Monday, June 30, 2008

Jim Rogers versus Vitaliy Katsenelson, Part II

This was Katsenelson's response to my question:

Dave, that is a great question. But I really don’t know the answer to it. As I understand commodity cycles are created by over/under investment in production. Not sure if interest in stocks (especially at the end of the secular bull market) was a cause of under investment in search and production of commodities.

Katsenelson was of course right about what drives commodity cycles. After I finished reading Hot Commodities, I wrote this response to Katsenelson:

I did a little more reading on Jim Rogers after I posted that question, and I have his answer. You hit on part of it above. According to Rogers, after the end of a secular bull market in commodities, commodity prices are dropping so stocks look more attractive as an investment; then, the lower commodity costs boost the margins of non-commodity producing companies, fueling their profits. As the secular bull market in stocks continues, demand for commodities gradual increases, but supply doesn’t increase as much, because, as you pointed out above, investment goes to stocks rather than commodities. When tech stocks, or drug stocks, or whatever non-commodity sectors are booming, few want to invest in digging a new mine for zinc or copper or whatever.

So, long story short: it’s not a coincidence that we have a secular bull market in commodities at the same time we have a secular range-bound market in stocks. Jim Rogers’s first response to this is that one should invest in commodities, but he also notes that other asset classes (e.g., stocks) in commodity-producing areas ought to do well too. That suggests a couple of ideas for a value investor in stocks: invest in companies in commodity-exporting countries such as Canada or Australia, or invest domestically in the stocks of regional business in areas that are benefiting from the boom in commodities, e.g., Oklahoma (energy) and Iowa (agriculture).

I didn't get a response from Katsenelson to my last comment above, but judging from his recent stock ideas (e.g., the menswear retailer Jos A. Bank), he doesn't share Jim Rogers's ideas for how to invest during this secular bear or range-bound market in stocks that appears to be coinciding with a secular bull market in commodities.

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