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Mines and Metals: Hong Kong, Singapore

Global Perspective

The "Mining and Money" conferences in Singapore and Honk Kong were well-worth attending. The format is strong on what the title says, with little in the way of speculative stock stories. This is the style and the Hong Kong convention is the premier such event in Asia. Quite likely they inspire a lot of business contacts.

This writer enjoyed both events and both cities. Fellow speakers, presenters and panelists seemed to coalesce into agreeable groups. For chat, beverages, lunch or dinner. The Annual Awards Dinner in HK was the highlight.

Is there a future for mining and finance, in general?

Yes, but it will be in precious metals, first. It will take some time before base metal and energy operations are again favoured.

Reasoning behind this is that in the post-bubble contraction base metal and energy prices generally decline relative to gold. In so many words, gold's real price goes up as the real price of most commodities goes down.

The typical contraction lasted for some twenty years, with the usual nearer-term business cycle providing some relief from the prevailing deflation of the bubble in credit.

The bull market that peaked in 2007 seems to have had the key elements of a great bubble. The expansion since 2009 is the first business cycle and bull market out of a classic crash.

This business cycle could be considered as "normal" to what one would expect coming out of crash. The "abnormal" is that absurd pursuit of arbitrary growth numbers has been accompanied by the greatest financial bubble in history - in the global bond market.

Some numbers provide perspective.

In 2007, global equities reached a market cap of $60 trillion and declined to $25 trillion in 2009. The bull market since has driven this to $80 trillion.

The same calculation on global bond markets has the number inflated to $200 (no typo) trillion.

And then there are the derivatives.

As recorded in the US, this business cycle is becoming mature - as stock market speculation has become as intense as reached in 2007 and 2000. In a world of financial speculation the end of the bull market has been accompanied by the start of the recession. In the "normal" cycle the stock market peaks about a year before the economy does. The stock market is included in the "Leading Indicators".

The next few months could, as in 2007, confirm this phenomenon.

In which case, most commodities will resume the decline that started with the speculative peaks set in 2008 and 2011. Our research was reliable on those significant turning points.

In the meantime, from recent lows a modest rally in many commodities has been likely to run into May. Forces of financial and economic contraction could become more evident in the latter part of the year. This would include widening credit spreads, a steepening yield curve, a firming dollar, weakening commodities and rising trend for gold's real price.

One of the most sordid events in history was the Great Famine that attended Mao's Great Leap Forward when starvation ended some 30 million lives. Too many central planners with power. The other big event has been the discovery and growth of the middle classes in China and India which has been part of the greatest boom in history.

While the boom seems to be fading, the main subject of both conventions was that continuing growth of the middle class in Asia and India will eventually turn base metal and energy prices up. High rates of consumption will continue.

This may not be the case. What's been going on in China and India has not been unique.

In the 1800s something similar happened in America. The economist W. W. Rostow calculated that US production amounted to 5 percent of world industrial production in the 1840s. Forty years later it amounted to 29 percent.

Timelines by David Christian and UN Industrial Development Organization provide some figures for China. In 1980, China's industrial production amounted to 4 percent of the world's total. Now it is at 19 percent.

During the period of the survey of the US, urban population went from 10% to 29%. China's equivalent went from somewhat above zero to 19%.

During this period there was negligible migration into China. In the US, the rate of immigration (per 1,000) in the 1840s was 14, in the 1850s it was 6 which was also the number for the 1870s. For the 1880s it was 7.

We could call it the American Industrial Revolution and as it developed a great financial bubble completed in 1873. Great Britain hosted the senior economy and in 1884 economists began to refer to that post-bubble contraction as the "Great Depression". It lasted to 1895. Of interest is that senior economists in the UK were still analyzing it as the "Great Depression" until as late as 1939. Economic history is often ironical.

Without going into further detail, our view has been that great financial bubbles have been independent of demographics. But post-bubble contractions can force changes in demographic and migration patterns.

Financial history seems close to ending the first expansion out of a great financial crash. The next phase of the contraction could become more evident later in the year.

The bubble year of 1873 provides further instruction.

Walter Bagehot was the highly-esteemed editor of The Economist in 1873 when he published Lombard Street. This book boasted that through judicious use of its reserve the Bank of England could prevent a severe contraction. The boom collapsed that fall and the Great Depression prevailed until 1895.

In that fateful year of 1873 a writer at The Economist with an independent mind summed up the action in copper.

"By articles in newspapers, reviews and magazines all sorts and conditions of men were induced to interest themselves in copper. It was shown by figures and arguments, apparently conclusive, and presented with great ability . . . that the world's [supply] of copper would be so much reduced that famine prices must prevail. The confidence in the future was strong enough to cause a further advance of 25 per cent, which was more than lost in the sequel, furnishing a fresh illustration of the rapid action of high prices in these days in bringing forward supplies from every quarter of the globe."

The subsequent contraction in highly inflated stock prices was significant.

An index of coal producers reached 50.6 in August 1873, from which the first bear market took it down to 23.1 in February, 1879.

After a rebound to 44.8 in 1881, the coal index fell to 12.7 in May, 1885. The low at the contraction trough was 12.5 in 1897.

Enjoying a bigger party, the mining and smelting index soared from 99 in January, 1871 (there was the Franco-Prussian War and the world was going to run out of copper) to 447 in late 1872. From a high of 419 in 1873, the mining index declined to 24 in 1884. The low with the depression bottom was 25 in 1897.

Great bubbles have been accompanied by the belief in an agency that will be able to keep the boom going. As strains in the credit markets were appearing in 1873, the Herald in NYC editorialized that nothing could go wrong:

"True, some great event may prick the commercial bubble, and create convulsions; but while the Secretary of the Treasury (U.S. was at that time between central banks) plays the role of the banker for the entire United States, it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representative of gold to the amount of scores of millions."

And then in the crash Vanderbilt commented upon the over-building of railroads:

"These worthless roads prejudice the commercial credit of our country abroad. Building railroads form nowhere to nowhere at public expense is not a legitimate undertaking."

 

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