Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Monday, November 19, 2007: Several
readers have said I am "Gloom and Doom" because I don't
like the stockmarket generally. I wish to make myself clear: Specifically there
are opportunities in the market, especially in shorting yuchy performers
or buying specific mining stocks. There are also huge areas outside the stockmarket
-- like commodities, mining, real estate and entrepreneurial startups. Today
is not for being Gloom and Doom. Today is for rebalancing, for
checking what you own and junking what faces an iffy future, knowing that the
U.S. economy is slowing down, the U.S. housing and financial business is a continuing
mess, and China and India are booming.
wit: I'm in a syndicate which owns an office building in Canada. Two and a half
years ago, we paid $900,000 for the building. We just sold it and will pocket
$3,500,000 for our "troubles." That's big gains in 2 1/2 years. The
gains came twofold: First, we fixed up the building, increased occupancy and
rents. Second, the Canadian dollar appreciated against the U.S. dollar.
we rebalance our investments we need to move our assets to places where they're
less dependent on the U.S. dollar. I anticipate that the dollar will continue
to decline at least for the remaining term of this administration. The dollar's
value is largely determined by what you can earn in government bonds in the
U.S. versus what you can earn overseas. Here our short-term rates are low, and
are being kept low by a Fed Reserve keen on stimulating our economy and saving
our banks and sundry financial institutions. Overseas, they are raising rates
to fight inflation. Hence the gap is widening, providing less and less incentive
for anyone to give us their money. If a bunch of our large lenders -- China,
Japan, the Mideast oil countries, etc. wake up one morning and say "Yuchy
dollar!" a major crash in the U.S. dollar is possible.
I wrote about currency, and my belief in higher oil, higher gold and higher
is such an important part of the Australian economy, the Australian financial
press is much better at reporting on mining and commodities. Here's a piece
from The Sydney Morning Herald, the town's major newspaper on gold.
for gold as mines left empty
THE era of
"peak gold" has arrived.
Try as they
might, miners cannot find enough ore at viable costs to replace their fast-depleting
reserves, even if they dig kilometres into the the Earth.
not much gold out there," said Gregory Wilkins, chief executive of the
producer Barrick Gold. "Global mine supply is going to decrease at a
much faster rate than people generally believe. Many of the new mines that
people are anticipating will never come into production," he told the
RBC Capital Markets gold conference in London.
is a great disparity between the money spent on exploration and success. It's
hard to say where the price of gold is going, because we're in uncharted waters.
I would say it could easily move to $US900 ($1008), $US1000, or beyond. It
could happen very quickly. .
from the US Academy of Sciences that some 26 per cent of all the copper and
19 per cent of all the zinc that ever existed in the Earth's crust has already
been lost to mankind, mostly wasted in milling or smelting or buried in landfills."
Data has never
been collected for gold, and the 5 billion ounces mined over history is still
around. Roughly 1 billion ounces are in central bank vaults. But the same
patterns of exhaustion are emerging.
output is down to the lowest since 1932. Much of what remains elsewhere is
locked up in no-go countries run by demagogues or serial expropriators.
put yourself in harm's way," Mr Wilkins said. "It's a non-starter
to invest in a country that takes your mine away from you.
of countries where we won't go is getting longer. There's Venezuela, and all
the countries in Latin America that are influenced by [President Hugo] Chavez.
In Ecuador they withdraw licences after they have been issued: you can't tolerate
that kind of instability. Russia is another country where things are deteriorating."
The chief executive
of Goldcorp, Kevin McArthur, said his group would not set foot outside North
America. "We won't build a mine where we won't go on holiday. We're even
tending to stay out of the US because that has some of the highest political
risk in terms of mining investment."
The gripe is
that revisions to the 1872 Mine Act will add royalty costs and allow regulators
to shut down projects on a whim.
said global output was on a relentless slide. "We'll see four-digit gold.
It will have to reach $US2500 an ounce to equal the 1980 record in today's
terms, so we have a long way to go."
a 27-year high of $US846 an ounce early this month following rate cuts by
the US Federal Reserve, although it has fallen back on profit taking.
to be betting on a "Bernanke reflation", suspecting that the Fed
will turn the liquidity tap back on to cushion the US property slump.
of RBC Capital Markets, Tony Fell, said the world money supply had been growing
by 5 to 10 per cent while the stock of mined gold had been rising at 1.6 per
cent, creating a mismatch that must be covered.
Mr Fell said
the total debt burden in the US had exploded to 340 per cent of GDP, in stark
contrast to the steady levels of about 150 per cent of the postwar era.
It almost insures
further dollar debasement. "We're in the very early phases of a prolonged
bull market," he said.
RBC argues that
the global dollar system known as Bretton Woods II is "coming apart at
the seams" as Asian, Middle Eastern, and Latin American states start
to break their dollar links to avoid importing US inflation. The result is
to resurrect gold, which is fast regaining its role as the world's benchmark
It was the last
currency bust-up - caused by the US attempt to fight the Vietnam War and fund
the Great Society without adequate taxes - that lay behind the 1970s bull
market in gold.
RBC said in
a recent report: "The late 1960s saw first France and then Germany and
Britain all start to swap their dollar reserves for gold. We may well be witnessing
a similar situation today as price pressures build in the emerging world."
This piece is
also from The Sydney Morning Herald and talks about China's insatiable
appetite for Australian iron ore.
adds iron to China's soul
ON THE day BHP
Billiton announced its bid for Rio Tinto, a local government official in Hebei
province told the Herald that the mill he regulated produced 4 million tonnes
of steel a year. He asked if we could avoid mentioning the name of the very
large state-owned company involved - because it only has a licence to make
2.5 million tonnes.
The BHP Billiton
chief, Marius Kloppers, does not know how much steel China makes each year,
because China itself does not know. Similarly, Kloppers does not know how
much iron ore China produces. The Government can guess at the volume of dirt
being mined but it has little idea of the percentage of iron content.
But a lack of
reliable supply and demand numbers does not mean the commodities super-cycle,
which BHP's bid for Rio Tinto is premised upon, is any less real.
In the same
corner of Hebei, south of the Great Wall between Beijing and the Bohai Sea,
and hidden by a semi-permanent smog blanket, local miners told the Herald
that they were now digging ore with as little as 20 per cent iron -- less
than a third of what BHP would be bothered with in Australia.
are being ripped down and new ones created out of flat corn fields, as excavators
shift millions of tonnes of waste rock to get to profitable ore. Mining costs
are rising because the holes are getting deeper, placing more pressure on
trucks and fuel.
production is also being squeezed by central government policies. Transforming
low-grade ore into a resource that can be fed into blast furnaces requires
an enormous volume of electricity - but some of those refiners said their
electricity supplies were being rationed to just five days in every 10. The
Government is systematically trying to strangle small, energy and pollution-intensive
producers in a losing battle to clean up and consolidate the industry.
Some of the
smaller mines are owned by young cowboys who drive flash cars and make a point
of pulling out bricks of 100-yuan notes to pay small restaurant bills. They
are not exactly doing it tough, but nor is the Government making it easy for
them. Right now they are complaining because they cannot legally buy mining
explosives, thanks to terrorism concerns around the recent Communist Party
They think the
ban on detonator caps will be reimposed in time for the Beijing Olympics.
In this corner
of China, which is the epicentre of the world's steel revolution, Australian
ore is lauded, partly because of its high ore content -- typically two or
three times the 20 and 30 per cent ore content that local miners say they
are digging. Local mill executives also say Australian ore is particularly
valuable because it has an acid content that blends perfectly with local ore
and coking coal, inside the huge steel-making blast furnaces.
In most parts
of China the word Australia invites a responses like "kangaroo"
or "beautiful". But here the stock response is "Aokuang"
-- an abbreviation for Australian ore.
Marius Kloppers will be in Shanghai to meet Xu Lejiang, the new chief of China's
leading steelmaker, BaoSteel. He will fly over about 2000 buildings above
20 storeys, knowing that most buildings above six-storeys are reinforced with
steel. One 101-storey building he would not have seen last time is the World
Financial Centre, which alone contains 20 per cent more steel than the Sydney
be comforted by the latest rash of extraordinary steel consumption statistics.
It takes 200 grams of steel to make an umbrella - and China made 1.5 billion
of them last year. China also made 85 million bicycles, with 20-25 kilograms
of steel in each bike.
desperation for Australian ore explains why Kloppers can credibly argue that
he is not "scampering off to China" this week out of fear that the
Chinese leadership could scuttle his audacious plan to swallow Rio Tinto.
Rather, he would like to bill his trip as a pre-planned courtesy call on his
most important customers and their key regulators, designed only to neutralise
the impression that BHP is treating them with disrespect. There will be no
offers to sell mining assets, or to cut an early iron ore contract deal.
he will head for the Beijing headquarters of the two key steel regulators,
the National Development and Reform Commission and the Ministry of Commerce.
BHP lieutenants will fan out to see as many customers and officials as they
representatives were in the same offices sending the same messages last week.
The trip was planned weeks ago, well before news of BHP's bid for Rio Tinto
was made public.
BHP is on the
right side of the greatest commodities cycle the world has seen. It could
stretch for decades.
But that does
not mean that this second week of Kloppers' sales offensive will be any easier
than the first. He will be telling his most important customers in East Asia
that becoming dependent on an international iron ore duopoly will be good
for them. It is not an argument he could hope to win.
iron to China's soul.
subprime mess continued: This is Fortune's latest
It has photos of the erstwhile heads of Citigroup. Bear Stearns, Morgan Stanley
and Merrill Lynch and underneath each photo showing how much money they're written
off recently as a result of the subprime mess. The amounts are $9.8 billion,
$450 million, $3.7 billion, and $7.9 billion.
Post had this interesting story this weekend:
mess is a crime story
The subprime mortgage and asset-backed paper scandals constitute one of the
biggest frauds ever perpetrated. They have resulted in mass foreclosures,
writedowns, bankruptcies, firings and billions lost. The US$10-trillion U.S.
home-lending sector was, and perhaps still is, rotten. At the top were mortgage
lenders, then Wall Street and others who exported junk debts to lenders around
the world after prettying them up.
At the bottom
was a corrupt system that handed out mortgage broker licences like driver's
licences, and then handed out mortgages like candy at Halloween. In between
were crooked appraisers and organized crime.
are now seeping out. A money manager friend of mine said his limousine driver
in Chicago became a mortgage broker then made a fortune indiscriminately handing
out mortgages to friends and relatives. He retired to Poland a multi-millionaire.
In Cleveland, a church preacher moonlighted as a broker and put his parishioners
into houses they could not afford, including a 78-year-old woman just kicked
out of her home.
have uncovered a massive foreclosure fraud scheme involving appraisers, brokers
and accountants who recruited straw buyers, inflated condo prices, drew up
fake tax returns, got huge mortgages, paid developers less than the mortgage
raised and pocketed the difference. The straw buyer was paid off and abandoned
the property to foreclosure.
The press thinks
this is a financial story. It's a police story. These scandals contain all
the necessary elements that characterize all world-class frauds: 1. Many "little"
people must be involved who don't know what others are up to or that they
are party to a crime. That makes proving conspiracies and criminal intent
difficult. 2. As many borders as possible must be put in place between the
victims and the perpetrators. That makes investigation expensive or impossible.
3. Perpetrators should not be in the same country as victims. If victims are
foreign, police investigations are less politically justifiable.
elements provide the "winning conditions" for every successful fraud
because far-flung wrongdoing, involving many jurisdictions, frustrates the
press, the law enforcement officials and makes litigation expensive or even
like Enron or Bre-X's, allowed the frauds to grow undetected, giving the bad
guys time to get away or to hide their ill-gotten gains. Some have had time
enough to end up on a beach somewhere that doesn't have any extradition treaties.
This is why
the RCMP did not "get their man" in the $9-billion Bre-X fraud.
The case was too complicated and expensive to pursue and too many victims
and the perpetrators were outside of Canada. Enron, by contrast, was heatedly
pursued because the victims and the perpetrators were in the United States,
plus there were links to the George Bush Presidency.
In the subprime
mess, there seems little political will to do much of anything south of the
border. Foreclosures dot the urban landscape, mostly affecting speculators
or disenfranchised people. Wall Streeters get tossed from jobs, write down
fortunes and collect obscene severance. It's all business and usual. I hope
intermediaries will be sued out of existence by the deep pockets they damaged
to my friends with young, creative children
The boss wondered why one of his most valued employees had not phoned in sick
one day. Having an urgent problem with one of the main computers, he dialed
the employee's home phone number and was greeted with a child's whisper. ' Hello
'Is your daddy
home?' he asked.
' Yes ,' whispered
the small voice.
May I talk with
The child whispered,
' No .'
wanting to talk with an adult, the boss asked, 'Is your Mommy there?' ' Yes
'May I talk with
her?' Again the small voice whispered, ' No .'
Hoping there was
somebody with whom he could leave a message, the boss asked, 'Is anybody else
whispered the child, ' a policeman '.
a cop would be doing at his employee's home, the boss asked, 'May I speak with
busy," whispered the child.
'Busy doing what?'
' Talking to Daddy
and Mommy and the Fireman ,' came the whispered answer.
Growing more worried
as he heard a loud noise in the background through the earpiece on the phone,
the boss asked, 'What is that noise?'
answered the whispering voice.
'What is going
on there?' demanded the boss, now truly apprehensive.
the child answered, ' The search team just landed a helicopter .'
and a little frustrated the boss asked, 'What are they searching for?'
the young voice replied with a muffled giggle... ' ME .
Jewish President -- finally the right perspective
The year is 2016 and the United States has elected the first woman as well as
the first Jewish president, Susan Goldfarb. She calls up her mother a few weeks
after election day and says, "So, Mom, I assume you will be coming to my
think so. It's a ten hour drive, your father isn't as young as he used to be,
and please my arthritis is acting up again."
about it Mom, I'll send Air Force One to pick you up and take you home. And
a limousine will pick you up at your door."
know. Everybody will be so fancy-schmantzy, what on earth would I wear?"
replies Susan, "I'll make sure you have a wonderful gown custom-made by
the best designer in New York "
Mom complains, "you know I can't eat those rich foods you and your friends
like to eat."
responds, "Don't worry Mom. The entire affair is going to be handled by
the best caterer in New York, kosher all the way.
Please, Mom, I
really want you to come."
So Mom reluctantly
agrees and on January 21, 2017, Susan Goldfarb is being sworn in as President
of the United States
In the front row
sits the new president's mother, who leans over to a senator sitting next to
that woman over there with her hand on the Torah, becoming President of the
United States ?"
The Senator whispers
back, "Yes, I do."
Says Mom proudly,
"Her brother is a doctor."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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