Howards End: The Global Village Unbalanced

New Zealand has entered a phase of economic doom and gloom with business confidence more depressed than at any time since the 1987 sharemarket crash. But the global economy is also unbalanced. John Howard writes.

Today, few people have any perception of the value gap between digital currency, digital debt, and digital stocks, and the world of "real" raw materials and commodities.

While the apparent buying power of digital currency and digital stocks can be doubled - or increased 10 fold overnight - because the supply is never-endingly elastic, the raw materials that we need, use, and consume everyday have inelastic supplies that require many months to expand.

Consequently, there is a great imbalance worldwide in people's perception of what they want and what they need.

When the markets are rebalanced - and they will be - a new boom may quickly develop as currency and stocks are converted into raw materials or products.

If raw material prices go into a sharp increase, it is only a matter of time until the price of gold, for example, takes off - as it did in the 1970's in spite of the US Government's price suppression efforts.

It's been well said that if America sneezes the rest of the world catches pneumonia - and America, now seems to be at the high-middle (end) of a stock-market buying frenzy.

In the last decade America re-invented the money-game - the worst kept secret of its continued success.

This effectively outstripped its main competitors' advantage to produce bargain-basement quality products which people consume daily.

What happened was that Americans seemed to have said if "they" can out-produce us, we can out-think them with a never-ending pyramid of money derivatives.

So money, and its definition, has been changed dramatically during the decade of the 1990's to preserve America's world economic dominance.

This was acknowledged recently when Federal Reserve Chairman, Alan Greenspan, conceded: "We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money."

So the "elites" concentrated on winning with the highest score in the only game that now matters - the money game.

Where does it all end? On the present irrational thinking, it doesn't.

As measured by stock market trading volume stocks used to be for the wealthy. Now, they are for everybody.

Example: Trading volume on the NYSE, ASE, Nasdaq is 500 times more each day now than it was in 1970. And when we add in both old-world markets that have been rediscovered (by mutual funds) like the FTSE, the CAC, the DAQ and the BOLSA, and then add on the Asia Nikkei, Hang Seng, Korean and Chinese, it's easy to see that worldwide, daily trading volume is 1,000 times greater than 30 years ago.

In stock market capitalisation the money represented by common stocks has been increased 1,000 times. No wonder there are so many stock market millionaires.

Today, if you dare look, you'll see a gigantic new money-creation machine spitting out billions of new money substitutes each day, while the commodity markets of the world (except for rumblings in oil, aluminium and copper) have languished near their historic lows for 20 years.

After a 20-year commodity bear market people moved on to other investments.

Declining markets attract little in the way of increased productive capacity, and the commodity bear market was no different. Productive capacity has deteriorated, was cannibalised or scrapped. The physical economy was asset stripped while demand was met from stockpiles of inventory. Prices declined because of inventory liquidation at near all-time lows.

However, it seems to me that this imbalance will shortly create an opportunity of a lifetime.

When public opinion is this imbalanced the future value of high-tech and dream machines versus raw materials that the world needs, uses and consumes daily, is really in question.

If so, this next change could be big - really big.

As an optimist you will probably see no end in sight for today's worldwide prosperity boom. People who walk will have bicycles - people with bicycles will have a car - people who drive will travel by air. You will reason that this means more increased consumption of raw materials.

As a pessimist you may say, someday soon they will figure it out and realise that a computerised bank or mutual fund statement is really no different than the hunting dog that only gets a mouthful of feathers. People will want to exhange their digital credits for something they can touch. Again, you will reason that this means more increased consumption of raw materials.

Either way, a financial seachange correction is coming, and as an investor who sees and feels greater price volatility each day in markets of stocks in "real" and "artifical" business, you may feel that perhaps you should start looking at good old-fahioned commodities as the next big investment wave.

Throughout history there have been bull markets in raw materials every 20-30 years. Supply and demand regularly gets out of balance leading to recurring periods of rising (and declining) prices.

It seems that one of history's recurring raw material bear markets is coming to an end as supply and demand becomes unbalanced due to economic shifts.

Importantly, raw materials inventories are historically low as the world has become complacent on commodities and taken them for granted. This means the world has allowed supplies to run down to woefully thin levels and is satisfying its needs hand to mouth on a just in time delivery system.

These lows could stand for years and, like the 1970's, we could see tremendous rises in raw material prices despite economic stagnation, as supply and demand corrects imbalances.

Mother nature, of course, also plays a large part in commodity prices like corn, soybeans, cotton, coffee and most other things farmers grow - and lately around the world mother nature is not being kind to farmers and commodity producers. Not so in New Zealand where farmers have had bumper harvests of late.

It seems to me that the "good" weather, along with our lower dollar, explain why our farmers and agriculture sector are starting to do very nicely.

The people in the cities of New Zealand have to come to an understanding with which they may have some difficulty.

That is, we are still an agricultural nation and the fruits which flow to rural New Zealand will ultimately also end up in their pockets.

In the recent past it's been the reverse and I suspect there has been a good deal of complacency about the rural sectors because of that.

Of course, rapidly rising global commodity prices also equals inflation and since our imports currently exceed our exports, I wouldn't be at all surprised if the Reserve Bank might find it necessary to increase interest rates even though our internal economy might be stagnating, or perceived to be.

But even if the Reserve Bank did increase interest rates, they would still be at moderate levels by historic standards - and business would also have more certainty that inflation would not take the edge off their competitiveness.

What we have got to do is start thinking five and ten years out, and look at commodities which are already in short supply in the world and which we are not growing or producing - but should be.

In any event, I certainly won't be betting my future prosperity on electronic digits.

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