Global uncertainties are a sure bet

It was some months ago that I was asked by Russ Noble if I would write a few words for an op-ed article in Canadian Mining Journal. There were several subjects that came to mind, just about all would have been too lengthy and not bear the kind of information required for this specialized and excellent magazine.

Sitting back, I thought I would write about development, global economic movements, freedom and the overall investment climate.

Amartya Sen, a winner of the Nobel Prize in Economics, wrote a book in 1999 called “Development as Freedom”. He concluded the book with a quote from William Cowper:

“Freedom had a thousand charms to show, That slaves, however contented, never know.”

Sen wrote too that, “Development is indeed a momentous engagement with freedom’s possibility”. In his book, Sen presented and defended a particular approach to the development of the global human population. He recommended as a process the expansion of substantive freedoms that would be available to people all over the world. He presents the perspective of freedom in both an evaluative analysis of assessing change and in a predictive analysis of “seeing freedom as a causally effective factor in the generation of rapid change.”

For Sen, freedom, as witnessed by the Arab Spring, has a diverse characteristic that relates to a variety of activities and political ethics. It cannot, and does not, yield a view of democratic industrial development that can be translated into some simple formula to allow wealth creation, opening up of markets or efficient economic policies and planning. “The organizing principle that is needed to place all of the different bits and pieces into an integrated whole causes an overarching concern with the process of enhancing so-called individual freedom and the social commitment necessary to bring that about.”

In short, what Sen was saying over ten years ago was “welcome to the world of industrial globalization.” The economic phenomena that has braced the increased use and pricing of virtually every resource commodity on a world-wide basis – freedom.

The US was downgraded by Standard & Poor’s and the stock markets around the world went crazy. It was obvious that there was no way that the US debt ceiling was not going to be lifted, but the press and media took over and did their normal thing by placing the tremendous fear of loss in the minds of all. The best choice of all the comments that I heard at that time was, “The guys who can’t shoot straight were downgraded by the guys who can’t count.” But it was not rocket science to figure out that borrowing forty cents for every dollar needed to be spent is not a sensible path to long term credible prosperity. For me, it was just a bunch of noise that could have been overlooked as a consequence of nonsensical political moves in the United States.

What it showed was that the attitude of the US citizenry to the problems of the severe twin deficits took on the look of a combination of hope, indifference, lack of knowledge and total puzzlement, which will continue to cast a shadow over everything the future economic situation holds. However, the entire US economy has become used to high “asset inflation” being used to stay afloat, from home ownership to stock markets.

In 140 BC, Roman politicians devised a plan to provide free wheat to their citizens in order to gain the votes of the poor. They also provided free circuses in the quest to allow the entertainment to achieve their power and keep it.

The current US administration has created a straight parallel between the Roman Empire and the American Empire. The entire debt ceiling debate was an absolute farce and resembled the circuses of Roman times. The American voter was treated to the high wire acts of what would happen in the highly unlikely event that the US defaulted on its debt obligations. Only in present day America could the politicians emulate the Romans of 140 BC and in the end treat the public to a massive sleight of hand, which was designed to pretend to solve the spending problem without cutting spending and set up a future course to increase (not decrease) the country’s debt from $14.5 trillion to almost $25 trillion over the next ten or twelve years.

The US has created “free bread” out of massive social benefits and for the same reason the Romans did so – to get elected.

David Walter, a former head of United States GAD, said recently that there “are striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, and over-confident and over-extended military in foreign lands and fiscal irresponsibility of the central government.”

The US welfare state is bankrupt and the freebies will eventually have to be cut; there is no choice to avert social disaster completely than to continue increasing the debt and deficits and pay for the excesses by printing currency. It was interesting to hear Mr. Bernanke in a big-time ducking mode in trying to answer questions related to this.

A good friend and old partner of mine – Seymour Schulich – wrote a book called “Get Smarter”. In it he quoted Charlie Munger when he gave an explanation of the “idiocy” of the buyers, sellers and players in the stock market. Munger said that, it’s not always obvious, but it’s best explained by the story of a guy who sold fishing tackle that was purple and green. “Do fish really take these lures?” he asked; and he replied, “Mister, I don’t sell these to fish.” Investment advisors and business reporters are somewhat like the fishing tackle salesman.

The world’s major problem is democracy and the average American, Canadian and European do not truly understand what is swirling around the world. There is a real sense of unease as economically the world is flying blind and at a stall speed. The monetary system that we have learned to rely on is collapsing as we wonder. The best quote on that subject comes from Ernest Hemingway in The Sun Also Rises: “How did you go bankrupt? Two ways – gradually and then suddenly.”

Our politicians from democratic and developed countries will keep spending and our central bankers will keep printing money.

According to David Walker again:

“With the recent increase in the debt ceiling and continued higher budget deficits at the federal level, the US is on course for its own crisis. We are not exempt from a debt crisis. We’re never going to default, because we can print money. At the same point in time, we have serious interest rate risk, we have serious currency risk, and we have serious inflation risk over time. If it happens, it will be sudden and it will be very painful.”

Bankruptcies and suicides appear obvious and according to the Greek historian Polybius, democracies always kill themselves.

In December of 1999 it was my opinion that the twenty-year bear market for commodity and resource business was almost over and I brought the CMP tax flow-through issue back to life, and in general began to take advantage of the resource boom since then.

Since that positive call in 1999, demand from developing countries like China, India and others caused a large shift in the price structure of resources in particular as well as agricultural commodities. Recently, Jeremy Grantham said this paradigm shift in prices is remarkable because it has come after a 100 year period of continuous price declines of commodities in general. As he then said in a recent quarterly letter of GMO: “Statistically, also, the level of price rises makes it extremely unlikely that the old declining trend (100 years) is still in place.” Our call for resources in 1999 has worked well, and in December 2010 on the sale of our mutual fund subsidiary we likewise made the call that the paradigm shift in resource commodity prices is still in place and probably has a five to ten year or longer life ahead of us.

This call into the future is made with full knowl
edge that the global economy is filled with Black Swans that can come to be problematic as we go forward. I am also aware that there are many others in my position who have the view that the resource industry is in bubble territory because all of the price increases are pushing the result of the debasement of the US dollar and is called “asset inflation,” and is not likely to continue as just plain old price inflation, because the US CPI incorrectly says that we have very low inflation.

We remain solidly long-term bullish on our scenario that demand for most commodities, including food, will remain in excess of the world’s ability to supply.

The political winds of countries with central banks are a long way from blowing in a favourable manner. With the current clear unsustainability of almost all government finances and its overpowering leverage, there is more to come.

There will be a future crisis of such force that it will cause the winds of the political world to change direction and hopefully put us into a position of monetary clarity and sustainability. Until it does, the temptation of politicians and central bankers to print money and cause inflation will remain in place. Because of that, hold on to your gold and hard assets.

The United States and Europe require a fiscal crisis to force a majority acceptance of the consequences of an overleveraged government. But President Obama and German Chancellor Merkel want to be re-elected.

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