With the world economy “reflating,” the price of oil and other commodities has surged.  This is consistent with HS Dent’s forecast for “one last hurrah” in commodities in mid-to-late 2009.  We believe, however, that the long-term picture for oil and commodities in general is quite bearish.

Consider Kopin Tan’s comments in this week’s Barron’s:

“…the slump actually has masked the beginning of a profound, long-term  shift that will affect oil and oil stocks for years.  Thanks to a confluence of factors–a legislative push to wean the nation off foreign oil, and end to very cheap fuel, a global rush toward fuel-efficient cars, fewer people driving to work and more citizens becoming concerned about the environment — U.S. gasoline consumption might never surpass the high of the summer of 2007.”

So, in reply to the “peak oil” supply arguments from many commodity bulls (and doomsday / conspiracy theorists), Mr. Tan has suggested we may instead be looking at peak oil demand.  

Mr. Tan may be a bit too optimistic about Americans growing to love compact cars; this remains to be seen.  But we do think that he is correct about U.S. demand for energy being somewhat muted in the years to come.

Meanwhile, we read in the Financial Times this morning that India, after its recent discovery, will now be supplying much more of its own crude oil and will depend less on imports.   We should also remember that Brazil made one of the largest discoveries in decades off its Atlantic coast, and this supply will be hitting the market in the next few years.

But what about China?  Won’t Chinese demand cause the price of oil to skyrocket again?  Maybe.  But we doubt it will be sustainable.  Investors are getting increasingly worried that China is on the verge of “blowing up.”  Yes, it is a country of 1.2 billion people.  But even a country of that size can have too much infrastructure.  Is China at that point yet?  Who knows.  Chinese government statistics are notoriously unreliable.  But at some point in the next few years, we believe the investment-fueled Chinese boom will go bust — knocking out a major source of oil demand.

Bottom line:  Look for a secular bear market in commodities, not bull.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

It’s official.  In one very specific instance the Chinese are relaxing their one-child policy.  It seems in the town of Shanghai the policy has been even more effective than it has in the rest of the country.  With a dirth of children, the average age of the city is soaring, with over 20% of the population over 60.  This situation creates incredible issues for the area, including a drain on social services and a labor shortage.

To combat this, the UPI reports that China is allowing couples in which each parent is an only child (courtesy of the one child policy in place for almost 30 years) to have a second child.  In order to get the word out, government workers are going door-to-door and handing out leaflets.  It would seem that the government is very interested in heralding this program in order to create a rash of births in as short a time as possible.  Which seems like a good idea because by their own analysis the population of the city will move from 22% of the population over 60 today to 34% of the population over 60 in 2020.  That’s 10 short years from now.

So even if this new relaxation of the law has it’s desired affect, the children that are born of it will only be 8 or 9 when Shanghai reaches the point of a full 1/3 of its population being over 60.  Unless child labor has made quite a comeback, Shanghai is still in for a tough road for another decade after 2020 as its current population gets even older.

We are often asked, “In light of the economic troubles we face, what is the best business line to be in?”  Of course the answer is complicated by geography, existing skill sets, available capital, etc.  However in some instances, the question is easy, even if a bit unorthodox.  China, through its own laws and regulations, has created possibly one of the best, sure-fire business models ever.  And it’s probably not one you’ve considered.  But you’d better act quickly, as others are seeing the light.

I teach our conference that we call Demographic School, where we educate people on how we came to our economic conclusions, how others approach the world of economics, and what we see on the horizon.  Last year I was teaching this conference and I came to the section on demographics in other countries.  It is always an eye opener to explain how our nation is actually one of the places in the modern, industrialized world that actually has positive population growth.  Too many of us were educated when Erlich’s book, The Population Time Bomb, was the ruling authority on where we were headed, which was over a cliff because of too many people on the planet.  He could not have been more wrong.

In places like Italy, Japan, Singapore, and a host of others, populations are actually declining rapidly.  At least, rapidly in demographic terms.  This phenomenon will create situations with dire consequences both socially and economically for these countries. 

Back to China. 

As I discussed the different situations around the world I brought up the fact that China, in order to slow population growth, instituted their one child policy around 1980, which required anyone having a second child to pay a very heavy tax (There are some exceptions).  A business that grew out of this was mobile sonograms, as Chinese want to have sons so they can support their parents and carry on the family name.  This policy has not, I repeat, HAS NOT, been lifted or lightened.  In fact the Chinese government has reiterated this policy in the last year.

Here enters the law of unintended consequences.  Due to the sex-selection of parents, the Chinese government reports that they have 32 million more boys than girls between 5 and 20 years old.  32 million.  Think about that.  In a few short years, the Chinese will have over 30 million young men for whom no wife is available.  There simply is no corresponding woman in the system, much less a woman in your area, or a woman you like, or a woman who likes you. 

So what do you do about that? This is the question I always pose, as it has no answer.  However that day last year when I was teaching the class, someone shouted out an answer - “Open gay bars!”  I should have seen it coming.

And here we are.  On 6/28 the NYT reported on the first Gay Pride week in Shanghai, complete with a hot body contest.  Apparently there is a growing gay scene in the city and it is centered in an area known as the Gay Triangle.

With 32 million more men than women in just a few short years, I’d imagine the celebrations in this area of town will only get bigger.  I’d bet a few more bars open across the country.

Yesterday, Dennis Gartman wrote a few words we’d like to repeat. (Yes, we know we quote him a lot in this blog, but the man does good work). Gartman said,

“Long time readers of [the Gartman Letter] know that we believe demographics drive everything. Demographic trends…trump taxation; they trump economics; they trump politics on the Left and on the Right. Simply put, demographics are triumphant, and yet few pay any heed to these tidal circumstances that colour all things else”

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In the early stages of the housing bust, the myth of “decoupling” could be found on the pages of virutally every financial magazine and newspaper.  There was a genuine belief that somehow the economies of East Asia–which depend heavily on exports to the West–could somehow continue to thrive with the West mired in recession.This has, of course, been proven to be patently false.   Not only have the East Asian nations failed to avoid a slowdown of their own, but in some cases–such as in Japan and South Korea–the East Asian economies have gotten hit even harder than those of the West, where the crisis began.   Read the rest of this entry »