Multiple Expansion
May 10, 2010
My Currency Epiphany
May 20, 2010

Escaping The Next Data Point…

I am writing from Sydney Australia. Sometimes you need to just get away from it all and take some time to think things through. I’m an investor—not a trader. I am not trying to capture the next 3% move. Let someone else figure that out. PPI figures, CPI numbers, employment (or unemployment), bailouts and wild market gyrations, what does it all mean? Should I even care? These erratic moves scare investors out of the right positions—they throw you off the scent of a winner. I don’t mind having my convictions tested—but sometimes I just want to get away from the noise and think it through. I am looking for big picture trends. That’s why I’m in Australia. Over the next few weeks I intend to see the whole country by car. I am driving from Sydney to Perth and making plenty of stops along the way.

I believe that the way to make money is to find the bull markets and play them. Australia barely even felt the economic downturn last year. While Europe is collapsing and the US is just coming out of recession, Australia is booming. The Australian central bank continues to RAISE rates. Things are good here. I want to learn more. Prosperity brings opportunity. There will be small company winners. I have meetings planned. As I drive, I am sure I will learn of other great businesses that I didn’t even know existed. Mainly, I’m here to drive and let my mind wander. A lot has happened to the world, even in the past few weeks.  I need a roadmap going forward.

These are the big picture trends as I see them.

1.    The economies of the Western World are overleveraged and that deleveraging will take years to work its way out. Along the way, there will be lots of mini-panics.  I don’t mind volatility, but most of these companies are valued for prosperity—I don’t have such a rosy view of things. There aren’t many bargains.

2.    The governments of the Western World are stuck in a Keynsian nightmare. They’ve stimulated, and are on the verge of insolvency—yet they cannot arrest the forces of the existing leverage and malinvestment. They should step aside and let things clear, but they won’t. They will increasingly pursue erratic and counter-productive policies to keep themselves in power and win votes.

3.   Western Governments have massive unfunded entitlement programs and other off balance sheet liabilities. As baby boomers age, these liabilities are going to start needing to be funded. I see no politically expedient way to fix this problem. Get ready for money printing. Paper currencies as we know them will never again be trusted.

4.   In particular, the Euro is in the early stages of collapse. The Pound and Dollar aren’t far behind. Governments with a printing press do not default—rather; they add zeros to their currency. Get ready for epic levels of inflation before this is all over. Got gold?

5.    Asia, South America, Australia and New Zealand are largely unaffected by the Western World’s woes. Sure, there are property bubbles. There are huge swathes of malinvestment. However, there aren’t the same debt levels. There aren’t the same levels of government interference in business. Moreover, the demographic trends are much friendlier towards economic growth.

I like to find sectors that will do well given my world-view, and where I will still make money even if I totally bungle the macro. With that in mind, here are a few secular investment trends that I find very attractive now.

1.       Commodity prices will continue to go higher. The worldwide population will continue to grow and 4 billion people in the third world will increasingly live at a first world standard of living. Ignore warehouse stocks and pessimists at brokerage offices. Forget about short term swings in price. Demand will continue to increase. There will be violent shake-outs along the way, but until the world invests hundreds of billions in new production (which isn’t happening), prices will continue to go higher.  This goes for metals, energy products and everything else. There has been massive underinvestment in new production. It will take decades to catch up—yet demand continues to grow. This is a recipe for higher prices—even before increased inflation exerts its own forces.

2.       Mining is an awful business. I rarely ever invest in it any more. Miners have all depleted their resources for decades. They all need to spend more on exploration. You could have said the same thing a decade ago. What’s changed now is that with higher metal prices, miners have a whole lot of excess cash flow for the first time in years. Even more importantly, junior miners are raising sizable levels of capital. The correlations aren’t exact, but over time, those have been the two largest contributors to increased exploration spending. Get ready for a tidal wave of exploration expenditures. If you have a business that helps companies find ore bodies, you are now in the sweet spot.

3.       Demand for protein will continue to increase. Studies always show that as people gain wealth, they eat more calories and protein becomes a larger percentage of their caloric intake. In the past decade, two thirds of the world’s population have begun the long trek towards first world living and eating standards. Population levels world-wide continue to grow. Protein consumption will begin to rapidly increase from here. Unlike many commodity prices that are up many times in the last few years, protein has barely budged. It is the cheapest sector of the commodity index. How do you play this? I intend to find out while in Australia.

4.       Get ready for South America to catch up with the rest of the world. The days of coups and socialism are over. Look at Colombia, Brazil, Chile and Peru. They were basket cases for decades. They are now rapidly modernizing. Once they’ve shaken off the occult of socialism, they will never go back. There are too many people who want to be rich. The rest of Latin America will follow behind at varying degrees. Assets aren’t cheap here, but wait for panics to buy small growing businesses.

5.       Specialized niche businesses will always triumph over any headwinds. I have my eyes open for the next winners.

These are the big trends that I want to invest in. There are plenty of other trends. However, I don’t know how to play them—or I refuse to play them. I don’t want to invest where government policies can trump good logic. Many trends like the aging of first world societies are widely recognized, priced for perfection and difficult to make money in. If you want to buy shares of an old folk’s home, good luck. Hope they don’t change the reimbursement regime overnight.

While I’m on the road, I always think of new ideas to invest in–new sectors that interest me. I also want to test my thinking on the big picture. Can the Euro survive? What if they toss out Greece? What if governments gain religion and actually work to restrain spending? What happens in an inflationary crisis? Are there any real winners? Do I own enough gold? Where will the opportunities develop after this crisis abates?

There are always great opportunities. You need to keep your mind open. Sometimes you need to let your mind wander. You need to escape the daily data points. You need to think creatively. I intend to do all of that in the next few weeks.

Categories: General
Positions Mentioned: none

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