Prices for rare earths and some rare earth mining stocks are showing positive price action following China's crackdown on illegal mines. But is this the beginning of a sustained recovery, or just a temporary blip on the screen? House Mountain Partners founder Chris Berry explores these questions in this interview with The Metals Report and shares his macroeconomic outlook. As Berry reminds us, V-shaped recoveries are preferred, but rare. That means investors must cultivate patience and courage.
The Metals Report: What economic indicators are most valuable to your analysis? Which indicators are less useful?
Chris Berry: Because the industrial metals are my primary focus, I pay close attention to metrics geared toward industrial activity. This includes Purchasing Manager Indices (PMI), industrial production data and capacity utilization data. I also look at the velocity of money as a signal of inflation. These data points are forward-looking indicators and are a reasonable gauge of the expansion or the contraction in an economy's industrial base. Additionally, the PMI data in particular gives a more granular look at economic activity including new orders, inventory, prices and output. This granularity is helpful in accurately gauging the expansion or contraction of an economy's industrial base.
While recent PMI data released out of China confirms that the economy continues to cool down to a more sustainable growth rate, the PMI data in the Eurozone and the U.S. surprised to the upside, which is a hopeful sign going forward.
I tend to focus my attention less on some of the macro indicators like gross domestic product (GDP) and unemployment figures (UI). However, there is still value in GDP and UI numbers, especially in showing the rate of change over previous months. I tend to give more credence to past monthly revisions of this data as it is more accurate. Despite the fact that it is "backward-looking," the data gives a clearer idea of the trends, and the trends are my main focus.
TMR: Besides economic indicators, what other factors do you keep your eye on to get an idea of trends that might be developing?
CB: Personal experiences can help to gauge trends outside of official statistics. When I'm on the road, I stop into all types of businesses to get a gauge of the health of that business and, by extension, health of the local economy. On a recent trip to Paris, I happened to go into the flagship Hermès store on the rue du Faubourg Saint-Honoré, and was very surprised at what I saw. What really took me aback was that the company had hired salespeople who were fluent in Mandarin and were helping Chinese customers, all of whom were buying. This reinforces one of my core investment theses—that there will be amazing growth in the market that services the increasingly large and affluent, global middle class that has exposure to the international economy. This example in Paris is a single instance and does not make a trend by itself. But experiences like this are valuable pieces of evidence of the rising power of the consumers and the implications for commodities going forward.
TMR: How do you reconcile that with the uprisings or social volatility in Egypt, Turkey and even Brazil? How is the social unrest linked to the commodity supercycle?
CB: When you begin to experience a higher quality of life, it means now you now have something to lose. You're typically earning more money, paying taxes and you have skin in the game. You have assets and you have expectations of your government to provide basic services. A higher quality of life is like a Pandora's Box—once it's been experienced, there is expectation for maintaining, if not improving, quality of life in the future. There is no going back. It is incumbent on governments to do whatever it takes to make sure that their populaces can continue to experience these creature comforts at a reasonable cost.
The uprisings in each of these countries that you just mentioned all stem from different issues. The case of Brazil is instructive. The uprising in Brazil is a surprise to many people, as this country has been one of the powerhouses of global growth, and the middle class has expanded there greatly over the last 10 or 15 years.
Brazil is an example of uprisings happening in a democratic regime. The uprising emanated from an increase in bus fares—approximately a $0.09 fare increase. Tiny in the grand scheme of things but with Brazil set to host the World Cup and also the summer Olympics, the government is spending lavishly on public works. Many Brazilians feel left out and unhappy with having their quality of life impinged upon for the sake of Brazilian authorities worried about public relations in the eyes of the global elite during these sporting events.
The New York Times recently published an article discussing this further, stating that a cheese pizza costs $30 in Brazil due to a host of factors. This is another example of why the average Brazilian citizen is upset.
The inability of governments to manage the demands of their citizens has serious implications for foreign direct investment. Citizen demands for more wealth can also drive resource nationalism, which has been a major problem for mining companies in recent years. As a commodity investor, this is a serious consideration and is why I favor miners with deposits in the safest geopolitical jurisdictions.