Stubborn Beliefs That Devastate Portfolios
Having heard so many diverse opinions at the NY Hard Asset Show, it occurs to me that there are some supposed “universal truths” held by investors that could affect investments. The issue is that the market over-reacts to expected events, and then over-compensates. Often, by the time investors have positioned themselves in a particular sector or commodity, the market has passed that sector by.
The Time Worn “Universal Truth” that Uranium Is a Good Place to Invest
First we turn to Japan.
One year ago the Japanese economy was dealt a devastating blow by a major earthquake and the resulting tsunami and nuclear crisis. In 2011 Japanese economic growth, as measured by real (constant-price) GDP, is estimated to have declined by almost 1%. There are indications the economy is now turning around. Industrial production advanced 3.8% in December, followed by a further 2% increase in January. The Japanese Ministry of Economy, Trade, and Industry (MITI) is projecting 1.7% increases in February and March. Over the 2012 calendar year the advance in GDP could well fall in the 2-3% range. Such an advance for what is still the third largest economy in the world, following some two-plus decades of stagnation (since 1990), would be an important tailwind for the global economy, and would like boost Japanese equities significantly.
Post-tsunami reconstruction is contributing to the turnaround, as is the recovery in the global economy. We anticipated this in our blog of March 18, 2011.
But Is This The Entire Truth?
Japan just announced the closure of its last nuclear reactor. It is true that countries around the world are still building reactors. But it is also true that there is a worldwide pause in the belief that nuclear is the way to go. So should you buy nuclear stocks, just because last year nuclear fuel was a market darling?
Another possibility is that rather than the world running out of gas and oil supplies, that there is more oil and gas cheaply available today, than at any time in recent memory. If nuclear reactor energy costs far more than gas and oil costs, how many reactors do you think will be built, reagrdless of all of the current planss and projections.
Japan’s Population Crisis
Now if we accept that Japan is now growing and could contribute significantly to a world economic recovery, should we be investing in Japanese driven securities?
Once again, being part of an belief of yesterday, can confuse investors. Best to look at long term trends I think.
Japan has a debt level that approaches 300% of GNP. 300%.. When you worry about the US debt levels, or Greek debt levels, neither of those countries has debt anywhere near Japan’s level of debt. Let’s assume that nothing is done to reduce the debt level in Japan, and I don’t believe there are any viable options, other than letting the economy grow, or promoting massive inflation. Inflation destroys governments so I doubt that the Japanese government will embrace inflation and try to hold inflation in check.
That leaves the natural solution – population growth and economy growth. Except Japan has one of the oldest populations on earth, and the birth rate is one of the lowest on earth. Couple that facts with the fact that Japan discourages immigration. The natural solution of population growth and economic growth will not happen in Japan.
So in spite of a temporary economic spurt, Japan is headed for more economic malaise.
Gas & Oil
The big energy companies are trading at P/E multiples that are quite low. They seem a good bargain, don’t they? Except Peak Oil is a myth. Because of the recent developments in fracing, and in seismic techniques, we now have in North America something like an 800 year supply of natural gas, and more oil that is recoverable than at any time in recent memory. In fact, the USA will become a net ENERGY EXPORTER in 5 years.
Remember what happens when there is an abundance of anything – the value that anyone is willing to pay for that commodity falls. The relentless increases in the price of oil that we have witnessed in recent years, is a matter of history rather than of the future.
So another belief of yesteryear is irrelevant today.
Gold
In our last blog, we talked about the price of gold falling. Maybe gold will again rise, but the current trend is down. One of the most basic of investing truths, is NEVER GO AGAINST THE TREND.
China
There is not sufficient space in this blog to describe China’s economic miracle, but rest assured, that miracle has warts on it.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
