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Keynote Speech given on Monday June 17, 2007 in Vancouver, Canada
Slide Show that accompanied June 17, 2007 Vancouver Keynote Speech
Note: there is no written text for the speeches John Kaiser gives at conferences. The slides in this presentation represent the outline of his speech which usually reflects commentary he has already provided to members of Kaiser Bottom-Fish Online. This particular speech was unusual in that it pulled together previously presented fragments into a vision that admittedly is still a work in progress. On July 26, 2007 John Kaiser posted an overview of his outlook to the home page of KBFO which sums up key aspects of the speech. The home page posting is presented below.
July 26, 2007: The resource sector has spent 2007 climbing a wall of worry that the boom which escalated in 2003 was on the threshold of ending. No January Effect greeted the new year, and base metal prices retreated as speculators contemplated the ultimate destiny of the American subprime mortgage problem. But by Q2 of 2007 base metal prices had recovered, and in the case of nickel had pushed to an astonishing level of $24/lb that even the Secular Bulls declared as an unsustainable, "supply managed" situation. Cyclical Bears, who had been proclaiming the end of the commodity bull since early 2004, ramped up their rhetoric about a "mania" created by an over-the-top hedge fund industry which was manipulating the huge derivative market by accumulating physical metal of all types and squirreling it away in secret warehouses.
The mining industry, which had been pilloried in 2006 for ignoring the Rise of Asia and heavily foward selling metal production in 2004 and 2005 in sympathy with the declamations of Frank Veneroso, the arch-proponent of the view that no super cycle is at work and that the OECD continues to define the global economy, ignored the prophets of collapse and embarked on a major merger and acquisitions binge to secure raw material production infrastructure and assets. So in 2007 we have witnessed a number of surprising takeover battles, such as Norilsk winning Lionore, Freeport McMoran absorbing Phelps Dodge, Teck-Cominco bidding for Aur Resources, Lundin Mining acquiring Rio Narcea and Tenke, Sherritt repatriating Dynatec, and Rio Tinto bidding for Alcan, to name a few. But even as the mining industry capitulated, abandoning its bearish attitude and embracing the idea that a long term super cycle driven by the Rise of Asia, led by China, followed by India, and fueled by the borrowing boom in America, the reality of higher interest rates began to hit home in the United States, and the first wave of debt default, driven by adjustable rate mortgages issued to subprime borrowers, began a vicious circle of defaults and foreclosures that threatened to collapse the real estate boom that had been a major funding source for OECD consumption of goods deflated by a "China Price" made accessible through the process of globalization.
The primary narrative hanging over the resource sector during 2007 has been the question of, will the subprime problem spill into the prime mortgage market, induce a collapse in real estate prices, and in doing so rip the rug out from underneath the booming economies of China and India? Countering this anxiety has been the somewhat wishful argument of the Secular Bulls that China has reached the stage where its domestic economy has sufficient momentum to enable the overall Chinese economy to weather a weakening in demand from the primary export market that has helped it rise from the morass of Communism since the collapse of the Berlin Wall in 1989. While capital has flowed into the stocks of mining companies, with overflow driving the TSXV and resource/energy sector component of the TSX to record trading volume and value levels, the more junior segment in which Kaiser Bottom-Fish Online specializes has been haunted by the worry that the bust portion of the commodity cycle is lurking just around the corner. The result has been a troublesome year in 2007 during which juniors have been able to attract heavy funding, but often at the expense of serious stock dilution. In other words, resource juniors have had no problem attracting capital to fund their projects, but they have had a tough time achieving higher prices.
Capital has gravitated to those companies with "pounds" or "ounces in the ground", who have been given a mandate to race their projects to production. While Secret Warehouse Man (Frank Veneroso) and his Blindspot Pals (ie Paul van Eeden) have wrung their hands about high metal prices, and predicted that problems such as defaulting subprime mortgages will result in a "nuclear winter" for metals, the market has steered clear of the straw man belief that this time is different, and has instead embraced the believe that this time will be different for a lot longer than normal, and the winners will be those companies who bring into production new mine supply before the rest succeed and induce the glut which will eventually overwhelm demand and drive base metal prices lower. While the Secular Bulls refuse to believe that the traditional lagged relationship between the commodity supply and business demand cycles has been eliminated, they do believe that the duration of the imbalance has been stretched out by the emergence of the Asian economy as a colonial style supplier of cheap labor stripped of safety and environmental costs which is undergoing a social-cultural evolution from communist egalitarianism to middle class consumerism that will allow domestic demand to absorb slackening caused by the OECD consumption machine running out of steam. What has had the Secular Bulls worried is the risk that the "Hollowing out of America" by offshoring production to regions where a "China price" prevails, otherwise known as "deindustrialization", will indeed sap OCED consumer demand for Asian exports before the Asian economies are strong enough to become the biggest consumers of their own production.
Everybody knows that the eventual outcome of high raw material prices and unfettered capitalism will be ugly as the capitalist process hurtles all manner of new supply into production, and absolutely horrific if demand collapses. But those which are first to supply will be in a position to absorb the fall in profitability better than the latecomers. And as with every other bubble which involves the funding of infrastructure, as opposed to paper bubbles such as the cultivation of tulips, the bubble induced massive investment in raw material supply infrastructure will lead to an input cost that is lower than current imbalance induced levels, which lower cost can only serve to boost overall demand whose accretional effect over time in the context of a continuing Rise of Asia toward the footprint taken for granted by OECD residents will underpin an ongoing uptrend in real raw material prices.
This is the logic that is driving the flow of capital into juniors with advanced projects which do not work at historical average metal prices, but which could be hugely profitable if the new reality of 3 billion people scaling their old communist (China) or bureaucracy (India) mired standard of living to that taken for granted by the OECD world kicks in. The pessimism of Secret Warehouse Man and his Blindspot Pals is to some degree a slur on the ability of Asians to achieve during the next 30 years what it took the Anglo-American-European complex more than 200 years to accomplish. But while the Rise of the OECD West was fueled by the Industrial Revolution, the Rise of Asia is being fueled by the Communications Revolution made possible by the Internet and the Personal Computer. What Secret Warehouse Man does not understand is that the latter has the effect of accelerating time, which creates a disruption that renders the cycles implicit in his 200 years of economic data irrelevant.The second half of 2007 will be dominated by the OECD world grappling with the "subprime" problem and what its worst case outcome implies for the Rise of Asia and consequently base metal prices. As we enter the "eye of the hurricane" we may very well see the price of gold benefit as people try to park some of their wealth in a physical asset that is unlikely to evaporate or otherwise become worthless. Our suspicion is that the inflow of capital will come less from parties anxious about a financial meltdown and the end of civilization, otherwise known as "apocalyptic gold bugs" or "hard money" fanatics (this crowd has already converted its cash into gold hidden under floorboards or squirreled away in secret warehouses), but more so from sensible people who realize the times are changing and want at least part of their wealth (aka power) stashed in an asset with some degree of "durability". We think the turbulence the junior market will encounter as the overall global economy wanders through the eye of the hurricane will be smoothed by an emerging uptrend in the price of gold, and as the hurricane winds down, proving to have been just a tropical storm, the market will embrace a "new reality" whereby the Rise of Asia will be perceived as inexorable, the "China Price" a transient historical anomaly, and the OECD an ongoing viable participant in the global economy.
In fact, we think something extraordinary is underway that will pick up from the impulses initiated during the sixties, and carry them to a fruition facilitated by the accumulated wisdom of the most powerful and selfish generation in the history of the human species. Because without question, the most urgent question of the moment is: what if Asia achieves the per capita footprint taken for granted by the OECD? In this regard the Me Generation appears to have met its match, and thereby its ultimate demise, but what if the Me Generation mutates into an Us Generation? What if the extreme selfishness of the Me Generation undergoes a revolution that is not assisted by drugs as it was during the sixties, mediated by the new age introspection of the seventies, or lubricated by the polarizing fundamentalist spirituality of the eighties and nineties? What if the Me Generation rethinks the relationship of the self to the other, starts to reduce its physical footprint, and in the process achieves a degree of happiness that has eluded people hooked on passive consumption?
This may sound like a bunch of abstract claptrap, but when you look under the covers of the discourse about "global warming", "organic", "clean" and so on, you either have to conclude that we are in the midst of a very nasty algae bloom, or a transformation that has its roots in the genetic code of all species, namely the imperative to survive. One thing is unavoidable, namely that it will be a long time before the human species will be able to do without the material world. As we cope with the problem of preventing our aggregate footprint from flattening the planet, we will still mobilize an enormous amount of raw materials. In helping facilitate this mobilization and enlisting the efforts (aka capital) of others in this process, we at Kaiser Bottom-Fish Online hope to have ensured that we and our KBFO members have ended up particularly well endowed. So, there you have it, we think that prosperity is a viable alternative to the apocalypse. And we think the "global warming" linked "green" movement is an essential part of the solution to the question as to what OECD members can do to counter the one-way flow of goods and services defined by the "China Price". It will involve personal sacrifice, because buying things that are more durable or efficient will be more expensive, but the ensuing smaller footprint of such consumption will not only make a difference in the world, incrementally small but aggregationally huge, but will also provide a "spiritual" bonus which more than offsets the purchasing powerloss.
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