Getting Market Perspective

In case one has not noticed, the “risk appetite” is back on in the markets. This means that inflows into the commodity sector are increasing and having a positive effect on prices. Obviously. But the “theme” of this blurb is that of continued growth. In the amazing video (below) we see that humanity, despite possible

setbacks, continues to grow inexorably. The “rest of the world” of the Emerging Markets has now surpassed OECD countries in energy demand. Are we about to face a new paradigm change in the use of energy or a large spike in pricing as demand outstrips supply of fossil fuels ? Or, are we, as is my premise, that energy will and must expand to cover new technologies even as upward pricing pressure on fossil fuels continues. The point is that societies may be expanding further and faster than our ability or desire to change and find other economically viable alternatives. With our technological abilities, we foresee a ramping up of alternative technologies because the cost of development becomes ever cheaper. It will however take another decade or so before the full force of renewable energies start to makes itself felt in the overall mix. One of the most likely near term

changes will be in battery technology. Today more and more gadgets run on batteries. Now with the introduction of full-scale electric cars, it is likely that batteries and battery technology will need to be drastically improved.

In a recent report we quote :

„ Lithium’s future rests on the shoulders of the move to hybrid and electric vehicles (EV) by the automotive industry. This is expected to increase demand significantly for lithium in the next decade. A recent HSBC report predicts the “low carbon” global economy will be three times larger than it is today growing to $1.2 trillion in size by 2020. That’s a 13% compound annual growth rate (CAGR). This new low-carbon global economy has numerous components; transportation figures prominently accounting for about 70%. The electric vehicle market is predicted to grow to $473 billion by 2020 with most of this growth occurring in the latter half of the decade due to falling prices and advancements in lithium battery technology. This global forecast, but it (a 20-fold increase) is impressive increase nonetheless.

Hence, we have added more lithium into our portfolio and may continue to do so. The point is not so much that lithium is rare, on the contrary, it is relatively abundant, but the grade of lithium and the costs for mining plants of lithium are quite expensive.

Here's how much lithium carbonate is needed for individual consumer goods:

Cell Phones 5 grams
Lap Top Computers 10 grams
Hybrid EVs 6 kilograms
Plug-In EVs 12 kilograms
40 KWh EVs 24 kilograms
1 MW Bulk Storage 800 kilograms

Going back to our video above, we think it is likely the case that, barring some catastrophic war or cataclysm, we as a society will expand the use of the above items and therefore require (demand) more of the product. Likewise, in the graphic above, half the world is now just beginning to „come online“. This will likely have a dramatic effect on consumer goods, fuel consumption, energy and electricity consumption—all are energy.

We have now started to re-balance our portfolio to take into consideration these “mega trends”.

Wrap Up.

The one thing we must now understand is that with Quantitative Easing (money printing) the Central Banks of the world are now INTENT upon producing inflation at ALL costs—no matter what.

This will likely in the next 12 months start to put upward pricing pressure on all commodities, as these are denominated in US Dollars, a weakening currency.

Hence, we should expect higher prices across the board as funny money flows outward. The problem with inflation is …. trying to wrestle it back under control, i.e. put the genie back into the bottle.

Good luck Central Bankers—you may get what you wish for, but that may be uncontrollable and nasty.
We await the outcome of the greatest monetary experiment in the history of the world.

At Buss & Roth Investment Management we help clients with their portfolios, money management, etc.