Marc Faber: Long-term Bear, short-term bull

Marc Faber isn't the first person to trash the greenback. Interestingly enough, he still likes U.S. stocks, however. He particularly likes commodity stocks. I agree with him that the FCX, NEM, and XOM are good values. I can't say that I have his same tolerance for risk regarding buying the airlines.

I agree with him wholeheartedly that Ken Fisher is wrong in saying that the U.S. isn't carrying enough debt.

Jim Rogers

This is a condensed version of a speech he recently gave in Vancouver. He can be a bit repetitive if you've heard him speak previously or read his books. Still, he makes a valid point.



The commodity bull market has a long way to go. This bull market is not magic. It’s not some crazy “cycle theory” I have. It does not fall out of the sky. It’s supply and demand. It’s simple stuff.

In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. “Let’s invest in a sugar plantation.” No one called and said, “Let’s invest in a lead mine.” Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they’ve never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor’s note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 1/20th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.

There Will Be Blood

There Will Be Blood, a movie starring Daniel Day Lewis and directed by Paul Thomas Anderson, is hitting theaters today. How fitting, seeing as that as I write this, oil is sitting at around $99 bbl. Oil is on everyone's lips it seems. Yesterday, The Wall Street Journal had some excellent piece on the rise of crude oil from $10.72 to $100. Many are wondering if the price of oil will send the U.S. and world economies into recession. As regular readers of this blog know, I'm a firm believer in the commodities bull market; I have been riding the coattails of high oil prices for the last three years. I don't see the end coming yet. So I've decided to share with you some of my favorite books and websites for learning about black tea.

Books

Oil Titans: National Oil Companies in the Middle East by Valerie Marcel and John V. Mitchell. This is an excellent primer on the history, power, and scope of the national oil companies like Saudi Aramco and Kuwait Petroleum Corporation. These companies control most of the oil and gas reserves in the world, so ignoring them is foolish. They are also the engines behind the enormous pools of money wielded by sovereign wealth funds.

The Prize: The Epic Quest for Oil, Money, and Power by Daniel Yergin. Yergin is the dean of energy consultants, chairing Cambridge Energy Research Associates(CERA). This book won the 1992 Pulitzer Prize for nonfiction. No one makes a move in the energy patch without consutling with Yergin and CERA.

Twilight in the Desert by Matthew R. Simmons. Simmons is a Houston energy investment banker. He is a firm believer in Peak Oil Theory and posits that the Saudis have been lying for years about their reserves.

Oil on the Brain: Adventures from the Pump to the Pipeline by Lisa Margonelli. A big picture overview of the world of oil from a micro-level, man on the street perspective. It puts a human face on the industry.

Websites

www.resourceinvestor.com
www.hardassetsinvestor.com
www.nymex.com - website of the New York Mercantile Exchange
www.lifeaftertheoilcrash.net
www.oilonline.com
wwww.energycurrent.com
www.simmonsco-intl.com - Matt Simmons' investment bank's website
www.iea.org - The International Energy Agency
www.bullsector.com/oil.html- a list of oil & gas stocks
www.energy.gov - the U.S. Department of Energy
www.opec.org
www2.nrcan.gc.ca/es/es/main_e.cfm - Energy Resources Canada
www.pemex.com
www.brs-paris.com/index.php?page=drybulk - tanker rates

Book Review: Commodities Rising by Jeffrey M. Christian

Commodities Rising is an excellent, hype-free primer on the commodities markets. Mr. Christian, who heads CPM Group, a commodities research firm that provides consulting and investment banking services to individuals, institutions, and corporations, and international organizations. Christian does not believe that we are in a commodities supercycle. I do not agree with these thesis, but I appreciate the thoroughness of his arguments and his long-term perspective on the markets.
The book does an excellent job with providing a general overview of the various ways in which to participate in the commodities markets, i.e. futures, forwards, stocks, ETFs, etc. The author shares two particularly interesting insights about the commodities markets. First, they are filled with misinformation and outright lies. The commodities markets are assymetric as regards information. Secondly, most transactions take place in the cash market in the form of forwards, not the futures market deliveries. The weakness of this book is that there is very little in the way of concrete counsel on how to profit from commodities. He offers no specific companies that he particularly likes, nor trading or options strategies. Also, it can be a bit repetitive and boastful of the author's intelligence and experience.