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It’s a funny
old world. Two people can look at the same situation yet reach such
different conclusions. A friend last week told me that he was
planning on climbing into the banking sector. According to him these
shares are oversold and sitting at bargain prices. That may be the
case, but it prompted an interesting debate on strategy.
He thinks
that banks always make money and current jitters are temporary.
Looking at last month’s banking sector heat map showing blue for
gains and red for losses, the picture looks – appropriately – like a
blood bath and I can see the temptation to buy in anticipation of a
correction on the upside.
I’m not going
to knock him – clearly in any transaction there’s a buyer and a
seller. Someone thinking this is the best place for his money and
someone else who thinks it isn’t. And anyway, it’s only a fool who
thinks he knows more than the market.
But it did
force me to explain my own attitude.
My view is
simple: resource companies have things. Proper things. Things you
can touch. Unlike another famous bubble, resource companies aren’t
run by cool guys in jeans building cyber space from their basements.
These things
– commodities – are finite. There’s divided opinion as to when we’ll
run out, but one thing is certain: it easier to print money than
replace a used resource.
And anyway,
if a miner did have to liquidate, he’d still be able to sell
trucks, reserves, drilling equipment and the mine…
What would a
bank sell? It’s debtor’s book?
One argument
of those not already riding the resources bull is that a downturn in
the US economy will remove demand and collapse prices. That was
probably true ten or twenty years ago but let’s not discount 1.2
billion Chinese sitting on the largest dollar reserves in the
history of the greenback wanting to buy cars, build bridges, own
mobile phones and – not insignificantly – use oil. If it’s true that
China consumes half the world’s iron ore output, I think it would be
fair to say that demand for resources is not solely dependent on the
American economy. I can hear you doubters saying that the US
provides the impetus behind Chinese demand and I agree that much of
what China makes ends up Stateside, but c’mon – not half the world’s
iron ore is going into DVD players and flat screen TVs. Surely not?
When some
unknown Chinese politico mentions that they should look at
alternatives to the buck, and that statement causes the dollar to
become a few euro cents cheaper, you have to wonder who the real
heavyweights are here…
My point is
that banks are sitting on sub-prime write downs of somewhere near
$40 billion (it’s easier to type the word than the zeros) and even
now, no-one is prepared to call it the end. Mines on the other hand,
are pulling stuff out of the ground that a lot of people want. And
when there’s talk of the Chinese buying a stake in Rio Tinto so as
not to miss out on any BHP Billiton action, it might pay to listen.
So with
monetary supply increasing at such a rate that the Fed no longer
sees fit to reveal its M3 figures, we have to ask ourselves: where
do we want to be when infinite money chases finite resources?
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