Zinc, China and Letters to the Editor

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You know business is good when it is “really difficult to recall a more positive environment” for your group. But that’s how good things are for Wal King at Leighton Holdings (ASX: LEI). The company reported a 34% increase in profit for the most recent quarter.

One of “the new Pharaohs” is what we called Leighton in a research report we recently completed. We were referring to the massive but neglected bull market in global construction in infrastructure. China this. China that. China China China. It’s all we ever read about. And for awhile, it’s also all we ever wrote about.

But we think there are other, better stories for investors right now. That doesn’t mean China will go away. But in does mean the world’s constant focus on China and America might be a bit misplaced. There is, after all, “life on the other side of the planet.”

Many Americans (and Australians we suspect) have zero interest in what happens anywhere else in the world. But if they would just step through the looking glass for a second…they would see a world of entirely different investment opportunities from what we read about every day.

Even a world of energy haves and have-nots is full of investment intrigue. For example, in the case of coal and energy, the realities of the energy market as described in this week’s IEA report look entirely different from Lagos, or Cochabamba, or Capetown, than they do from a boardroom in Houston, or an SUV in rush out traffic on the 405, or from St. Kilda Road.

While the G-7 nations battle it out for what’s left of cheap global oil, there is likely to be a mad scramble in the rest of the world to apply existing coal-to-liquids technology to create transportation fuel from a resource many nations in the world do have, if not in abundance (coal). There are other opportunities and sectors, especially in global infrastructure. Yet investors in the U.S. are a giant family standing outside the family mansion, one wing of which is on fire. Some are throwing buckets of water on it. Others are just watching. Some are setting up refreshment stands…others are moving to a new wing. There is all sorts of activity, but it all revolves around the house on fire.

Meanwhile, over the horizon and across town on the other side of the tracks, literally or proverbially, whichever you prefer, something incredibly audacious and mind boggling is happening, the scale of which hasn’t been attempted since…well since the Egyptians built the Pyramids really. It’s the transformation of petrodollar surpluses into huge, modern-day monuments to capital. We wrote about this in the December issue of Outstanding Investments (which follows closely on the heels of the November, both of which are being laid out by our new graphic designer at the desk next to us today.)

What’s going on at 54 Leadenhall Street in the City of London? Zinc stocks have dipped below less than 100,000 tones, which is barely enough to meet three days of global demand, currently running at about 29,000 tonnes per day. Watch zinc. It’s probably going to $5,000 by the end of the year. After that? A crash? Higher highs? WE don’t know…but we addressed the issue in the belated but completed November issue of Outstanding Investments.

We’re getting more and more reader mail dr@dailyreckoning.com.au Bring it on, we say, channeling our Dear American leader. One reader writes:

“Dan your comment about the housing powder keg leaves me a bit unclear.

”Are you suggesting that the Australian housing market is about to go up in flames?

”This has been the call of many commentators for the past 3 years since property peaked in September 2003. Yet we find that the gains of 2001-2004 have held in most areas. If I held property in Sydney/Melbourne over this period I would have seen massive appreciation in value tempered by relatively small decreases in the past 2-3 years. Elsewhere property has either held historic highs or gone on to post moderate to spectacular gains.

”For first home buyers and renters the situation is grim. They have to live somewhere and if land-lords costs via interest rates are increasing, these will surely be passed on in higher rents. This makes saving for a housing deposit even harder. Maybe we should just get used to rental auctions from now on.

”So what is your call? Own your own home and fork out extra in interest, or rent someone else’s property and fork out extra in rent?”

We don’t really have a call, just an observation that there isn’t always a good solution for every economic problem. People have to live somewhere, which means you either pay rent or you pay a mortgage. The boom in credit and mortgage products initially sent house prices up, which was good for existing homeowners, and provided an incentive to those who didn’t yet own a home.

Now, though rising rates are making life tough on everyone, both buyers and renters, and, we would ad, those who bought homes thinking they could quickly flip them. In Japan, it took 15 years for the real estate market to hit bottom. Some pundits think there is no bottom for the Aussie market, merely a hitch in the giddy up of rising prices. A three year pause and off we go.

We’re not so sure. We think it could be a long-slow burn, or a sudden large blow up. Either way, markets that overshoot to the upside always over correct to the downside. At some point, real estate prices will be reasonable again. Renters won’t be forced to either pony up or move on out to cheaper accommodations. But until then, the funny money has effectively put everyone in a bad spot. That’s what playing with the money supply as it were a toy does to an economy…it destroys everyone’s wealth, the rich AND the poor, owners and renters, the landed gentry and the feudal vassals who work the land…

And then there’s this comment from another reader who takes objection to our analysis of American politics:

“Instead of dated stereotypes why not employ fact? During Clinton’s time civil service jobs declined and debt reduced, esp relative to GDP. In Bush II’s time the reverse has happened. These governments are miles apart. You American anti-government types have repeated your rhetoric so often you can’t tell what’s going on anymore. If you want no government, why not move to Nigeria, Sierra Leone or the Congo? Government is a fact of life – always has been, except on a frontier, and that is only transient. There is good government and bad government, it can be measured and it is not the same.”

Well, without retreating to the use of statistics, we reckon total employment by government (state, local, and federal) went up in Clinton’s time, and in Bush’s time…and every other time. It’s always going up. But we’ll check this weekend and post on the Daily Reckoning blog what we find.

As for debt as a percentage of GDP, it is true that federal debt grew less fast during Clinton’s years. But it was mostly sleight of hand. The Federal government’s unfunded liabilities (Social Security and Medicare) weren’t then and aren’t now fully accounted for by the Executive Branch’s economists (regardless of who is doing the miscounting).

We prefer self-government to big-government. That is, we have our hands full just trying to regulate our own habit and vices. We don’t see where people find the time to tell their neighbors, or the people in Iraq what to do. That’s not to say we oppose law and order. But honestly, it only takes a few laws to establish a stable order, and those laws—thou shalt not murder, thou shalt not steal, thou shalt not covet thy neighbors house, thou shalt not buy high and sell low—have been around for thousands of years. They are received wisdom, common law if you will. We don’t need a new Congress every two years to tell us what men have known in their hearts for centuries.

On the other hand, it takes a Congress—a whole village of idiots—to tell you who you can marry, how much tax you should pay on your pastries and pies, and how much profit an oil company should make this year. There IS good government and bad government. But we think the best government is self-government, and we stick to that, whether we are in Nigeria, Siera Leone, Congo, or St. Kilda.

Dan Denning at the Old Hat Factory

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au