Loewen & Partners hosted a event last night in Toronto where Dr. Michael Power of Investec Asset Management gave a presentation.
Dr. Power is a noted advisor to Hedge Funds and travels extensively giving presentations internationally to Hedge Fund managers and others.
His presentations on current trends and matters of interest are widely followed and respected.
He pointed how US debt and changing demographics were inexorably shifting power and influence to China and then to India. Essentially I agreed with his presentation.
In a brief overview, he stated that inflation was not to be measured by traditional metrics, but rather by the changing living standards around the world, and the changing GDP of major country influences around the world – in essence the drop in economic standing of the US and Europe, and the unstoppable move forward by China, then overtaken by India.
The Unpredictability of Predictions
My first response to anyone who is a futurist, or who has the ability to spot major trends, is to thank him for the insight. However, I also have a theory that is proven by history. “What we as humans will never master, is to predict with accuracy the future.” Recent events, sometimes described as Black Swan events, are a vivid example. Who could have imagined that government surpluses of a few short years ago in the US, would turn suddenly into massive deficits that everyone is running in fear of?
The inevitability of the inevitable is flawed.
Interest Rates
While in an overall sense, I cannot disagree with the thesis, there is also the effect of interest rates. We currently live in this delusional world where we think that inflation is something that can be controlled by government.
Governments have many tools, but the total control of interest rates, continues to elude us. Once the Genie is let out of the bottle, interest rates have a way of running away ahead of all attempts to restrain them. The result is a massive shift of wealth.
The speaker felt that this massive shift would inexorably be to the new Eastern economies. However another way to look at the issue, is that the massive accumulated reserves of the new Eastern Economies, would be reduced in value by 20% in a single year, if inflation was 20% for that entire year.
Inflation has a funny way of changing the rules of the game.
Another effect of massive and sudden inflation, is social unrest, or government action to restrain social unrest. Governments fall and the economic basis of countries change, sometime violently, with rapidly changing inflation.
The future remains uncertain.
Other Immeasurable Factors – the One-Child Policy of China
I have discussed before the possible effects of the one-child policy in China. If the reader does not recognize that there will dramatic social effects that are unforeseeable, I would just shake my head.
Political Certainty
We currently regard the squabbling in the US between the Democrats and the Republicans as unsavory, but they all treasure democracy and capitalism. Compare that to the recent arrest in China of the dissident that had the nerve to actually have a blog criticizing government.
Regardless of anything else, the economic colossus known as the US was built on individual freedoms. That concept has not yet penetrated worldwide. Economic policy remains only one of the factors of economic growth.
I would also point out the 6,000 year history of China, with the continuing social unrest and upheavals in that society throughout their history, including militarism, Maoism, and so many more. Has this history all of a sudden be rendered meaningless? Has mankind all of a sudden advanced so radically? It seems to me that mass murders continue around the world to this day, and that humans remain humans.
The Rule of Law
Analysts praise changes in the rule of law around the world as reasons to invest in this or that country.
I agree, yet as easily as any totalitarian regime changes laws, laws can be changed yet again next year. That is not so easy in the US or Europe, where long standing traditions restricts the change of laws based on individual freedoms.
Don’t Count Out the Old World Just Yet
I certainly agree that the economics of the world is changing. I certainly agree that demands for commodities, and for goods and services is rising from the new powers and looks to continue for the foreseeable future.
But I urge the reader to use caution and to be nimble. “The certainty of the future, is never as certain as we would like.”
The Underlying Current of the Commentary
Although not a central theme of the presentation, the point had to be recognized that investing in commodities was a very good thing to do. The expected rise in demand for commodities from the new economic powers, was unstoppable and would continue to increase for at least the next twenty years.
Commodities
I certainly agree with this. My theme since starting this blog was to recognize demand rather than speculate on stocks. Commodities are the place to be. Our thesis is that if there are any bumps along the way, being nimble is essential and being nimble meant not buying the large caps, but instead buying good value juniors.
Small v Large Caps
Large caps are like steering a giant ocean liner. Changing direction in reaction to world events, takes a long time and is painful. Witness the BP fiasco in the Gulf of Mexico. The stock price of BP plummeted, and has stayed depressed.
For the same total expenditure of buying 100 shares of BP before the Gulf disaster, one could have bought 10,000 shares of juniors – 1,000 shares of each of 10 companies. Looking back, imagine for yourself which would have enriched your portfolio more?
There is an article in The Economist this week on the shift from West to the East of living standards.