Archive for November, 2008

Zimbabwe’s central banker in praise of Fed

Sunday, November 30th, 2008

Marc Faber just released his latest market commentary report. In that report, we learnt that the US Federal Reserve had received an unexpected praise from the highly esteemed Dr. G. Gono, the chairman of the Reserve Bank of Zimbabwe:

As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

..That is precisely the path that we began over 4 years ago in pursuit of our national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification, and demonization we have endured from across the political divide.

..Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander.

…As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.

Is this a hoax? Well, you can check this document from the Reserve Bank of Zimbabwe here. Looks like the US and UK central banks are in the same league as Zimbabwe.

Price discovery for physical gold for purchase

Thursday, November 27th, 2008

Over the past 4 months, spot gold prices had fallen from a high of around the US$950 level to a low of just above US$700. While the spot gold prices had fallen, a curious phenomena happened- physical demand for gold had in fact increased. In Australia, the Perth Mint Gold had to stop taking orders while it is working non-stop 24×7 churning out physical gold for retail purchase. Elsewhere in the world, the same is happening. Reportedly, some individuals are said to be willing to pay say, 10-15% above the spot price for the physical gold.

So far, the demand for physical gold (not for jewellery purposes) has not reach the mainstream society yet. For years, it remains the realm of some rare gold bugs. But interest is growing over the past few years and that explains why companies like Perth Mint Gold are ill-prepared to handle this increase in physical demand.

Consequently, there is a growing disparity between gold spot prices and the price of physical gold for retail buyers. One of our readers, ADEMAC, has found a very interesting resource for discovering the price of physical gold. With that resource, you can keep track of spot gold prices and the price of physical gold (in various forms) at eBay.

But purchasing physical gold involves a little more knowledge because there are many prices for different forms of physical gold. For example, while a 1-ounce gold coin may be around 8% above the spot price, you may find that a 1/4-ounce gold coin may fetch around 33% above the spot price. Why is it so?

To find out more about the resource that ADEMAC had found and why a 1/4-ounce gold coin fetch a much higher price, please turn to our forum discussion here. If you have any questions about purchasing physical gold/silver, you can ask them at our Gold, Silver & Precious Metals forum.

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Back in Marc Faber: Asset Markets May Rebound Within 3 Months, we asked for your votes on what you think will happen to the global equity markets in 3 months time. Some of you have cast your votes. So far, the majority (though a slim one) believes that a whooping big rally will happen. If you haven’t already, please cast your votes here. You will need to register first before voting (the registration process is designed to be very quick for your convenience).

Marc Faber: Asset Markets May Rebound Within 3 Months

Tuesday, November 25th, 2008

Back in Bear market rally on the works?, we explored the possibility of a stock market rally in the context of a bear market. We wrote,

At such extreme levels, it is very possible that we will see a counter-trend rally soon. But please note two things:

  1. It does not mean that prices cannot go down further in the short-term. Who knows, perhaps there will be more panic selling in the days to come, thus bringing the technical indicators into even more extreme levels?

More than a month had passed and everyone could see that the panic selling had intensified. It is only since a couple of days ago that there was some kind of bounce. Naturally, many investors are extremely wary of this. Many of them will take this opportunity to sell.

Interestingly, Marc Faber had this to say in this interview:

What you could see in the next three months is a very strong rebound in asset markets, in equities, followed by a selloff in bonds and eventually a sell-off in the dollar.

Why is the reasoning behind Marc Faber’s view?

Firstly, based on statistical probability, the market for stocks, non-government bonds and commodities are at a level that is even more oversold than the infamous 1987 crash. Therefore, based on history’s lessons, a rebound is likely to happen soon. As we mentioned before in Bear market rally on the works?, even during the infamous bear market of the Great Depression, there were many multi-month rebounds before stocks bottomed out in 1932. The only argument against this line of reasoning is the Black Swan argument (see Failure to understand Black Swan leads to fallacious thinking). Who knows, perhaps 2008 will go down in history as the worst ever bear market that is unprecedented in the entire history of human civilisation? In that case, as Marc Faber cautioned,

Statistically a rebound should happen, but if it doesn’t “the air is out” and the world faces an economy “worse than the depression of ’29 to ’32,” he said.

Next, the key to understand why a rebound can happen is that

But “I assure you if you throw enough money at the system, eventually you can reflate, especially in the United States,” Faber added.

What is happening is that despite the gigantic deflation in asset prices all over the world (around US$60 to $100 trillion of ‘value’ had gone up in smoke), governments are trying their hardest to pump liquidity (money and money substitutes) into the financial system and spending their way into budget deficits. Consequently, financial institutions are sitting on a huge pile of cash as they sell their assets and hoard it. The problem with ‘cash’ (the safest ‘cash’ is Treasury bills and government bonds) is that they have practically no return. Therefore, it is only a matter of time before the overwhelming volume of liquidity burst the seams and triggers a rally. As Marc Faber said,

If the market continues its sell-off, there will be more capital injections and more liquidity creation and one day it will trigger a huge rally where people rush out of cash into assets because they will become not concern about deflation but concern about the monetary impact of this liquidity injection on asset prices and so they rush in to hard assets whether it’s land or raw materials, in particular gold.

In such an environment, we will happen to the value investing philosophy? We will talk more about that soon.

In the mean time, what do you think will happen to the global equity market in 3 months time? Vote and express your thoughts here! (Today, we will do something a little different- we will close the comments for this post so that you can vote and comment here instead. You need to register first before you can comment and vote).

P.S. In 3 months time, we will re-visit this vote and see whether you, our dear readers, are right or not. 🙂 We will close the vote in 10 days time, so hurry with your votes.

Effects of retreating foreign banks in Australia

Sunday, November 23rd, 2008

Recently, we found this news report in the mainstream media:

 A significant retreat of foreign banks from the Australian corporate lending market is under way, which will leave the “Big Four” domestic institutions scrambling to pick up the slack in a mass refinancing of company debt due to happen over the next 12 months.

According to research compiled by banking analysts at Merrill Lynch, the total debt raised by Australian companies since 2006 stands at $285 billion. Merrill estimates that as much as $54 billion of that amount is held by what it describes as “retreating” offshore banks.

“This dislocation represents a potential benefit for major banks to refinance and upsize to good customers at vastly improved margins. However, it also raises the likelihood of potential bad debts collapsing sooner and a need for capital.”

As we mentioned before in Can falling interest rates and rising mortgage rate come together?,

In other words, there are not enough domestic deposits to fund all the needed credit (e.g. home loans) in this country.

Australia is dependent on foreigners for credit because of its lack of domestic savings. The retreat of foreign banks from Australia will result in more credit rationing for Australia’s businesses. Over the next 12 months, as businesses need to refinance their company debt, they may find that either (1) the price of money will go up further or (2) credit being denied. With the economy slowing, Australian banks are increasingly more careful with their lending. Furthermore, the recent lending fiascos (e.g. ABC, Centro, etc) will mean that they are in damage control mode, which implies that they will have to be even more stingy with their lending.

What is the longer-term effect of this?

Inevitably, this means that the weaker businesses will fail because their supply of credit is choked. Those who still have credit flowing through their balance sheet will find their debt repayment cost increases. That, along with falling revenue due to the slowing economy means that they will have to cut costs more aggressively. Since employees are one of the greatest costs for businesses, staff retrenchments will be undertaken. Laid-off workers will tighten their belts and cut their spending, which means other businesses will have their revenue cut. Businesses will become more pessimistic about the future, which means they will no longer invest for the future. This will result in businesses higher in the chain of production to suffer, which means they will have to cut the number of staffs. Many of these unemployed workers have large amount of debts, which means they will have to sell their assets (e.g. house) to de-leverage. This will in turn depress asset prices. Depressed asset prices will increase the chances of asset owners to fall into negative equity, which means that should they become unemployed, their debts will become bad debts for the banks. Bad debt for the banks will mean further rationing of credit. Further rationing of credit will start the next round of vicious cycle.

In engineering terms, this is called a positive feedback loop. It would not be easy for the government to intervene strategically to short-circuit this feedback loop.

Time-wasting public discussions

Thursday, November 20th, 2008

Sometimes, we despair at the kinds of politicians we have in Australia (and by extension, the rest of the liberal democratic world). Recently, the Opposition frontbencher Andrew Robb accused the government’s Treasury department of “manipulating” figures when it made a forecast of 2% economic growth. That 2% is only 0.5% more optimistic than the RBA’s forecast of 1.5%.

To us, this is just nitpicking and exaggeration for the sake of playing the role of Opposition. As a result, some time are wasted during parliment time to address this issue. Can you believe that our dear politicians are sniping at each other while the nation is facing a serious economic problem that can turn out to be a serious recession (or maybe even a depression)?

All because of different methodologies used to make forecasts.

In the days to come, there will be a lot more public discussion on whether Australia will experience two consecutive quarters of negative growth or not (called a “recession”). Again, this will be a complete waste of time and energy. The US is already facing a major economic crisis and yet, there are some resistances in calling it a ‘recession’ (technically).

Here, as investors, we don’t really care whether Australia will hit technical recession next year. As we explained before in Example of precisely inaccurate information,

The price index is a very important number. It is used to derive real GDP growth from the nominal GDP growth. From the growth (or contraction) of real GDP, we can then define when an economy is technically out of (or in) recession.

Now, if the price index is a logically invalid number (let alone accurate), then how accurate will real GDP growth figures be for capturing the growth of output of an economy? If this figure is inaccurate, then how accurate will it be for defining when an economy is technically in recession? In that case, how useful will it be to be so precise in defining the exact point for which the economy is in technical recession?

By the time it is absolutely clear that Australia will fall into recession, it is already too late to change your investment plans accordingly. In fact, the Australian stock market has already factored in a significant recession. The smart money has already pulled out of stock market and sold down the Australian dollar.

Therefore, whenever you hear from the mainstream news media about stock prices falling because of “worries” of recessions, you know straight away that such stories are not written by investors for investors. You will save yourself a lot of time by skipping such stories.

For us, we are more worried about the long-term implications of bailouts, rescues, pump-priming, printing of money and so on.

Two faces of the China growth story

Wednesday, November 19th, 2008

Everyone is familiar with the China growth story. In fact, this story is so familiar that it is very easy to miss this subtlety- the ‘China’ in the China growth story has two faces to it. It is easy to see one face of ‘China’ and treat that face as the monolithic whole for the entire nation. This assumption misses the complexity of China.

To understand China’s complexity, consider its economic growth over the past couple of decades. No doubt, China’s economy grew very rapidly over that period of time. But this growth is very unevenly distributed as most of the growth are concentrated on the cities and major population centres. This is the face of ‘China’ that everyone sees in the China growth story. As of right now, this face of ‘China’ is facing a major economic correction (see Does the major Chinese economic slowdown signify the end of the commodities boom?). This in turn has major implications on commodity prices.

Then there’s the other face of ‘China’- the backwater rural regions. They have yet to experience much of the benefits of the prior economic growth. These rural regions still form the majority of China’s population. In other words, the majority of Chinese has yet to fully benefit from the two decades of economic boom. As we wrote in Why are the poor suffering from food shortages?,

At the end of 2006, China’s rural population stood at around 737 million. From 1990 till today, we estimated around 230 million rural peasant Chinese migrated from the countryside to the cities. Our guess is that the majority of the rural migrants are males. Over the past couple of decades, it is this mass migration that provided the vast quantity of labour to propel China’s rise as a major economic power.

The uneven distribution of economic growth over the past couple of decades is socially unfair and thus, hardly surprising that the rich-poor gap had widened since then. In short, the economic boom bypassed rural China. But on the positive side, this means that rural China is also much less affected by the currently unfolding economic bust in the cities. However, this bust still has an impact on rural China to the extent that these 230 million peasant migrants to the cities have to return to their homes in the countryside due to the collapse of the Chinese export industry.

Therefore, in the face of a looming mass reverse-migration back to the rural regions, the utmost priority of the Chinese government is to lavish development on the inner rural regions of China that have missed out on the economic boom. At the same time, the impact of the economic bust on the urban dwellers has to be cushioned through spending on social welfare. To achieve that, the Chinese central government have to embark on legal reforms to give peasants more rights.

The implication of this is that in the years to come, China will be too busy looking after itself to continue lending to the US.

Does the major Chinese economic slowdown signify the end of the commodities boom?

Monday, November 17th, 2008

Even as late as the end of last year, when the credit crisis was only a few months old, there was a popular de-coupling theory that believes that Chinese economic growth will run independently from any malaise in the US economy. As we recalled what we wrote at Is Chinese growth ?de-coupled? from the US economy? in November last year,

According to this new theory, China should continue to grow and power the global economy regardless of what happens to the US economy. This is the ?de-coupling? theory. Proponents of this theory sees that so far, China had ?de-coupled? (both in real and financial terms) the most from the US.

Today, this theory is very much discredited. As this news article from the Sydney Morning Herld (SMH) says,

China’s domestic economy is slowing, but no-one really knows how much.

IT IS NOW eight weeks since Beijing waved goodbye to the Olympic Games and yet the sky remains an eerie, brilliant blue. The world is waiting for China’s smokestack economy to roar back to life.

Only weeks ago it seemed China might provide an island of growth that would keep Australia afloat while the rest of the world fell apart.

How could a Wall Street credit crisis knock over a country with closed capital accounts, where shops do not take credit cards and where people buy apartments with suitcases of cash?

There is no doubt that the Chinese economy is slowing much more than expected. The latest data reported that China’s 3rd quarter GDP slowed to a less than expected single digit of 9% (see China’s third quarter GDP growth slows to 9%). There are reports that tens of thousands of factories in China’s manufacturing province, Guandong, have already gone bust.

Is China falling into a recession along with the rest of the world? Our long time readers should not be surprised at this development, as we warned at Can China really ?de-couple? from a US recession? in January this year,

So, do you see China being caught in between? On one hand, a slowdown in US consumption will ultimately result in far greater proportion of contraction in investment spending in China, which accounts for the majority of Chinese economic activity.

Now, we will ask a very interesting question that has never been brought up by the mainstream media: Is this slowdown of the Chinese economy within the design of the Chinese government? Please note that we are not suggesting this slowdown is deliberately engineered by the Chinese government. Rather, we are suggesting that this slowdown could be part of the longer-term big picture plan.

Why do we say that?

Remember that we wrote at China to pull the plug? in March last year (2007)

… the Chinese leadership is highly concerned about the social and environmental impact of breakneck economic growth over the past few decades. There is worry that the status quo is ?unstable, unbalanced, uncoordinated and unsustainable.?

Assuming that this news is true, we can expect significant policy changes in China that will shift focus from the economy to the environment and social stability. This means the Chinese government will take steps to slow economic growth significantly in order for the non-economic aspects of the nation to catch up and for the economy to catch a breather. Indeed, China, for all her impressive economic growth, has a host of other serious problems as side effects.

Whatever the specific actions that the Chinese government take, we can be sure that there will be a great impact on the global economy and financial markets.

If you are a frequent watcher of the Chinese news media, you will notice that in recent times, the government showed its intention to develop the inner provinces. There are some snippets of images showing government initiatives in the agricultural heartlands of the peasant countryside (in Chinese lingo, that’s called “scientific farming”).

Thus, in the bigger scheme of things, this slowdown of the Chinese economy is still consistent with the Chinese government’s long-term plans. As we wrote in Can China really ?de-couple? from a US recession?,

The needs of the Chinese consumption economy is different from the US consumption economy. Some Chinese are rich. But some other parts of China are unbelievably poor. Wealth distribution in China is rather uneven and there are still many pressing social and environmental issues to be solved. Currently, the Chinese export economy is tooled towards US consumption. To re-tool and re-configure the Chinese economy towards its domestic needs requires a period of adjustment in which capitals are destroyed and built.

Our guess is that this is the adjustment period that China re-tooling its economy whereby capitals will be destroyed and built. The slowdown may still be significant, but that does not mean that the long-term commodity boom is over. As we said in What the commodities super-cycle is and isn?t?,

The point we are trying to bring across is that this secular commodity trend is a very long-term trend that will take decades to unfold. Within this secular trend, there will be cycles of bad years. But do not mistake these cycles of bad years as a permanent decline that will stretch on forever and ever.

What should China demand in return for help in combating economic crisis?

Sunday, November 16th, 2008

Even before this weekend’s G20 Summit, there was a lot of rhetoric on international solidarity and cooperation to tackle this global economic crisis. Since this crisis is a shared curse of every nation, global leaders pledged (or at least agreed nominally) coordinated action in a spirit of teamwork and camaraderie. After all, one of the reasons why the Great Depression was a depression instead of a severe recession was because of the spirit of self-interest, blame laying and cliques among the nations.

China gave indications that it will help in the bailouts via the IMF (see China ready to help tackle crisis via IMF). No doubt, there will be expectations on China to fork out a substantial part of its massive hoard of US dollar reserves to do so.

But will the Chinese government just help for nothing? Domestically, they have their own economic worries and problems to tackle. Naturally, their domestic needs will take the first place. As such, this will have negative repercussion on the US economy (see Is China?s pump priming bad for the US?). At the same time, the Chinese are too subtle to act so belligerently in the open.

What should the Chinese do then? To answer this question, we will put ourselves on the shoes of the Chinese. What will we do?

Well, if we are to dip into our hoard of US dollar reserves to help in the bailouts and rescues, we will demand one thing in return- the IMF’s gold reserves. China has only 600 tones of gold reserves whereas the IMF has around 3200 tonnes. If we can swap our US Treasuries/dollars for IMF’s gold, we will kill 4 birds with one stone:

  1. Be Mr. Nice in the eyes of the world because of our ‘generosity’ in sharing our US dollars.
  2. Increase our gold reserves by more than 6 times in one swoop.
  3. Leave the market price of gold unmolested.
  4. Getting rid of our US dollars without causing a destabilising run in US dollars in the forex market. This will reduce the vulnerability of our national savings in the hands of the money printers running the US government.

The only hitch is that at today’s gold spot market price, China’s current US dollar reserves of US$1.9 trillion can buy up half of all the gold ever mined in the entire history of humanity.

Anyway, we are not them and hence, we don’t expect them to act like us.

What good will come out of the G20 summit?

Thursday, November 13th, 2008

This coming weekend, leaders of many nations will gather together for a G20 summit to discuss longer-term solutions for the global economic crisis. This summit will involve not just involve the ‘rich’ and mostly Western economies, but also emerging economies like China. As the British PM said here,

The alliance between Britain and the US – and more broadly between Europe and the US – can and must provide leadership, not in order to make the rules ourselves, but to lead the global effort to build a stronger and more just international order.

There is plenty of rhetoric about the formation of a coming “new world order” from the G20 summit. But all these are just big talks and hot air.

Firstly, the world’s biggest economy (US) is in no position to lead. The US is the world’s biggest debtor nation who borrowed from the world’s biggest credit nation (China). As we said before in Will the US dollar collapse?,

Thus, this situation is akin to an individual owning the bank money. If he owes the bank a million dollars, he is in trouble. But if he owes the bank a billion dollars, the bank is in trouble?if he goes bankrupt, a large portion of bank?s loan portfolio will be wiped out, rendering the bank insolvent. The US owes the rest of the world so much money that they cannot afford to let the US go ?bankrupt.? But the rest of the world knows that sooner or later, the US will go ?bankrupt.?

Obviously, the debtor is in no position to be the boss. That’s why Gordon Brown’s empty talk about US and Europe providing leadership is a joke.

Secondly, although it is possible that the G20 summit will produce some substantial and coordinated actions from governments, it will be nothing close to a “new world order.” This is because it is all about trying to return to the status quo of fiat money, credit expansion and most importantly, maintaining the US dollar as the world’s reserve currency. As we explained in Awash with cash?what to do with it?

The US, being in the enviable position of having its money as the world?s primary reserve currency, is not subjected (for now) to the same rules as the other countries?it can spend more than it earns simply by printing its own dollars to pay foreigners.

There is no way the US will let their dollar relinquish its reserve currency status without a fight. Even if they are willing to do so, what will be the alternative? Gold? Not likely because this will be too tough a medicine for any nation to take. As we explained in Can there be an alternative reserve currency?,

All these problems leave only one candidate to function as the world?s reserve currency- gold. The world used gold under the classical gold standard (there is a brief history of money in Why should you invest in gold?) and it arguably worked very well until the interruption of the First World War. But it will require the global economic situation to deteriorate to the point of extreme pain for the idea of reverting to the gold standard to be entertained. So, don?t hold your breath on that.

So, at the end of the weekend, the G20 summit will most likely be another lame-duck session.

What the commodities super-cycle is and isn’t?

Wednesday, November 12th, 2008

There are many skeptics of the commodity super-cycle. They have seen the rise of commodity prices as a bubble and consequently, see many resource stocks as being extremely over valued. The recent reports by the media of “fears of a global slowdown” and a significant slowdown of China prompted the sell-off in commodities and thus, add fuel to the belief that the commodity bull market is over.

On the other hand, there are many ardent believers of the commodity super-cycle theory. They sees that China and India are going to de-couple itself from the Western world and power the global economy regardless of what happens to the United States. Consequently, they see that commodity prices are not in a bubble and there is more to go. As a result, they start to bid up resource stocks to a sky-high level.

For us, we believe there are some truths in both camps. Yet at the same time, both camps tend to exaggerate the truths in their beliefs, resulting in bad long-term investment decisions. Both camps fail to understand the big picture and let the short-term price movement cloud their judgement. Today, we will repeat this explanation, for the sake of our newer readers.

Let’s turn to our earlier article, Understanding secular vs cyclical,

One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends. Confusion between the two can result in lost profits or worse still, losses. Before we can give examples of secular and cyclical trends, let us begin with definitions from the Encarta® World English Dictionary:

Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

Now, let’s turn to Example of a secular trend- commodities and the upcoming rise of a potential superpower,

It has been said that today?s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West. Napoleon once said that China is a sleeping giant that will shake the world when awaken. Today, despite the breakneck growth of the Chinese economy, China still have a lot of catching up to do in order to attain the same level of affluence, standard of living as the West- there are still hundreds of millions of peasants in China that is still relatively poor by Western standards.

To be a successful long-term investor, you have to appreciate the magnitude of the length and scale of this long-term secular trend. To help you do so, consider these real-life scenarios:

  1. Sydney is considering building a desalination plant that is projected to be completed in 2009. This project began as an investigation in 2004.
  2. A proposed brand new railway line from Rouse Hill in Sydney to the city may take up to 2015-2017 to complete.

So, you can see that major large-scale capital infrastructure projects can take several years to complete. In these examples, we are citing only a desalination plant and a railway line.

Now, take a look at China. They have plans to develop their nation towards the Western standard of living. They still have hundreds of millions of poor rural Chinese living in the countryside who have yet to taste the newly-found wealth of the coastal cities. Ditto for India. Combined, both of them have around 2.5 billion people. Can you imagine the colossal magnitude of the tasks ahead? If a Sydney desalination plant and railway line requires so much time, material and financial resource to complete, imagine how much more is needed to develop two nations with gigantic populations to a level that we, who live in the West, now enjoy? Whether they eventually succeed is irrelevant. The fact is, they are going to try, with major consequences to the rest of the world.

So, you should be able to see by now, the development of this secular trend will require decades and colossal amount of resources and commodities to come into fruition. This fact is the basis for the commodity super-cycle theory.

But life is not always so straightforward. As we said before in Will the China boom go in a straight line?,

However, the market always latches on to the generalities of a story and takes a simplistic projection of the story too far into the indefinite future. What do we mean by that? Put it simply, we do not believe that the rise of China will take on the path of a straight line.

As we said before, this trend will take decades to come into fruition. Within the decades, there will be business cycles, setbacks, problems and so on. As we wrote in that article,

Any time when the path does not look like a straight line upwards and take a temporary dive, the market will flip to the other extreme of this story and project extreme pessimism into the indefinite future.

Currently, with commodity prices taking a beating over the past couple of months, there are some who believe that the commodity bull market is over. Well, isn’t this taking a too short-sighted view?

Furthermore, let’s say China falls into a major economic correction in the near-term (see Can China really ?de-couple? from a US recession?)- we believe this is a real possibility. Does this mean that’s the end of the bull market for commodities (note: we are NOT talking about stocks here)? That is, will China’s long-term needs for resources and commodities going to decline from then on, forever and ever and return to the stone-age just because of a recession? We are sure there will be many experts pronouncing the end of the China growth story when such a day comes. To use an extreme example, it looked that way too for the US during the 1930s during the Great Depression. But history proved that’s not the end. In fact, the US went on to become a superpower in the 20th century. But on the other hand, if China falls into perpetual anarchy/revolution, then all bets are off and we will have to reconsider the commodity super-cycle theory.

The point we are trying to bring across is that this secular commodity trend is a very long-term trend that will take decades to unfold. Within this secular trend, there will be cycles of bad years. But do not mistake these cycles of bad years as a permanent decline that will stretch on forever and ever.

Understanding this big picture is one thing. Translating this understanding into a successful investment strategy that is suitable for you is another. In fact, it is tricky and many pitfalls and potholes lie on the road.

Firstly, since this is a multi-decade trend, some of us may not live that long enough to see it, let alone invest in it. For young working adults who have an expected lifespan of 50 or more years to go, it may be feasible to ride on this secular trend.

Secondly, for many of us, to take advantage of the commodity trend, the only available avenue of investment is through resource stocks. As we mentioned before in What is the meaning of ?oversold?? Part 2: Value perspective,

But having said that, remember that as we said before, all mines/oil/gas fields have a finite life. In the absence of potential new production from future exploration and mining development projects, a mining business will cease after a estimated number of years. The implication is that if the downturn is severe and long enough, some mining businesses may not last long enough to be able to realise the value of the long-term inflationary trend of commodities.

Thirdly, even though this secular trend have decades to run, you still have to decide (1) when is the right time to invest in it, (2) which commodity-related investment vehicles/stocks to put your wealth in and (3) at what price to pay for it. For example, if you enter during the cycles of bad years, you may end up with major disappointments in your investment results. As such, you will have to consult other research and professionals who will take your personal situation into consideration for advice as this is beyond the scope of this article.