding invisible hand, no small feat.
Take a look at the video footage here and you’ll find out what “neo liberalism” is and why some people think it doesn’t work. You can see our interviews with several other protestors/observers/bystanders, along with some of our own observations.
In other news, the mining industry is buzzing with merger activity, even more than Australia’s media industry. We read in today’s Wall Street Journal that New Orleans-based Freeport McMoran (NYSE: FCX) has agreed to acquire another large copper producer, Phelps Dodge (NYSE: PD), for US$25.9 billion. The Journal reports that “The combination of two major copper producers continues the recent streak of big-ticket mining deals, as the industry’s biggest players scramble to secure companies with large production and new mine developments.”
“The deal amounts to a large bet on the long-term sustainability of high metals prices,” the Journal continues, and we agree. We’ll have more on that below. But there’s also this, “Long-held concerns that copper supplies could fall short of demand have been offset by a growing sense that supplies appear insufficient.”
The basic math in the resource market hasn’t changed (it hasn’t changed anywhere, as far as we know. One plus one still equals two, which is less than three.) When demand is growing faster than supply, prices will rise until new investment creates new supply or high prices slow demand. True, new supply for some commodities may be coming on line in the next year. But all this means is that the individual investor will have to drill down into the metals and resource sector on a commodity-by-commodity basis to find those places where capacity is not keeping up with demand.
Zinc and nickel are good examples. Locally, we read today that Kagara (ASX: KZL) has acquired the nickel portfolio of Lion Ore Mining in Western Australia for $25 million. It’s not an earth-shattering deal, but that doesn’t mean it isn’t a sensible one for KZL. According to the Age, “The acquisition includes the rights to various tenements which cover the down-plunge projection of the ore bodies adjacent Western Areas’ Flying Fox nickel mine, about 400km east of Perth.” Kagara’s Chairman Kim Robinson says, “This new growth initiative in nickel compliments our other new business development opportunity with the large-scale Admiral Bay Zinc project in Western Australia’s Kimberley region, where we are commencing a landmark resource drilling program in 2007.”
That’s the picture from the ground level. And it’s a picture we like, both for Kagara and the Australian resource and mining sector in general. But the picture looks good from a larger perspective as well. “Surpluses in mineral supply will emerge in 2008, but continued growth in demand and rising mining costs will stop prices from dropping back to their level of the 1990s,” reports today’s Australian, citing a World Bank Study prepared for the G-20.
“Resource industry leaders in Melbourne for the G20 summit said there had been a lack of investment in capacity in the industry, with a decline in levels of both skills and research and development,” the article continues. “The industry has been responding to these changes and is making massive investments, but the lead times are typically up to 10 years,” added the Energy and Minerals Business Council.
In it’s formal communiqué, the G20 put it even more directly, “Above average growth in the global economy has seen spare capacity decline which, combined with buoyant energy and mineral prices, has increased the risks to inflation….While physical stocks exist to meet demand and investment is increasing, the expansion of supply to date has struggled to keep pace with demand growth, resulting in significant increases in prices.”
Pretty simple, when you cut through the formal phrasing. What it means for investors now is that the resource boom is far from over. But it is not as easy to profit from it as it was a few years ago. With big fish eating little fish all over the industry, we are on the hunt for little fish, whether they be energy exploration companies or gold producers. We are also conscious of the fact that the relationship between China and Australia is the most important economic relationship in Australia’s future, and bears more thought.
Treasurer Peter Costello (who we find usually makes a lot of sense on economic matters) agrees, and put it this way in remarks to reporters, “ I have already raised the issue of minerals and energy with the Business Council including key Chinese buyers at the meeting that I had with the private sector this morning. I will also be discussing this obviously with the Chinese Minister to get a fix on where he thinks Chinese demand is going and it is a very important aspect of the Australia-China relationship, the demand that our companies are getting for energy, for base metals and it will be a big feature of our discussions.
Here we confess that one of the main reasons we moved to Australia was to be closer to the China action—and figure out how individual investors could take advantage of this economic affair between China and Australia, one of the world’s most underreported but important strategic relationships. As you’ll hear in the interviews we recorded, not everyone is fan of the relationship. But the Treasurer certainly is.
Costello added this, “I want to see an energy freeway between Australia and East-Asia where we are supplying needs that a growing East-Asia will have, principally China but not just China – Japan, Korea. This is an enormous opportunity for Australia but it is important for these countries. They are going through with China, massive industrialisation, they need to be assured that they are going to get energy and they are going to get metals. They have got a big population. They have got 1.3 billion people that are going to have demands for housing and transport and energy and they are looking for long-term continuity of supply.”
This is the very situation we described in The Bull Hunter. We called it “The Money Migration,” and will have more on it later this week.
We were trolling for a copy of an International Energy Agency briefing given to the G20 this weekend when we found this bit on the IEA’s website under the header of “chokepoints.” It was related to a comment we made last week about the vulnerability of Far East Asian energy supplies to disruption of the world’s key trade routes.
We reproduce it here to show that we don’t just make stuff up here at the Old Hat Factory. We also reproduce it to show that investing in LNG-related industries—as we’ve recommended in Outstanding Investments—is one way to invest in the emerging energy market.
“According to the Reference Scenario of the World Energy Outlook 2005, much of the additional oil and LNG that will be exported in the future can be expected to be shipped along these three maritime routes, with oil shipments through the Straits of Hormuz projected to grow to 32 mb/d in 2030, while LNG shipments along the same route will jump from 28 bcm to 175 bcm. By 2030, as much as 28% of the world’s oil supply and 4% of gas supply could flow through the Straits of Hormuz. In the Alternative Policy Scenario, where a more efficient and more environment-friendly energy future is depicted, oil and LNG shipments through the Straits of Hormuz are projected to reach respectively 29 mb/d and 154 bcm in 2030.
“Another busy and narrow route is the Malacca Straits between Indonesia, Malaysia and Singapore. Around 13 mb/d of the oil (more than 15% of world oil demand) is subsequently shipped through this channel, much of which is destined to the Far East. Narrow channels, shallow reefs, thousands of tiny get-away islands, and slow traffic with some 900 commercial vessels passing through each day makes the Malacca Straits a sensitive transit point.”
“More than US$1.3 billion in works of art have been sold in the past two weeks during a record New York auction season that has pushed art prices to an all-time high,” reports today’s FT. Is this a sign of inflation? Or just the growing appeal of “real assets” and collectables? We don’t know. But for awhile we have rather sinfully coveted a print of Leonetto Cappiello’s Maurin Quina lithograph of a green devil on black background.
We used to ogle the poster at the store situated beneath our Markets and Money office in Paris. Now, we ogle it on-line, but at wildly divergent prices. Thank goodness for the real free market, and the internets! Genuine originals in enormous size run north of US$6,000. But you can also buy a framed copy from Wal-Mart for US$152, yet another triumph of globalisation.
Either way, we like the poster, and unlike a U.S. dollar bill or Treasury bond, we suspect it will be worth a lot more than the paper it is printed on in one, three, five, ten, or thirty years. It would look good in our portfolio, but it would also look good in our office. You can view it at http://www.parisposters.com/Cappiello-Leonetto/Maurin-Quina-(Large).html
Did you know that Yahoo (NASDAQ: YHOO) is down nearly 30% so far this year. More importantly, its business model seems to be disintegrating under the pressure of keeping up with the Google (NASDAQ: GOOG) Signs of internal strain at Yahoo showed up in a memo leaked to the Wall Street Journal this weekend. It was called, “The Peanut Butter Manifesto.” It shows that despite its warts, a competitive marketplace usually rewards consumers and punishes fat, lazy, contented firms that fail to ad value, provide a decent service, or efficiently produce scarce resources.
Written by Yahoo’s Senior Vice President Brad Garlinghouse, the memo worries that Yahoo is spread too thin, overstaffed, and lacks a coherent strategic direction. “There are so many people in charge (or believe that they are in charge) that it’s not clear if anyone is in charge,” Garlinghouse writes. This sounds like the “complexity catastrophe” Eric Beinhocker writes about in his tome, “The Origin of Wealth.” It also leads us to believe that marketplace forces are “democratizing” the media market more than any changes in the law can. We cite our own humble voice of independent financial analysis as an example, and look forward to more voices and more competition. Our point is that Big Media is going to have a hard time keeping up, just as Yahoo, once unsassailable, is having a hard time staying on top.
Sometimes, we assert, it’s better if no one is in charge. That’s because for some things, it’s not possible for any one person to know enough to make a good decision. Our patron and skeptic-in-chief Bill Bonner believes in the management (and life) philosophy of “dynamic indifference.” Leave people to their own devices and they will self-select. Let them be free to choose, as Milton Friedman suggested. The good ones will have the freedom to figure things out and do without being told. The not-as-good ones will either fail or resign.
Either way, it’s impossible for a manager to handle the myriad decisions that a firm faces each day. He’s better off doing his little part in the division of labor and that’s it. We would quote something from our favorite moral philosopher Friederich Hayek if we had one of his books handy. But instead, we will simply say that sometimes freedom means sticking to your own business.
This approach works for an individual’s behavior in the market place. As our friend Andre recently wrote to us, “We have been following with interest your banter debate regarding the compulsory voting in Australia. As you probably can guess, in my opinion, voting with pen on paper is totally useless, and the only voting that should be done is with one’s feet and one’s money.”
This is exactly the point we have clumsily been trying to make for weeks. Every choice you make is a vote in the free market. This is the great gift of the free market, always increasing and sometimes mind-boggling varieties of choice. Where you eat lunch, if you drink Diet Coke or Perrier, or whether you come to Macca’s on Saturday for a charity event, all of them are votes, and all of them play some small part in determining how scarce resources are allocated and what producers produce. For some people, so much choice is oppressive. But if having choice is kind of oppression, we say bring it on!
Human action always has consequences, it’s just that in economics, the consequences of those actions are often delayed and thus not always visible (saving to pay for your retirement, for example.) In the political and digital media age we live in, abstractions suffer. People want what they want and they want it know. Many political chants often express just this desire for immediate political gratification of economic desires: What do we want! Jobs. When do we want them? Now!
While it is fun to stomp and shout, and for some people, to break stuff, the truth is that how you spend your time and money reflects your values and priorities. That’s why economics used to be called moral philosophy. It also explains why so few people showed up to protest the G20 this weekend. It’s not that they don’t care. It’s that globalization has been good to Australia, and generally raised living standards across the world. If that weren’t true, there’d be a lot more people in the street, or attending the Really Really Free Market.
But the only public spectacle to be found on Saturday was a handful of people who wanted to break things and the media who wanted to show pictures of people breaking things. The cops kept order and the taxpayers footed the bill.
By the way, our friend Andre ads that, “I have been waiting for somebody to publish a collection of interesting donkey votes for some time. My favourite voting slip and validation is ‘Any form of government is a form of oppression’. LOL. This might be a little too anarchic for the Markets and Money.” Hmm. No comment from the Old Hat Factory. We are practicing self-censorship/self-government/self-oppression. But if you have a favourite donkey vote, send it to us at email@example.com and we’ll publish a collection later this week.