Friday, April 13, 2018

Time for a bull market in resources


Tech stocks are losing their leadership in this 9-year bull market (for now).  These days, many investors are scared and predict the end of the bull market. The fears from 2008 still linger and many are careful. If sentiment is a contrarian indicator, then I start to believe that this is still not the year that the U.S. stock bull market will end. Many economies are doing fine and other than a short trading panic, I'd say no real euphoric overvalued market exists. The Trump ‘Trade-wars’ have had a sobering effect on investors. Canada’s stock market is in a semi-bear market.  The pipeline dispute is coming to a head and I get more and more the feeling that Trans Mountain will be build.  Maybe, we get a modest bear market, say 20% down or so or a severe correction but too many things point in the right direction.
We may not like Trump right now, but when we look back he may be seen as a Ronald Reagan is seen today. He is a hardnosed pr.ck but in the end he wants to make deals not kill world trade. He wants to get better deals for the U.S. and with many decades of trade deficits who can begrudge the U.S. trying to rebalance the books.  Trump may be unpredictable but isn’t that the tool of a good deal maker and poker player?  So, whether he is a dumb bully or one of America’s better presidents that may only be decided in the future.
If no major bear market, or only a mild one, then what will take over the leadership in the markets? Probably commodities. Commodities have been severely beaten down. A strong U.S. dollar may have made matters worse. Commodity based industries who suffered from too much money between 2000 and 2011, have done their penance and are today lean and mean.  Even gold miners start to focus more on profitability rather than production. The oil industry, gold and uranium mining or potash, they all have shaken down.  Oil supply is now falling short of a demand that increases 1 or 2 million barrels per day every year. Emerging economies are the main driver behind demand for energy and raw materials.  Why are emerging economies likely to create even more demand in the near future?  Because consumers in the big economies of Europe and North America are firing on 3 cylinders if not 4. Thus, lots of export opportunities for emerging markets.
No matter how gruesome the conflicts in the Middle East, they will not significantly affect the world’s recovering economies.  The rest of the world is becoming increasingly less dependent on Middle Eastern oil and so, there is less necessity for the U.S. and other world powers to interfere in that part of the world that seems to endless bicker and fight. I hate chemical warfare as much as the next guy. The Middle East though must first learn to love peace rather than being a bunch of feuding tribes or sects.  Russia keeps on meddling, thinking it is still a world power rather than a perpetual trouble maker. What does its meddling in U.S. politics and in the politics of many other countries achieve?  Only more economic sanctions.  What did the Krispal poisoning in England achieve?  If it was an act of Putin’s revenge, then Russia pays a very expensive diplomatic price and it will suffer even more economic sanctions.
Adding it all up, I see a world with $70 to $80-dollar oil and rising prices for many other commodities. Contrary to the CO2 scare, declining sun spot activity has the potential to create a ‘little ice-age' in the coming decade(s). This year we have one of the longest winters in a decade and we have a natural gas inventory that is at five-year lows. The U.S. is exporting more and more natural gas and also uses gas for increasing natural gas-powered electricity replacing coal and preparing for the electric car. I suspect that higher natural gas prices are here much sooner than many forecasters think.  So, that means an oil & gas industry firing on all cylinders may be just around the corner.  Rising energy prices are just as effective in slowing down economic growth than increased interest rates. My guess is that consequently interest rates will rising slower than many expect.
Once the hurdle of pipelines is behind us, the economy in Western Canada will be growing at a much higher pace. Real Estate will catch up and we will be confronted with skilled labor shortages because of all the oil and gas expertise that has been lost during this last down turn.  It won’t be so easy to recover from that. It looks like Alberta’s NDP has somewhat grown up. I hope that the Liberals sudden discovery of the importance of the Oil & Gas industry for Canada and the importance of all its other resource industries will not be a temporary lapse in ideology but rather a more pragmatic stance for the good of Canada.  If the Trans Mountain pipeline will finally be build as well as LNG facilities along B.C.s coast we will have a good economy and a resource industry that has learned the importance of environmentally responsibility.  It would be, at least for a while, a win-win arrangement.
For investors this means that it is time to switch our investment focus to resource economies.  Canada, Australia and S. America. In a world where China finally learns what it means to be an economic superpower. It does not only mean ‘me, me, me’. It means, open borders not only for trade out of China but also for the rest of the world to have access to Chinese markets. And, may we pray for less theft of and more respect for intellectual property?  It is the mind that creates prosperity not objects such as coal, iron or oil.  It is our thinking hat that creates value from these ingredients. Our brains create more efficient production with ever less input.  And protection of intellectual properties creates an incentive to always invent better and more efficient things. China and India with such huge populations should statistically have more engineers and inventors than anyone else.  But if people are not free; are not allowed to think critically about everything in their lives; If they are not able to enjoy the fruits of their novel and innovative thinking then innovation will suffer.  That is the real secret and yes, based on sheer numbers, the U.S. and Europe should not be the economic power houses they are and if countries such as China and India want to play their roles in this world they will have to ‘grow up’ in those aspects.
I think, it is time to invest in resources once again; I think it is time to invest in emerging markets again and maybe we create in the U.S. a soft landing rather than a full blast economic downturn. They were first out of the gate from the economic ruins of the Great 2008-2009 recession and they are at the highest risk of entering the coming downturn first.

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