 The "Real" Boom!
Puru Saxena
27 June, 2005
Let us assume that an investor
is looking for one asset, which he could buy and hold for the
coming 10 years. This individual is extremely busy with his work
so he does not have the time to closely monitor his investments
on a regular basis. He is simply looking for an undervalued asset-class,
which he could buy and forget for a decade without any sleepless
nights. His plan is to invest his money in only one asset-class
and he intends to cash in on the profits in 2015. So, which asset-class
should this guy invest in? Should he buy US stocks, Asian stocks,
perhaps bonds or even leave his funds in cash? Below, I provide
my analysis of what he ought to be doing with his money.
But first, I want to start
with an underlying philosophy. As an avid student of economic
history, I have realised that all assets go through multi-year
economic cycles commonly known as bull-markets (boom) and bear-markets
(busts). These cycles surely follow each other as night follows
the day. During a bull-market, an asset goes from depths of
undervaluation to overvaluation. A bull-market usually ends with
intense public participation, optimism and euphoria. On the other
hand, a bear-market takes an asset on its long journey from extreme
overvaluation to acute undervaluation. A bear-market usually
ends with "blood on the street" or deep, dark despair.
As a money manager, it is my job to identify, which assets are
in a bull-market and those that are in a bear phase.
Looking back at history, it
is now easy to see that if the above investor had to buy one
asset in 1970 for the next 10 years, he should have bought commodities.
For those who are not familiar, commodities went through an enormous
boom during this period. Supply conditions were extremely tight,
demand was rising and we also had the "Oil Shocks",
which led oil to its all time high in 1980. During that period,
the US economy was in a recession, inflation fears were running
high and interest-rates were rising fast. The whole world was
convinced that inflation would continue to escalate and that
savings would eventually become worthless. Thus, everyone turned
to hard, tangible assets to protect their wealth. The boom, which
started off as a gradual bull-market (as they all do) erupted
into an enormous mania in the late 70's as investors kept piling
their cash in commodities whilst completely ignoring the prices
they were paying. During the 70's, several commodities went up
through the roof. Sugar went from 1.4 cents/pound in 1966 to
66 cents/pound in 1974 - a staggering rise of 45 times! Oil went
from $2/barrel in 1973 to over $30 in 1980 and gold went from
$35/ounce in 1971 to over $850/ounce in January 1980! Looking
at the statistics now, commodities were an obvious choice in
the 1970's but hindsight is always 20/20.
If our investor friend was
looking for one investment theme in 1980 for the next 10 years,
he should have bought Japanese stocks and real-estate. During
that period, Japanese assets soared exponentially as the world
became amazed by the "Japanese miracle". Money kept
pouring in from around the world and the Japanese stock-market
index (NIKKEI) rose from 6,500 in 1980 to 38,915 in December
1989. The future looked obvious: Japan's hardworking and focused
society seemed unstoppable. In the 1980's, the Japanese economy
was a sensation - the most dynamic economy the world had ever
seen. Meanwhile, Japanese real-estate also surged. At the peak
of the bubble in 1990, Japanese real-estate was worth four times
the value of all property in the US! The Imperial Palace in Tokyo
and the nearby park were valued more than the whole of Canada!
So, it is obvious now that the land of the rising sun would have
been the best option for investment purposes in 1980.
Let us now turn to the next
decade - the roaring 1990's. During that period, our investor
should have put all his money in American assets. During that
period, the world's super-power came alive as the world fell
in love with the US. As many will remember, the last decade saw
the exponential rise of the American stock-market led by the
NASDAQ. Stocks, bonds and real-estate soared as inflation was
low and interest-rates were falling. In the 90's, you just could
not go wrong. All you had to do was to buy any American asset
and the bull-market would have done the work for you. The technology-heavy
NASDAQ rose from almost 500 in 1990 to over 5,000 at the turn
of the millennium. Everyone was convinced that the "New
Era" had arrived. Companies like Amazon, Cisco Systems
and Yahoo became the technology darlings of the investment world.
Locally, people standing in queues for Tom.com and Sunday IPO's
come to mind. Looking back, it is obvious now that America would
have been the best investment destination in the 1990's.
After having gone through the
various asset-booms of the past three decades, I would like to
point out that they all had one thing in common - the eventual
bust. Commodities peaked in 1980 and declined for two decades;
Japanese assets peaked around 1990 and are still deflating after
fifteen years; NASDAQ collapsed in 2000 and despite record-low
interest rates, American stocks have failed to better their all-time
highs recorded five years ago. The brutal truth is that no asset-class
goes up or stays depressed forever. This is one fact that every
investor must keep in mind when speculating or buying for the
long haul. Our history is dotted with several "New Eras"
and "Economic Miracles", which were supposed to change
our world forever - American canal systems and the railroad boom
in the 19th century, the auto boom at the turn of the 20th century,
the commodity boom in the 70's, the Japanese boom in the 80's
and the technology boom of the 90's. Yet, none of these booms
lasted forever. The current housing boom will be no exception.
So, let us address the original
question - "which asset-class will boom over the coming
decade? I am of the opinion that commodities will prove to be
the best performing asset-class. Therefore, our investor above
should park all his funds in commodities and when he returns
in ten years time, he should be sitting on a huge profit. Why
have I chosen commodities out of all the assets? For the simple
reason that in 2001, commodities were the cheapest they had ever
been in the history or capitalism. The commodities bear-market
(1980-2001), which lasted two decades, ended up wiping out a
large number of businesses involved in their production. Declining
commodity prices and increasing costs forced the marginal companies
to either close down or look for alternatives. This resulted
in tightening supplies worldwide.
Let us take a look at the most
important commodity - oil. Over the past 35 years, there has
not been a single major oil discovery anywhere in the world!
Global production is peaking and there is no additional supply.
Meanwhile, demand for oil continues to rise especially in the
emerging world where populations are huge and per-capita consumption
of oil is still extremely low. As global demand rises and supply
remains tight, oil prices will continue to surge.
Similar supply-demand patterns
can be seen across the majority of commodities. As China and
India become more prosperous over the coming years, their demand
for food, clothing, housing and energy will increase significantly
resulting in higher prices.
So far, industrial commodities
such as metals and energy have done exceptionally well. However,
agricultural commodities such as sugar, corn, wheat and orange
juice haven't gone up as much and are still close to their all-time
lows adjusted for inflation. Over the coming 18-14 months, I
expect agricultural commodities to provide the best returns.
Below, I provide a long-term monthly chart of wheat (inflation-adjusted).
I don't know about you but living in Hong Kong I can foresee
that China is shifting away from a rice-based diet as its people
become more accustomed to Western foods.
WHEAT - (Spot Cash,
$ per bushel - adjusted for inflation)
Source: www.thechartstore.com
What will happen to the depressed
wheat prices when the 1.3 billion Chinese start consuming more
bread, cakes and pasta?
Similarly, take a look at the
long-term inflation-adjusted monthly chart of Cotton. Despite
the horrific inflation we've seen since the abandonment of the
gold standard in 1971, cotton is extremely inexpensive. As the
3.6 billion Asians (56% of global population), acquire more wealth,
their demand for clothing will also rise exponentially. This
should send the price of cotton significantly higher in the years
ahead.
COTTON (spot cash,
cents per pound - adjusted for inflation)
Source - www.thechartstore.com
Furthermore, I expect gold
and silver to outperform industrial metals over the coming years.
We now live in an era where inflation is the norm. Fed Governor
"Helicopter" Bernanke comes to mind. Despite what
the mainstream media says, the "deflation threat" is
not a real concern but only a smokescreen, which allows central
bankers to continue printing more money for their own benefit.
In today's world, where paper currencies are only empty promises
backed by nothing, I expect all of them to keep losing value
against time honoured wealth - gold.
In my opinion, the US dollar
is a doomed currency and will eventually become worthless, the
Euro is nothing more than a far-fetched political fantasy and
the Yen isn't attractive either as Japan is still deflating.
In these circumstances, the public will eventually wake up and
smell the rat. Smart money has started treating gold as a currency
rather that a commodity and over the period ahead, you can expect
gold to rise against all currencies and not just the US dollar.
Despite a strong run by commodities
since 2001, the investing public remains sceptical. People are
concerned that China's economic slowdown will have a negative
effect on the demand for commodities. I disagree with this theory
because the previous bull-market in the 1970's also took place
amongst an economic recession and rising geo-political tensions
in the middle-East.
Today, things are no different.
Geo-political tensions are rising, inflation is becoming a concern,
demand is rising and supply is extremely tight. Noting all of
the above and as a capital preservation strategy, I strongly
advocate an investment in commodities for the coming decade.
A lot more follows for subscribers...
Jun 27, 2005
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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