5 Sure Things to Look for in 2008February 2, 2008 at 12:14 pm | Posted in All in a Day's Work, Newsflash | Leave a comment
Tags: 2008, America, China, Cotton, Trends
I’m a sucker when it comes to predictions and forecasting trends, especially when it comes from reliable sources. I read this article earlier today and I found it an enlightening confirmation of what is slowly happening around the world. Read the article by the Forbes Financial Round Table below.
Each quarter, the Forbes Investors Advisory Institute under President Wallace Forbes hosts a financial round-table discussion to sample the economic and investment outlooks of some of the best and brightest minds on Wall Street.
The most recent discussion was held on Jan. 8 at Forbes headquarters in New York City. Below are the transcribed and edited remarks of Henry Mercer, president of Mercer Capital Advisors.
I’m as cautious right now as I’ve been in some time. Certainly since 1999.
What’s going on in the housing industry is going to have long-term implications. You have probably two million unsold homes out there, and I think that industry is going to be in the doldrums for at least two years. That means that all the people working in industries ancillary to the housing market, like the home builders, the mortgage brokers and so forth, are going to have tough times. Many of them are going to be laid off.
I think the credit situation is extremely serious. Not only are the money center banks suffering huge write-offs and significant executive turnover as a result of it, but they are also going to have to shore up their balance sheets, and they’re probably going to require foreign capital in order to do that.
In addition to that, when these banks get financially solidified, I think they’re going to be very careful in making loans. So I think it’s going to be hard to borrow money when people or institutions or corporations get the enthusiasm to do that.
I also think that America is not quite the place it once was. This is a global environment, and America is losing ground. I think people underestimate the unusual position America was in after the end of World War II, where we had enormous scientific talent, we had enormous manufacturing capability and the rest of the world was in economic shambles.
Today the rest of the world is in terrific shape. Some countries, particularly China, have infrastructures superior to ours and a scientific capability that rivals ours. We still have the greatest universities in the world, but many of the students coming to train here are going back to their home countries after graduation.
My view is that people underestimate the seriousness of the energy situation. We are only finding oil at a rate equivalent to replacing the oil production that erodes every year as a result of the existing wells getting tired. In addition to that, China and India are consuming less than two barrels of oil per person per year, while we consume 26 barrels, Western Europe consumes 13 to 15 barrels, Japan, Korea the same amount.
As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there’s no way the world can meet that demand. So I think the price of oil is going a lot higher.
I also think that we have to recognize that we’ve been running a trade deficit now for a decade–a serious trade deficit for a decade–and that foreign holders of dollars have become increasingly impatient. I traveled around the world twice last year. I was in the Middle East twice and in China and India and I can tell you that, while they are not going to sell any U.S. bonds, they may slow down their buying of them. Our demand for the kindness of strangers to finance our deficits is going to continue inexorably. So I think that’s leading to a serious situation.
I’m getting older now, so I only invest in sure things. I don’t invest in things that only “might” work out. So let me give you five sure things.
Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.
The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies. And of course, if the dollar is weak, that’s an inflationary phenomenon because the United States, having dismantled its manufacturing establishment, is dependent on foreign goods for our survival. This is something people aren’t sufficiently worried about.
Cotton is going to be the commodity of choice because the world’s standard of living is increasing, and the places where it’s increasing fastest are warm, and they don’t wear wool; they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing, and that’s all you have to know.
Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the 7% that they did last year.
As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we’re in the agricultural area with Potash Corporation of Saskatchewan (nyse: POT – news – people ) and a lot of energy stocks–large caps such as Schlumberger (nyse: SLB – news – people ), smaller caps such as National Oilwell Varco (nyse: NOV – news – people ) and Ultra Petroleum (amex: UPL – news – people ). In technology, Qualcomm (nasdaq: QCOM – news – people ). Finally, in adult education we think that a lot of people will be laid off and they’ll be trying to improve their skills so we would buy the Apollo Group (nasdaq: APOL – news – people ).
Let me throw out a couple of other things. I think we’ve all been hit by the wave, as it’s now being referred to, of Barack Obama’s ascension. I think we have to assess the investment implications of that.
It’s pretty clear to me that the Democrats are in a good position to take the White House and, if they do, and particularly if they gain some seats in the Senate and the House of Representatives, the Bush tax cuts, particularly those that related to dividends and capital gains, are very likely to be rolled back. So that’s an investment implication of this change in political chemistry that I think we all have to assess.
Byron Wien is chief investment strategist at Pequot Capital Management.