Your Weekend Markets and Money will take a slightly different approach today, dear reader. For the past few months we’ve been buried deeply into the work of our colleague Phillip J Anderson. Nobody looks at the market quite like Phil.
None of us have much of a chance of doing so either, because you need a decade or two to study all the past bull and bear markets and economic history like he has. But we can bring him to you directly. We’ll have more on that in the coming weeks. Today, however, we’ll share a chat we had with Phil immediately after his presentation at the investing conference World War D.
If Phil is right, you can sleep a little easier at night. He believes the coming decade will be so productive it will dwarf the debts of the Western world. That clashed with many of the speakers at World War D. So we began there.
Callum Newman: Phil, we’ve heard a lot about the debts, the troubles in the economy, the central banks, and currencies. You’ve come out and said ‘it’s going to be the biggest boom of all time’. Did it feel a little bit lonely up on the stage?
Phil Anderson: Yeah it did. Two things I can say there. First I try to have a cyclical view of the way things go. As I try to point out; debts have always been a problem. Since the time banks have been around. Sometimes they are worse, sometimes they’re not so worse.
There comes a time when you have got to worry about them, and there comes a time when really the market has priced in the risk and we get on with the business and things progress forward.
I think we are in a time now where all of those risks have been pretty much identified and the market knows what they are. We’ll deal with them and we’re just getting on with the business of producing wealth. Having said that though… I just didn’t say that yesterday — that we’d get the biggest boom of all time. I’ve been saying that since about 1998/1999.
The biggest boom of all time relates to where I think we are in the so-called commodity price wave. The name the economist have given that is the ‘Kondratiev Wave’.
Callum Newman: Can I just jump in there for a second. Mark Faber actually mentioned this very briefly yesterday, but he didn’t expand on it. Do you want to?
Phil Anderson: Briefly. Mark knows the K-Wave pretty well. I’ve seen some of his articles. He is very good on that. He may well have a little bit different conclusion than I’ve got, I’m not sure. Briefly, commodity prices have in the past or the past several hundred years exhibited 30 years upwards to 30 years downwards, but it’s not something you can date to an exact year.
It’s my view that we started that 30 year wave approximately 2001/2002. I’m on record that having forecast that quite accurately. It is all in my work. It is my view I think this will continue and I think we will see that continue until about 2030 or thereabouts.
History shows that on the upside of a K Wave enormous wealth is produced. Serious wealth is produced. It’s a fantastic time to see that happen. Now, again having said that; markets don’t get fooled all the time and they were fooled once up through 2007/2008.
So when I say ‘the greatest boom of all time’ the first thing people think about is that they will see share prices rise, they’ll see the DOW going to four million and they will see Australian house prices triple in one year.
That’s not what I’m referring to. When I say a ‘great boom’, it will be a fantastic time to run a business, produce a product that everybody else wants to buy or produce a service that people find really cool and then sell that business to someone else.
I try to show people when they are producing wealth like that, and you’re running a business, you’ve got to have an exit strategy. Your exit strategy is to sell or to float on the stock exchange and have somebody buy the business you’ve produced.
This is an astoundingly productive way of creating wealth and you’ve seen that process in the U.S. most of all, which is what Wall Street does very well.
In the last 12 months where have the most IPOs being put forward? Europe. People keep telling me Europe is not going very well, but it is. Where are they coming from? Spain. Parts of Greece, the kids there they’re doing stuff, they are producing things. It is an amazing time to be alive. And it is going to produce a lot of wealth.
Callum Newman: It is interesting because I know Jim Rickards is very bullish on the euro and he said for a long time, capital is sort of going back to Europe, the Chinese are keen to invest there and there are lots of things happening there.
Phil Anderson: Yes, well they have the property rights, so there will be money going in there, because the people putting their money in they know they can get it out again, common sense, really I think.
Callum Newman: I just wanted to go back to the commodity thing. Another well known commodity investor, Jim Rogers. He is one of the few people that called the big commodity boom.
Phil Anderson: He did yes, in his book.
Callum Newman: But he is another voice that says it’s not over as well. When we hear in Australia that the mining boom is over, what is your take on that?
Phil Anderson: It’s over in the sense of the markets pricing in unrealistic prices of assets, that’s over, that’s gone. The market is not going to get fooled again. But it isn’t over in the sense that the commodities that we are producing — they’re going to be used and needed.
That of course brings us back to China and people’s view on China. But I just don’t think that story is over. All of the stuff that we are doing with iPods, iPads these sorts of new products and stuff, they all need commodities.
I still think this has time to run yet and commodity producing nations they will continue to do very well. But the market is not going to price it into unrealistic expectations again.
Whilst we won’t see it in asset prices, I still think the process is going to continue, where a lot of people will still do very well.
Callum Newman: I want to pick you up when you were watching [Jim] Rickards because this will tie in when you talked about the property cycle in your presentation.
Phil Anderson: I know what you are going to say.
Callum Newman: Yesterday he said The Great Depression was caused by the gold standard or Churchill pegging sterling at the wrong price. You shook your head then, why?
Phil Anderson: Yes, well this is the misconception; this is what I tried to explain in my talk. I found I became a much better investor once I understood the economic rent. The Great Depression wasn’t caused by going back on the gold standard in 1924. It was a dreadful decision, it was done at the wrong price and it brought consequences which were not good. But it’s a symptom of the system and system is the economic rent.
People then blamed The Great Depression on the collapse of the stock market. Now the stock market did collapse, but what collapsed first was property prices. So Florida has this big huge massive boom which peaked in 1926 and 1927, and then it was downhill all the way.
By the time 1930 came along it was just the market, the market was built on sand. Then the stock market topped it off. But of course everybody sees the drama and that’s what everybody writes about, makes a great story. But underlying that is that is less dramatic but a bit more meaningful; which is real estate.
Callum Newman: A very interesting point to that is that everyone remembers 1929 but the actual low in the stock market was 1932.
Phil Anderson: Yes.
Callum Newman: So was that the low of the real estate cycle?
Phil Anderson: Well generally I happen to think that real estate has an eighteen-year cycle. The stock market at the real estate market lows, the stock market will bottom first and you know you’ve hit the real estate lows because the stock market starts making higher bottoms on worst news. But real estate takes a long time to recover because at the end of the day it’s the economic rent that takes all the gains. But the gains have to manifest first.
That is why the second half of a real estate cycle is so strong. We’ve had seven to ten years of producing gains. The world is producing at the moment prestigious gains, we really are. The IPOs coming out of the U.S. What is happening in Silicon Valley, huge amounts of money; ultimately the economic rent takes the benefits, so I think you are going to see a big second half.
Stay tuned next week for the second half
of Phillip J Anderson’s interview at World War D
for Markets and Money
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