The Financial Center of Gravity is Shifting
Don't just look at the stars - be one

Clyde Harrison
Mar 24, 2008

When the current credit train wreck ends, it will be a long time before the tracks are cleaned up.

The US and G-7 are rapidly becoming far less important and command far less control in the world economy. In order to make an accurate forecast, one must determine what has already happened that will effect the future.

When you make an investment, what you own is an opinion. This is mine.

In the 1950's the US was the world's largest creditor. Japan was beginning to industrialize with South Korea soon to follow. Europe was rapidly rebuilding. During the next 50 years Europe, followed by the US, became more and more socialistic. Equal results for unequal efforts defies the laws of nature. Socialism always has and always will continue to fail. The US went from the world's largest creditor to the world's largest debtor. In 1977, the US federal budget was $300 billion. In 2007, it was $3 trillion - 10 times larger. Leverage is as toxic on the way down as it was intoxicating on the way up. Today we owe $4 trillion to the rest of the world. Much of the world doesn't want any more treasury bills so they have started sovereign wealth funds to buy real assets. This is the largest rotation of wealth in world history. The Jeanie is coming out of the bottle and it won't look like Barbra Eden.

Only government - Congress made up mostly of lawyers, could accomplish such a colossal mismanagement of America's economy. The dollar decline will continue in an ongoing zigzag downward course. Currencies are the only market where the long and the short want the price to remain the same so it will be a continuous depreciation over time at an increasing rate not a crash.

The current three leading candidates all promise more of the same. The only difference is the speed at which we will eat our seed corn or mortgage our futures.

If Obama wins he will harm our children's future the most. Because Pelosi and Reed will run the government.

The congress' latest plan is to hand out $168 billion. No one has mentioned we will have to borrow the $168 billion from China.

"Change" is the 2008 campaign word. Get the economy moving again. I wish there was one front runner who meant moving forward, not more taxes and deflation of the currency.

The current plan is to have the Bernanke FED create boatloads of dollars. Helicopter Ben will rise to the occasion and be joined by many other countries. Currencies do not float, they sink at different rates. The supply of paper assets will overwhelm the supply of raw materials.

The US Government's raw material supply policy matches their brilliance in other areas. Our energy policy is: The only place you're allowed to drill for oil is next to a dry hole. The only place you are allowed to build a refinery is nowhere. Don't drill within 100 miles of a shoreline and don't build a wind turbine where Edward Kennedy can see it.

We restrict raw material supply as demand is exploding.

As the US moved from capitalism to socialism, many third world countries were moving toward capitalism.

Today, 1 billion people in the world, G-7, use two thirds of the world's raw materials. Over 5 billion use the other third. Many are pursuing capitalism; China, India, Russia, Brazil and Vietnam. In China, to be rich is glorious. In the US, if you're rich, you're attacked. In China there is no capital gains tax and no corporate tax. Money and talent go where it's treated well.

Today, it's easier and cheaper to start and operate a business in China than in the land of the free, where we are free to pay tremendous federal, state and local taxes, free except for the mountains of regulations; like who you employ, how you pay them, how you operate your business all the way to what you do in your own home with your own children. Regulations are destroying jobs and creativity.

Is it any wonder that China is growing at 12% and America at 2%?

In my opinion, the raw material market, energy, agricultural and base metals are only in the second inning of a nine inning bull market.

30 years of restrained and neglected natural resource supply is being overwhelmed by demand. The lead times to create more supply are measured in years. Three billion people in emerging nations have discovered capitalism.

Capitalism is easy to understand, it's nature with a balance sheet.

The difference is in nature. If you fail, you are eaten. Under capitalism you go broke. I like capitalism better.

Today, China is booming. They have declared the national bird to be the construction crane. In the last five years China went from exporting oil to the second largest importer in the world. The emerging market countries will go from walking, to bikes, to motorcycles, and to autos. They will need oil and gas, chemicals, forest products and metals. At $1.00 per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.

China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.

In 1900, the US started to industrialize. We were using one barrel of oil per person per year. By 1970, we were using 27 barrels per person. In 1950, Japan started to industrialize, they were using 1 barrel per person. By 1970, they were using 17. In 1965, South Korea started to industrialize. They were using one barrel per person per year. By 2000 they were using 17. Today, China uses 1.3 barrel per person per year and India uses .7.

In 1950, Japan per capita income was 18% of the US, today it's 96%. In 1965, South Korea's per capita income was 16% of the US, today it's 56%. India and China have 2.5 billion consumers, 9 times the US. The US uses 25% of the world's energy, China and India use 8%. India and China have 280 people per car. The US has 2 people per car. Last year, China produced and sold the same number of autos as the US. Eighty percent were purchased with cash.

Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan's urban population increased 70%. Personal consumption increased 600%.

What is occurring today in China, which contains just over 1/3 of the citizens of the emerging nations: China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural. China has 20% of the world's population and 7% of the world's land. China's grain imports will grow from 14 million tones today to 57 million tones in 2020.

China was the largest economy during 27 of the past 30 centuries. China currently consumes 47% iron ore, 32% aluminum and 25% of the copper. China currently consumes 6 million barrels of oil per day. The US consumes 25 million barrels per day. China has almost five times the population of the US and will some day consume more oil than the US.

To date most of China's growth has been on the east coast. 800 million Chinese live in rural China today and 40 million a year are moving to the city for the better life.

China wants to halt this migration by bringing the better life to the whole country. To accelerate this, they have a number of infrastructure construction projects in effect. All the projects are scheduled to be completed in 5 years.

$200 billion dollars for 500 power plants. They are currently completing 4 power plants per day.
$200 billion dollars for railroads to the west.
$30 billion for a 300 mph bullet trail between Shanghai and Beijing.
$65 billion for 97 new air ports.
$40 billion for subways in 15 major cities.
$300 billion for 10,000 miles of new expressways.

The $900 billion in construction in China will be paid for by US taxpayers, not out of their kindness to strangers, but in interest on the money we have borrowed from China. Now add Egypt, Russia, Brazil, Vietnam and you begin to understand why I started a raw materials fund.

The mergers of the giant producers today do not create one more ounce of supply. It won't be long and they will be merging the junior mining companies. Years into this bull market, and still the cheapest place to drill for oil and mine metals is the stock exchange.

Today, 1 billion people consume two thirds of the world's raw materials. 5.6 billion people consume the other third and they are becoming more successful. The industrial revolution involved 300 million people. The emerging nation revolution involves 3 billion.

There is no need to connect the dots, they over lap.

Lead times to create raw materials are measured in years. In Canada $80 billion in infrastructure has been committed to production of the tar sands. The goal is to produce 3 million barrels a day by 2015. At $85, oil is a bargain liquid. It costs 10% less than bottled water, it's one third the cost of milk, one fifth the cost of beer and only 2% of the cost of Jack Daniels. TaTa, the Indian car company has produced a $2,500 automobile. Hundreds of thousands will be sold in the 3rd world. That demand will increase the price of a gallon of gas one dollar in the next three years because of increased demand.

Phelps Dodge is opening a new copper mine. It took 12 years of paper work to receive federal approval.

In China:

Company: "We found copper."

Government: "Start digging. What can we do to help?"

Company: "We need a road."

Government: "You got it."

China's growing at 12%, the US at 2%. Money goes where it's treated well.

Currently oil companies who search for oil at great risk earn 9 cents per gallon. The US Government, at no risk, takes 51 cents per gallon.

The political systems of G-7 are at a great disadvantage, stuck with unfunded liabilities and debt. Current politicians are unwilling to cut spending growth. The Chinese have a 30 percent savings rate and 1.4 trillion US dollars to purchase real assets.

Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.

I believe we are only at the start of the largest bull market in history for raw materials.

By the end of this bull market, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a coal mine in Al Gore's yard.

As you climb the ladder of financial success, check to make sure it's leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.

Long-term - the future is very bright because man has been succeeding in bringing about change for the better since he or she first emerged from the cave. Big problems usually disguise big opportunities. Markets travel in a zig-zag form. For many years setbacks will be an opportunity to buy. In all probability, every one of us who got in early will sell way too soon.

Governments and central banks are completely incapable of keeping tomorrow from coming.

In the next 12 months, let the winds of change fill your sails. Don't just look at the stars - be one.

Clyde C. Harrison
Brookshire Raw Materials
510 Diamond Lane
Cary, IL 60013 USA
847-516-2826
email: charrison@brookshirerawmaterials.com
website: www.brookshirerawmaterials.com

Copyright ©2011 Clyde Harrison. All Rights Reserved.

Mr. Harrison is the Founding Member of Beeland Management Co., L.L.C., which manages the Rogers Raw Materials Index Funds. Mr. Harrison served as Beeland's CEO for its first five years. During this time the fund gained 150% while the benchmark S&P index gained 1%. Mr. Harrison has served as a pension fund consultant and is a seasoned derivative trader. Mr. Harrison began his career in 1968 in finance with Lamson Brothers, becoming the youngest partner in the firm's history. In 1974 he became General Partner with Carl Icahn, managing hedge positions for corporate takeovers of up to $100 million.

Mr. Harrison has been a member of the Managed Futures Committee of the Chicago Mercantile Exchange. He has served as a bank director for five years, consulted for NBD Bank, Northern Trust and served as Special Consultant to the Chairman of the Chicago Board Options Exchange. Mr. Harrison is a prior member of the International Monetary Market. He currently serves on the board of Geocom Resources, Inc., the board of Brookshire Capital Corporation and is on the advisory board of Preservation Capital Fund, L.P. Mr. Harrison has also served as General Partner for a number of private investment and trading funds.

Mr. Harrison has been acknowledged for his contributions to several books, has published numerous articles and has made multiple television appearances. He has been featured in Barron's, Pensions & Investments, Investment News and Crain's. Mr. Harrison has been a nationally-recognized public speaker for over 12 years and a regular speaker for the National Conference for Public Employee Retirement systems.

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