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You would think that an unsustainable global construction boom would have pushed cement prices near the top of their historical trading range heading into the bust. What could be more obvious? That was not the case though. Yet another "sure thing" investment crashed and burned. Go figure. I suspected there was serious overcapacity but I certainly didn't think there was THAT much. Wow.
October 22, 2009
COLUMN-China's looming output glut: Christopher Swann
Today's GDP figures provided further evidence that in its efforts to avoid a slowdown, China has been stoking over-capacity.
Even before the release, officials estimated that the peak output of steel was about 40 percent greater than expected demand. Purchases of cement, meanwhile, may absorb only two thirds of the industry's potential production.
Despite this looming glut, China's state banks continued until recently to shovel record funds into heavy industry -- more than $1 trillion in the first six months of the year. The consequences of this investment binge will last well into next year.
This blog has taken a more deflationary stance and continues to do so. Commodity investors beware, and that includes fiat commodity currencies as well, unless you think gold can rocket higher even if global prices fall. Again!
On an inflation adjusted basis, both cement and gold did very well during the 1970s. They were both horrible investments during the 1980s and early 1990s though. I don't think it is just a coincidence that they moved together. Both gold and cement are commodities. If one buys gold, it is with the understanding that it may someday be used to buy cement. That's the math behind the psychology. Right? Of course...
Maybe it is different this time.
That's pretty much the scariest sentence in all of investing though. Rarely does it work out in the average investor's favor.
Gold investors of today are going to ban me at some point if I keep this up. It's just that I have a healthy skepticism of ANY investment once it reaches "sure thing" status. I was heckling dotcom stocks in 2000 when few were. I was heckling real estate in 2004 when few were. Although I owned gold from 2004 to 2006, I now find myself heckling it too.
This article started with a curiosity over historical cement prices. I was not actively seeking to warn about gold again. I ended up there though. Go figure.
I should also point out that I am aware of the risks. I very well could be wrong. I'm staking my blog's reputation on a gold price bubble theory at a time when most would consider that insane. So be it.
It all comes down to this. I honestly believe that toilet paper is the much better store of value if one must hoard these days and I'm sticking to it. Toilet paper has yet to go up in price much and yet it surely will if inflation takes off. Is it easy to hoard? No. Does it require a lot of work to transport it home? Yes. Is it easy to rationalize not hoarding it? Yes. It takes a lot of work to buy physical toilet paper at reasonable prices. I do not deny it. However, the market does not care about the work involved. It's either a bargain or it isn't. Relative to gold, I believe with 100% conviction that it is a serious bargain.
In sharp contrast, well over a billion dollars worth of gold is now traded daily just through the physical gold (GLD) ETF alone. All it takes is a button click to participate. I wonder how much thought goes into the idea that gold is 1/4th of the bargain it was when it was four times as cheap though. At what point will most participants actually question its price? $2000? $5000? Or is it a great store of value at any price? Just how much cement do gold investors imagine they will be buying with it in the distant future?
One last note. There's a lot of talk of India's government buying gold these days. From an emotional standpoint, this would seem to be a gold bug's dream come true. However, let's look back through history and see what it has to say. When was the best time to actually buy gold?
Goldfinger Brown’s £2 billion blunder in the bullion market
Gordon Brown had decided to sell off more than half of the country’s centuries-old gold reserves and the chancellor was intending to announce his plan later that day.
It was May 1999 and the gold price had stagnated for much of the decade. The traders present — including senior executives from at least two big investment banks — warned that Brown, who was not at the meeting, could barely have chosen a worse moment.
The best time to be buying gold was when a major government was actually selling it. That's the conclusion of history. Only then could you know for sure that you were buying it cheap.
And lastly, I'm really starting to see how Japan fell into a deflationary spiral and has yet to emerge. Nobody really believes that deflation can be sustained when there are government monetary printing presses that can print money at essentially no cost. Maybe they should. If cement can't even keep up with inflation during one of the biggest construction booms in the history of this planet, what does that tell you about the ongoing bust? It tells me that the deflationary forces are extremely powerful and should not be underestimated.
Just opinions!
Source Data:
BLS: Historical CPI
USGS: Historical Statistics for Mineral and Material Commodities in the United States
15 comments:
In the cement chart, I failed to mention that the price is dollars per metric ton. Sorry about that. It's late and I don't feel like fixing it and posting a new version.
I think it has something to do with the wages I'm paid. Perhaps I shouldn't complain about $0 per hour to do this work though. It could be worse.
Paying to Work for Free
http://www.onpointradio.org/2009/08/paying-to-work-for-free
"A hot business has grown up around paying for hot internships. Unpaid internships. Mom and dad shelling out $5000, $8000, $9000 to buy a summer internship that may get junior started."
"This blog has taken a more deflationary stance and continues to do so. Commodity investors beware, and that includes fiat commodity currencies as well, unless you think gold can rocket higher even if global prices fall. Again!"
Mark (or do you prefer "Stag"?) Woe betide you cos I like the way you think! But (yes, there's usually a "but") at the slightest whiff of ongoing deflation the p-t-b will panic and do anything to avoid the hard way out because they've now gone too far for anything other than the easy way out, including whatever as-yet unheard-of,undreamt-of wheezes not excluding negative interest rates to help create some sort of inflation.
You may be very briefly right about deflation (as you say, who knows) but all of the above means the gold price is not going meaningfully below $1000 because the world is now starting to anticipate the effects of all of the above and look beyond any possible transient deflation in the very near term - and IMHO cement doesn't enter this particular equation - yet...
Some interesting thoughts from Buiter on gold here (IMO he's a bit convoluted in places), as well as some comments that show up the weakness of his (to me) tame conclusion....
http://blogs.ft.com/maverecon/2009/11/gold-a-six-thousand-year-old-bubble/
Stevie b.,
I may be bracing for more deflation, but I'm not exactly rushing off to sell my long-term inflation protected treasuries, I-Bonds, or toilet paper!
As for the link you offered, I actually refered to it in my post. You must have missed it. :)
well Mark/Stag, I guess I'm a rotten multi-tasker and now a rotten proof-reader, cos I've read the post 2x and I can't see anything about Buiter.....but the 3rd time I clicked on the link and there it was, so I guess you did refer to it... obliquely :)
What I can see is that you're hedging your bets a bit and seems we're not arguing about the longer-term. TIPS sound ok (and I know you did a recent post on them which I have just skimmed) but can the inflation index on which they're based not be manipulated? I also seem to remember decades ago that I owned UK index-linked gilts and it wasn't as straightforward as I had thought, in that I think rising inflation and then high interest rates actually reduced the "real" premium, which I think theoretically could go negative? (I'm a bit hazy on all this now). There's also the fact that (in the UK I think, but maybe I'm getting confused between the UK and US) you need to buy newer issues of IL gilts/TIPS because where premiums (premia?) are already built-in to the price of existing issues, these can be eroded away with deflation, so perhaps it's not necessary easy to hold shorter-dated issues to maturity and feel certain of an assured return?
And when you say "just how much cement do gold investors imagine they will be buying with it (gold) in the distant future?", gold investors don't see it that way. I know nothing about cement, including its keeping qualities and cost of secure storage. I CAN see that eventually, when I might need cement, I will need more $s to buy it. If e.g. I'm on a fixed income, I need to be as sure as I can be that I'll be able to afford it when the time comes. You say, "if one buys gold, it is with the understanding that it may someday be used to buy cement" (and by inference buy cement now cos it's better value), but I am not convinced that post-tax real interest (if any) will be enough to ensure I come out even if I stay in money, and as I'm not sure about the wisdom of being stuck in cement long-term, I'd rather be in gold.
Perhaps it all boils down to the K.I.S.S. principle.
Stevie b.,
"but the 3rd time I clicked on the link and there it was"
It's all a part of the Da Stagflationary Code (Da Vinci Code). Hahaha! :)
"I also seem to remember decades ago that I owned UK index-linked gilts and it wasn't as straightforward as I had thought, in that I think rising inflation and then high interest rates actually reduced the "real" premium, which I think theoretically could go negative?"
It was recently pointed out (by dearieme) in the comments that the Bank of England itself loaded up on those index-linked gilts for their pensions. They must trust their own CPI in order to do that. Similarly, Dick Cheney owned TIPS heading into the bust (the bulk of his assets were in normal treasuries though). That bet certainly worked out well for him.
As for real yields, they did turn negative in the 1970s on most asset classes, bonds in particular. I do think that is a distinct possibility. That's a reason to own TIPS now. You can lock in today's real yields. In a sense, I did exactly that with I-Bonds in 2000. They are still earning 3.4% above inflation (and tax deferred no less). Investors would kill for that now.
"And when you say "just how much cement do gold investors imagine they will be buying with it (gold) in the distant future?", gold investors don't see it that way."
I did. I wanted to be able to buy the SAME amount. I was looking for an inflation hedge.
Like you, I don't necessarily think that cement is a great bargain right now. It could be but I just don't know. I am concerned that if we slide into more deflation that it will drop in price.
Over the ultra long-term, gold's price has been stable when adjusted for inflation. Until recently, that was also true of cement.
Being fearful of buying cement because it might drop in price further is not the greatest of reasons to hoard gold though. Holding cash would be sufficient. I'd feel much more comfortable hoarding gold if I KNEW that cement prices were going to rise, and rise substantially. Like you, I am most certainly not sure of that though.
"Perhaps it all boils down to the K.I.S.S. principle."
There are many KISS principles at play right now though and they don't all tell the same gold story.
1. Don't buy any asset that's quadrupled in price in a short period of time that's on a parabolic path. Didn't work for dotcom stocks. Didn't work for real estate. Might not work for gold.
2. Buy hard assets because the dollar's long-term future is very bleak. Gold is the second easiest hard asset to store. I would argue that platinum stores slightly better and is much rarer but only slightly more expensive. However, gold being the second easiest asset to store is clearly a good reason to own it.
3. Never buy the "obvious" asset to own. That almost never works out well (see George Soros quote below). I would argue that gold is the second most obvious asset to own, with oil being the most obvious. I base this on how often both are discussed on financial TV (and late night infomercials).
4. Buy the cheapest hard asset you can find that you know you will someday need. I do not personally need gold at some point in the future. I cannot eat it. I cannot drink it. I cannot breathe it. I cannot wipe my, well, you know, with it. By owning it now, I am reliant on someone else needing it at some point. I do not wish to be reliant on others to tell me what my assets are worth though. I want to personally know what they are worth to me.
Toilet paper satisfies all four KISS principles at once (and probably more I did not think of). Its price is not on a parabolic path, it is a decent hedge against a bleak long-term dollar outlook, it isn't obvious, and it is still relatively cheap.
"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected." - George Soros
Few expect toilet paper prices to rise much. Ask people you meet on the street how much toilet paper they have hoarded as a defense for the ongoing financial storm.
Mark - many thanks for your response. I don't want to bore you to death on this as I've rambled on a fair bit already, but.... when you say "don't buy any asset that's quadrupled in price in a short period of time that's on a parabolic path. Didn't work for dotcom stocks. Didn't work for real estate. Might not work for gold", I don't think you're comparing apples with apples. Gold is not a localised phenomenon, it's truly global in its appeal to potentially everyone on the planet. If currencies stop being trusted as they decline one-by-one in a desperate lunge for debt devaluation & competitive advantage, do you really think the world will beat a path to the toilet-paper door? And if indeed you do & it did, and assuming people globally were concentrating on essentials by that time and toilet-paper was still one of them, is the supply not more elastic than gold? Other products that use the same raw material as t-p may be less in demand, allowing t-p production to increase at possibly reduced cost for the er...um...end-user.
And finally,as an aside, I think if you look at the gold chart it doesn't look anywhere near any sort of real blow-off to me. Soros may be basically right in your quote and like you I exist to be a contrarian, but to some degree gold IS a bet on the unexpected...and there's a greater likelihood of that in the future now than there has been since the early 70's, a likelihood that IMHO is not nearly as fully discounted as some may think.
Anyway, nice chatting and doubtless we'll both see where we've both gone wrong before too long!
http://www.telegraph.co.uk/finance/newsbysector/industry/mining/6546579/Barrick-shuts-hedge-book-as-world-gold-supply-runs-out.html
Stevie b.,
"Gold is not a localised phenomenon, it's truly global in its appeal to potentially everyone on the planet."
That was also true of dotcom stocks and real estate. Do you think only Americans were investing in dotcom stocks? Investors worldwide were doing it. The financial world is now global on all investments.
"If currencies stop being trusted as they decline one-by-one in a desperate lunge for debt devaluation & competitive advantage, do you really think the world will beat a path to the toilet-paper door?"
Yes. I absolutely do with every single fiber of my being. I can simply look to what has happened when other currencies have failed or there has even been a hint of failure. I offer three stories to back my claim.
1. In 1973 there was a massive toilet paper shortage simply due to Johnny Carson making a joke about it on late night TV.
http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/trivia74.html
"Much to the amazement of not only the show but of toilet paper factories across America, 20 million people that watched the Carson show that evening ran out in the morning and bought as much toilet paper as they could carry. By noon on December 20, 1973, practically every store in America was out of stock. Many of the stores tried to ration this valuable paper but they could not keep up with the demand no matter what they did."
Note the "this valuable paper" comment.
2. Then there's the story of bedpan hoarding in Germany. Can you imagine getting to the point when bedpan hoarding seems like a good idea? Desperate people do desperate things.
http://www.lewrockwell.com/north/north123.html
"Here is my favorite story that illustrates this. Before he died, I knew Dr. Norbert Einstein. He was Albert's cousin. He was a banker. He told me that only late in the German inflation did his Aunt Rosa catch on to what was happening to the value of money. She then wanted to get into goods and out of money. But the truly marketable goods were gone. They were being hoarded. All she found was a large inventory of bedpans. She bought them in late 1923. Then came the currency reform of December, 1923. It produced the recession of 1924. There was Aunt Rosa, figuratively sitting on top of a pile of bedpans."
If one still has money and can see that the value of that money is heading to zero, there will be MASSIVE shortages in the stores as people make one last desperate attempt to buy goods before they no longer can.
3. I refer you to the following link on what others think we should invest in if hyperinflation will soon appear. I don't need someone else's opinion though. I thought up the toilet paper hoarding all on my own, lol.
https://www.kitcomm.com/archive/index.php?t-25814.html
"Toilet paper.
Toilet paper.
Toilet paper.
Toilet paper.
Toilet paper.
Toilet paper.
Toilet paper.
If you manage to live, you don't want to live with out." - appel
And lastly...
"Other products that use the same raw material as t-p may be less in demand, allowing t-p production to increase at possibly reduced cost for the er...um...end-user."
That is not what happens when hyperinflation sets in. There is MASSIVE demand for basic necessities. Survival mode sets in. That's what history shows. Anything that is truly needed, will be hoarded (and other things as well). And I will tell you this, the mere thought that toilet paper AND food will run out will cause their prices to appreciate even faster than gold at that point. Panic will set in. Food would clearly be at the top of the list (far higher up than gold or toilet paper). If I am down to my last 10 cans of tuna as supplies dwindle in response to the demand, then NO amount of gold will buy them from me. You may wish to keep that in mind.
"If I am down to my last 10 cans of tuna as supplies dwindle in response to the demand, then NO amount of gold will buy them from me. You may wish to keep that in mind."
You are absolutely correct, but...tuna (yes I have some too (and rice etc) is perishable and one could end up on a pretty boring diet if the denouement refused to come within a reasonable time after the sell-by date. Replacing antiquated tuna with new tins is certainly an extra, possibly inflated cost to bear in mind if you had had a meaningful number of tins and no gold.
Re toilet paper, perhaps t-p substitution is a good possibility - I dimly remember in my early childhood in days of rationing in the late 1940s that a store of newspaper often came in handy...
What you say about e.g. dotcom stocks is also right as far as it goes, but... I'd wager there's a much bigger percentage of the global population that could invest in gold relative to the percentage who invested in dotcoms.
And co-incidentally with my other link on gold, I saw this just afterwards:
http://www.financialsense.com/Market/wrapup.htm?321gold
cheers!
Stevie b.,
"I'd wager there's a much bigger percentage of the global population that could invest in gold relative to the percentage who invested in dotcoms."
Who? During the dotcom bubble people had jobs and could afford to speculate. Is that as true today? If and when times turn really tough, people will need to sell hard assets to buy food. Even you picture SELLING gold to buy tuna in the future. Better hope there's a buyer.
The inflationists might not be right you know. I'm especially skeptical of any article which refers to shadowstats (your link). in this week's grocery flyer from QFC I am offered 99 cent bread, 50 cent canned vegetables, 99 cent eggs, 29 cent (per pound) turkey, and $1.88 (per pound) bacon. I've been stagflationary for 5 full years so far. And yet, I continue to brace for even more deflation. I run the risk of my neverending short-term tame inflationary stance becoming Japanese style permanent. Nothing has been resolved. There are still way too many banks, restaurants, and malls.
Stag - as I said earlier, I'm with you on that 'flation front, but I come at it from a slightly different perspective given my previous comments - I think attempts at reflation will succeed one way or another. Commodities/raw resource prices will explode and that and probable general interest rate rises will quickly put the kybosh on any growth, hence stagflation. I read a most interesting comment recently to the effect that solar cell technology costs are falling exponentially (>3X) every decade. Seems to me that this, together with the developing economies continuing to "grow" more than the developed ones, gives a lot of hope for the global economy in say 5 years time. How we get from here to there is the nub of the problem as I see it, but assuming no trade wars the eventual end result will be a more level global economic playing field.
And re "who" might invest in gold etc - I meant any human being on the globe who knows absolutely nothing about stock markets but who has some savings and knows from their economic history that gold has been a better store of value than their local currency!
Mark - coincidentally (again) just read the following - maybe there's a few spare bags for you....
"The Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined".
Mark - should have added that of course you alluded to this, but these figures kinda make it all look quite stark..
Stevie b.,
Good grief! China sure loves cement, lol.
We loved cement heading into our Great Depression too. There are some who consider massive skyscraper construction as a sign of a bubble and I am one of them.
Land gets more expensive. Building higher uses no more land than building shorter. Everyone starts to assume land prices only go up. Someone figures out that borrowing more money to buy more land is always a winning bet. Then something really bad happens! ;)
Speaking of which, commercial real estate seems the next underestimated shoe to drop.
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