Joel Bowman, reporting from Taipei, Taiwan…
Metals up. Dollar down. Stocks up. That’s more or less how the last 24 hours played out on the global economic stage.
After digesting Act I of this week’s financial melodrama – the World Bank’s growth forecast downgrade from “soft” to “limp” – investors are bracing for Act II: Bernanke & Co. Will the Federal Open Market Committee (FOMC), who meet today and tomorrow to discuss the fate of the world’s reserve currency, be able to stay investors’ shaky hands? We have no idea, as usual, but it probably doesn’t matter anyway. The world will have to deleverage its house of cards one way or another. Sooner would be easier in the long run; later would be easier in the short term. Either way, tens of trillions of dollars worth of mal-investments need to be wiped from the books. That takes time.
That EZ-credit and over indebtedness are the root causes of the current debacle notwithstanding, most economists expect interest rates will stay put, in the “free to 0.25%” range. If you want to find the source of an idiot’s problem, just look at the solution he keeps applying to try and solve it.
What might our elected and unelected public servants do differently to avoid sinking deeper into the same mess, we wonder. For starters, they might try listening to people who actually got it RIGHT during the heady days prior to the collapse, rather than reenlisting the terminal inadequacy of those who got it so very, very WRONG.
A few months ago, two guys who saw all this coming appeared in front of a panel who didn’t. Here’s how that discussion went down:
“Even if we do everything right…” Nouriel Roubini told a panel of scoffing neckties on CNBC back in February, “we’re still going to have a severe u-shape recession [which will] last two years.”
“Yeah, but that’s not the end of the world, is it?” interjected one necktie from behind the safety of the studio desk.
“No, in that case it’s not the end of the world…but it’s still a recession that is three times as long as the previous two and three times as deep as the previous two. And, if you don’t do everything right, and I think there’s a large probability that’s going to happen, then we may end up in a multi-year near-stagnation or near- depression like the one Japan had, meaning an L-shape recession…and that is ugly.”
Next up, Nassim Nicholas Taleb, author of The Black Swan and another guy who “got it right.”
“What I see here is the same symptom that caused me to worry about the system. We have the same people in charge, who did not see the crisis coming who took humungous amounts of hidden risk, they’re still around; the bankers that got us here are still around, and we’re giving them more money, so I don’t see that we’re doing something to get out of the crisis.”
Mr. Taleb continued, “I would like to see the responsible people [for the crisis] not just punished, but out of office. Mr. Bernanke did not understand the risks the system was taking. I want him out of there.”
The “doom and gloom” tolerance level on the set must have been at fever pitch around this time, because they had to cut for a commercial break. Before they did, however, Mr. Roubini and Mr. Taleb were asked whether they thought Timothy Geithner’s plan might remedy the situation.
Mr. Taleb: “I don’t think much of all that class of people managing these plans in society. They failed and they’re going to fail again.”
Mr. Roubini: “I agree.”
Was Mr. Bernanke flicking through the channels that morning? Did he happen to catch any of that? Again, it probably doesn’t matter either way. Federal reserves do what federal reserves do: enable unsustainable, government-sponsored currency thrashing. It is infantile and delusional to think that the same ingredients will produce a different sausage. And, in an environment where more of the same means more of the same fraud and deceit, the smart few will take their dwindling dollars elsewhere.
In today’s edition Rude favorite, Chris Mayer, investigates what the world’s best savings need and reveals how you can beat the rush to own it first.
Buy What the Chinese Are Buying
By Chris Mayer
How many entrepreneurs have sat down and thought to themselves, “If only the Chinese would buy my product…Heck, if only one in 10 Chinese would buy my product, I’d be rich!”
Call it the China Dream. It has a long history.
James McGregor wrote a book in 2005 on doing business in China called One Billion Customers. If the title sounds familiar, it may be because a man named Carl Crow wrote a book called 400 Million Customers, back in 1937. You see, the dream only gets bigger over time!
For the most the part, this dream remains a mere dream. But sometimes, someone, somewhere, figures it out. Carl Crow was someone who figured it out, and it made him a rich man.
Carl Crow led an adventurous life. Born in Highland, Missouri, in 1884, Crow started out as a newspaperman. Eyeing his fortune, he started China Press in Shanghai in 1911. But Crow eventually realized there was more money to be made in advertising. In 1918, he launched an advertising agency in Shanghai. As an adman, he helped his clients – mostly Westerners – sell their products to the Chinese.
His agency flourished. Crow’s billboards peppered China, from Shanghai all through the Yangtze Valley and as far north as Hubei. Chances are, if you flipped through a magazine in China between the World Wars, you saw Crow’s work in advertisements for cars, matches, cameras and many other goods.
He had a great run of 19 years. Then the war with Japan began in July 1937. Crow, who was outspoken in his criticism of the Japanese, fled the country. He could take none of his wealth with him. He lost everything — house, business, money. Back in the U.S., Crow penned his classic book, which helped him start over again. It’s still in print today. It’s widely viewed as a classic and is surely one of the most read books on China ever published.
Crow’s book, though, really shows how China was as much a money pit as a place where gold nuggets sprouted from the bushes. It remains that way today, ever tricky and hard to figure out. But for those who find a way, as Crow did, the rewards can be immense.
Let’s face it; a market of more than 1 billion noses is one you shouldn’t ignore. But it’s no small task trying to figure out which facial cream they might buy or what toothpaste they might favor.
However, there is another, more sure-footed way, to tap into that mass of humanity called China. Boiled down to its essence, the tactic is simply this: Buy what China needs, but can’t make enough of for itself.
In other words, as an investor, buy what the Chinese MUST buy. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.
You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.
Let me give you a little more color on potash. [Editor’s note: Last December, Chris urged the subscribers of Capital & Crisis to purchase the shares of Potash Corp. (NYSE: POT)]. I recently listened to a couple of presentations by Chinese potash companies. They all confirmed that there are few commercially developed potash reserves in China. The Chinese use 12-15 million tonnes of potash every year, but produce only 3 million tonnes.
Harry Yang is an executive director at Sinofert, of which Potash owns a stake. Yang pointed out that Chinese soil is potash deficient. “China uses enough nitrogen and phosphate because it is self-sufficient in nitrogen and phosphate,” Yang said. (Nitrogen and phosphate being the other two key nutrients.) “But China significantly underuses potash.”
Compared with farmers in the U.S. and Europe, application rates are half on a per acre basis. “Ten years ago, [Chinese] farmers had no idea about potash. Farmers are using more and more now.”
Liu Guocai, chairman of another Chinese potash company, Migao Corp., shared his views. He pointed out that potash inventories are low. He predicts that China’s demand for potash imports will bump up significantly later in 2009 in preparation for the 2010 planting season.
As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.
More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food. It made a $500 million deal for poultry and pigs from the U.S. China attempted, but failed, to buy farmland in Mozambique and the Philippines. You may have also seen reports on Chinese deals in Africa. In Zambia, Chinese farmers already produce about a quarter of the eggs sold in Lusaka, the capital, for export to China.
As China maneuvers to secure its future food supply, one can easily see that the economic axis of the world is shifting from West to East. Understanding the dynamics of this shift will create some wonderful investment opportunities in the years ahead.
Someday, someone will write a book called One and a Half Billion Customers. Why not begin investing alongside the Chinese now, before the next half billion of these consumers arrive on the scene?
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