Raw Materials - Economics 101 (Raw materials are now close to their lowest prices in history.)

Financial Sense Online ^ | 6/25/2002 | Clyde Harrison

[rohry]

GUEST EDITORIAL

Clyde Harrison
CEO, Beeland Management Co., L.L.C. &
Sponsor Jim Rogers Index Funds

Raw Materials - Economics 101
by Clyde Harrison
June 25, 2002

 

Whenever a government does something for someone, it must do something to someone. The definition of politics is the advance auction of goods that have not yet been stolen. Some countries offer rule of law. We suffer from rule of lawyers. Lawyers have the right to collect money from U.S. citizens at the point of a gun to pay for their economically illiterate programs. Recently the Congress was taken over by the liberals – the lifestyle police. Using history as a guide, this should move us from energy conservation to energy anorexia.

The last central banker to get it right was Joseph in the Bible. 7 good years followed by 7 bad. Belief in Greenspan and the FED is misplaced. Central planning was totally discredited when Russia collapsed. Faith in the FED is based on elaborate mathematical models relying on the breathtakingly faulty assumption that human beings behave rationally. The FED is like the post office, giving out money instead of stamps. Today the two largest economies on the planet, Japan and the United States, are printing money as fast as they can.

In the US, the jobless rate is 5%. Greenspan has slashed the cost of renting money 400 basis points and increased the supply $900 billion or 30% in the past 9 months.

I expect a V shaped bottom in the GNP. The up trend will start in the second quarter of 2002, but there will be an L shaped bottom in corporate profits.  In the stock market, I expect a few years of W’s (wwww).  Study the period from 1966 to 1982. The stock market produced a no-return; while the currency declined 40%.

When you dramatically increase the supply of something, the value declines. When stock prices rise, people talk about a bull market. When consumer prices rise, they talk about inflation, but both are either a price increase or a decline in the value of the currency. If you believe Alan Greenspan and the FED guide the economy, you must also believe the twelve birds sitting atop the rhinoceros guide him through the jungle.

The investor could purchase T.I.P.S. to protect them from inflation.  But if you own tips, you're letting the borrower (the government) tell you what they owe you. Your returns are sure to get chain-weighted and seasonally adjusted to mediocrity. Raw materials in many instances, such as in the ‘70’s, protected investors from inflation, but here the demand versus supply plays a far more important role.

The Law of Supply and Demand

The history of capitalism tells us that cycles are the norm. Indefinite business trends simply are not. The stock market isn’t any more likely to go straight up forever than it is to go straight down forever. Cycles occur because of temporary imbalances in supply and demand, imbalances that eventually correct themselves.

Today in the United States there is a complete lack of understanding of the relationship between the lifestyle we enjoy and the resources that must be harnessed to enjoy that lifestyle. We want our SUV, but not the oil wells to fuel them. In the past 10 years fuel economy has dropped 2 miles per gallon. In 1973, 36% of our oil came from foreign sources. Today 56% of our oil comes from foreign sources. The Energy Department estimates that by 2010, 61% will have to come from foreign sources. The “not in anyone’s back yard” attitude and a "back to the caves" no growth environmental policy has resulted in no new refineries being constructed, in the U.S. in the last 25 years. We now import 900,000 gallons of refined gasoline a day. Our oil problem rests not with a lack of supply, but our refusal to develop our natural resources.

For years there has been inadequate investment to increase the supply of oil.  The cheap oil to find and drill has already been found.  The world is using around 27 billion barrels of oil per year and discovering around 7 billion barrels of new oil per year.  At some point the depletion of reserves will become a big problem. The only question is:  At what price will the public demand drilling? – $60/BBL, $100/BBL?  Our short-term, politically-correct policies could result in a bounty on caribou in the long term with bus loads of hunters heading to Alaska on weekends.

We have reduced supply. What about the demand side of the problem?

Washington talks about more mileage for SUV’s and increased conservation focusing on a tiny fraction of demand.

Peace put 2 1/2 billion people in the world labor market. India and China alone contain 2 billion consumers. Suppose each of the 2 billion people consumes a mere quart of gasoline per week as their economy booms. That’s an additional 1.7 million barrels a day, new demand that is sure to increase price. Today, China is booming. They have declared the national bird to be the construction crane. Between 1990 and 2000 per capita income increased 315%. The Chinese will go from walking to bikes, to motorcycles, and to autos. They will need oil and gas, chemicals, forest products and metals. China and other low cost producers are producing deflation in many manufactured goods and at the same time increasing demand for raw materials.

Consider the following:

• World oil production is around 75 million barrels per day.  The U.S. has 5% of the world population and consumes 25% of the world’s oil.

• U.S. population: 263 million – 2 people per car

• Mexico population: 93 million – 11 people per car

• India and China population: 2,161 million – 281 people per car

• If India and China consumed half as much energy as the U.S., it would consume all 75 million barrels each day of the world’s oil production.

• Energy consumption in India and China is increasing 10% per year versus 3% in U.S.

• India now has more millionaires than Canada’s total population of 31 million.

• Motorcycle and appliance sales are higher in China than America.

• In the first 6 months of 2000, China’s oil imports increased 100%.

• The Chinese eat less meat in a year than we eat in a weekend.

Raw Materials At Lowest Levels in History

Raw materials are now close to their lowest prices in history. Tops and bottoms are creatures of extreme. Markets rise above all rational expectation, then go higher, and then they fall farther than common sense suggests. The most desirable investments for the future might not be in cyberspace, but back to the basics.

By the end of 1998 the only drilling rig in Texas not laying on its side was at the Midland Petroleum Museum. Oil in 1982 was $28 a barrel. Allowing for 3% inflation, that would equal $47 a barrel today. In 1981 there were 4,530 oil rigs operating in the U.S.. Today there are 800 -- up from 500 in April of 1999. It takes a long time to add to capacity.

In the last 20 years, the capacity to produce most raw materials has declined, dramatically in some cases, while demand has continued to increase. As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.

© 2002 Clyde Harrison
June 25, 2002

Read other editorials from Mr. Harrison

[rohry]

I don't know if the GNP growth figures are right for China, but everything else seems right...

[rohry]

Interesting article for your perusal...

[LS]

Thanks. I'll take a look at this.

[DeaconBenjamin]

Joseph's financial planning left Pharoah owning all of Egypt. No doubt he is the example to all central bank successors.

[Fzob]

If you believe Alan Greenspan and the FED guide the economy, you must also believe the twelve birds sitting atop the rhinoceros guide him through the jungle.

Intereting read.

I'm no ecomomist, but it sure makes sense that the money managers are typically way ahead of the economic curve planned by the government boys. Unless of course the government guys do soemthing totally unpredicted then all bets are off.

[Fzob]

Let's try that again with a actual proof read. Interesting read.

I'm no economist, but it sure makes sense that the money managers are typically way ahead of the economic curve planned by the government boys. Unless of course the government guys do something totally unpredicted then all bets are off.

[eno_]

This is only a problem if you think a prosperous Asia will not buy lots of stuff from us, making it possible for us to keep well ahead of raw materials prices. It also assumes China and India will be as big ninnies about nuclear power as we are. Raw materials price declines are not a cycle, but a long term trend. Same with farm prices.

[First_Salute]

"Whenever a government does something for someone, it must do something to someone. The definition of politics is the advance auction of goods that have not yet been stolen. Some countries offer rule of law. We suffer from rule of lawyers. Lawyers have the right to collect money from U.S. citizens at the point of a gun to pay for their economically illiterate programs. Recently the Congress was taken over by the liberals &endash; the lifestyle police. Using history as a guide, this should move us from energy conservation to energy anorexia."

Joanie, I just knew that you would appreciate these points.

[rohry]

"Whenever a government does something for someone, it must do something to someone."

My favorite quote of the article...

[TheMole]

India now has more millionaires than Canada’s total population of 31 million.

I'd like to see a source for that one. I'm a little skeptical.

Some commodity prices may be at all-time lows, but oil os not one of them. Oil was down near $10 a barrel in 1999 and is over $25 now, so I think we can safely say that's one important commodity that is not at an all-time low.

[Bonaparte]

Thanks for posting this. Harrison writes like a cross between Frederic Bastiat and our very own Firehat aka Norm Liebman.

[RightWhale]

I believe raw materials will be one of the best investments for the next 10 to 15 years.

Time scales are tough. With all these international trade agreements the raw materials are bound to be cheap. The only thing that could drive prices up is if the international agreements are severed, and the only thing that could do that is a state of world war, or at least outright hostility.

I have been watching the price of copper, of all things, for the past 1/4 century. This, the price of copper, is the key to the moment that asteroid mining will be economically feasible. The price of copper is a little too light at this time to encourage lending institutions to spring for the big bucks necessary to set up asteroid mining. They could do it now and make money, but a price about 30% higher would be better. Except for iron, which is regulated, the rest of the metals tend to follow each other and copper is as good an indicator as any.

[jwh_Denver]

Joseph's financial planning left Pharoah owning all of Egypt. No doubt he is the example to all central bank successors.

Maybe through your ignorance you place Joseph in the same category of self serving scumbags that we have as central bankers we have today but he was a righteous man with the wisdom to save Eygpt and its people from starvation. First of all the Pharoah already owned Eygpt and God had told Joseph what was going to happen and Joseph told the Pharoah how to protect its people from the famine that was to come. 7 good years followed by 7 bad years. (This record is in Genesis chapter 41). Joseph told the Pharoah to have collected %20 of the bountiful harvest of the first 7 years so that when the famine hit they would have enough food for the bad 7 years. Eygpt had so much grain they were able to have food for their own people but also to sell to other countries and so through Joseph's wisdom Eygpt had a very nice trade imbalance in their favor.

A few good men through history may have tried to emulate Joseph's feat as central bankers but don't even try to put today's slug sucking money hungry scumbag central bankers as having the same intentions, motives, and results that Joseph had in the same category. Joseph was a servant of Pharoah who did not figure in the profit of this as opposed to the central bankers milking the system for every dime they can squeeze into their own accounts.

[First_Salute]

Bump.

[FoxPro]

Our short-term, politically-correct policies could result in a bounty on caribou in the long term with bus loads of hunters heading to Alaska on weekends.

I do not understand this. Could somebody explain this?

[VOA]

(Raw materials are now close to their lowest prices in history.)

I think that's about the same thing that the book "The Skeptical Environmentalist" has reached.
Can't remember the name of the author, but he's a Danish Professor of Statistics.
He notes that at this point we have more years of known petroleum reserves than ever
in history (e.g., even in the 1920's, the known years of petro reserves was lower).

[VOA]

I do not understand this. Could somebody explain this?

I think, in poorly constructed language, this is what he might be saying.
Don't know if you've heard it, but conincident with the drilling that has been done
in the northern reaches of Alaska has resulted in a five-times sized caribou herd
in the neighborhood of the drilling rigs.

Maybe he's saying that in the long run, we'll run out of oil, be forced to drill in many areas
of Northern Alaska, and have an explosion of caribou herds that will necessitate
a bounty to encourage thinning of an explosive growth in caribou population.

Although I've never seen it in major media, I did snag a photo of a large herd of
caribou lazily grazing just around the grounds of an Alaska rig that was posted
here on freerepublic.com a year or so ago.
(Sorry, I don't have means to post it.)
The oil companies should run commercials of this and hijack Borden's slogan:
"Contented Caribou Come From Active Alaskan Oil Fields"

[rohry]

Our short-term, politically-correct policies could result in a bounty on caribou in the long term with bus loads of hunters heading to Alaska on weekends.

"I do not understand this. Could somebody explain this?"

I think he meant that if we keep "protecting" the caribou with such ferocity there will soon be an over-population of them. This would warrant sending hunters up to cull the herd. (It is very unclear, though. I agree with you).

[mercy]

My calculator doesn't have enough space but I think that's one millionaire for every 193.5 folks. Seems a bit high.

[rohry]

I have been watching the price of copper, of all things, for the past 1/4 century.

Could you post a chart of the price of copper over the last 25 years? I've been interested in this for a year and don't know where to find it. Thanks, in advance.