By
Dr. Stephen Leeb
:
Lately we've been focusing on the best of what we consider to be
low-risk/high-return stocks. These have ranged from
Intel (
INTC
)
to
Eli Lilly (
LLY
)
. And here, too, we see no need to change our view. These kinds of
investments should continue to be very good ones.
But now we're ready to get a little more aggressive. We like
silver, we like copper, and we like gold. And the major reason we
like these commodities (as well as virtually all other commodities)
is China.
China continues to do a remarkable job on almost all fronts.
Yes, many financial experts and commentators continue to buy into
the idea that China is reaching the end of a long period of
outsized growth. But this is a very bad mistake. As we've been
saying for some years, China "gets it" - especially when it comes
to resource scarcity and energy scarcity. If everyone else "got it"
the way China does, then China's job would be much more difficult.
And by "job" we mean establishing a country that is built to thrive
throughout this 21st century.
While it's true that growth in China has slowed down, it's also
true that it will ramp up in the second half of the year, and
probably continue at a fair pace (and not just by Western
standards, but by Chinese standards) throughout this decade.
The beneficiaries will be the aforementioned copper and silver,
gold, and virtually all commodities essential for building out an
infrastructure necessary to accommodate new energies. Yes, this
also includes oil - big time. In general, we prefer to build a
commodity portfolio around the ETFs that are directly linked to the
commodity. For copper that means i
Path Dow Jones UBS Copper Total Return Sub-Index ETN (
JJC
)
; for silver, it's
iShares Silver Trust (
SLV
)
; and for gold, it's
SPDR Gold Trust (
GLD
)
.
Still, the biggest winners in the next move up in commodities
will be miners, but not the big ones. Ironically, the large miners
will suffer for the very reason that there will be such an
explosive bull market - namely, the rapidly escalating costs of
mining ever scarcer resources. That's why we prefer junior miners
such as
NovaGold (NG)
, even though they can be horrifically volatile. More generally, we
reiterate very strongly our recommendation of
Market Vectors Junior Gold Miners ETF (GDXJ)
.
(One small caveat here, and it applies to gold itself rather
than anything else, is that some of our indicators suggest that the
period of consolidation we've been experiencing may have a bit more
to run. But this is a quibble in the face of what we believe will
be an inevitable bonanza to end all bonanzas.)
Let's talk about China a little bit more.
Recently Bloomberg News ran a story whose title contained the
phrase "China Slowdown Worst in Wenzhou," referring to a city with
a population of about 9 million in eastern China. (The story is
available on all Bloomberg terminals and online at
Bloomberg.com).
This piece is littered with anecdotes pointing to how poorly
Wenzhou is doing. One quote from a shoe merchant conveys the common
theme: "'This is the worst year,' he said as he waited for
customers to buy sneakers from his half-empty shelves. This place
used to be packed with buyers from around the country, now it's
full of unsold shoes." The shoe merchant now plans to shut down his
store, which had been very profitable for two decades. Other
anecdotes in the story are equally gloomy, suggesting a city in a
terrible economic depression.
And yet, after a series of dismal subheads throughout the
article (
Inventory Buildup …Weaker Exports… Quiet Streets…Giving
Up...
) we find out that Wenzhou's growth moderated to a 5 percent pace
last quarter.
What would we give to have growth of even 3 percent, never mind
5 percent, throughout our country?
This only verifies what a skillful job China has done in
persuading brokerage firms like Morgan Stanley, Credit Suisse and
UBS that its growth rate has no place to go but south. Though we
haven't heard much from the redoubtable Jim Chanos lately, or many
other short-sellers of China that have frequently been in the news
previously, we would guess they have not changed their views. They
should, and quickly.
I recall speaking at a conference on China I attended last year,
where I was one of only two China bulls. Still, I was in good
company, as the other bull was David Rubenstein, one of the
sharpest private equity players in the world and the man who built
Carlyle into a gigantic firm. He made a comment about China that
continues to resonate with me: in 16 out of the last 18 centuries,
China's economy has been the best in the world.
The two outliers were the last two centuries. Any reading of
modern Chinese fiction, such as the work of Lu Xun, grabs you by
the gut in its portrayals of a China dominated by foreigners.
There's no way the Chinese want to repeat "the sins of the last two
centuries." And the way they're going, they won't.
Mark Z. Jacobson, a Stanford professor we have often quoted, and
whom we know well enough to say his research is thorough and
excellent, has estimated the costs of building out renewable
energies worldwide to be in the neighborhood of $100 trillion. For
China, whose population is approximately one-fifth of the entire
world's, that would suggest expenditures in the neighborhood of $20
trillion. We actually think Jacobson is somewhat conservative here,
and as we said before and in our book "Red Alert" he and so many
others, ignore the problem of resource scarcity.
There is probably nothing more critical or important to a
country or the world itself to develop in a way that does not run
into a roadblock created by scarce resources. Thus, as some people
bemoan (or cheer) the slow growth in China, they seem not able to
see the areas of extraordinary and critical long-term progress. For
example: the northwestern part of China is not known for its
bustling industry, especially in the desert area known as
Gansu.
And yet, Gansu, the home of about one million Chinese, has seen
annual investments totally about $6 billion in wind, solar and
other areas related to renewable energy. The result has been
noteworthy. An area once known as a center for oil has largely
replaced the now depleted wells with solar farms, wind farms and a
smart grid. By 2020 the area should be more or less free of oil and
largely running on renewable energies.
If you multiply the million people in Gansu by 1,500 (i.e., to
arrive at the approximate total population of China of nearly 1.5
billion), you'll see the scale at which China is hoping to build
out its renewable energies: Gigawatts of wind and solar are likely
to be eventually measured in four digits. If you do the math and
make a few assumptions, you can see how China could easily spend
$20 trillion on these efforts.
And to assume a country on its way to spending this kind of
money is headed for some sort of Armageddon is just silly. Remember
too that renewable energies are labor- as well as
resource-intensive.
The real question comes down to longer-term shortages of copper,
silver and other metals and minerals destined to become scarce. A
thousand gigawatts of solar would surpass the current yearly supply
of silver by several-fold. And a thousand gigawatts would be a very
modest long-term goal for China. How about the rest of the
world?
For example, Asia has another very large economy called Japan.
Recently that country announced plans for ramping up solar energy
to 3.2 gigawatts, simply a fraction of one percent of the amount of
electricity they will eventually needed in Japan. But even these
3.2 gigawatts move the needle in silver, as it represents nearly
1.5 million ounces of the metal.
Is it really hard to see why we like silver, which is a crucial
component in solar energy technology, or why we like copper, whose
role in smart grids and hybrid cars will eventually come close to
exhausting all available supplies of copper?
Gold, of course, is a different animal, but, as we've said so
many times, how in the world can you ration scarce resources with
paper money? Another sign that China "gets it" is their massive
imports of gold at the same time as they are achieving the world's
highest rate of gold production internally.
China's intention of making the Yuan the world's major reserve
currency is also evident, as recent financial reforms included
liberalizing the amounts banks can pay their customers for
deposits.
That China can do more than one thing at a time - i.e.
liberalize their banking system while building out new energies -
can also be seen from the record amounts of long term loans that
took place there in the second half of May, the majority of which
went to - you guessed it - renewable energy projects.
Yes, we are still betting on stocks and indeed think the U.S.
market will rally, but if you want to play the game the Chinese
play so well, think long term, and "long term" in this case means
"think commodities".
Clearly, this article is very much informed by my frustration
with our political process. While it still may not be too late to
come together and develop a world we want our children to live in,
our politics are marred by mudslinging and arguments over matters
that have little to do with the year after next, let alone the rest
of the century. We need to get our act together pronto - and stop
fighting about it.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Disclaimer:
Leeb Group, its officers, directors, shareholders, employees and
affiliated entities and/or clients of such affiliated entities may
currently maintain direct or indirect ownership positions in
financial instruments (i.e., stocks, bonds, options, warrants,
etc.) of companies or entities whose underlying exposure is in the
companies mentioned in this article.
See also
Emerging Market Bond ETFs Closer To 'Risk-Free'
Than U.S. Treasuries
on seekingalpha.com