Our MoneyWeek panel sees trouble coming, but opportunities too… What they would buy now: oil exploration, nuclear power, utilities, silver and diamonds.
Merryn Somerset Webb: Let’s begin by talking about the US. The latest employment figures were encouraging, wouldn’t you agree?
Dan Denning: Not really. Most of those new jobs came about because of hurricanes, government employment, statistical manipulations and seasonal adjustments. Very few of them were actually good jobs that will produce additional goods and services.
MSW: Are you saying the recovery in the US is not as strong as it looks?
Bob Catto: No, it isn’t. Anyway you look at it, the US is headed for trouble. The big stimulus – tax cuts, higher government spending, low interest rates, incentives for buying new cars, falling mortgage rates, rising house prices – have already worked their way through the economy. You can’t do these things forever. Sooner or later, you have to stop and begin paying for them.
The only thing I can think of that they can do is to let the dollar fall further. That would cure the debt problem and also allow American industry to become more competitive. But apart from a weaker dollar, there’s very little that they can do.
Peter Bennett: But wait a minute. The dollar doesn’t fall without consequences. You don’t get a silver lining without a cloud. What about the people who own dollar credits – the people to whom Americans owe so much money… in dollars? How far can the dollar fall until creditors start to become a little worried and do not increase their purchases of US government debt?
BC: I don’t see how foreigners are going to keep on exporting their goods and accepting dollar bills, I just don’t see it.
Tim Price: Still, in America, they’re still pushing up debt levels. There are advertisements throughout the United States encouraging people to borrow. I find Citibank’s the most confusingly wonderful, in so far as they talk about “living richly”. Then you discover it’s an invitation to take out home-equity loans. “Impoverish quickly” would be more honest.
Bill Bonner: The trouble with a falling dollar is that it puts pressure on interest rates immediately and the domestic demand collapses right away anyway. So even if you’ve got a little boost from exporting your products, you still go into recession.
DD: I have a suggestion here, because I don’t think we have to worry about the dollar getting too weak too fast. The Chinese are trading their dollar credits – their US Treasury bonds – for real assets such as mines and oil. Sinopec made a deal with Iran yesterday to buy gasoline and oil from Iran. If they went into the commodity markets to buy oil and resources, they’d just drive up prices. Or, if they sold their US bonds, they would drive down the dollar. So the Chinese are trying to solve this practical problem by using their foreign-exchange reserves and their dollar assets to buy the foreign producers. Rather than buy the wheat, in other words, they’re buying the farm.
PB: Is it like Japan buying the Rockefeller Center?
DD: It’s entirely different. The Japanese bought those assets as vanity purchases. They bought Monets and golf resorts and paid a fortune for them. Then we all laughed at them when the bottom fell out of these markets. Well, the Chinese certainly aren’t making that mistake.
Arild Eide: Every month the US needs 40 to 50 billion dollars. If the Chinese are slowing down their purchases and the Japanese have slowed down their purchases already… who finances the US deficits?
DD: I wondered about that. The latest reports were that since the last two months of July and August, purchases by Japanese and Chinese were a long way down, but interest rates didn’t go up.
AE: It’s all wishful thinking that you can actually get out of this without pain. You can’t. Eventually you have to pay the price for having spent too much.
BC: Has there been a precedent for any country, apart from Korea recently, which has a very strong exporting/ manufacturing base, that has run up a huge debt and managed to unwind that without trouble?
BB: You have to have the world’s reserve currency to get into as much trouble as the US. The only comparable situation is maybe Britain after World War I. The UK ran up huge debts in the war and then couldn’t pay them. That is what led the US Fed to cut rates… to try to make things easier for the British. It triggered a famous boom in the late 1920s, which, of course, led to the crash of 1929 and the Great Depression.
MSW: Doesn’t sound like a model we would want to follow. OK, enough on America. What about the UK?
James Ferguson: Oh, we’ve got much better leadership. [Laughter.] Gordon Brown has managed the economy so well. [More laughter.]
TP: As far as housing’s concerned, the UK’s worse than America. In the US there are hotspots. In the UK the whole country is hot.
But the difference, the big difference now, is that interest rates here are higher than they are in the States. After raising them five times, housing priceshave topped off, but they certainly haven’t crashed.
MSW: Not yet.
JF: But looking on the bright side, even if the global economy slows down next year, as these global imbalances are unwound, I don’t think equities will necessarily do too badly. OK, earnings won’t be great, but in a doom and gloom world, interest rates won’t rise. You can find lots of firms in the market that actually give a good yield. Equity markets can cope with poor economic growth. What they can’t cope with is poor economic growth and inflation at the same time. So for me, the thing that will kill the market would be…
MSW: Inflation.
JF: Well, stagflation. We’re not going to get economic growth.
MSW: How about China?
DD: The Chinese consumer class is 200 million people. Within Asia and within China particularly, there’s much more potential demand… Asia has morepent-up demand in it than either Europe or the United States. The United States is overspent, Europe doesn’t have any pent-up demand, because it’s older.But Asia does have pent-up demand, it’s the only place in the world with substantial rising incomes.
TP: But there is a danger. We are making assumptions about what we perceive to be happening in China. But this is not a free market, it’s not a democracy; it’snot an open society. We could be very wrong indeed.
Barry Norris: The best time to invest in emerging markets is after they’ve crashed. Yes, China has to suffer if the United States and Europe go into some sort of heavy recession or depression. But the Chinese will still have manufacturing capacity that they can turn back on. Perhaps the next rebound will make it the China century after all.
BB: Our mutual friend, Doug Casey, says that Americans should teach their kids to speak Chinese so that way they could get jobs as houseboys in China.
MSW: Well, I think that might be enough misery. Maybe we could move on to things that MoneyWeek readers could, and should, actually invest in. And I can see Bob probably has a hot stock for us.
BC: No, I stick to the stocks I know. I’ve mentioned Uruguayan Minerals before; I think I’ve mentioned Pursuit Dynamics. I would stick with those. Dan mentioned nuclear power stations being built. Good idea. Because wind farms are not going to be the answer, nor solar power, nor the hydrogen cell in the short term – so I think nuclear is the obvious answer.
The Finns have started building again, and the Swedes are going to postpone the close down of one of their plants, as are the French. The whole sector has taken on a new lease of life. There are some interesting stocks out there in the uranium sector.
And then you’ve got to consider the mining stocks, such as Cameco. But there’s also Afrikanderlease in South Africa and Summit Resources in Australia – junior exploration companies. Some of these stocks could have a very good run.
MSW: Arilde, what’s your investment recommendation?
AE: Small denominations – silver and coins. Maybe also look at solar panels and windfarms.
MSW: Why not gold?
AE: I’d take silver, it’s actually much better value.
MSW: What about you, Tim?
TP: I think the utilities sector in Britain and in Europe is looking great. It is high yielding and it’s already on a bit of a tear, but I think it can still go further. ENEL in Italy, for example, it’s yielding almost 5%.
JF: 12% I think, with a special dividend this year.
MSW: Dan?
DD: Korea Electric Power. The three largest liquid natural gas shipbuilding companies in the world are all South Korean. It cost about $150m to build a liquid natural-gas tanker, but it’s worth it.
JF: I like Shell Transport and Trading, which has a yield of 3.7% and shouldbe good for £6 a share based on its earnings outlook as the scandal begins to die down.
PB: I would mention two areas in which I think you can actually make a lot of money. Now that Bush is in for another four years, military spending is going to continue to rise. Very hard metals like tantalum are difficult to find, but they are being used now for making many parts of attack helicopters and transport helicopters in the United States. So I would go for tantalum manufacturers, or groups that have concessions on tantalum mines. Really, your best way, your only way, to get into it is to buy BHP, which basically is the world’s largest manufacturer.
And the second area is consumer debt. What’s happening in America is that real wages have been stagnant or falling since 1970. People try to maintain and improve their standards of living. What can they do? Either sell assets or take on more debt. So collection firms are almost sure bets.
And I’ll tell you two of them. One is Encore Capital. The other is Portfolio Recovery Associates.
MSW: Barry?
BN: I would still be buying Maurel et Prom, the French oil company. They have a discovery in the French Congo that is so huge that the Chinese are going to build a refinery in Africa in order to secure the supply of the oil from the field. I think it’s on about nine times next year’s earnings.
BC: If you’re looking at that sector, look at Heritage Oil and Gas, which sold its stake to Maurel et Prom. Look at the valuation, the comparative valuations aren’t stunning. Everybody’s heard of Maurel et Prom. I don’t think anyone’s heard of Heritage Oil and Gas. But if I were to tip one stock, then I would tip Brazilian Diamonds. I’ve just been out there.
The demand for diamonds is growing. The supply is not growing at the same pace, so there’s a shortage. Diamonds rose 16% last year. De Beers no longer have a stock overhang, they’ve got two months’ supply, which is tiny. The Chinese have started buying them.
AE: If I may, if I can actually mention a stock, because that’s probably really what you want, isn’t it? There’s a company in the States called Epic Systems and they make software that all law firms use in the administration of bankruptcies. And they also branch into class-action suits.
MSW: Well, that’s certainly an upbeat recommendation to end our Roundtable.