Kaiser Media Watch Blog - January 1, 2016 to January 31, 2016
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The January 5, 2016 issue of the Financial Times featured two interesting articles by Gideon Rachman (Political shocks that will define 2016) and Mohamed El-Erian (Commodities offer opportunities - but handle with care) that suggest the commodity capitulation washout has bottomed. Rachman in his "Foreign Affairs" column warns about "continuity bias", the tendency to "assume that this year will be a bit like last year - only more so". For those of us who follow the resource sector, and the resource juniors in particular, that is not what we want to hear as we enter the sixth year of the worst bear market in decades. Rachman points out, however, that the defining events of the past years have been "big surprises and sudden discontinuities", black swans such as the Rise of Donald Trump, things that "the pundits and politicians are not yet talking about". While warning that predicting the unpredictable is a "fool's game", he suggests that for 2016 one should "look for potential discontinuities" in the geopolitical arena rather than "more of the same". He goes on to describe several potential discontinuities such as Xi JinPing's anti-corruption drive backfiring with his ouster, Trump securing the Republican presidential nomination (he also hints Hillary Clinton as Democrat nominee is not a safe continuity, which opens the nightmarish possibility of a November 2016 election featuring Ted Cruz as the Republican nominee, Bernie Sanders as the Democrat nominee, and Donald Trump as a self-nominee), Brexit becoming reality, and victory in Syria turning ISIS into a global problem. Being ahead of the curve (see SVH Expresses February 15, 2015, April 14, 2015 and July 11, 2015 for my view that security of supply forces will supplant macro-economics as a driver of commodity prices) did not work out very well in 2015, but Rachman certainly encourages me to stick to those views for 2016. El-Erian's "Insight" column is a variation on Rachman's theme that it may be wise not to expect more of the same. El-Erian suggests that the downturn of energy and raw material prices has exhausted itself, and that capital parked in ETFs and other index funds will become uncomfortable with the trendless volatility that will characterize these speculation vehicles as commodity prices stabilize. He does not suggest that commodity price rebounds are imminent, but argues that the noisy trough created by the end of the price declines will create breathing room for distressed companies that enables them to reorganize their affairs. He suggests that "patient capital" with a 5-7 year time horizon (similar to what experienced private equity funds such as Resource Capital Funds (RCF) are already doing while the newbies continue to snoop around in search of text-book perfect opportunities) should be seeking out "single-asset opportunities in mining and non-traditional energy". He is, of course, arguing that investors should do this through fund vehicles with such a focus, of which his employer is no doubt cobbling some together. But what I find heartening is the idea that it is time to start sifting through the battlefield of fallen resource warriors in search of the survivors that in the next couple years will rise and march onwards as the supply cutback response to the recent supply glut calamity sets the stage for a future supply deficits. And do so with a longer term time horizon. Forget about short term gains and betting correctly on volatility swings and instead focus on stories with exceptional multi-year potential such as Scandium International Mining Corp. When you mix in Rachman's indirect warning about security of supply "discontinuity" risks, we have a strong case for acting sooner than later. I feel very good about my new 2016 Bottom-Fish Edition as well as my Spec Value Hunter 2016 Portfolio to which I anticipate adding a number of juniors from the bottom-fish list.