An article or two ago I wrote out how I think the economy in North America might roll out in the coming years. Basically I said the good times baby boomers enjoyed for years likely have ended. Oh sure, some people will continue to make big wages, have lots of money and fun. But the middle class is being attacked from several angles and unless people know or learn how to defend themselves, they will find that finances get tougher and tougher to deal with as the years go by. And the kids of many baby boomers may find they are paying dearly for the good years their baby boomer parents enjoyed. After all, the U. S. is borrowing something like $5 billion a day and someone will have to pay that money back someday. It will be our children and maybe grandchildren.
But if we understand what I call the China Effect, I think we can strategize, plan and learn what we need to do to thrive in the years ahead. Ignore the China Effect and odds are life won’t be very rosy, or at least it will be tougher to deal with.
The China Effect will be helped by the India Effect and some years down the road by the Iran Effect. I will also write about the Brazil Effect in a future article. In short, emerging markets with big populations are getting richer and starting to influence the global economy more than ever. China is the biggest and richest of these.
China has something like 1.3 billion people in 400 million households. India has almost as many people and households. Iran’s population is growing rapidly. Emerging nations cover almost 80 per cent of the land in the world, they make up 85 per cent of the population (and growing) and produce less than 25 per cent of the world’s GDP. The middle class is growing in emerging nations. (The middle class is shrinking in North America.) Something like 180,000 people a day are moving from rural areas to urban areas in those emerging nations, contributing to the growing middle class. And guess what: These new middle class people will want the things we take for granted — a house or apartment, appliances, cars, decent roads, cell phones, electricity and you name it.
Estimates for how many U. S. dollars China holds range from less than a trillion to $2.3 trillion and growing. Either way, it’s a lot of buying power. So what is China buying with its piles of cash? If we know that, we should be ready to supply that stuff to China. I can’t be one of those suppliers, but as an investment strategy I have decided to own stocks in companies that supply stuff to China.
WHAT IS CHINA BUYING?
Well, China has been stockpiling copper. It will need lots of it to build houses with plumbing, for electricity, for electric cars and so on. It will need coal to help it produce steel for buildings, highways and so on. I also hear China could start to build houses with wood and Canada has lots of trees.
China is telling its citizens to buy gold. If each household bought just one ounce, that’s 400 million ounces. I figured it was 181,818 tonnes of gold, which is more than all the gold in the world at this time. The total amount of gold mined so far since man started this is around 140,000 to 160,000 tons which is about 145,000 tonnes. It’s a cube that would be 62 feet on each side and some say it would fill two Olympic swimming pools. If each family in China wanted one ounce of gold, they’d be waiting a long time. So it won’t happen next week. But little by little more and more families in China will own gold, and odds are the price of gold will go up.
Add in India. The folks in India already like gold. Farmers are famous for buying gold and there are millions of them in India. They harvest a crop, pay the bills and if they have money left over, they buy gold. They buy it as jewelry or as ornaments and basically that stuff becomes part of the estate. Some of that gold will never see the gold market again. Given the demand for gold in China and Indian, we own some gold stocks.
China and other countries are tired of being badgered as giant producers of pollution mostly from coal used to make steel but also to generate electricity. So
So what is China buying with its piles of cash? If we know that, we should be ready to supply that stuff to China. I can’t be one of those suppliers, but as an investment strategy I have decided to own stocks in companies that supply stuff to China.
China is building and will build a huge herd of nuclear reactors. They will need uranium. As of late 2009, it sounds like China is or will be stockpiling uranium so I’m “stockpiling” uranium stocks.
One company in China, China Guangdong Nuclear Power Holding Co., is one of two nuclear developers in China. In December 2009, that company announced it now uses 2,000 tonnes of uranium per year, but by 2020 it will need 10,000 tonnes per year.
So why wouldn’t China stockpile nickel, lead, cobalt, you name it, when the prices are down? We should get to know the companies that produce those products.
China has made a lot of money exporting stuff to developed nations. So let’s say it was exporting to the U. S. with maybe 100 million households. If and or when it starts to produce stuff for its 400 million families at home, China will need a lot of resource products and a lot of energy. These new economies are not going to go away anytime soon.
SUPPLYING FOOD TO CHINA
China does grow some rapeseed, cotton, corn and so on but not nearly enough for its people. So it will have to import. I figured out that if each family in China ate the equivalent of one loaf of bread per week, China would
need 12 million tonnes of wheat per year. I don’t know when this will happen because China might want to stockpile copper, uranium and so on before it decides to import more food, but this will put a floor under the price of grains and oilseeds. I think the prices that used to be the ceiling for crops will become the floor.
Farmers will be managing more money and have cash flow, and will have more profit potential than when grain prices had
a low ceiling. But costs will rise as well, and remember, higher grain prices mean tougher times for the livestock industry.
I think the price of farmland is going to head up and I will write an article another time to discuss how a retiring farmer might retire from farming in light of rising land prices.
CHINA, OUR DOLLAR AND LIVESTOCK
China is learning how to raise hogs. Pork is a favourite food but sadly the Canadian pork industry was quite busy selling pork or pigs to the U. S., so markets in China have not been developed. So China is learning to grow its own pork. The Canadian dollar is higher now than it has been for years and I don’t think it’s coming down anytime soon. Plus the U. S. is putting all kinds of non-tariff trade restrictions on meat coming from Canada. And of course meat, is getting a bad rap so people are eating less of it than years ago. It all adds up to tougher times in the livestock industry.
WHAT’S AN INVESTOR TO DO?
To me, the answer is clear. We as investors need to find companies that sell stuff to China. I own such companies. Anyone who doesn’t own stocks in those companies might be wise to at least look at them. Anyone who isn’t an investor might be wise to at least think about learning how to invest. Learning how to make money with stocks is one of the legs on my five-legged stool. And now with the Tax Free Savings Account, a Canadian investor has an opportunity to make tax-free dollars.
As an aside, I do think that the federal government understands that tougher times are coming for Canadians so it’s encouraging people to save. Remember China is encouraging its people to buy gold. Canada is encouraging its citizens to save. I encourage you and everyone else to learn how to make money with stocks.
I think the livestock industry faces some severe challenges. From what I see stocks can make me a lot more money than a livestock business can make for many producers. And I teach how to make money to readers of StocksTalk. Some days I wonder why it takes so long for people to figure this out. My decisions on stocks are reversible. Most decisions farmers make are not reversible. That alone should be a reason to learn how to make money with stocks with at least some money. Start small, learn more, expand the portfolio and over time who knows, your stocks could be a nice sideline business that you can do from anywhere in the world.
Education is easy to carry around. You likely told your kids that. So how come many farmers don’t want to get more educated on stocks and how to make money with them? It seems that farmers can accept the risk of having a cow die, or a crop fail and they do it again. But if a stock drops, hey stocks are bad. I would think that anyone who carries the risk of farming could easily handle the risk of owning stocks.
I know a lot of farmers have a lot of net worth in farmland and that likely will go up. But the only real estate your children might own could be their house and if the economies stay tough house prices might not rise all that much. And if the economies stay tough, many jobs might be exported to India or China and already have.
So learning how to make money with stocks might be one of the few businesses that you, your children and many other Canadians can learn. The stocks that make money in the future likely will not be the stocks that made money in the past, so we have to sort this out and we can. And I’m not saying the U. S. is a dead economy. It will bounce back. But there are other growing economies and I find comfort in and have made a lot of money with stocks that have both feet planted in North America and or Canada and serve those growing economies.
So I’m saying there will be all kinds of opportunities for you and me in the years ahead but we have to be in step with the new economies and with those opportunities. I encourage you and your children to dance in step with the new economies wherever they might be.
Andy is mostly retired but he still manages his investments. He also publishes a newsletter called StocksTalk where he tells in detail what he does with his investments and how he tries to stay in step with new trends. If you want to read his newsletter free for a month go to GOOGLE, type in StocksTalk.net;click on StocksTalk, go to Form, fill out five lines and click submit.