Today’s Markets and Money comes to you from Gunbarrel, Colorado in the western United States and gives us a chance to answer a question from a perplexed reader. And as it’s been a rather slow day here in the US market (retail down big on subprime woes affecting domestic spending we’ll take a more metaphysical look at currency movements and economic trends and why these things are worth belabouring.
Here’s the question:
I just started subscribing to your e-newsletter about a week or so ago. I think it is quite good, and I have recommended it to several people already. I notice, though, that seems to devote a lot more time to the US than to Australia. I wonder if I have just caught an off week or if that is typical? If you do more on Austr. I would be interested to hear about how Austr. is fitting in with the Asian economies.
As Bill Bonner mentioned earlier this week, the entire global boom quite literally begins in the iron ore of the Pilbara and the coal of Queensland. It’s Australian resources that provide the raw materials for Chinese factories to crank out goods for American consumers. Aussie coal powers Japanse, Korean, and Chinese factories, too. The enabling agent in all of this is credit, which stimulates consumer demand to begin with. But in the physical scheme of things, Australia is the grand departure stage for the world’s manufactured goods. (Oil is another key element.)
We hadn’t quite seen Australia in this light when we moved down in late 2005 to begin publishing a local version of the Markets and Money. Markets and Money, is published in France, Germany, the UK, South Africa, Spain, and of course in the United States. Each local version is local in its own way, focusing on local stock markets and the problems investors have in their own country with their own currency and their own economy.
But the world is incredibly round and integrated, not flat at all, as that moron Thomas Friedman asserts. Each country plays a different role in the global drama, with different strengths and weaknesses, different pitfalls and opportunities.
The financial day starts in Sydney, moves to Tokyo, travels over the Silk Road through India to the oil fields in the Middle East, then that hedge fund haven in London, and on across the Atlantic to New York, the mercantile exchange in Chicago, through California and eventually back to Sydney where it all begins again. Round and round it goes…it never stops.
Markets and Money’s founder, Bill Bonner, who’s been writing every day, Monday through Friday, since 1999 – is Pennsylvania-born, Maryland-raised, Paris- dwelling, world-travelling publisher Bill Bonner. He began reckoning each day when the Internet and e-mail made it possible. But more importantly, he realised continual analysis off the market – often a debunking of conventional wisdom and the mass manias that follow – was possible and pretty darn necessary in an age filled with so many financial frauds and con men.
The whole thing has evolved from there, with a global cast of characters providing insights from their particular area of expertise. Your editor was based in Europe during the last three years, but elected to move to Melbourne after sensing all of the economic momentum (and opportunity) in the world was migrating East, away from North America and Europe and toward Australasia. We’d visited Australia in 2003 and liked the place so much we began the plan to move right away.
So far, we have found very few professional contrarians willing to go on the record and join us in our Daily e-zine/crusade against conventional investment thinking. Are there any contrarians in Australia? Or is it full of latent or creeping socialists who want to impose wage and price controls on your fruit and veg?
Well, we know for a fact there are independent minded readers in Australia who have the good sense to question popular political and economic thinking. There are nearly 10,000 of them that read the Markets and Money each day now. We’ve met quite a few in the last year in person. And we hope in the future (we’ve only been up and running locally for about 16 months) to bring you more independent research on the local market from local Australians. Until then, you’ll have to deal with the hand-picked team we have at the Old Hat Factory.
As for the focus on US events, well, much of what happens in the world today takes its lead from the consumption habits of the US consumer. So the fate of the American dollar, the impact of the implosion in the subprime mortgage market, the absurd conentions about money and energy emanating from the mouth of Ben Bernanke… these types of global events have local impact. Our goal is to look at that for you and see if we can find some opportunity in it.
You’re also reading more about America this week because your editor, jet lagged and overfed, happens to be in North America right now, on a mini-investment conference tour, talking about Australian resource stocks to North American investors. That tour has brought us to Colorado and the National Fuel Cell Research Center, which is conveniently located about an hour from where we grew up, went to school, and enjoyed many a Rocky Mountain high (our home town, at the base of the Continental Divide, is at 2,286 metres). Back home, spending our hold money, we realise all the dead presidents in our wallet are rather tired and not going as far as they used to.
“We think the US dollar will continue to fall. But against what? That’s the question,” said Frank Troter of Everbank a few days ago. Since we’ve moved to Australia to cover the Aussie markets, we only see Frank a couple of times a year at investment conferences. But his crew has been on top of the currency markets over the last four years, accurately calling the relative movement of currencies.
“Whether you like it or not, everything still keys off the US dollar. Its fundamentals stick. Its yield advantage is strong against the yen, but weak against the pound, the euro, and the commodity currencies are kicking its butt. As bad as it’s been for the buck, it’ll get worse,” he said.
What does this mean for the Aussie dollar and Aussie exporters? Well, it probably means parity, where one Aussie dollar buys you one US dollar. If you’ve ever wanted to visit the Grand Canyon, New York City, or see how a baseball game compares to cricket, now is the time.
How soon will parity arrive? A year, maybe more. But before then, the dollar will probably lose even more value against things. And by things we mean tangible assets that are not currencies. Things like oil, gold, copper, zinc, lead, cotton, corn, wheat, orange juice, pinball machines, and paintings.
What could screw it all up? Rising energy prices. Yesterday the International Energy Agency said the world’s daily oil needs are growing, while the world’s oil supply is not. “The IEA forecasts that the Organization of Petroleum Exporting Countries, the cartel that supplies more than 40% of the world’s daily oil needs, will have little spare capacity left by 2012,” reports today’s Wall Street Journal.
“Natural-gas markets also will be tight because of inadequate supply increases, limiting the ability of consumers to switch between oil and natural gas. Still, demand for oil and gas is expected to rise at a brisk pace in the next five years. It said global oil demand is projected to expand 2.2% a year, on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year. This forecast is based on global economic growth of about 4.5% annually. Oil demand is expected to increase most rapidly in Asia and the Middle East.”
Where is the extra nine million barrels of oil going to come from, dear reader? Global production is already struggling to keep up with demand. It’s one thing to say the world will need 95 million barrels of oil a day in five years. It’s another thing altogether to find out if the world can actually produce 95 million barrels a day.
Given the declining production at some of the biggest fields in the world and the lack of discovery of large reserves to replace producing assets, maybe it’s time to consider the possibility that global oil production has peaked. We’re on a bumpy plateau in which supply and demand are roughly in synch. But what’s at the end of the plateau?
That’s a big fat unknown. From an investment perspective, we think it means a lot less oil use and an increase in a wide variety of alternative energy sources and technologies. That’s the unconventional opportunity.
Finally, some poetry. This is from something called the “Identity of the Relative and Absolute” which we will be reading at a memorial service later this week. These lines made us think of money as well as metaphysics. After all, things find their true value in exchange, when you find out what one person is willing to give another for a given thing.
In the barter system, you could trade the products of your labour for the products of someone else’s labour. This worked up to a point. If you make something useful like bread, you can always trade it for shoes, clothes, wine, or a knife.
But money as medium of exchange is a lot more useful than barter. As long as both parties agree on the value of the medium, the medium can be used to purchase anything in free exchange. The key is the mutual confidence in the value of the money.
This, of course, is why gold has been around for so long. It’s a pretty handy medium of exchange over time. It’s supply is difficult to increase arbitrarily, which means it’s value remains relatively constant over time. Good for consumers. Not as good for governments, which are fond of creatign new money to pay for new wars.
The US dollar will probably reach intrinsic value in our investment lifetimes. That will be absolutely bad for dollar-denominated assets, and relatively good for gold. It will also be good for other paper currencies which are relatively more sound and stable than US dollar.
Each thing has its own intrinsic value and is Related to everything else in function and position. Ordinary life fits the absolute as a box and its lid. The absolute works together with the relative Like two arrows meeting in midair. Reading words you should grasp the great reality.
~~ Excerpted from “The Identity of the Relative and Absolute”
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