Category Archives: Commodities

Crisis of Confidence

I, through my firm, was a customer of PFG, the latest registered broker dealer to steal from its clients’ accounts – first reports indicate $200 million may have been taken.  This pattern is becoming too frequent. Innocent victims have lost money yet again.  How did it come to this?

Broken Markets

Self-regulation by an oligopoly… I don’t think there is any economist or politician who wanted this outcome, but special interests and lobbying have led to this.  This is how the futures industry works today.

Capitalism is broken without fair rule of law and regulation, and today top firms organize and self-regulate with practices that add cost but lack teeth. This discourages competition from smaller companies, but it also gives the largest companies free reign to raid their clients’ accounts and hide their crimes for years. So far it seems there is little or no accountability when they are discovered.

If market participants cannot expect basic protections, then they will leave, prices will fall, volume will shrink, and markets will whither.  Companies will have less access to capital and be exposed to more risk, and the economy and workers will suffer.  We’re already a long way down this path.

The economic ideal and the allure of free markets is only possible when regulation protects innocent market participants, minimizes fraud and cheating, and does not deter innovation. That means expanded domain of the SIPC, the SEC should have unlimited authority to monitor accounts and communication (opt-in would be fine), and companies should only minimally participate in their own oversight. With this structure, investors would be protected, transparency would reduce fraud, and free markets could flourish with competition and innovation.

Sounds obvious, but don’t hold your breath.

Corporate Corruption

There are a lot of types of corporate corruption, but they all start from an imbalance in power and oversight.  There is one tiny change could have a huge impact on this problem: allow shareholders to nominate people for elections of the Board of Directors of public companies.  It’s a small, seemingly obvious shareholder right, but it would have a big impact.

Management should not have the exclusive right to nominate their bosses. In fact, because the Board of Directors is supposed to represent the owners’ interest, it seems crazy that owners can not nominate. When the owners of a company are empowered to nominate Board members, management comes back under control, compensation comes back to reality, performance is scrutinized better, and the interests of investors are better served.

In private equity and smaller firms of every kind, this is always how it has worked.  Major shareholders often join Boards of private companies and nominate other Board members.  How public companies ever achieved the ability to control the Board nominations without rights for shareholders, I’ll never understand.

Too much

There are so many other ways that markets are broken and corruption is bringing us down.  Is it too much to fix?  Are we destined to watch for the rest of our lives as the emerging markets grow right past us and Americans fight amongst ourselves? Is our political and influence machinery too dogmatic or corrupt to embrace new good ideas together?

I’m not confident.

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Long tight trendline on gold

semilog – constant exponential growth

Long term investment strategy blather

“The FED has been daring us, effectively, to go out and buy risky assets for the last 2 years”

“It will be the creditor that tightens global liquidity.  Not the debtor.”

I don’t agree with Russell Napier’s ultimate conclusion about S&P hitting 400, but this interview is full of gems:

http://video.ft.com/v/946244201001/Long-View-Historian-sees-S-P-fall-to-400

(it’s part of a series: http://video.ft.com/v/940727417001/Long-View-A-gathering-storm)

The reason that I don’t agree with his conclusion is that I think emerging market credit expansion will be harder to control.  I think credit expansion will be highly private, opaque, poorly regulated, and broadly accepted by the population.  Expansion of credit is an expansion of the money supply.  During which, emerging market consumption and inflation will be higher than expected.  Corporate profit growth would likely rise faster in that scenario, so downside risk should be protected to some extent by strong corporate balance sheets.

Or of course it could go the other way.  🙂

Bullish on POT

Potash Corp. of Saskatchewan, Inc. (Ticker:POT)

The run up in the market size for technology over the last 4 decades coincided with the dawn of an Information Age.  We are now in the dawn of a Biological Revolution and Potash is a valuable and constrained ingredient.

If you have 20 or more years to invest, the world economy will look different when you sell than it does today.  As agriculture demand expands to fit an emerging global population that doesn’t starve, production and productivity has to rise.  Potash is the constraining factor.  I expect demand to rise strongly for decades and, because supply is constrained (with what we know now), prices should rise.

With a profit margin at 30% and an operating margin at 38%, they achieve ROE of 28%.  Great numbers for a company with $6billion in revenues.  Their dividend isn’t much to look at, but with quarterly revenue growth of 68% since last year, reinvesting in growth is a good move on their part.

Planning and Investing for the Long Term

2 Great articles quickly tell the story of global trends, risks, and strategies:

The 1st, by McKinsey & Company, focuses on Globalization’s critical imbalances:

Globalization’s critical imbalances

The 2nd, by Investors Insight, talks about how to use global macroeconomic issues like these in your investment decisions:
What’s the point of macro?

Not Investment Advice

Dear Friends,

First

No Liability. This is not advice for any specific person. Everything here could be wrong; think for yourself. Only you are responsible for your behavior. If you accept these terms, you may continue reading.

I get asked for financial and investment advice a lot, and want to help. There has been tremendous public attention aimed at complicated financial and economic issues, and I’m happy to give my perspective on planning and investing.

Cash Flow and your House

First of all, as always, never maintain a balance on your credit cards from month to month. For those who maintain big savings accounts and a mortgage, make extra principal payments now. Savings accounts earn much less than mortgage interest, so use some of that savings to reduce the interest you pay. By law there is no penalty for making extra principal payments.

The Planning Mindset

Economic risk is high right now. We could recover with strong employment and growing prosperity. We could have a run on US Dollar debt and fall into an inflationary and humanitarian collapse. The likely future is somewhere in between. Our future course is unknowable, and anyone who tells you otherwise is overconfident. Instead, try to be aware of the range of possibilities and strike a balance that leaves you well prepared.

The biggest reason for high risk right now is the fragile confidence in the long term solvency of debtor nations. The shaken confidence is rational because it remains unclear if global debt and trade imbalances can come back into balance smoothly – or only through national default.

Making Investments

Stocks look pretty reasonable right now. In the US, dividends and earnings look good from a historical perspective. In a lot of emerging markets, stocks have big discounts because of perceived risk — but how much riskier is it for an emerging business to imitate existing efficiency, compared to a developed business improving through R&D? Owning stocks now looks better than usual, and diversifying globally seems as important and attractive as ever.

Bonds look bad. They may be in a bubble. If the Federal Reserve and the banks can not work together to maintain a stable monetary base, we risk high inflation. Monetary policy has eased in an attempt to offset the shrinking bank leverage, but history suggests that reversing this situation will not go smoothly. The recent financial reform included some good ideas, but does not protect against re-leveraging the banks.

Assets are the opposite of bonds; the same thinking above applies in reverse to assets. If bank lending recovers while monetary policy is still generous, then inflation can raise the price of real estate, gold, and everything else.

Overall, pay down your mortgage and use credit as little as possible – interest rates are high for people and companies. Don’t loan the government money by buying bonds — money has flooded in and they pay a low interest. Focus on global equities and real assets, especially emerging markets and commodities that are supply-constrained.

Economics and Trends

In the modern adult lifetime, emerging markets look poised to fully emerge. Investing globally looks wise. As global production enables global consumers to behave more like US consumers, there will not be enough raw materials. The constraining factors are the commodities used in production, so owning those looks wise. There is plenty of low skill labor in the world, so education will become increasingly important. The most educated nations likely have better 10-40 year outlooks than the less educated nations.

Finally, innovation has been lowering prices and improving products at an ~increasing~ rate, so save your money and delay your gratification because products in the future are going to be much better than what you can buy today.

Hope that helps.

Happy to discuss,

Dan

Global Economics: Videos closing 2008, Looking toward 2009

Great summary of world markets right now. He’s more negative than I am, but I agree with many of the specific investment conclusions he draws.

Great summary and (I think) good advice, too.

Good contrast between markets and main street. Good policy summary.

First annual decline in oil price in 7 years… what does it mean and what might happen next?

Oil, oil exploration and production stocks, oil services stocks? What happens when price of oil falls?

Thinking about inflation and deflation… global implications for supply and demand of basic materials. Wideranging discussion.

What’s happening in emerging markets?

Krugman talks about his work that won him the Nobel Prize: the relationship between economies of scale and world trade. Good stuff. Also, policy analysis and implications of incoming administration.

Drilling down on Oil:

Oil prices and energy policy under Obama. Why does volitility increase when capacity utilization approach 100%? 🙂