Ed Wallace

The Commodities of Wealth

By Ed Wallace

Every month the media covers the consumer confidence surveys, typically the one issued by the University of Michigan instead of the less well known one by the Conference Board. One thing those surveys have in common is that they’re made up of numerous parts, though current month confidence is typically all that’s reported — “How do you feel about the economy right now?”

Rarely reported is the secondary survey of expectations, or “How do you feel things will be in the near future?” This figure is far more critical for forecasting sales of big-ticket items such as purchases of automobiles or homes. Why? Because most won’t enter into a long-term loan or mortgage if they aren’t sure that today’s warm fuzzy feelings about the economy will last. For perspective, the U of M’s Consumer Confidence Index fell to 91.2 in January, but its expectations for the future number (how we view things later this year) is a pitiful 78.3. The Confidence Board’s survey was 120 for current outlook, but a mere 87 in expectations, down almost 20 points from October. For the record, 1986 was considered the perfect year for our outlook on the economy and that’s why both surveys were marked 100 for that year.

Of course, such surveys are not the only leading indicator on the direction we think the economy is headed. And to be fair, consumer confidence surveys can be all over the map based on whether the people surveyed are reacting in a positive or negative way to last week’s news. For a business perspective a more realistic view are orders and sales of Class 8 (big rig) trucks. That’s due to the fact that trucking companies know what their future schedules for shipping of goods will be; and that scheduling plays into whether or not their business is expanding and how soon their trucks might need to be replaced.

ACT Research and FTR show that orders for Class 8 trucks in December fell 43 percent over the same month in 2017. Yet 2018 overall was a record year for sales of those large transport units. So, that’s a good thing.

Of course, those two issues — consumer confidence and Class 8 orders and sales — tell us a great deal about our nation’s economy; but when it comes to the world outlook, the figure that can often sway an economist or investor’s outlook is the Baltic Dry Index. A quick definition of the Baltic Dry Index is “a measure of what it costs to ship raw materials such as iron ore, steel, cement, coal, and so on — the materials needed for industrial production — around the world.”

Rising demand for these types of ships, and therefore higher pricing for them, would suggest that manufacturing worldwide is on a tear. Therein lies the problem. On December 8 of last year that Index stood at 1,702; and as of this writing it’s collapsed to 629, down 62 percent. Again, to be fair, the Baltic Dry Index also collapsed three years ago and recovered nicely — and without a worldwide recession. Additionally, oil and gasoline futures pricing shows a reasonable demand for product, but hasn’t regained the manic pricing enthusiasm we witnessed a few years ago.

At worst things could still slide downhill. But at best, and this is a bit more likely, most individuals, investors, economists and corporations are showing reasonable due caution looking forward into 2019. Of course, in the end economies slow and grow; and when things turn positive again, consumer confidence goes up, big rig truck sales expand, and the cost of bringing minerals, rare earths, and iron ore to industrialized nations for manufacturing will skyrocket.

Which is why, although the way things are going, that country may never know the benefits of being civilized itself, Afghanistan plays such an important part in the future of the civilized and industrialized world.

Rare Earth

Shortly after we invaded Afghanistan, the United States Geological Survey flew reconnaissance missions to conduct magnetic and hyperspectral surveys of that country. The conclusion was that Afghanistan may be sitting on a trillion dollars’ worth of iron ore, rare earth elements, aluminum, gold, silver, zinc, mercury, and lithium; that’s according to an NBC news report from September 2014. More important, the USGS published its findings in the journal Science the same year.

Of course, by then these studies had been turned over to the Pentagon’s Task Force for Business and Stability Operations, theoretically charged with rebuilding Afghanistan — assuming one’s idea of rebuilding a war-torn nation is bringing in Caterpillar equipment and strip mining the place. Let’s just say it’s a fairly safe bet that sometime in the future your automobile will be made with Afghan iron ore; and Tesla and other electric car manufacturers will be using Afghan lithium and cobalt to make their battery cells. Further, Afghanistan may have the largest deposit of rare earth elements outside of China and that’s critical for automotive and computer production too.

Speaking of China, its Road and Bridge Initiative has already announced road projects in Afghanistan, while the its government has also signed a 30-year, $3 billion deal with the China Metallurgical Group to mine a major copper and iron ore deposit in the Mes Aynak region of that country. Woodrow Wilson once suggested that our military fights to make the world safe for democracy; today, apparently, it does the same for international mining operators.

Mercenaries to Miners

Now, however, as we and the rest of the industrialized world move toward finding the raw materials for our future automotive production and other goods, enter Erik Prince. That founder of Blackwater — which provided the paid mercenaries of our most recent wars — has a plan to start an “ethical” company to discover and exploit cobalt, lithium, and copper from the Republic of Congo and Afghanistan. According to Foreign Policy magazine a week ago, Prince is looking to raise half a billion dollars to get things up and running.

This is important because Tesla, Volkswagen, General Motors, and Renault have all pledged that they will source their cobalt only from mines inside the Congo, where child labor is not used and exploited. Of course, that’s a pledge meant to make a first-world country feel better about its consumption of precious commodities from Third World Countries. Simply because it’s impossible to audit that labor condition given how the market currently works. We went through something similar with the blood diamonds of Africa not long ago; that passionate cause disappeared along with the Leonardo DiCaprio movie of the same name and its poorer than expected box office results.

Yet even Foreign Policy magazine had a hard time aligning Prince’s pledge to act ethically in two of the world’s worst locations for these operations for the obvious reasons. The magazine pointed out that his company, Blackwater, was often in trouble in war zones; he’s provided foreign troops for the UAE in the Yemen conflict; and he’s tried to help create a private air force for the repressive government of South Sudan. Other than that, he’s just a swell guy and loads of fun at the sports bar.

Maybe the biggest problem is that he’s also the head of the Hong Kong-based Frontier Services Group, a logistics and security company which counts among its largest primary investors the Citic Group, owned by the Chinese government. One might even call Erik Prince the real-life Milo Minderbender from Catch 22; finding out that Prince has already opened an office in Kabul for the Frontier Services Group simply justifies that snarky assessment.

In the real world, discovery and mining raw materials are a necessity if we’re to keep our nation wealthy and provide ourselves with manufactured goods, including automobiles, in the future. Particularly the cobalt and lithium that will create the batteries to power our future electric cars and plug-in hybrids. On the other hand, this is like sausage. Most love it, but nobody wants to hear how it’s really made.

The article in Foreign Policy reads in part, “Prince’s record in conflict zones provides little reason to believe he has either the inclination or the ability to mitigate violence in Congo or Afghanistan.” It adds, “Prince is just one player in the global rush to secure valuable minerals in the production of cell phones, electric car batteries, tablets, laptops and other modern inventions, but he has the potential to deepen the instability that’s an inevitable part of the resource curse in distressed nations.”

Can there be a clearer case of an American who rents the Pentagon mercenaries for our wars, then cozies up with the Chinese to exploit the minerals in the countries his mercenaries just helped subdue?

At one point in the 1969 movie Catch 22, Milo yells gleefully, “We’re going to come out of this war rich!” And today life imitates art.

But now you know where the stuff to make your next car is coming from.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com