Every investor wants to know: "What is happening in today's economy?" and, "How can I invest intelligently today, given this uncertainty?"

We met up with John Kaiser of Kaiser Research at the Cambridge House International's Montreal Investment Conference. He provided some fascinating insight to help investors understand what is going on in the market today and what is likely to happen in the years to come. He presented some interesting solutions that moved beyond today's bad news and talked about some underlying factors that don't get much airplay.

Mr. Kaiser participated in a panel at the conference, and afterward we asked him to summarize the discussion and what his position was: "The big thing that everybody is worried about is: In spite of the prices of both precious metals and base metals, why is there a decline in trading value in the stocks? Why have stock prices retreated? Why are valuations considerably lower than what you get when you plug in the current metal prices? The point I was making in the panel was: There is an enormous fear out there that we are heading into a global recession that could spin out of control into a global depression. None of this is good for base metals and rare earths and specialty metals. Nobody believes that this is good for gold and silver, either. Even if it were temporarily good for gold and silver, it would not be good for equities that are trying to produce or find gold or silver."

He continued by speaking about hyperinflationary concerns and the trend toward gold and silver among investors, which he says is a politically-motivated discussion: "The whole narrative about hyperinflation and currency debasement is an ideological agenda. Unfortunately, the resource sector is dominated by a libertarian perspective that is unhappy with the way welfare systems and big government has evolved. They want everything dismantled. However, if they actually achieved what they wanted, you'd end up with a world that would be quite unpleasant and probably not foster GDP growth. These same people fear economic meltdown but they also don't want to dismantle social systems because they will be victims. They will buy gold and silver because they're not sure what sort of chaotic developments there will be in the financial system and they're steering clear of equities… but equities are related to a real worth economy of producing new wealth. Gold and silver ownership are just a hedge against the uncertainties that the future holds for people."

Next, he provided a detailed look at gold and silver in recent history, and how it relates to Chinese economic growth: "I've looked at gold and silver in a way that is very different from most people’s view," said Mr. Kaiser. "If you take all the gold that exists in the world and multiply its value by the average gold price, and divide it by global GDP, you get a very interesting chart: You see the run-up in 1980 and at that point all the gold that existed (which was 3.2 billion ounces) was 26% of global GDP (in US dollar terms). Then China started to come on stream. There you can see America's GDP as a percentage of global GDP start to decline while China's percentage starts to increase. The uptrend in gold, with a bit of a delayed reaction in silver, tracks this inverse relationship between America's declining GDP and China's increasing GDP. At the same time, you see America's share of global military budget at 40% to 43%. Now we're looking at a situation where this is unsustainable as America becomes a smaller percentage of global GDP. There are only 350 million people driving the American GDP, whereas there are 3 billion people in the BRIC nations who are all on the upswing in terms of per-capita output. The strength in the gold and silver prices is to a large degree coming from international unease about what happens when America becomes relatively weaker and China and the rest of the world becomes stronger. What sort of chaos lies ahead of us?"

Then Mr. Kaiser gave a humorous analogy to illustrate his position: "China is like someone who has just turned the drinking age and is at the bar partying really hard but can't hold his liquor. So the rest of the Western world is in the bar wondering what is going to happen."

Mr. Kaiser believes that the outcome should be a global rebalancing of trade. "Hyperinflation is not going to be the solution," he said. "Industrial policies and the rebalancing of global trade kicks in so that you have economic growth around the world, not deindustrialization of the US. If this rebalancing happens, then we'll see the global GDP grow."

He continued on the theme of rebalancing to describe an interesting concept of manufacturing transition that is about to take place: " China's strategic decision, made 15 years ago, to be the world's cost-dumping ground (they will sacrifice their environment, the health of their workers, etc.) is coming to an end. As demand for products grew, China dominated. But they are now turning this around. They are enforcing and creating new rules for how businesses operate. This has resulted in a sharply higher increase in prices, which of course has caused a lot of squawking by end-users."

But that's only just the start. Oil prices will play a part as well. Mr. Kaiser explained: "The global consumption of oil keeps rising. America's consumption is the largest but it's been pretty steady for the last 20 years… but everyone else's consumption has grown. And companies who have moved their production to China are seeing higher transportation costs to the US. Companies are rebasing manufacturing in the US, closer to markets, to ease distribution prices. Even Chinese companies are moving production to the US. We saw this phenomenon in the 1980's with Japan who started building their cars in in the US."

We asked if there were any concern over a lack of cheap labor or cheap energy that is normally a requirement for manufacturing. Mr. Kaiser responded by first addressing labor: "The old way of manufacturing was labor intensive because of union costs and cost-of-living standards. But the next wave is super-automated. Doing it in America starts to make sense."

Overall, this will have a positive effect on the America economy and Mr. Kaiser gave us a macroeconomic look at how it will be positive: "There is no foundation to the American economy," he began. "The boomer generation fears that there is no economic backbone to create jobs for the younger generation, which will in turn create pay to support boomers in retirement. Once that shifts and real GDP growth becomes apparent, the capital will loosen up and that will drive economic growth."

Next, Mr. Kaiser answered our question about cheap energy as another requirement for manufacturing in the US. He said: "The US has a massive abundance of coal and lots of natural gas. The coal industry has relied on legacy rules which allowed it to keep old power plants and there is a push to force the old legacy plants to comply (to environmental regulations). That will make the cost structure of coal-fired power go up and that creates an opportunity for wind and solar to become part of a grid. Those are intermittent power sources. Nuclear power is also a potential power source because uranium is readily available around the world. For the interim, the public sentiment is against nuclear energy (because of Japan's recent tragedy). We're reaching a point there the infrastructure costs for alternative energy can be built on a non-subsidized basis. We have an enormous shale gas boom going on right now. The shale oil boom is not going to be cheap oil but people are getting used to higher-priced oil. America has an energy advantage over other countries."

Mr. Kaiser summarized with a very positive statement: "There are lots of reasons to be optimistic for the United States in the medium term."

Finally, we asked Mr. Kaiser about the short-term, and he brought the conversation back to politics. "The bias in the market is toward very negative outcomes over the next twelve months. One of the signs that we should be watching for is a Republican Party nominee who is a pragmatist and who has the interest of America as a growing economy at heart. Then it will not make that much difference who wins the next election. There's a concern out there right now that a year from now, when the economy is worse off, a party will come in power that has an austerity philosophy and will take the economy into depression. But if we get a candidate on the Republican side whose interest is not to have this happen then it's a toss-up… Then we'll see a turnaround in market sentiment."

In the short term, Mr. Kaiser believes that the bad news could continue. He doesn't seem to be overly bullish. But he believes that with the right political climate, and an increase in US-based manufacturing fueled by automation and cheap power, America could see an economic turnaround.

REFERENCES

John Kaiser's company: Kaiser Research Online: http://www.kaiserbottomfish.com/s/Home.asp

Cambridge House International's Montreal Investment Conference: http://cambridgehouse.com/conference-details/montreal-investment-conference-2011/59