How to PROFIT From Commodity Inflation | Why Commodity Prices Will Increase - Dr. Stephen Leeb

Jason, Housing is going to be one reason why I think it's going to be very hard to hide inflation. I think housing prices are going to continue to rise. I think you may have mentioned earlier that lumber prices are one of the commodities that are really rising. That's going to continue. That means if you buy a house now, the value of that house is going to rise almost surely faster than the value of the stock market.

It's my pleasure to welcome Dr. Steven Lieb to the show. He is founder of the Lieb Group. He's the publisher of investment newsletters and services including the Complete Investor, Lieb's Real World Investing, the Cash Cow, the Complete Investor, and he was named the best financial investing newsletter by the Software and Information Industry association in the 2013 SEPA Awards competition. He's chairman and chief investment officer and strategist of Lieb Capital. He's the author of about nine books. He's got a new one out, a second one about China. His last one was very much a revered book. He's also author of the Coming Economic how youw Can Thrive when oil costs $200 a barrel. That one was back before the Great Recession. But his new book is China's Rise in the New Age of How Investors Can Profit From a Changing World. And he's coming to us from New York. Steven, welcome. How are you?

It's fine, Jason. It's great to be talking. I wish I were outside, but it's nice talking at home and it's nice talking to you.

Good stuff, good stuff. Well, we're glad to have you. So first of all, tell us a little bit about your new book and maybe your last book about China, if you would, and why it matters to Americans.

Well, it matters a lot to Americans and it could matter in a positive way and a negative way. China has risen as fast as any economy probably in the history of the world. I don't think I'm exaggerating.

I don't think you are either. I think that's true. Yeah.

I think 30 years ago or so, certainly 40 years ago, 1980, China was a developing country and basically more than half the population, the majority of the population was in poverty. Today, China is leading the developing world to middle income status and their growth has just been spectacular and in many ways I think they've exceeded us. I hate to say that, but they have a very cohesive society and I think it's become absolutely necessary for us to realize that and stop competing and to realize that the world is at a turning point. 85% of this world right now, Jason, is developing, which is to say that their income, their GDP or income per capita is about one ninth that of the developed world. In other words, they live on about one for every thousand dollars we have an income, they have a hundred dollars in income on average. The developing world. The developing world is 85% of the world's population. And they have started to really develop thanks to China. China set the example. The developing world, to a large extent has coalesced around China as well as part of Asia. And right now we are in a situation where commodities have become incredibly important. More so than probably any time, maybe since the Stone Age, because in order to develop, you need commodities. And this has been totally overlooked. The developed world, by Contra, is really obsessed with technology, and I think that's good because developing the developing world is going to take a combination of commodities and technology. Because no matter how you try to connect the dots with respect to commodities, that is, do we have enough? The answer right now is no, we do not. We are really dependent on making technological breakthroughs to complete this development, to really see a world that is basically living at a standard of living that is, well, I would say middle class, that, you know, where people can afford to eat, afford shelter, et cetera. I'm not talking about where everyone is rich. I'm just talking about a middle class world. In order to achieve that, we are going to, I think, have to transition from one energy source, namely fossil fuels, to another. It's going to take tremendous energy to affect that transition and a lot of other things. But the key here is, is we need commodities in a way that we've never needed them before. And we also are going to need technology in a way that we've never needed it before. Right now our technology is focused on communicating as the two of us are doing right now. That's great. That's wonderful. That's part of it. But we also need material science, et cetera, and we've got to get together and cooperate. That is the basic message of the book. But for investors, the message is own commodities and especially own gold.

So it's interesting when you keep saying, you know, we're going to need commodities in a way we've never needed them before. Does that mean a lot? We need them a lot, or does it mean something else?

No, it means exactly what you said. Okay, we're going to need a tremendous amount.

Okay, so we need a large amount of them. But we have, you know, more people and we're doing more things nowadays. So that doesn't come as a big surprise, but it almost seems like. And of course, you know, tech is more ideas based than commodities based to some extent. Right. So it would seem like our reliance on commodities, even though we need more of them because we have more people, we're doing more things. Right. So that's just sort of a proportionate ratio. 1sec. But it would seem like our reliance would be higher on commodities in the past because the world was a much more physical world than it is nowadays. And I totally agree with what you said about materials science. Like all of this technology that we all keep talking about, it's basically all just communications tech.

Very well put. I agree with you. I was looking for a word to describe what our technology is focused on and I keep coming up with information technology. I like your word much, much better. Communication focused. Jason, we have needed commodities in the past and commodities were basically at the source of developing about 15% of this world. 15% of this world right now is developed. The other 85%, which comes to.

Six.

And a half billion people, are not developed. They are living with an income that is 1/10 or 1/9 the income of the developed world. Those countries, those 6.5 billion, which is greater than the world's population probably 10 years ago or 15 years ago, they are developing. We have never been in a situation, not even close to it, where 6.5 billion people were all developing together. So much different need, if the need is gargantuan.

Got it. I totally agree with you there. And that's really interesting you say that because, you know, we've heard a lot about the rising billion, but it's really the rising three billion and six and.

A half billion.

Because are you saying only a billion are sort of in what you consider the developed or middle class world or. What do you mean by that?

No, what I mean is that there are high income individuals, high income countries that basically have standards of living that we would call middle class on average. Below that are middle class countries. This is what the World bank calls middle class countries have income, average income levels of maybe six to $8,000 a year. I think that's for a family of four. Actually, that's not very much. If you think about it. That is hardly enough to you for subsistence. I mean, it's a little bit more than that. But that 6,000 or 7 or $8,000 is going to have to turn into maybe 40,000 in order for a family of four to live in a reasonable style. So we're talking about not just 3 billion. We're talking about probably 6.5 billion, and raising their average income to a level where they can enjoy, to some extent, middle class privileges.

So it sounds like a lot of this discussion or a lot of this thesis is based on globalization and the rising middle class. And you can correct me if I'm wrong. It really reminds me of something I've often quoted, which is an article I read maybe 16 years ago, maybe 17 years ago, with Michael Milken and Jeremy Siegel. And they were talking about the rising middle class. And Jeremy Siegel really sort of was the first person I heard to maybe say it this way. That sort of struck me where he said, with all of these people, you know, and at that time, globalization had lifted about 250 million people out of poverty. Right? And, you know, with all these people coming into the middle class, there is going to be an asset shortage. Where are all the assets for these people to buy? As they have investment income, right. They have additional income that they can put to work in investments. And so he talked about it, he called it the looming asset shortage. And I think that was a pretty profound insight. And it sounds like that's what you're.

Saying to an extent, in a way. My wife and I wrote a book in 1999 called Defying the Market, and it was basically saying that we did not have the technology to serve what the world was going to need, which was developing commodities. Now, the only reason what I'm saying, I'm not trying to compare myself with Jeremy Siegel. I have great, great respect for him, and I think he's done a lot of good work. But I'm not sure what he was talking about when he said assets. If we were talking about financial assets, that's not the problem right now. The problem is physical assets. The problem is shelter. The problem is food. The problem are the very basics of life that we don't need so much in this country. I mean, our per capita COPP consumption, for example, has fallen in the past 10 years. We've reached a certain level where we're not just building houses, we have a lot of construction that's already taken place. China's copper consumption is slow, but it's still rising. I'm talking about the countries that are that instead of having an average income of maybe 8 or 9,000 or 7,000, have average incomes of 2 or 3,000. They need homes, they need infrastructure, and they need the real stuff. And that's the only thing I was trying to clarify by what Jeremy Siegel meant. It's not financial assets. It's real assets that are basically outperforming right now.

Yeah, bricks and mortar, right?

That's exactly it.

And does this real asset shortage, you know, that builds the brick and mortar, that builds homes, does this translate into higher consumer prices, just all across the board, Higher. Higher home prices, et cetera?

You know, it's a very complicated question. The short answer is yes. The longer answer would involve how we measure inflation in this country and in the western part of the world. And it's very controversial. And there are some people that argue that inflation, instead of being 1 or 2 or 3%, whatever it is, according to what measure, is actually at a much higher level. And, you know, that's the discussion about what's reported as headline inflation. What you cannot argue with, and I always say, I always try and stick in my own analysis to things you can't argue with. You can't argue with the price of copper, Jason, it's over $4 a pound. I have never. The last time it was that high was in 2011, and before that, it was never at that high, never reached that height in 2008, for example. You can't quarrel with those prices. You can't quarrel with. Factories are paying for a collection of commodities right now. It's gone up probably 20 or 30% in the past year or less, and that is inflation. Now, whether that shows up in the CPI is an open question. It depends how they calculate it, and the calculations are really arcane and difficult. But.

But I would agree. I mean, the CPI is totally manipulated, you know, waiting, hedonics, substitution, all that.

You've got it. You've got. Absolutely.

Yeah, absolutely. Do you think that these prices are sustainable? Are they a result of the flood of money, the, you know, the money creation, the low interest rates, the artificially low interest rates? I mean, are those sustainable? Are, you know, it's sort of hard to determine. Are these. I guess maybe a way to look at it would be, are these prices, these high prices in Dr. Copper. Copper and all the other things. Right. Look at lumber. I mean, you know, we're. Our clients invest in income properties, they buy real estate nationwide and, you know, just lumber price increases alone have pushed new home costs overall up by like 14% in some places. I mean, it's. It's staggering. That doesn't even include copper and other things in the equation. Right. There's these builders have huge shortages of building materials and are having to pay premiums.

You know, it's across the board. And it's not accidental because commodities are all Interrelated. And basically what causes that interrelationship is that they're all dependent on energy. And you need energy to produce commodities, you need energy to produce goods, and you need copper to produce lumber. You know, in some way you have to make machines that chop down the trees, et cetera, et cetera. So there's this connection between all commodities. And I think your question was, are lower interest rates having an effect? And of course they are. You have the economy on steroids right now, but you also have. Up to now, I've been talking about the inequalities among countries that the developed world is much better off than the developing world, but there are also massive inequalities within countries within the US that, that point has been made to the point it's almost cliche. And I don't think people pay that much attention. Well, they do pay attention to it. And what, you know, Jerome Powell yesterday said that he's going to continue to buy interest rates despite the improvement in the economy.

I know it's ridiculous.

Well, it is, in a way, ridiculous. But what he is basically saying, I think drill beneath the surface. And maybe this is because we have Democratic president right now, but I'm not sure that it would been much different had Trump been reelected. He's saying that the only people that have really been affected by this dramatic recovery are those that are above a certain income level in this country and they've been dramatically affected. I mean, basically you can pick out.

Measures and what you mean to say is dramatically enriched.

Enriched, right.

It's the cantillion effect. There's cantillionaires everywhere. You know, they're pumping money and some people are closer to the money. And it's making wealth inequality a terrible problem.

It has become, I think, a real threat to America.

I agree. The middle class has totally disappeared. You know, if you want a stable country, you better have a big middle class. Okay. Yeah.

So well put. And what, what Powell is saying is that this country is not stable. I don't care what the GDP figures say. I'm sort of like trying to read between the lines. And I know this hurts you if you're in the housing business because you don't want to see houses go up in price. But in answer to your question, you made a good point, because this is affecting the people that are not in the lower tier. It's affecting the middle class in this country. If you have to pay another 14% for houses, basically you're going to have to get, you know, I'm going to take that back based on what you said, I do think that they're not going to be hi. They're not going to be able to hide inflation. It's going to be a much, much more difficult task. They're going to have to, you know, I don't know what they're going to have to do to keep hiding it, but they've been successful so far. But what I can point out, Jason, and then I'll shut up, I'm going on is that and the last 20 years, gold outperformed stocks by 400% versus 200%. Its percentage gain was twice that of stocks. And I'm talking the S&P 500 dividends reinvested and more than twice that of bonds. So commodities have already been outperforming everything else in terms of assets, whether you're talking financial assets or real assets, what you wanted to own.

So, Stephen, fascinating discussion. I would definitely love to have you back on the show anytime because you've just got such a wealth of information here. But give us some thoughts on housing to kind of wrap it up for us, if you would.

Well, Jason, housing is going to be one reason why I think it's going to be very hard to hide inflation. I think housing prices are going to continue to rise. I think you may have mentioned earlier that lumber prices are one of the commodities that are really rising. That's going to continue. That means if you buy a house now, the value of that house is going to rise almost surely faster than the value of the stock market. I think that's a very good livable investment. Livable. And here's a way of making money and enjoying your money by living in it and securing yourself, hedging yourself against what I think is going to be kind of a crisis in commodities. So I think it's a great business to be in.

Actually, you know what I call it? You'll like the name of it. I coined this term about, I don't know, 18 years ago. I call it packaged commodities investing or assembled commodities investing because that's basically what it is. You know, people buy a house and they're just buying a package of commodities of glass, steel, lumber, concrete, copper wire, petroleum products, labor, energy, you know, so.

It'S really, I don't think name one commodity that is not likely to outperform the stock market over the next 10 and 20 years. So if you're young or even a middle aged or even an older home buyer, you really can't do, you're going to do extremely well that's probably an incredibly good. That's the best consumer purchase you can make. You can't buy gold and bury it.

In your backyard and add that, that to an artificially cheap 3 decade long fixed rate mortgage and then add to it that you can outsource the repayment of that mortgage to a renter. I mean it's the ultimate almost.

I'm not just trying to, you know, say this, but I'm almost you're talking me into looking around for homes to buy at this point because I think that that is, it's an incredibly good investment. If you're looking to sort of, of hedge and hedge in a big way, I mean really outperform. If you're looking to see your wealth multiply much faster than inflation, whatever the inflation figures are and enjoy that multiplication by living in it. I know again, your phrase was great. I can't quite. Commodity packaged commodities. Investing packaged commodities. It's perfect. And the package that you're talking about is going to, to far outperform any financial asset. That would be one way of summarizing my message.

I couldn't agree with you more, Steven. If you have the time, I'd love to have you back on the show real soon because with your body of work, I mean you've just got so much great content, so much great insight. We'd love to have you back on, but we got to wrap this one up. In the interest of time, give out your website if you would and just any closing thought on the macro picture.

Sure. My website is stevenlieb@just stevenlieb. I mean that's. And you know, wrapping it up. I would simply say commodities are really the things to own right now. If you want a livable commodity, housing, you can't beat it. I think that gold will probably be the best performing commodity. So if you want to put the two together, buy a house and buy some physical gold and bury it in your backyard.

They call that the midnight gardener.

Midnight gardener. I honestly think that would be a great approach and I think at the end of 10 or 20 years, however long your timeframe is, five years even you are going to stand in such good shape relative to most of this country.

Yeah, good stuff. Dr. Steven Lieb, thank you so much for joining us. We really appreciate it. Very good to talk to you and please come back soon.

I would love to come back Jason, and thank you very much. It's been a very informative discussion for me just talking to you. I really appreciate it.

I do too. I really enjoyed it.

Thanks Me too.

Sam.