In a wide-ranging talk that covered everything from China to Germany to the US policy that has affected gold over the past two decades, US Global Investors CEO Frank Holmes was, at heart, an optimist, even closing his talk with some philosophical advice for the betterment of humanity and peace of mind.
Gratitude, he said, was not only important for health but was the umbilical cord for longevity – “the idea that when you’re thoughtful for the fact that you’re here”.
“Lots of people didn’t wake up today. So when you take that moment to be thankful, this is when you have the capacity to look for great things, you will find opportunities in the stock market and investing around the world,” he concluded his talk with.
When getting to the crux of his talk though, tantalisingly entitled “Sex, babies and commodities”, he didn’t mince words.
He said China’s leadership was ushering in a new era in the country that drove much of the commodities being spruiked at the conference, with the change in its one-child policy marking what he called a “tipping point”, which must be recognised by miners and funders alike.
“Recognise tipping points: the idea when you can have more than one baby … what happens when 1.4 billion people get a little horny? What happens if just 1% get a little horny? What will be the population growth? If you just do the simple demographics of people, there will be a new city of San Antonio every year,” he said.
“What does that mean, what are the products - the commodities – for it? So I share with you: long-term, the wind is at your back.
“In China you have two social security cards, one for urban and one for rural. And if you lived in the rural area and you’re building all those skyscrapers, you cannot move your family into Shanghai to get healthcare benefits and go to school. This is an old system – the Russians used it but got rid of it; China still has had it, and this needs to go through reform, which means it will help with the urbanisation.
“China’s PMI is so important to look at the short-term movement of commodities as a whole.
“As Robert Friedland said years ago, the biggest commodity book in the world is China and right now, they have a little extra copper – they’re a little constipated with it, and with iron ore, and it will take another three months of challenges for that country to deal with liquidations, and it’s going to put pressure on. But the government is sensitive and they’ll come out and make change.”
A unique insight into these structural changes and some inherent problems that China’s government is struggling to deal with was given on the first day of the conference by China International Capital Corporation’s research department managing director Hongyu Cai in the afternoon session.
Starting with the well-known fact that the Chinese government had been talking about transforming its economy from being investment-driven to consumption-driven, she highlighted some disparities in the system, the gross inequality that exists in the country and internal doubts among economic commentators about whether it can sustain its growth.
“In 2014 the government is trying to maintain 7.5% GDP growth, even though economic commentators are questioning whether this is achievable, and in fact our macro-economic team has just downgraded its economic forecast for this year from 7.6% to 7.3% this morning, because for the first three months of 2014 we have seen lower than expected growth from a lot of the indicators,” she told delegates.
“In terms of fiscal policy, it’s going to be neutral to moderately expansionary, and monetary policy is neutral to moderately tight. The government will continue to strengthen the shadow banking situation, given there is increasing stress about the financial crisis caused by the over-lending by the shadow banking side.”
She said that while CICC is forecasting relatively stronger growth in the first half of this year compared to the second half, it has played out weaker than the corporation expected, with industrial production and fixed asset investment coming down more than the market consensus.
“There is huge income inequality in China, which we think is the major reason behind the structural imbalance, because low incomes have caused low consumption,” she said.
Those with access to funding are state-owned entities, which make more investments, but these have been expensive and inefficient, so there is fierce competition brewing among the SOEs, and there is the added issue of some investments causing pollution and the associated environmental issues.
Therefore, she concluded, “money is not finding good investment targets, so it needs to go to other products in an attempt to find yield of 10%”
While household disposable income as a percentage of GDP has been growing at 75% of the GDP, since 1992 it has been coming down, despite the strong economic growth, so the benefits are not reaching Chinese households. It’s reaching the SOEs or the government.
She highlighted characteristics of the “new economy”, like rising consumption and falling saving rate, causing declining investment rates, which leads to rising interest rates. While the aim of the consumption driven economy is improved returns on equity, whether this is achievable is still being questioned by many, she said.
