Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20
How Soon Will We See Stock Market SPX 4000? - 8th Oct 20
Stock Market Spy ETF Testing March Price Peak – What Do the Charts Say? - 8th Oct 20
5 Consequences of US Debt at $50 Trillion - 8th Oct 20
Long Term Cycles Suggest Stock Price Reversion Pending & Gold Price About To Explode High - 8th Oct 20
AMD Zen 3 Ryzen 5000 Launch - Performance, Prices Skews, Cinebench r20 Scores, 5800x, 5900x, 5950x - 8th Oct 20
Gold vs. Silver – Absolutely No Comparison - 8th Oct 20
Gold: Why You Should Be Wary of the "Consensus" - 8th Oct 20
UK Covid-19 Hospital Admissions and Deaths Since Testing Positive in 28 days Analysis - 7th Oct 20
Amazon Prime Day 2020 Sales Top Tips of How To Get Big Savings! - 7th Oct 20
Want To Win Big In Forex Trading? Leverage Is Your Friend - 7th Oct 20
Why I am Voting for Donald J. Hitler - 6th Oct 20
Markets Chop & Grind: Gold, Stocks & Commodities - 6th Oct 20
Silver Price Great Buy Spot Ahead of Second Big Upleg - 6th Oct 20
Forget RTX 3080 Get Zen 3 Ryzen 5900x / 5950x - GPU vs CPU - PC Bottlenecking - 6th Oct 20
How to Get Budgies / Parakeets to Eat Vegetables for the First Time - 6th Oct 20
How to Pick a Reputable Double Glazing Window Company - 6th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Why You Should Invest in What China Needs to Buy

Commodities / Energy Resources Aug 29, 2012 - 03:14 AM GMT

By: The_Energy_Report


Best Financial Markets Analysis ArticleThe U.S. is no longer the safest place in the world to invest, says Don Coxe, a strategic advisor to the BMO Financial Group. While U.S.-based companies are forced to wade through red tape and legal challenges, relatively lax regulation in emerging economies created stiff competition. In this exclusive interview with The Energy Report, Coxe explains how investors should position themselves as China and India rise to superpower status.


The Energy Report: You are famous for taking the long view of the political economy, Don. What does the machinery of history tell us about the likely future of the Western world as measured against the newly industrializing economies, including China, India and Brazil?

Don Coxe: For the first 17 centuries of the so-called Christian Era, China and India together generated about 40–50% of global gross domestic product (GDP), due to the sheer size of their populations. But when they did not participate in the Industrial Revolution, the relatively small number of people living in Europe and North America were able to take over 70% of global GDP. The East stagnated.


Then, in 1978, a momentous event changed the world—Deng Xiaoping was invited by the British Labor Party to visit Great Britain. Labor was facing an election against Margaret Thatcher, whom they regarded as the devil incarnate. The party wanted to show Deng how awful things were for the British working class. However, he was astounded at how well the working class lived. When he returned to China, Deng changed the slogan on the Mao posters from "to work is glorious" to "to be rich is glorious." It was the most important editorial alteration in the history of the world. Then, he put politics to work liberating the entrepreneurial spirit of the Chinese people.


Twelve years later, in India, the Congress Party brought a Sikh into the Cabinet, Manmohan Singh. The fall of the Berlin Wall and the collapse of the Soviet Union had been a shock to the Left in India; people could see that China was moving forward; a charismatic leader was needed to change things. Manmohan Singh became, in his own modest way, the Deng Xiaoping of India. He didn't have Deng's absolute power; he was just one cabinet minister. But the results were amazing: India quickly climbed from a rate of growth of about 4% to 6%, then to 7%, and then to 8%. The magic of GDP compounding worked, just like how compound interest grows.


Remarkably, China returned double-digit rates for 10 straight years—a feat never seen before. Of the new wealth being created in the world, more than half of it is being created by China and India. Indonesia, Vietnam, Malaysia and Brazil have started growing their GDPs at much faster rates, too. In a mere 15 years, economic and political power has shifted dramatically toward the East.


TER: How has this shift impacted the global demand for natural resources?


DC: The only way to grow from being a primitive economy to being an advanced economy is by consuming natural resources. At the beginning of the last century, the most important corporation in North America was J. P. Morgan's U.S. Steel Corp. replacing Britain. The U.S. became the major industrial power of the world by riding the success of its domestic steel industry. Now China uses 50% of the world's steel. Industrialization requires energy as well as metals, of course. This is why China has gone from being the 20th largest consumer of oil in the world to being the second biggest with breathtaking speed. Fortunately, we've found new oil resources. Otherwise, the Chinese would be driving oil prices to levels that would bankrupt us.


TER: Are the pricing mechanisms for energy commodities controlled by the East?


DC: China does not produce much of its own energy commodities. India produces a lot of coal, but not gasoline. Growing Asian demand for energy resources has disrupted global market patterns. Oil is at $97 per barrel (/bbl). If China were still where it was at 10 years ago, oil would be at $50/bbl.


TER: How do the needs of the new middle classes in these emerging economies affect investment opportunities for Western investors?


DC: In this century, about 400 million people worldwide have already transferred from subsistence to high-protein diets. There has been a huge increase in the price of basic grains, which are converted into meat and milk and eggs. It takes seven units of vegetable protein to produce a unit of beef, six for milk, five for pork and three for poultry. As people added these items to their diets and their physiologies changed, they absolutely had to keep on ingesting high protein quotients. They couldn't go back to a few slices of bread a day. This has created a gigantic bull market in agriculture. For example, at the beginning of the millennium, corn was at $2/bushel, and now it's $8.35/bushel. Soybeans were $4.90/bushel, and are now at $17.25/bushel. The agricultural sector of the U.S. economy has enjoyed sustained economic growth based on strong prices for four years. Shares in agricultural firms that produce fertilizers, farm machinery and genetically modified seeds are terrific investments.


TER: What is the effect of the current drought in the Southwest?


DC: There is drought somewhere in the world every year. The bad luck this year is it came in the most important grain-producing section of the world. But if the drought had been over the North Atlantic, we wouldn't have noticed it. Due partially to drought, the prices of grains have climbed to record highs. But one of the things that got put into the Farm Bill five years ago was crop insurance. There is now going to be a gigantic claim against this insurance, because farmers are allowed to recoup 85% of what their average production per acre was for the last three years at the price of corn, soybeans or wheat today. This means that farmers whose crops are hit hard by drought don't have to work very hard, and their income is 85% of those who have perfect weather. Not bad.


TER: How do biofuels affect agricultural investments?


DC: The biofuel industry is an example of where greed and good intentions combined to create a monster. Back in the 1990s, when there were corn surpluses, we got the bright idea to produce corn liquor to add to gasoline. The idea was to create "green" jobs and renewable energy rather than relying upon coal, oil and natural gas. This wasn't a problem when corn prices were reasonable. But then the ethanol beasts succeeded in having the alternative fuel mandates increased. They actually got a law passed through Congress that mandates putting 15% ethanol in every gallon of gas next year. God help us if the government actually imposes that mandate, because I don't know where we'll find the corn.


But bad as we may be, the Europeans are almost as bad. They add palm oil to diesel fuel. They're ripping down the jungles of Southeast Asia and the demand for palm oil has skyrocketed its price. Palm oil has been calculated to be the single most important protein source for poor people in the big cities of Southeast Asia. It's their biggest source of protein, because they cook with it. When palm oil is sent to Europe to replace hydrocarbons, local palm oil prices skyrocket.


Three years ago, the nations of Southeast Asia, including Indonesia, sent an emergency letter to the European Union (E.U.), demanding that it stop the palm oil mandates. The E.U. knows how to handle things like this—they set up a committee. That committee has not yet reported. The result is that the prices of all of these vegetable oils—palm, soybean, canola—have skyrocketed. The chairman of Nestle was asked what we need to do to get food prices down to sustainable levels. He said it's quite simple. Stop subsidizing ethanol. That's it. Bang.


I analyze global food issues for the G8 meetings. I've been pointing out the problems with biofuel year after year, but nothing happens about it because the ethanol and palm oil lobbies are so powerful. I personally regard this as an outrage.


TER: What exactly is a commodity "super cycle"?


DC: The global economy has been through a crash and a recession, but commodity consumption overall is higher than it was before. Why? When the U.S. went into recession in 2008, Europe went down the tubes. But China, India and Indonesia did not; they continued to consume commodities. That's what I call a commodity super cycle: It transcends the ordinary economic cycle. In past recessions, the worst economic assets were commodities—their prices plummeted. That has changed. For example, during our boom periods, about 40% of the metal consumed is manufactured from scrap left over from economic downturns. When the new economies, particularly China, were formed, they didn't have previous industrial cycles, so they had no reserves of scrap. Therefore, they've been buying virgin metal and our scrap. The metal component has been dramatically higher in this super cycle than it's been for 150 years.


TER: How have natural resource commodities fared in general since the tech meltdown at the turn of the millennium?


DC: The tech crash in 2000 was the greatest idiocy in the history of financial humankind. There was a 150 multiple on NASDAQ and very few barriers to entry in the tech business. The crash was inevitable. This meant that the emerging economies were able to get our technology cheap. They caught up with us in a hurry. Without the crash, it would have taken China and India two generations to acquire the technical knowledge and the factories to compete with us. Plus, by Moore's Law, the cost of information technology fell by 50% every 18 months. And in many cases, they just stole our patents. The tech crash was great news from the standpoint of China and India—it meant that perfect competition was operating in technology. They were able to set up their own factories, obtain foreign subcontracts and get in on the global commodity game because they had lower operating costs.


The NASDAQ stocks recovered a bit, but then came the idiotic real estate crash. That crash was based more on fraud and on government policy than on Moore's law. When governments mandated that banks had to make a certain percentage of their loans to poor people, Wall Street said, we'll take these loans off your books, because we have these marvelous new collateralized debt obligations. With alchemy, we can buy sub-prime mortgages and mix them in with good mortgages and—magically—get a triple-A rating.


That was the second time that technology was involved in creating a crash. Technology was involved the first time in the stocks of companies doing neat, new things. The second time, technology created the mathematical formulas to produce financial products. It's the equivalent of mixing sewer water with tap water and claiming that because there was more tap water than sewer water in the glass, it was safe to drink.


TER: How have the ups and downs in the residential real estate market affected natural resource commodity stocks?


DC: Much wealth has been destroyed. This wealth could have gone into the stock market and personal savings and individual retirement accounts. It was just wiped out in the 2008 crash. Consequently, the multiples on perfectly good commodity stocks are now much lower than they should be, considering their quality.


TER: Do you have any thoughts on why junior energy and metal mining stocks have been at relative lows over the last three quarters?


DC: Part of the problem is political. Extremely rich, tax-exempt organizations staffed with lawyers attack mining companies when they try to open new mines or drill for oil. A whole sector of the economy has been taken outside the tax system. It used to be if you were trying to prevent an oil company from drilling, you had to take your own risk and get landowners together to wage the fight. Now the fights are being waged by rapacious lawyers hired by extremely rich non profit organizations set up, ironically, from the estates of capitalists who actually created wealth.


Blocking the Keystone Pipeline was a shocking political development. Elitists from Hollywood posing as environmentalist experts demonstrated in Washington and spent a night in jail, for which they were treated as national heroes. This creates a political risk climate for the resource industry. It's tough to get capital for small companies when somebody out there is going to be coming after you, politically.


TER: How do politics affect international competition for natural resources?


DC: The oil companies and mining companies are not allowed by law to bribe local dictators; the Chinese are free to do that. They can also destroy the landscape, which we are not allowed to do in this country. We have tied the hands of our corporations working abroad. Meanwhile, the Chinese are developing mineral resources in some pretty toxic parts of the world. There are 800,000 Chinese living abroad, going to universities, learning and working. They are moving into countries, particularly in Africa, where there is no chance that a listed U.S. company could ever make a legitimate deal.


We are witnessing a great transfer of political and economic power. A much bigger percentage of the new resources at the margin are being successfully developed by China, because its firms do not have to worry about tort lawyers suing them, or their own government prosecuting them.


TER: Are the Chinese coming into North America as well?


DC: Yes. They are currently buying Nexen Inc. (NXY:TSX; NXY:NYSE) in Canada. From the standpoint of Canada, China is actually a friendlier country than the U.S. is—with Obama blocking the Keystone Pipeline. And the environmentalist groups in the U.S., the ones that are big funders of Obama, are determined to not only stop new pipelines, but also to shut down the oil sands, which they regard as a big source of carbon dioxide. If your next-door neighbor is trying to stop you from developing your own property, you will find friends wherever you can.


TER: The Canadian tar sands and the black shales are worthwhile prospects, as are the discoveries in North Dakota. Let's talk about the economic benefits of investing in those spaces.


DC: It is stunning that North Dakota is producing more oil than Alaska! The companies doing this are a boon to the U.S. economy, although they've had opposition all the way. But I do believe that the good guys are going to win in most cases, because most of the voters want to see progress. They want to see lower gas prices. They want to see gas replace coal. I think that the enviro-left is going to lose in the long run. Therefore, the junior explorers ought to be successful.


But in the case of the Canadian companies, they may be wise to make deals with China, rather than with American firms, at least for the next four years.


TER: Who are these tax-exempt enviro-groups that you're talking about?


DC: The Sierra Club. The Natural Resources Defense Council. There is a long list of organizations that are staffed by really smart, dedicated people. You can't say exactly that they are rapacious, but they have a view. Of course, it really amuses me that they will fly in corporate jets of their own to meetings, while trying to snuff out the excessive carbon footprint that the rest of us have. There is a certain amount of phoniness about them. But there is no question that they are a real barrier to development. However, as long as we have 8–9% unemployment, they're going to have trouble convincing the average man or woman on the street that what they're doing is in his or her interest.


TER: We talked about the downsides of regulating the energy and mining industries. Are there upsides to regulation? I know that you have written that BP Plc (BP:NYSE; BP:LSE) should have been more closely monitored.


DC: I never would have invested in BP. When John Browne took over, he made himself the darling of the Left by talking about how BP was going "beyond oil." But when you looked at its work practices, they were shoddy. It was pretty embarrassing when the company that was supposedly the most enviro-friendly created the biggest mess of all. But it is possible for a well run company to safely drill in deep sea depths. BP probably needed more rigorous enforcement of existing regulation. The company had a refinery fire in Texas and people were injured. The government report denounced BP for multiple safety violations. It had a terrible track record in operating its Trans-Alaska pipeline, where it had multiple leaks.


TER: Are there energy stocks that are more appropriate for institutional pension funds than for retail investors?


DC: Energy-related commodity stocks should be in all portfolios. People should invest in the companies, rather than in the commodities themselves. That's socially better, because sequestering hundreds of billions of dollars' worth of commodities adds to global inflation. Individuals should to talk to an adviser who knows their personal affairs. But for a large organization or a person with a few million dollars to invest in natural resource commodities, we recommend about one-third of the portfolio should be in agricultural stocks, because they have the best risk-reward ratio. About 30% should be in gold stocks. The rest should be in oil and gas stocks. We don't recommend more than 8% in base metals. Because the Chinese are taking over these properties, we do not think there is long-term growth in the base metals.


TER: You're scheduled to talk about navigating the politicized economy at the upcoming Casey seminar. Can you give us a preview of your presentation?


DC: Today's investment risks are different from the risks of past eras, because the old rules applied when governments did not so voraciously inquire into your personal affairs. And tax rates were not as high. Governments were not so concerned about dictating operating rules for industrial enterprises. We are now competing against emerging economies that do not have to face that kind of governmental problem. Therefore, those economies are going to be more successful than us.


When building up a portfolio, one should not assume that the U.S. is the safest country on earth to invest in. It may be once again, but the evidence is that Washington is aggregating more and more power unto itself. It might not matter who wins the White House as this pattern continues. And we're now competing against China, which has all those people. It has a huge amount of internal cohesion, and it is determined to become as rich as, or richer, than we are. My basic rule is do not invest in companies that produce what China produces, or is likely to produce. Rather, invest in companies that produce what China needs to buy.


TER: That's good advice. Thanks for speaking with us today.


DC: My pleasure. I encourage your readers to attend the "Navigating the Politicized Economy" summit. I'll be delving into these topics in greater detail. If you can't make it, you can order the audio collection, which will include my presentation as well as a lot of valuable information from the conference's 28 expert presenters. It's cheaper if you preorder; you'll save $100.


Donald Coxe has more than 39 years of institutional investment experience in Canada and the U.S. He is Strategy Advisor to BMO Financial Group with $500 billion under management. From his office in Chicago, Don heads up the Global Commodity Strategy investment management team—a collaboration of Coxe Advisors and Harris Investments—to create and market commodity-oriented solutions for investors. He is advisor to the Coxe Commodity Strategy Fund, the Coxe Global Agribusiness Income Fund and the Virtus Global Commodity Stock Fund. Coxe has consistently been named a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and was ranked number one in the 2007, 2008 and 2009 surveys.


Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

1) Peter Byrne of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Don Coxe: I personally, and/or my family, and/or the Funds I advise through Coxe Advisors LLP do not own shares in the following companies mentioned in this interview: BP and Nexen. I personally, and/or my family are not paid by the following companies mentioned in this interview: BP and Nexen. I was not paid by Streetwise Reports for participating in this story.


Streetwise – The Energy Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.


The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.


From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.


Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.


Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.


101 Second St., Suite 110
Petaluma, CA 94952


Tel.: (707) 981-8204
Fax: (707) 981-8998

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules