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Unscramble These Letters: MOLYBDENUM |
Joel Bowman, reading aloud the introductory role call from
Taipei, Taiwan...
Could it be, dear reader? Is it time already to log the folly and
collective lunacy of the global financial crack-up in The Ghost of
Crises Past? The mainstream media says so...the markets say so...even
Wall Street's bonus recipients say so...
..but the irreversible laws of nature and uncommon sense scream,
"NO!"
Bill Bonner reckons there's still "Hell to pay"...at least. So far we've
only wiped out ten years of stock market wealth, employment progress and
real income gains, observes Bill. That still leaves a couple of decades'
worth of irresponsible credit expansion to clean up...
And that's to say nothing of the "waves of debt" battering the US economy,
adds Ian Mathias...nor the fragile state of the currency straining to hold
it all together...
There are, of course, still places where one might make a buck, chimes
Chris Mayer. There's money in metals, Mr. Mayer assures us. In fact, the
immutable reality of supply and demand virtually guarantees certain metals
will appreciate over the coming years (Hint: They're not ONLY the ones
you're thinking about)...
We've got all these stories, and more, in today's edition of The Daily
Reckoning...
First up, Bill Bonner reports from London, England...
Claptrap! Nonsense! Balderdash!
Everywhere we look, someone is saying something ridiculous.
Which is good news to us. This Daily Reckoning was getting to be
serious work...what with the world facing a total financial meltdown and
all.
So, we're pleased to be able to lighten up by, once again, telling you
what an idiot Tom Friedman is. You already knew that? Well, it doesn't
hurt to repeat it...
We hadn't seen much of the old Tom recently. His recent editorials in
The New York Times were no smarter than before, but a bit
subdued...as if some chemical trace of good sense had slipped into his
system, perhaps from a paper cut. But now, he's back, big as life and
twice as stupid.
We'll come back to Tom in a moment, but since this is a financial service,
we should probably begin with the financial news.
The Financial Times is looking over its shoulder. The recession
is over, it says; time to take stock of the damage.
"Beyond the Crisis... With most of the world's economies officially out of
recession, the FT launches a series examining the legacy of worst
global economic crisis since the 1930s," says the FT. But
according to the figures below the headline, the crisis wasn't so bad. The
US economy walked backward only 3.5%. Now, it's making progress again.
The FT editors should keep their eyes on the road. The
'recession' did more damage than they think. And it isn't over... There's
more trouble ahead.
The 'recession' in the US has wiped out...
..ten years of stock market progress. Actually, stock prices are no higher
than they were in 1998...
..ten years of employment progress. You have to go back to the '90s to
find a time when so few people were working in America...
..ten years of income gains. The typical household had less real,
disposable income than it had 10 years ago.
In other words, a whole decade has been lost. Baby boomers are now ten
years older, and less prepared for retirement than any previous generation
in US history.
In Florida, joblessness has reached 11.2% - officially. Unofficially,
nearly one out of 10 people is either unemployed, or underemployed. The
jobless picture gets even grimmer when you consider the effect of long-
term unemployment on the unemployed.
"It's a killer disease," says Thomas Cottle of Boston University. "People
are going to be damaged and may not recover in their lifetimes."
The FT elaborates: "The longer people are out of work the more
their skills decline and the less appealing they become to employers."
That puts the boomers in a bad spot. If they lose their jobs now they may
never work again. Which means, they will face retirement with very little
money...and a keen interest in making sure the feds keep the money flowing
their way. They may not recover in their lifetimes...
Housing starts are at a 10-month low. Mortgage applications are at a
12-year low. As far as we can tell, both housing and employment figures
are getting worse.
In short, the 'recession' is far from over, even if the feds are able to
jive up the GDP figures from time to time.
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And more thoughts...
Meanwhile, in yesterday's market action...the big thing that happened was
the same thing that seems to happen every day lately. Gold hit a new
record high. It rose almost $18 to close at $1,164.
Now, the question we must ask ourselves is an old one: is this the final,
blow-out phase of the gold bull market that began 10 years ago? Or is it a
trap...intended to catch the Johnny-come-latelies in the gold market? Of
course, we don't know any more than any other human being knows. But we've
been watching Mr. Market for a long time. And we've come to the conclusion
that he's an SOB. Trouble is, you never know exactly what kind of an SOB
he's going to be.
Is he going to lure investors into the gold market and give them a good
whack? Or, is he going to drive the price of gold all the way to
$3,000...and leave us behind?
The old-timers, the scarred and battered confrere of gold bugs, in which
your editor humbly confesses membership, are a bit skeptical of this
latest run-up in gold prices. We bought gold years ago. Heck, we bought so
many gold coins so long ago that we've forgotten where we buried them. So,
we wouldn't mind seeing gold race right up to its rendezvous with monetary
destiny - without stopping for red lights or little old ladies in the
crosswalks.
Trouble is, we don't think the world is ready for it. What do we mean by
that?
We were hoping you wouldn't ask. It's complicated and confusing. In many
ways, it's more of a feeling...an instinct...and a hunch...than a hard
analysis. But here goes:
Look, here's the hero of the financial crisis, David Einhorn. In 2007, he
figured out that the banks were going to get killed on their mortgage
debt. He shorted them - particularly Lehman Bros. He made a fortune for
himself and his investors.
Well, what's he doing now? Guess. He's buying gold:
David Einhorn, quoted in
MarketWatch, said that given the present situation gold was
the bet he felt most confident to make:
"If the chairman of the Fed is determined to debase the currency, he will
succeed," Einhorn said. "Our instinct is that gold will do well either
way: deflation will lead to further steps to debase the currency, while
inflation speaks for itself."
In other words, gold is a one-way bet. But wait. It's not like Mr. Market
to offer investors one-way bets. There's usually more to the story. And
the twist is probably this:
Deflation will surely lead to more steps to debase the currency, but those
steps don't necessarily or automatically take the feds where they want to
go. We have no doubt that the Fed chairman is determined. What we doubt is
that he is capable. We doubt, too that a 3.5% downturn over 24 months
corrected 30 years of credit excess. There's still Hell to pay. It means
another big takedown in the stock markets...crashes in China and emerging
markets...and collapsing commodity prices. Investors won't like it.
Will they turn to gold for safety? Or to the dollar? A year ago, they
dropped gold and ran to the dollar. Will they do the same this time? We
don't know, but we doubt that SOB, Mr. Market, will make it easy for us,
either way.
Back to Mr. Thomas L. Friedman. What we like about Mr. Friedman is that he
is such an unworthy opponent. It is like playing darts with a blind man or
a boxing match against a paraplegic. In a battle of wits, The New York
Times columnist is unarmed. We get to pummel him, confident that he
can't hit back.
Yesterday's column must have been intended to reassure Americans. The 21st
century might be the American century too, he says. Yeah, yeah...the
Chinese have more of our money than we do. And yeah, they can beat the
pants off of us in commerce. And yeah, we're all growing old and going
broke. But we still have something that nobody else has: imagination!
Forget capital formation. Forget savings. Forget relative pay scales.
Forget the trade deficit. Forget de-leveraging. Forget mortgage debt and
the zombie banks. And forget the public debt and the other $100 trillion
worth of financial obligations of the US government.
We can still walk with a swagger and hold our heads up high. Because we've
got...imagination!
Why don't other nations have imagination too? Why couldn't they invent
things such as sub-prime mortgages, color-coded Terror Alerts, and the
Ultimate Fighting Competition? Friedman does not attempt to explain the
Imagination Gap. So, we will just take it as a given.
But he goes on to say that he is worried. In addition to imagination, the
other critical ingredient to success in today's world, he says, is good
governance. And here, he's not so sure that the US has it as a genetic
advantage. Indeed, he thinks that the body politic USA sometimes comes up
with "suboptimal" solutions.
"A great power that can only produce suboptimal responses to its biggest
challenges will, in time, fade from being a great power - no matter how
much imagination it generates," he warns.
Wow...deep...right up their with Machiavelli, Clausevitz and Toynbee.
How do you come up with optimal solutions, you might wonder? Simple. At
least, it's simple in Friedman's world...where everything is simple. His
planet is populated by a race of such simpletons that they can come up
with better governmental solutions simply by being "better citizens."
What's a better citizen? It's someone who is "ready to sacrifice, even
pay, yes, higher taxes..."
Is that all there is to it? If we pay more in taxes we will have better
governance. But how much more do we have to pay? Maybe it can be graphed
out. If we pay 25% of our incomes in taxes, perhaps our solutions will be
25% optimal. If we raise taxes to 50%...well, 50/50 on the optimal scale
ain't bad. But if we go the Soviet route - to 100% taxation - can we
expect optimal solutions 100% of the time?
Oh, Friedman, what a lamebrain you are! We'll spot you one on that
imagination thing; we don't have any idea what you're talking about. But
on governance, where have you been for the last 50 years? If there's one
thing we've learned it is that governance is subject to the law of
diminishing returns, just like almost everything else - like greenbacks
and girlfriends, the more laws you have, the less you appreciate another
one.
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---------------------------------------------------------------
And here's Ian Mathias, from
The 5-Minute Forecast, chiming in from Agora Financial HQ in
Baltimore:
Whoever coined the phrase, "There's no such thing as bad publicity,"
didn't have the poor US dollar in mind. Since this time last week, the old
greenback has suffered one abusive headline after another, as the dollar
index has slumped to its lowest level in over a year...
Hmmm... Maybe the fact that America's national debt officially topped $12
trillion has something to do with the dollar's weakness.
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Yesterday morning, The New York Times dished up this front-page
headline: "Wave of Debt Payments Facing US Government." It turns out that
the money our government borrows via Treasury bonds has to be repaid one
day - with interest, no less. Breaking news!
According to the rag, the government will have to cough up $1.6 trillion
just by the end of March. Ten years from now, the mere cost of servicing
the debt is expected to reach $700 billion annually, more than three times
the current burden.
And staying in the Old Line State for the moment, today's
essay is below...
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The Daily Reckoning
Presents: |
No doubt dear readers are familiar with the
concept of Peak Oil. It's one we've visited many times in this space.
But what about Peak Metal? It's not something we read about in the
news...but it seems to make intuitive sense, right? When we extract a
resource - any resource - faster than Mother Nature can replenish it, we
must expect, eventually, to run out. Unfortunately (or fortunately,
depending on how you invest), "eventually" is much closer for some
metals than for others. Many and varied are the implications of this
reality.
Chris Mayer has all the details in today's column, along with a few ways
you can position yourself to take advantage of the situation. Please
enjoy...
Unscramble These Letters: MOLYBDENUM
By Chris Mayer
Gaithersburg, Maryland
The mere whiff of an economic recovery has sent the prices of many
industrial metals soaring. A genuine recovery and/or inflationary trend
will cause prices to soar even more. Heck, we may not even need much of
a rebound. Current extraction rates of certain metal minerals imply
we're going to see some big price moves soon.
Andre Diederen is a senior research scientist at TNO, in Holland, a sort
of think tank aiming to apply scientific knowledge to industry and
government. Diederen argues in a recent research paper that we face a
"looming metal minerals crisis."
"During the next few decades," he says, "we will encounter serious
problems mining many important metal minerals at the desired extraction
rates. Amongst them are all precious metals (gold, silver and platinum-
group metals), zinc, tin, indium, zirconium, cadmium, tungsten, copper,
manganese, nickel and molybdenum."
Diederen advances in this forecast because many of these metal minerals
have relatively low reserves. As we've mined much of the high-grade
ores, we now have to dig deeper and process more rock to get a given
amount of metal. Lower grades require exponentially more energy, as
Diederen shows. So he believes that the "decades-old paradigm of
increasing reserves as demand rises" is no longer valid without cheap
and abundant energy. The bump up in costs will be so great, in fact,
that much of the known mineral resources will never become economically
viable reserves.
By his estimate, the planet holds less than a 50-year supply of a number
of essential metals and minerals.
More importantly, we reach peak production of many metals well before
the 50-year period is up. For example, the remaining lifetime reserve of
zirconium is 19 years, but peak production is well behind us already
(1994). Referring to the chart below, Diederen writes: "Although exact
data fail, the elements strontium [Sr] through niobium [Nb] will soon
reach their peak production or have already passed their maximum
extraction rates."
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All the elements here face stiff headwinds as far as increasing extraction
rates. Some of the more interesting ones - from left to right - include
silver (Ag), gold (Au), molybdenum (Mo) and niobium. The latter is worth
highlighting because
Capital & Crisis recommendation,
IAMGOLD (IAG:nyse),
owns a niobium mine that is something of a wild card to value, but throws
off significant cash flow. It is also one of only three such mines in the
world and produces 8% of world supply. It's a nice little bonus you get
for owning IAMGOLD.
Diederen also makes the case that many metal minerals have no acceptable
substitutes for their major applications. And finally, even where we have
plenty of proven reserves, we may still face supply constraints because so
much of the resource is in one place that is not easy to access. An
example Diederen uses is chromium, which is mainly located in Kazakhstan
and southern Africa.
Common ideas people put forward that would avert the Diederen thesis
include recycling and technological progress. As to the former, Diederen
makes a good case that even with more intense recycling, we'll need more
primary production to meet growing needs. As to the latter, he cites the
Jevons Paradox: that when we use something more efficiently because of
technological progress, we wind up using more of the resource in absolute
terms. Certainly, you can see that with oil over the long term.
Car engines and all kinds of applications are more energy-efficient than
ever, yet our oil usage in absolute terms has gone up materially over the
years.
The developing supply crunch in these metal minerals sets the backdrop for
a major, long-term bull market.
Molybdenum is one of the most interesting metal minerals from an
investment standpoint. That's why I have recommended Thompson
Creek (TC:nyse),
a major miner of molybdenum, to the subscribers of my investment letter,
Capital & Crisis. I've stuck with this story despite a
gut-wrenching, hair-whitening ride. Over the last two years, the stock has
traded as high as $25 per share and as low as two dollars. It currently
sits at $11.70. The story here is all molybdenum, the price of which has
drifted down to about $11 a pound from prices around $35 in the middle of
last year. So if we don't see a rise in moly prices, TC isn't going
anywhere.
But longer term, I see good reasons for moly to rise, mostly tied to the
story of steel demand, against a rather tighter supply of moly. But for
now, the company had $262 million in cash last quarter end. It also raised
another $200 million after the quarter ended. So the market cap is now
about $1.6 billion and the company has practically no debt and nearly $500
million in cash.
Thompson Creek could be acquired by a copper miner, such as Freeport-
McMoRan, looking to boost its exposure to moly. More likely, I think, is
that Thompson Creek uses its cash hoard to buy a more-cash-strapped
competitor. We'll see. But the stock seems ripe for M&A with all that
cash.
Detour Gold (DGC:tsx;
DRGDF:pink sheets) is another ripe takeover
candidate. In a world where the gold majors are struggling to increase
production, Detour has the largest deposit not already owned by one of the
biggies.
As metal minerals prices slowly rebuild their momentum, I would expect to
see a large number of takeover deals in the sector. Place your bets now.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S. Did you catch our exclusive interview with Dr. Marc
Faber just now, detailing his predictions for 2010 and beyond? We went
live a couple of hours ago and already it's creating quite a stir. If you
just watched it, you know what we're talking about...
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..but if you didn't, don't fret.
You can still access the archived version by clicking here.
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