Thinking Positive

JulieW · Dec 23, 2012

The glass is half full

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To make money in the next year, you have got to think in reverse. Demand is not driving commodity prices, supply shortages and hot money are. Stop thinking about catching the ever briefer rallies in the Eurozone and think about what will rally when another member country defaults and one or more exits. Stop assuming liquidity will be more valuable than genuine unimpaired cash flows. Stop betting on China and pay attention to the way manufacturing is moving rapidly back to the West. Note that the markets are discounting deflation at nearly %100 and inflation at 0%. I just love those odds.

So, what to buy? US Manufacturing is looking good in spite of the lousy US economic data. With wages in Asia rising exponentially, with energy costs remaining pretty high, with consumers caring about quality, many manufacturers are leaving China for America: GE, Bridgestone, Tiffany's, Brooks Brothers, Ford, Caterpillar, Wham-O, Karen Kane. The Chinese themselves are increasingly buying into assets in the West: GM, US farmland, US energy. They have been since 2010. Flows are reversing. Of course, the new US facilities are the most advanced in the world and you only need 20 people to run them but they have to be really good at algorithms. Luckily there is a massive pool of available talent from Wall Street. This will not fix unemployment but it will generate real returns.

American companies are gradually moving their factories from China back to the United States as the costs go up but quality deteriorates in the slowing Chinese economy.[v]

US entrepreneurs are the ones to bet on. Reverse your thinking. Instead of saying they cannot succeed because no one will lend to them, become a lender yourself. You can lend to a US manufacturer for the purchase of a piece of equipment now and have the loan three times collateralized and make 15% in a year. Who needs a hedge fund when plain vanilla massively collateralized loans in an industrialized country make 15%? Disintermediate the banks!

Energy in the US is going to be the next Silicon Valley but much bigger, and I don't just mean shale gas. Thanks to the EPA no one has built a new refinery in the US for 30 years. Mexico's new President Enrique Pena Nieto is about to change all that with his commitment to allow private investment in energy and PEMEX and to build at least five refineries on the US border. Remember that China still wants to build a port in Baja Mexico that is bigger than Long beach to take energy and raw materials out of the Americas. Yes, there are a lot of dead bodies along the Mexican border with the US these days. But, we should not let that scare us away from such a historic change on that landscape.

In the US farming and mining are already huge beneficiaries of global food and raw materials shortages and the rising cost base caused by inflation. Pretty much every mining project in Australia is underwater because the costs are rising at 50% per annum. Emerging markets are raising the prices of all exports, as workers from Bangladesh to Beijing demand a larger share of the proceeds. The US (and Canada) is cheap and safe in comparison.

Now, I have gone and mentioned the most important word on the landscape, the one that everyone is in denial about: inflation. Never in history have so many governments printed so much money simultaneously. Why do you think hard assets are bid? It's not a maybe anymore. In case you had not noticed inflation is tearing the emerging markets apart. Oh, you believe the government's data points on that? Good luck to you. Governments always lie about their inflation rate. Big money will be made and lost in the gap between the actual inflation rate versus what the government tells you it is. Forget TIPS and inflation-protected securities where you will lose your money less quickly. Go for genuine unimpaired cash flows instead.

Think about why Warren Buffet thinks chemicals are better than gold. Gold will be sold when everybody needs actual cash. Governments will expropriate it when inflation is evident. Similarly, all commodity prices will gyrate wildly with a few words from government officials given all the hot money playing in tiny markets: QE, no QE, QE... Buy businesses (not the stock, the actual business) which have genuine demand like chemicals, farming equipment, children's prosthetics, food production, condoms, and other things we can't live without now matter how bad it gets.

Notice that things we can access or grow fast are the most liquid and therefore the most volatile like corn and iron ore. I prefer the things that take a long time to cultivate but where no capital is going in. With inflation in Vietnam and Malaysia running in the double digits (officially), no one can wait six years or more for rubber to return. Therefore, I like rubber. Expect the price of your tires to keep rising. I like diamonds too (not together with rubber though). DeBeers nearly went bust and lost their control over the market. No one will touch a diamond mine today for lack of vision and cash, yet with record money printing and inflation already in play in the emerging markets diamond prices keep hitting record highs. If I had the money, I already have the team to do something in this space.

The end of the social welfare state in Europe is unfolding. They are simply running out of cash (and converting to Sterling, USD, Gold and diamonds!). So, think about what you wish you had bought when the same thing happened to Sweden and India in 1991 when their social welfare state abruptly came to an end. Ask yourself: is it true that default leads depression? No. Defaults end depressions. Usually defaults are followed by substantial growth. It takes longer if you tell the investors you are going to screw them (Argentine style) but less time if you are quick to apologize about it. I like the option value of cash at this point. I look forward to buying a beach house in Greece (it's easy to find one using Google Earth), once they actually exit. I bet that Greece will land on the cover of Conde Nast travel magazines as the new, cool, hip place once it is the cheapest place to vacation again. You'll be able to buy Greek hotels and telecom assets (everyone will keep using their mobiles no matter what) for a song.

If I have to pick countries, I like the US, Tunisia and Burma as "out there" ideas. Tunisia has 30 years of universal mandatory education, a secular but ambitious middle class and a proven ability to serve the medical needs of Western Europeans who are about to lose their national health services because they are broke. Everyone will flock to Tunisia for dentistry, surgeries and sunshine. Burma is going to be the new Thailand. It's a tourism and commodity boom on the scale of the Wild West. The Chinese will reap most of the returns but there is still room to play.

If only entrepreneurs realized that they have the best skills to protect and enhance the value of money in this new world where uncertainty, volatility and inflation are undermining old business models and ways of thinking. If only entrepreneurs would stop dreaming of IPO's or having nightmares about the lack thereof. What would you do with the cash anyway? You would see it destroyed by some asset manager who is mown down by volatility; inflation, stagflation and events he will claim are "black swans" even though a child can see this coming. Note that a ten-year-old Dutch boy called Jurre Hermans recently won the Wolfson prize for explaining Eurozone crisis.

The bottom line: stop trying to flip assets. Build to own instead of building to sell. That's what will preserve your capital, protect you from the ravages of macro factors and provide the finest asset on the planet: a genuine unimpaired cash flow.

Remember, there are only two assets in the world economy: the power to build a balance sheet and the power to tax that balance sheet. We are now in an epic contest between these two forces. Governments are going to reach for our assets in a multitude of different ways - taxation, expropriation, restriction of the free movement of capital, people and goods across borders. But, who will win? I have to bet that the entrepreneur, the innovator, the hungry will outpace the government and give us the returns and the GDP we need.
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Auspm · Jan 13, 2013

renovator · Jan 13, 2013

Great article julie
Speaking of rubber....
Where i am theres a booming economy of rubber made of seaweed believe it or not( its more like a soft coral than a seaweed ) they make thongs buckets & all sorts of things from it .They can sell as much as they can grow to the processing plants .I was talking to someone about a month ago about how much it costs to set up a seaweed farm . theres a few problems that have me holding back like storms breaking it off the lines (think oysters a long line with droppers along it ) people stealing it in the middle of the night etc.I havent totally canned the idea yet .
Im thinking along the same lines as whoever wrote that article .When everyones getting out of manufacturing its a good time to buy in. machinery & premises are on sale . I have a few friends in the states looking for something suitable in the right area .I think this year is the time to buy in the US.

Clawhammer · Jan 13, 2013

I'm so positive, my blood-type is (B+) "Be Positive"

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Thinking Positive

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